Cit vs Imperial Fastners P Ltd
2012 Latest Caselaw 2703 Del

04
*IN THE HIGH COURT OF DELHI AT NEW DELHI

+      ITA 160/2012

CIT                                                  ..... Appellant
                   Through      Mr. Sanjeev Sabharwal, Sr. Standing
                                Counsel.

                   versus

IMPERIAL FASTNERS P LTD                   ..... Respondent
             Through   Mr. Sandeep Sapra, Advocate.


       CORAM:
       HON'BLE MR. JUSTICE SANJIV KHANNA
       HON'BLE MR. JUSTICE R.V.EASWAR

                ORDER

% 25.04.2012

Revenue in this appeal under Section 260A of the Income Tax

Act, 1961 (Act) impugns the order dated 17th June, 2011 passed by the

Income Tax Appellate Tribunal (tribunal) in the case of Imperial

Fasteners Pvt. Ltd., the respondent-assessee. The appeal pertains to the

assessment year 2006-07.

2. Having heard learned counsel for the parties, we frame the

following substantial question of law:-

"Whether the Income Tax Appellate Tribunal was right in holding that the expenditure of Rs.31,54,844/- was a revenue expenditure and not a capital expenditure?"

3. As we have heard learned counsel for the parties, we proceed to

dictate our decision.

4. The respondent-assessee is a company and for the assessment

year in question it had filed its return of income on 8th December, 2006

declaring loss of Rs.19,84,799/- under the normal provisions and book

profit of Rs.7,36,458/- under Section 115JB of the Act. The Assessing

Officer in the assessment order has recorded that the assessee had

debited a sum of Rs.31,54,844/- in the computation of income as

deferred revenue expense and 10% of the said amount was debited to

the profit and loss account as deferred revenue expenditure. The

assessee was accordingly asked to justify why for the taxation purpose

the assessee had treated the entire amount as revenue expenditure. The

assessee gave their explanation, which was not accepted by the

Assessing Officer, who held that the expenditure incurred had given

enduring benefit to the assessee for a period of 10 years i.e. the period

of lease. Accordingly, the Assessing Officer disallowed the claim by

treating the entire expense as incurred on capital account. Even

depreciation was not allowed.

5. The CIT (Appeals) affirmed the aforesaid findings given by the

Assessing Officer.

6. In the second appeal before the tribunal, it has been held that the

expenditure incurred was a revenue expense and should be allowed.

7. It is an undisputed fact that the respondent-assessee had entered

into an agreement with the Central Coalfield Limited, Ranchi for

taking on lease their thermal power station at Kathara. As per the lease

deed, the respondent-assessee was to pay monthly lease rent and the

ownership continued to remain with the Central Coalfield Limited.

The respondent-assessee was to operate and maintain power station in

addition to carrying out other works. The lease could be terminated in

certain circumstances.

8. The tribunal has referred to the expenditure in question, which is

as under:-

"

Sr           Supplier          Date   Bill     Description   Nature     of Amount
                                      No.          of        Expenditure   (Rs.)
                                                 Goods
1.       Vinsoil       Oil    06.08.05 001    T.R. Oil       For           443,906
         Company,        J-                                  Lubrication
         2/6B,     Rajouri                                   of parts of
         Garden,      New                                    plant for its
         Delhi-110027                                        running
2.       Balaji Industrial    23.09.05 014    Steel          Replacement 227,908
         Products     Ltd.,                   Hammer
         117     &    119,                    (Coal
         Industrial Area,                     Crusher)
         Jothwara, Jaipur-
         302012
3.       Savita Chemicals     17.10.05 4722   Turbine        For         633,764
         Ltd.,        Plot                    Fluid          movement of
         No.10/2,                                            Turbine
         Kharapada, P.O.
         Naroli,   Silvasa
         396230
4.       Exsol     Energy     13.12.05 345    Lead Acid Replacement          530,000
         Systems,      The                    Stationery
         Cranium, 24, Top                     Cell

