CHENNAI PETROLEUM CORPN. LTD.,CHENNAI vs. DCIT, CHENNAI

आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:

The appeal filed by the assessee is directed against order of the Commissioner of Income-tax (Appeals)-VII, Chennai in ITA No.30/2013-14/LTU(A), dt 13.02.2015 for the assessment year 2008-

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2009 passed u/s.143 r.w.s. 147 and 250 of the Income Tax Act, 1961 (herein after referred to as ‘the Act’).

The assessee has raised two substantive grounds against 2.

Commissioner of Income Tax (Appeals) confirmed the reopening of assessment due to change of opinion and Commissioner of Income Tax (Appeals) erred in confirming the disallowance of expenditure of�40,98,880/- on construction of compound wall in place of replacement of Barbed wire fencing as capital expenditure.

The Brief facts of the case that the assessee company is a 3. subsidiary of Indian Oil Corporation Limited which holds 51.89% equity shares of assessee company and also a Miniratna of Central Public Sector Enterprise and was formerly known as Madras Refineries Limited and the assessee company shares are also held by Government of India. The assessee company is the second largest refinery in South India and has two refineries, one at Manali and second being Cauvery basin at Nagapattinam and in the business of refining crude into petroleum & petro-chemical products. The assessee company being Government Company is subject to supplementary audit of the financial statements under Sec.619(3)(b) of the Companies Act. For the assessment year 2008-09, the assessee filed e-return of income on 29.09.2008, declaring gross income of ITA No. 720/Mds/2015. :- 3 -:

�1659,19,70,683/- and after considering deductions u/s. Chapter VIA, taxable income worked out to �858,63,68,998/- and Assessment u/s.143(3) of the Act was completed on 30.11.2010. Further assessee income was determined under u/sec.143(3) r.w.s 154 of the Act by order dated 20.01.2011 at �1696,65,08,090. On appeal to CIT(A), consequential order giving effect to Commissioner of Income Tax (Appeals) order, the total income was determined at �887,13,47,945/- on 17.11.2011. Subsequently, the Department noticed the income escaping assessment and notice u/s.148 dated 28.03.2013 was issued and in compliance to notice the assessee filed e-return of income on 11.04.2013 declaring the same income offered in the original return of income and further notice u/s.143(2) and 142(1) of the Act was issued. The Assessing Officer has recorded reasons for reopening of assessment at page no.2 of the order as under:-

"In the case of M/s. Chennai Petroleum Corporation Limited, for A.Y.2008-09, it was observed from the computation statement for Income tax purpose that claim of Rs.40,98,880 was made as expenditure on replacement of fencing which was not debited to P&L account. The expenditure being a value addition to the asset building, the same requires to be capitalised for income-tax purpose also and only depreciation at applicable rates is to be allowed."

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In response to the notice, the assessee filed a reply and objections for reopening of assessment at page no.2 as under:-.

‘’It is submitted that CPCL has disclosed all material facts fully and truly for the purpose of assessment in respect of expenditure towards replacement of fencing of RS.40,98,880 by disclosing it as an item of deduction in the statement of income for income tax purpose produced to the Department during the scrutiny assessment. Thus, the primary facts necessary for assessment were fully and truly disclosed and there was no concealment of facts. The Assessing Officer who has originally assessed our assessment has consciously considered the facts and arrived at a decision. Hence, the reassessment proceedings cannot be taken merely because the subsequent AO changes his opinion or takes a different view’’.

But the ld.Assessing Officer relied on the Apex Court decisions and also objections of the assessee and disposed off by order dated 22.01.2014. Subsequently, the asseseee’s ld. Authorised Representative and Chief Manager(Finance ) and Sr. Officer (Finance) attended the hearing proceedings and the assessee company filed written submissions dated 20.02.2014 reiterating the contentions on the issue. The Assessing Officer considered the submissions and made assessment but on the issue of claim of expenditure of �40,98,880/- being construction of compound wall in replacement of barbed wire fencing. Such expenditure was capitalized and depreciation was allowed. The assessee company relied on the Supreme Court decisions

