It is unsustainable to disallow revenue expenditures based solely on the description of expenses
Fact and issue of the case
Present appeal has been filed by the assessee against order passed by the ld.Commissioner of Income Tax(Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as “Ld.CIT(A)”] dated 15.07.2022 under section 250(6) the Income Tax Act, 1961 (hereinafter referred to as the “Act’ for short) pertaining to the Asst.Year 2017-18.
The only ground raised in the appeal is as under:
That the ld.National Faceless Appeal Centre, has erred in law and facts by confirming the disallowance of repairs to machineries of Rs.37,50,699/- on the groundthat it is capital expenditure and therefore theld.AO should be directed to delete the said disallowance while computing the total income.
A perusal of the above ground reveals that the solitary issue in the present appeal relates to disallowance of repairs to machineries amounting to Rs.37,50,699/-, treating it as capital expenditure.
We have heard both the parties and carefully perused the orders of the authorities below. The assessment order reveals that the assessee had claimed repairs to machinery to the tune of Rs.2,68,53,153/-. The details of the same were submitted to the AO during the assessment proceedings. On scrutinizing which, he found that certain expenses incurred by the assessee were in the nature of replacement and not repairs. The said expenditure amounted to Rs.72,79,477/-. The details of the same are reproduced at para-5 of the assessment order. On confronting- the same to the assessee, the assessee pleaded that the plant of the assessee-company was 40 years old and that the assessee was in the business of manufacturingvarious acids, which are corrosive and hazardous, and because of this corrosive nature of the products, some of the part of machinery are decayed and to maintain norms of the Gujarat Pollution Control Board, public safety rules etc. the decayed part of the machinery is to be repaired and replaced from time to time. The bills of all the expenses incurred were attached. The AO was not satisfied with the explanation of the assessee and noting that the expenses as tabulated by him related to replacement of various parts, he held that the same cannot be treated as revenue expenditure. He relied on decision in the case of Ballimal Naval Kishore Vs. CIT, 224 ITR 414 (SC) in support of his finding, and accordingly, he disallowed repairs and maintenance expenses to the tune of Rs.72,79,477/-. The relevant finding of the AO in this regard at para 5.4 to 5.7 of his order are as under:
The reply submitted by the assessee has been considered and found to be not tenable. On verification of the bills submitted by the assessee it is seen that the above expenditure were incurred in connection with the replacement of various parts of machinery and not mere repairing charges or any other expenses of recurring nature. Many of the bills are regarding the machinery parts which are replaced after a particular period of time. Therefore, such expenses cannot be treated as revenue expenditure.
Reliance is place in the case of Ballimal Naval Kishore Vs. Commissioner of Income-tax SC-HC/AAR  224 ITR 414 (SC)/ 90 TAXMAN 402 (SC)/ 138 CTR 284 (SC) wherein it was held as under:
Section 31 of the Income-tax Act, 1961, corresponding to section 10(2)(v) of the Indian Income-tax Act, 1922 – Current repairs – Assessment year 196162 -Assessee, carrying on business of exhibiting films in a theatre spent amount on new machinery, furniture, sanitary fittings and electrical wiring – In addition thereto, a substantial amount was spent on extensive repairs to building structure – Assessee claimed deduction of amount so spent, under section 10(2)(v) – Whether expenditure incurred by assessee Qualified for deduction as ‘current repairs’ within meaning of section 10(2)(v) – Held, no
In New ShorrockSpg. & Mfg. Co. Ltd.’s case (supra), it was observed that the expression ‘current repairs’ means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration but which is only for the purpose of preserving or maintaining an already existing asset and which does not bring a new asset into existence or does not give to the assessee a new or different advantage. They are such repairs as are attended to as and when need arises and that the question when a building, machinery, etc. requires repairs and when the need arises must be decided not by any academic or theoretical test but by the test of commercial expediency. The test evolved in New ShorrockSpg. & Mfg. Co. Ltd.’s case (supra) is the most appropriate, one having regard to the context in which the said expression occurs.
Applying the aforesaid test, it would be evident that what the assessee did was not mere repairs but a total renovation of the theatre. New machinery, new furniture, new sanitary fittings and new electrical wiring were installed besides extensively repairing the structure of the building. By no stretch of imagination, could it be said that the said repairs qualified as “current repairs” within the meaning of section 10(2)(v). It was a case of total renovation and had rightly been held by the High Court to be capital in nature.
