THE issue before the Bench is - Whether when the expenditure incurred in the past was allowed as revenue in nature, merely because the equipments were described as most important for tyre manufacturing plant, such expenditure is to be treated as capital in nature. NO is the answer.
Facts of the case
The assessee concern filed its return of income declaring losses. AO had adjusted all the brought forward losses and depreciation during assessment. In response to the rectification application filed by the Assessee, the income assessed was revised. On appeal, the CIT(A) partly allowed the appeal and certain disallowances and additions made by the AO were upheld.
Both the Revenue and the Assessee preferred appeals before the ITAT against the order of the CIT (A). Tribunal noted that assessee had not furnished its books of accounts before the AO. Meanwhile the Assessee had got its accounts audited and was declared a sick company. Accordingly, the order of CIT (A) was set aside by ITAT with a direction to the AO to frame the assessment de novo in respect of the disallowance made by the AO. Pursuant to remand, the Assessee was given an opportunity to furnish all the necessary evidence to support its claim. As regards the claim incurred on installation of plant and machinery, AO noted that the Assessee had claimed 1/5th of the expenditure in the profit and loss account whereas in the computation of the income attached to the return, the Assessee had claimed the entire amount as revenue expenditure. The AO disallowed 80% of the said amount as capital expenditure u/s 37 (1). In the remand proceedings, Assessee furnished invoices for purchase of 'one heavy duty internal (Banbury) mixer G.K. 255N' and purchase of 'reduction gear box for 3 roll calendar' respectively. The Assessee also furnished a Bill of Entry corresponding to the aforementioned invoice in respect of the Banbury internal mixer G.K. 255N. AO noted that no other documentary evidence was produced by the Assessee. Thus, AO noted that the Assessee had described the machines as 'part of the tyre manufacturing plant', 'vital part of the process of manufacture of tyres' and 'equipment for mixing the rubber and chemical'. The AO concluded that assessee was unable to establish that the said machines were part of some other machines. The AO also rejected the claim of the Assessee that the expenditure was incurred on 'current repairs'. It was concluded that the expenditure was 'capital expenditure' and depreciation as per the rules would be allowed to the Assessee.
On appeal, CIT(A) disagreed with the AO and held that the AO had not recorded any finding as to how the Banbury mixture and gear boxes could function independently and how the other plant and machinery were expected to run without the support of the aforesaid components. The CIT (A) held that the AO appeared to have been influenced by the heavy amount of expenditure. Moreover, the expenditure on identical items incurred in the earlier years were allowed as revenue expenditure. No distinguishing feature was pointed out by the AO as regards the AY under consideration. The CIT (A) accordingly deleted the disallowance by holding that the expenditure incurred on the Banbury internal mixer G.K. 225N and reduction gear box would fall within the meaning of repairs and maintenance only.
Held that,
++ both the invoice and the corresponding bill of entry, copies of which have been placed on record, describe the equipment imported as 'one heavy duty internal mixer G.K. 255N'. There is no indication whatsoever that what has been imported is only the body and not the entire mixer. There was sufficient opportunity to the Assessee to produce before the AO in the remand proceedings, sufficient documentation to substantiate its plea that what was imported was only the body of the mixer. The Assessee however, failed to do so. Turning to the decisions on when the cost of import of an equipment could be treated as 'repairs and maintenance', and therefore whether of a capital or revenue nature, in CIT v. Saravana Spg. Mills (P) Limited 2007-TIOL-147-SC-IT the SC was dealing with the issue whether a ring frame in a textile mill was an 'independent and separate machine'. It was held that each machine in a textile mill may be part of the integrated process of manufacture of yarn and integrally connected to the other machines in the mill for production of the final product. However, such interconnection did not take away the independent identity and distinct function of each machine. Accordingly, it was held that each machine in a textile mill was required to be considered independently. As regards the question whether a particular item of expenditure amounted to expenses towards 'current repairs' the Supreme Court explained that the question to be asked was “whether the expenditure is incurred to 'preserve and maintain' an already existing asset and not to bring a new asset into existence or to obtain a new advantage. For 'current repairs' determination, whether expenditure is revenue or capital is not the proper test.” It was held that the replacement of a ring by a new one did not amount to 'current repairs'. The issue was re-visited by the Supreme Court in Commissioner in Income Tax v. Sri Mangayarkarasi Mills (P) Ltd. 2009-TIOL-86-SC-IT. There the question was whether the expenditure incurred by the Assessee, which was engaged in the manufacture and sale of cotton yarn, on replacement of machinery was the revenue expenditure. On the facts of the case, and applying the tests enunciated in CIT v. Saravana Spg. Mills (P) Limited, the claim of the Assessee was negatived;
++ the Court notes that the two Banbury mixers have been described by the Assessee itself as equipment used for mixing natural rubber, synthetic rubber, carbon black, chemicals and other raw materials and that it "is the most important part for tyre manufacturing plant". It has described the Banbury F 370 equipment as a “major equipment and is used for mixing the rubber and chemical on regular basis and needs to be kept in perfect condition to ensure uninterrupted production and quality parameters.” The invoices produced by the Assessee do not support its plea that the expenditure was incurred only on replacement the body of the mixers. The Assessee had sufficient opportunities to demonstrate before the AO that the expenditure incurred by it was not of a capital nature. The Assessee was unable to succeed in that effort. The only documents produced by it to show that the Banbury mixers imported were vital to the tyre manufacturing plant and were of enduring benefit to it. The expenditure incurred in that behalf was rightly held by the AO, in terms of the tests laid down by the Supreme Court in Saravana Spg. Mills (P) Ltd. and Sri Mangayarkarasi Mills (P) Ltd to be of a capital nature. However the expenditure on the reduction gear box for the 3 coil calendar stands on a different footing. From the invoice produced by the Assessee, it is clear that the said imported item was part of the 3 roll calendar. Therefore, the Court concurs with the decisions of the CIT (A) and ITAT holding it to be revenue expenditure and deleting the disallowance of the AO. The conclusion as far as the second question projected by the Revenue is that ITAT erred in deleting the disallowance of the expenditure on the purchase of Banbury mixers as 'repair and maintenance'. The said expenditure on the import of the two Banbury mixers is required to be treated as capital expenditure. It is further held that the ITAT and the CIT (A) were right in deleting the disallowance of the expenditure on the reduction gear forming part of the 3 Roll calendar to the extent of Rs. 41,23,890;
++ the third and final issue projected by the Revenue pertains to deletion of the notional interest of Rs. 24 lakhs which was sought to be added by the AO on the ground that an interest free loan of Rs. 2 crores was given by the Assessee to its sister concern, Modi Stone Limited. In this regard it is seen that the ITAT noted that the sum of Rs. 2 crores was advanced to Modi Stone Limited on account of commercial expediency as the said company was declared sick by the BIFR by its order dated 15th April 1998. No interest was accrued on the above amount. From a perusal of the financial statements for the year ended 30th September 1997 it was seen that the Assessee was having mixed pool of funds comprising owned funds and loan funds. It was held that in such a situation where the one to one nexus between the borrowed funds and the loan advanced to Modi Stone Limited was unable to be established, the loan to Modi Stone had to be held as having come out of its own funds. Consequently, the order of AO and CIT (A) was set aside. The Court finds that the decision of the ITAT on the above aspect is turned purely on facts. The view taken by the ITAT on facts was a plausible one. Consequently, the Court finds that no substantial question of law arises for determination as far as the said issue is concerned. The appeal is disposed of in the above terms but in the facts and circumstances of the case, with no orders as to costs.
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