ITA No. 720/Mds/2015. :- 5 -: on reopening of assessment as a change of opinion, but in original assessment replacement of compound wall was not discussed and there is no change of opinion. The ld. Assessing Officer relied on the decision of Supreme Court in the case of Kalyanji Mavji & Company vs. CIT 102 ITR 287 and other various High Courts decisions i.e. (i) High Court of Mumbai in the case of Export Credit Guarantee Corporation of India Ltd. vs. Addl. CIT 30 taxman. Com 211 (2013) (ii) Gujarat High Court in the case of Praful Chunilal Patel and Vasanth Chunilal Patel vs. ACIT 236 ITR 832 (iii) High Court of Delhi in the case of Honda Siel Power Products Ltd vs. DCIT 197 taxman 415 (iv) High Court of Bombay in the case of Yuvaraj vs. Union of India (Bom) 315 ITR 84 and Co-ordinate Bench decision in the case of Chennai Petroleum Corp. Ltd in dated 08.01.2013 and the objections of the assessee and passed re-assessment order.

On other disputed issue of disallowance, the assessee filed a letter on 19.02.2014 explaining the reasons at page no.4 of the order as under:-

"It is to be noted that sec.30 applies only for repairs of building / premises. CPCL has not claimed the expenditure on construction of compound wall at Cauvery Basin refinery as repairs to existing building / premises because the existing barbed wire fencing is neither a building / premise. It is to be noted that the case law quoted by the Income tax Department in the Supreme court case -

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CIT v. Mangayarkarasi Mills (P) Ltd - 315 ITR 114 is related to replacement of ring frame in the existing textile machinery and hence it is covered u/s 31 of the Income tax Act which relates to repairs to Plant & Machinery. CPCL has claimed the replacement of fencing as revenue expenditure u/s 37(1) of the Income tax Act, wherein, any expenditure not being in the nature of capital expenditure expended wholly and exclusively for the purpose of business shall be allowed in computing the income chargeable under the head "profits and gain of business or profession. CPCL has relied on the hon'ble jurisdictional High court in the case of CIT v. Southern Roadways Ltd (304 ITR 84), wherein, a similar issue has been addressed."

The Assessing Officer considered the assessee’s submissions and treated the expenditure as capital in nature as it does not satisfy the conditions of Revenue, the ld. Authorised Representative submitted that the Hon’ble Apex Court in the case of CIT vs. Mangayarkarasi Mills (P) Ltd 315 ITR 114 held though accounting practices may not be the best guide in determining the nature of expenditure, the fact that the assessee tréated the expenditure as an addition to the existing assets shows that the claim for deduction under the Income tax Act was made merely to diminish the tax burden and not under the belief that it was actually expenditure. The ld. Authorised Representative relied on the decision of jurisdictional High Court in the case of CIT vs. Southern Roadways Ltd 304 ITR 84 but Assessing Officer distinguished the ITA No. 720/Mds/2015. :- 7 -: decision cited by the assessee as pertaining to assessment year 1995- 96 and 1997-98, since there is amendment to Sec. 30 of the Act with effect from 01.04.2004 and Explanation was inserted that the amount paid on account of cost of repairs in the nature of capital expenditure cannot be allowed. The Assessing Officer held the current repairs as the repairs undertaken in the normal course of user for the purpose of preservation, maintenance or proper utilization of assets or for restoring it to its original condition. Such repairs does not bring into existence of new asset nor obtain a new or different advantage. The assessee has replaced the barbed wire fencing to construct compound wall for entire factory premises and existing foundation was removed and new foundation of stones laid were old asset is replaced and new asset has come into existence, and such new asset will have enduring benefit. Considering the facts and legal position of expenditure �40,98,880/- claimed, the Assessing Officer has disallowed the same as the construction of compound wall was completed on 01.08.2007 and the asset is put to use for more than 180 days and allowed deprecation @10% and balance added to the income and passed order u/s.143(3) r.w.s. 147 dated 27.02.2014. Aggrieved the assessee filed an appeal before the Commissioner of Income Tax (Appeals).

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In the appellate proceedings, the ld. Authorised 4.