The assessee has incurred a sum of Rs.72,79,4777- for repairs to machineries. By no stretch of imagination, could it be said that the said repairs qualified as “current repairs”. It was a case of total replacement and had to be held as capital in nature.
In view of above discussions the expenses incurred of Rs.72,79,4777- is disallowed as it is capital in nature and added back to total income. Penalty proceedings u/s 270A of the Act is initiated separately for under reporting of the income.
The assessee carried the matter in appeal before the ld.CIT(A) who upheld the order of the AO partially to the extent of Rs.37,50,699/-, finding only expenses to this extent to be relating to replacement while remaining, he held, was in the nature of repairs to machinery. Accordingly, the ld.CIT(A) allowed the claim of the assessee vis-à-vis the same. His finding at para 5.3 of his order is as under:
This ground relates to making disallowance of repairs to machineries of Rs. 72,79,477/- on the ground that it is capital expenditure.
I have considered the submission of the assessee and gone through AO’s order. I find certain expenses are in the nature of replacement and not the repairs of he machinery. In para 5.2 of the order of AO, all expenses with this nature are enlisted. Out of these expenses the following expenses are considered to be not in the nature of repairs :
|Replacement part of leak element during shutdown||Rs. 1846906/-|
|Replacement of reactron section II unit||Rs. 653088/-|
|Ceramic replacements for SOS absorb (755250+495425)||Rs. 1250675/-|
|Total Rs. 3750699/-|
Apart from the above expenses, other expenses are found to be in the nature of repairs only, hence, are allowable as revenue expenditure. The AO is directed to restrict the disallowance to the extent of Rs.37,50,699/- in place of Rs.72,79,477/-and further allow depreciation on the capitalized amount of Rs.37,50,699/- at the rate applicable to the assets with which the above amount is to be capitalized. As a result, ground no.3 is partly allowed.
As is evident from the above, the basis with the Revenue authorities for treating the expenses to the tune of Rs.37,50,699/-as capital in nature, is noting the description that this expenditure was incurred for replacement of machinery part, and consistently, the Revenue authorities have held that since as per the provisions of law contained in section 31 of the Act ,dealing with allowability of repairs and maintenance expenditure of machineries, only current repairs are allowed, this replacement expenses are not in the nature of current repairs.
Observation of the court
We fail to understand how merely on the basis of description of the expenditure, the Revenue authorities have come to such a conclusion that the replacement expenses are not in the nature of current repairs. As per the decision of the Hon’ble Apex Court relied on by the AO in the case of Ballimal Naval Kishore (supra), current repairsmeans repairs for the purpose of preserving or maintaining already existing assets. Therefore, incurrence of expenses whether for current repairs or not, has to be examined on this touch-stone, where it is for preserving and maintaining already existing assets or not. It can be treated as capital expenditure ,not being in the nature of current repairs, as per the said decision,only if it brings a new asset into existence or gives to the assessee a new asset or different advantage. Now, merely because the description of expenditures states to be replacement of certain parts or machinery, it cannot lead to the conclusion that the expenditure was not for the purposeof maintaining or preserving of an asset, and it resulted in creation of a new asset or new advantage to the assessee. The assessee had explained that it was in the business of manufacturing various acids which corrodedits plant & machinery speedily, and therefore, its plant & machinery needed to be repaired and part of it replaced so as to maintain its working capability. Further, it is also fact on record that the assessee had incurred huge expenses to the tune of Rs.2.68 crores towards repairs & maintenance of plant & machinery and expenses only to the extent of Rs.37.50 lakhs have been found to be capital in nature.
Considering facts as above, we are not in agreement with the Revenue that expenses to the tune of Rs.37.50 were not in the nature of current repairs to be allowed in terms of section 31 of the Act particularly when the assessee had explained that considering the nature of manufacturing done by it , machinery parts corroded frequently warranting their replacement so as to maintain the machineries in working condition, which has not been controverted by the Revenue . And the finding of the Revenue of the expenses being capital in nature /noncurrent is based on mere description of the expense as replacement of certain machinerywith no facts emanating from the records before us to substantiate the same.
In view of the above, we see no reason to uphold order of the ld.CIT(A) confirming the disallowance of repairs & maintenance expenditure to the tune of Rs.37,50,699/-. The grounds raised in the appeal are allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 09th June, 2023 at Ahmedabad.
In the result, appeal of the assessee is allowed and ruled in favour of the assessee