       Floor, Adhchini,                      Batteries
      New         Delhi-
      110017
5.    Eagle Poonawala      10.03.06 8408    Mechanical    Replacement      143,899
      Industries, 212/2,                    Parts
      Hadapsar,      Off                                                   .60
      s\Soil Poonawal
      Road,       Pune-
      411028
6.    Advant               13.3.06   0139   Hot    Well Replacement        107,640
      Automation                            Level Switch
      Solutions Private                     Hot Well
      Limited, 11/124,
      Indira      Nagar,
      Lucknow (U.P)
7.    R.K.                 16.03.06 1245    Valves       Replacement       208,000
      Automobiles (P)                       Bearings Oil
      Ltd.       2620/3,                    Seals etc.
      Hamilton Road,
      Kashmere Gate,
      Delhi-6.
8.    Anil       Rubber    25.03.06 146     Conveyor      Replacement      750,031
      Mills (P) Ltd.                        Belt
      Plot        no.30,
      Sector-6,
      Faridabad
      121006
9.    Dhanbad Electro      31.01.06 06      Electric      Replacement      109,695
      Power      Meters,                    Meter
      28,         Binod
      Market,      (Near
      Court       More),
      Hirapur,
      Dhanbad 860002
                                                        TOTAL      3,154,843.60

9. We may note that the two expenses i.e. expense of Rs.4,43,906/-

on T.R. Oil meant for lubrication of the equipment and Rs.2,27,908/-

on replacement of Steel Hammer (Coal Crusher) were incurred before

the lease agreement dated 14th October, 2005 was executed between

the respondent-assessee and the Central Coalfield Limited.

10. The tribunal after referring to the nature and character of the

expenses, which have been incurred and after examining the terms of

the lease, came to the conclusion that the lease in question required the

assessee to incur expenses relating to current repair and maintenance to

make the plant operational and start running. It has been recorded by

the tribunal that replacement and other parts, purchased and installed

by the assessee were relating to normal wear and tear and the same did

not have a long life. The findings recorded by the tribunal, in this

regard are:-

"8. Right from the beginning it has been the claim of the assessee that the nature of expenditure incurred by the assessee is revenue. From the details it can be seen that none of the expenditure has created any item of capital asset. It is in the nature of lubricating oil, replace of steel hammer, turbine fluid for movement of turbine, lead acid stationery cell batteries which have been replaced, mechanical parts which have been replaced and other items of replacement like hot well level, valves bearings oil seals, conveyor belt and electrical meter. If assessee has to bring the plant in working order and to run it, these expenditure are necessary in regular course and they represents day to day expenditure either in the nature of current repair or in respect of wear and tear of the plant and machinery. Therefore, none of these expenditures have created any capital asset to the assessee and they are not in the nature of capital expenditure."

11. Thereafter, the tribunal has referred to the clauses of the lease

agreement which stipulated that the lease was for a period of 20 years

from 14th October, 2005 and would be subject to payment of monthly

rent of Rs.32,00,000/-, which was to start from 14th April, 2006. Under

clause 4.1, the scope of work/obligation assigned to the assessee

included maintenance of the plant and equipments and carry out

inspection, overhauling and repair of boilers. Reference is also made

to clause 17.3, which relates to surrender on termination of the lease.

The said clause reads :-

"17.3 At the expiration or sooner determination of demise, the lessee shall yield up and deliver upon lesser peaceful possession of the station in good running condition without claiming any compensation value thereof but lesser shall pay to the lessee written down value of the additions and alterations of the building, station or additional machinery that may be brought by the lessee at the station. On such determination the schedule station shall rest in and be the absolute property of lesser."

12. Another clause in the lease stipulated that it was the obligation

of the respondent-assessee to supply electricity to the lessor at a

prescribed rate. After examining the clauses the tribunal has held:-

"10. A cumulative reading of all these clauses will show that assessee was to operate the plant of generation of electricity and part of the generation of electricity was to be supplied to the lessor at prescribed rates. The assessee was to incur expenses on repairs and maintenance of the plant was to generate electricity and generate revenue in the year under consideration but the payment of lease rent was to start from 14th April, 2006 which date falls in the next financial year. The term of lease is 20 years. As per clause 17.3, upon expiration of lease, the

assessee was to handover the plant in good running condition except liability of lessor to pay to the assessee the written down value of the additions and alterations of the building, station or additional machinery that may be brought by the lessor at the station and on such determination the schedule station shall rest in and be the absolute property of the lesser. Thus, this clause conveys that what the assessee is entitled is only written down value of the additions and alterations to the building, station or additional machinery. The aforesaid detail will reveal that none of the items represents addition or alteration to the building, station or additional machinery. Therefore, the amount of expenditure incurred by the assessee cannot be said to be giving any enduring benefit to the assessee. It has not created any capital asset for the assessee. Therefore, keeping in view the terms of agreement and facts of the case, it cannot be said that the expenditure incurred by the assessee has given any enduring benefit."