Representative reiterated his submissions on the issue of reassessment proceedings and validity and on the claim of replacement of barbed wire fencing with new compound wall. The ld. Commissioner of Income Tax (Appeals) upon submissions of the assessee and also findings of the Assessing Officer on the issue of reopening of assessment u/s.147 made a detailed findings and relied on the decisions, observed at page no.5 of the order as under;-

‘’For the above proposition, the assessee relied on the Supreme Court decisions in the case of CIT vs. Kelvinator India Limited (2010) 320 ITR 561 and CIT vs Bhanji Lavji (1971) 79 ITR 582. The AO rejected the contention of the assessee by relying on the case laws mentioned earlier in this order. 4.1 What is required for reassessment jurisdiction is a prima-facie inference of escapement of income. In this case, the assessment was completed u/s 143(3) of the Act originally on 30.11.2010. Notice u/s 148 was issued on 28.03.2013 i.e. within four years from the end of the relevant AY. Therefore first proviso to sec. 147 of the Act is applicable to the facts of the case. Moreover clause (i) of (c) to explanation 2 to sec.147 of the Act is also applicable to the facts and circumstances of the case. Since the reassessment proceedings were initiated within four years, the decision of ITAT, Mumbai Bench in the case of CIBA India Pvt. Limited vs ITO (2009) 318 ITR (AT) 71(Mumbai) is applicable. Reliance is also placed on the following decisions:

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ITR 482 (Guj). 3. Innovative Foods Ltd. vs Union of India and Others (2013) 356 ITR . 389 (Ker).

In view of the above factual position as well as the decisions of various courts, I am of the considered view that the re-opening of assessment is valid and no error/mistake was committed by the AO. The grounds of appeal on this issue are dismissed’’. and dismissed the ground. The ld. Commissioner of Income Tax (Appeals) on the issue of expenditure being capital or revenue. The assessee incurred �40,98,880/- as revenue expenditure for replacement of fencing as per the findings of the Assessing Officer.

The foundation of barbed wire fencing was removed and new foundation was laid down which interalia brings a new asset and the benefit is enduring in nature. The assessee company has constructed the compound wall at Cauvery basin refinery, Nagapatinam and the decisions relied by the company are distinguished by the Assessing Officer and the ld.CIT(A) relied on the decisions of Karnataka High Court in the case of Senapathy Synams Insulations Pvt. Ltd vs. CIT (2001) 248 ITR 656 and also jurisdictional High Court decision in the case of CIT vs. Binny Limited (1995) 215 ITR 536 based on the observations of jurisdictional High Court the ld. Commissioner of Income Tax (Appeals) has concurred with the findings of the Assessing

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Officer and treated the expenditure as capital in nature and confirmed the order of Assessing Officer. Aggrieved by the order of Commissioner of Income Tax(A) the assessee assailed an appeal before the Tribunal.

Before the Tribunal, the ld. Authorised Representative 5. reiterated his submissions made before the Assessing Officer and in appellate proceedings. On the ground of challenging of reopening of assessment u/s.147, the ld. Authorised Representative submitted that assessee has furnished all materials before the Assessing Officer in the original assessment proceedings and assessment was completed on 30.11.2010. The issue has arised only because of change of opinion and not with new set of facts and the assessee relied on the decision of Apex Court in CIT vs Kelvinator India Limited (supra). On the issue of disallowance the assessee incurred an amount of �40,98,880/- on replacement of barbed wire fencing with new compound wall constructed at Cauvery Basin refinery, Nagapattinam and the compound wall was constructed to prevent trespassers and thieves from entering into business premises and the dominant purpose was to safeguard the property in the premises and the expenditure is not enduring benefit and falls within the residual provision u/s.37(1) of the Act, were expenditure has been incurred

ITA No. 720/Mds/2015. :- 11 -: wholly and exclusively for the purpose of business and not capital expenditure and supported his arguments with the jurisdictional High Court decision of Southern Roadways Ltd (supra) and prayed for allowed the appeal.