13. Looking at nature of the expenses, which have been incurred by

the respondent-assessee and the conditions stipulated and mentioned in

the lease agreement, the tribunal has rightly held that the aforesaid

expenses were in nature of current repair either for making the

plant/factory operational or to replace the damaged or unserviceable

parts to run/start the plant.

14. The Assessing Officer in the assessment order had not dealt

with the nature and specifications of repair undertaken or the

purchases made. Further to classify an expenditure as current repairs

or capital, the foremost requirement is to see whether repair

undertaken is to preserve and maintain or operationalize/operate the

already existing asset or bring into existence a new asset. Also, the

amount/quantum of money alone cannot be factor to determine whether

the expenditure falls under current repair or revenue expenditure. The

Supreme Court in Commissioner of Income Tax v. Saravana Spg. Mills

(P) Ltd., (2007) 7 SCC 298, has held :

"5. This Court in Ballimal Naval Kishore v. CIT approved the test formulated by Chagla, C.J. in New Shorrock Spg. and Mfg. Co. Ltd. v. CIT as to when the expenditure can be said to have been incurred on current repairs. In that case it was observed as follows: (New Shorrock case, ITR pp. 343-44) "The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of „repairs‟ because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure. If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which the legislature has permitted under Section 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure."

In the said judgment, it has been further observed by Chagla, C.J. that the definition of the word "repair" does not create much difficulty, but the difficulty is

created by the word "current" which qualifies the expression "repair". This adjective, namely, "current" is put in by the legislature. It indicates that the legislature did not intend that the assessee should be permitted to claim allowance for all kinds of repairs, even though conceptually the expenditure may be revenue expenditure. The legislature intended to stress that under Section 31(i) the permissible deduction admissible is only for current repairs, therefore, the question as to whether the expenditure incurred by the assessee conceptually is revenue or capital in nature is not relevant for deciding the question as to whether such an expenditure comes within the etymological meaning of the expression "current repairs". In other words, even if the expenditure is revenue, it may not fall in the connotation of "current repairs" in Section 31(i). The test formulated above applies to cases where the assessee claims allowance under Section 31(i).

xxx

11. An allowance is granted by Clause (i) of Section 31 in respect of amount expended on current repairs to machinery, plant or furniture used for the purposes of business, irrespective of whether the assessee is the owner of the assets or has only used them. The expression "current repairs" denotes repairs which are attended to when the need for them arises from the viewpoint of a businessman. The word "repair" involves renewal. However, the words used in Section 31(i) are "current repairs". The object behind Section 31(i) is to preserve and maintain the asset and not to bring in a new asset. In our view, Section 31(i) limits the scope of allowability of expenditure as deduction in respect of repairs made to machinery, plant or furniture by restricting it to the concept of "current repairs". All repairs are not current repairs. Section 37(1) allows claims for expenditure which are not of capital nature. However, even Section 37(1) excludes those items of expenditure which expressly falls in Sections 30 to 36. The effect is to delimit the scope of allowability of deductions for repairs to the extent provided for in Sections 30 to 36.

12. To decide the applicability of Section 31(i) the test is not whether the expenditure is revenue or capital in nature, which test has been wrongly applied by the High Court, but whether the expenditure is "current repairs". The basic test to find out as to what would constitute current repairs is that the expenditure must have been incurred to "preserve and maintain" an already existing asset, and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage."

14. Counsel for the Revenue has not been able to point out and show

that the aforesaid expenses were not incurred on replacement of parts,

lubrication etc. No new asset came into existence. The expenditure was

incurred to make the plant operational and functional. We may note

that in the assessment year in question the plant in fact became

operational and 22,53,500 units of power were generated and sold for

Rs.61,17,125/- as per the audited accounts.

15. The question of law accordingly is answered in affirmative i.e.

in favour of the respondent-assessee and against the Revenue. The

appeal is dismissed without any order as to costs.

SANJIV KHANNA, J.

R.V.EASWAR, J.

APRIL 25, 2012 NA