We heard the rival submissions and perused the material on 7. record and judicial decisions cited. The ld. Authorised Representative argued that the assessment is bad in law considering materials and particulars submitted in the original assessment and such disallowance is only change of opinion. We on perusal of assessment order found that disputed disallowance on the issue of allowability of expenditure of replacement of compound wall was not discussed as referred at page no.3 of assessment order. Since there is no opinion was formed at the time of regular assessment u/s.143(3) of the Act completed on 30.11.2010 and the assessee has filed objections to reopening of the Act and ld. Assessing Officer considered the objection of the assessee on the reopening of assessment and disposed off by separate order

ITA No. 720/Mds/2015. :- 12 -: dated 22.01.2014. Considering the circumstances and also submissions of the assessee and findings of the ld. Commissioner of Income Tax (Appeals), we are of the opinion that there is no infirmity in the order of ld. Commissioner of Income Tax (Appeals) and therefore we are not inclined to interfere with the order of Commissioner of Income Tax (Appeals) and dismiss the appeal on the ground of re-assessment.

On the ground of disallowance of expenditure �40,98,880/-, 8. the ld. Authorised Representative vehemently argued that such expenditure incurred to replace the existing barbed wire fencing to protect the property from trespassers and thieves and new compound wall was made on a separate platform and assessee has incurred expenditure in removal of the existing foundation of barbed wire fencing as the compound wall was constructed at Cauvery basin refinery and though the asset has been created but the purpose is not of enduring benefit and such expenditure has to be distinguished based on the functional test. Reliance placed by the assessee on the decision of Margayarakarasi Mills (P) Ltd (supra) were the replacement of ring frame in the existing textile machinery is a Revenue expenditure relates to repairs to plant and machinery. The assessee has considered replacement of barbed wire fencing as revenue

ITA No. 720/Mds/2015. :- 13 -: expenditure and claimed deduction u/s.37(1) of the Act which is wholly and exclusively used for the purpose of business. The ld. Authorised Representative supported his arguments with the jurisdictional High Court decision which squarely covers the case of Southern Roadways Ltd (supra) were similar issue was dealt. On Comparison with the provisions of Sec.37(1) and the nature of expenditure and the treatment of expenditure in the books of Accounts also factual circumstances and Apex Court decisions relied by the assessee the expenditure takes the characteristic of Revenue in nature though ld. Assessing Officer in his order has mentioned that this decision is not applicable for the issue in dispute as it pertaining to assessment year 1995-96 and 1997-98 and due to amendment in Sec.30 of the Act. Considering the factual circumstances the claim of the assessee fall under residual sec. of 37(1) were the expenditure has been incurred wholly and exclusively for the purpose of business and expenditure being a replacement cost to the existing asset which satisfy the functional test of revenue expenditure and also follow the jurisdictional High Court decision CIT vs. Southern Roadways Ltd (Mad) (supra), the lordship observed at page no.18 of page 91 that ‘’When an identical question whether the expenses incurred for replacing the old barbed wire fence around the compound by a compound wall is a revenue expenditure or capital expenditure came up

ITA No. 720/Mds/2015. :- 14 -: for consideration before the Karnataka High Court in CIT vs. B.V. Ramachandrappa & Sons (1991) 97 CTR (Kar) 180 : (1991) 191 ITR 34 (Kar), applying the well- settled principles laid down by the House of Lords, Privy Council, apex Court as well as by the decision of several other High Courts, referred supra, the Karnataka High Court held as follows : " .. The purpose of the fence around the business premises was to prevent trespassers and thieves from entering into the business premises; the dominant purpose was to safeguard the property in the premises. The materials in the premises were part of the business assets of the assessee. In this context, the compound wall could not be treated in isolation. It was part of the business premises and when only a part of the premises was replaced, prima facie, it would be a case of repair. The identity of the entire asset as a whole was not affected at all. The works carried out contributed to the better and safer utilisation of the existing business premises asset. The works effected, when considered in proportion to the entire business premises, did not result in significant replacement so as to alter the character of the business premises. Therefore, the Tribunal was right in holding that the expenditure incurred on replacement of thatched roof with asbestos sheets and barbed wire fence with compound wall was revenue expenditure."

Considering the ratio of High Court, we set aside the order of the Commissioner of Income Tax (Appeals) on this ground and Direct the Assessing Officer to allow the deduction of replacement of barbed wire

ITA No. 720/Mds/2015. :- 15 -: fencing with compound wall as revenue expenditure.

In the result, the appeal of the assessee is partly allowed. 9.

Order pronounced on Friday, the 26th day of February, 2016, at Chennai.