2015 (12) TMI 614 - AT - Income Tax

ITAT upholds CIT(A) decisions on repair expenses & bad debts. Capitalization not required for repairs.

The ITAT Ahmedabad dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on disallowing machinery repair expenses and bad debts. The tribunal ... Disallowance of machinery repair expenses - CIT(A) deleted the addition - Held that:- There is no rebuttal to the CIT(A)’s findings about kerosene, diesel oil expenses. And also that each head is of less than ₹ 25,000/- except in one case. Revenue fails to single out a case wherein any repair item gives enduring advantage or increases machine capacity. It quotes case law of Mahalaxmi Textile [1967 (5) TMI 4 - SUPREME Court ] and Ballimal Navalkishor (1997 (1) TMI 3 - SUPREME Court) in support. We find the former judicial verdict upheld the tribunal’s reference made to the concerned high court as the nature of expenditure involved. The latter precedent holds that when purpose of the repair in question is of preserving or maintaining already existing asset, it would amount to corrent repair only. There is no such ratio propounded that as and when a repair exceeds 20% of the WDV, the same would need to be capitalized. The Revenue fails to justify the Assessing Officer’s view abovesaid. - Decided against revenue Bad debts disallowance - CIT(A) deleted the addition - Held that:- The case file reveals that the assessee maintained two accounts under the heads security ledger deposits and a running one. Its former sum of security deposits could not be recovered despite exercising all civil and penal remedies (supra). The same proves non-recoverability thereof. The lower appellate authority also allows it as a business loss by following tribunal’s order (supra). The Revenue fails to point out any distinction on facts or quote any case law to the contrary. We affirm the CIT(A)’s argument in these circumstances - Decided against revenue Issues:1. Disallowance of machinery repair expenses2. Disallowance of bad debtsIssue 1: Disallowance of Machinery Repair ExpensesThe Revenue appealed against the CIT(A)'s decision to delete the disallowance of Rs. 6,51,333 made regarding machinery repair expenses claimed by the assessee-firm. The Assessing Officer sought to capitalize the expenditure based on the written down value exceeding 20% and cited relevant case law. However, the CIT(A) accepted the assessee's argument that the expenses were for normal repairs and not capital in nature. The CIT(A) analyzed the expenditure account and found that most expenses were for consumables and small machine parts, not capital items. The tribunal upheld the CIT(A)'s decision, stating that repairs maintaining existing assets do not need to be capitalized merely based on exceeding 20% of the written down value. The Revenue's argument failed as it could not prove enduring advantage or increased capacity from the repairs.Issue 2: Disallowance of Bad DebtsThe Revenue challenged the CIT(A)'s decision to delete the disallowance of Rs. 24,80,126 as bad debts claimed by the assessee. The AO disallowed the claim as the full amount due was not written off as bad debt. The assessee argued that the debts were irrecoverable, citing legal precedents and providing evidence of efforts made to recover the amount. The tribunal found that the security deposits were non-recoverable, allowing them as a business loss following a previous decision. The Revenue failed to provide any distinction on facts or contrary case law. The tribunal affirmed the CIT(A)'s decision based on the non-recoverability of the security deposits and rejected the Revenue's arguments.In conclusion, the ITAT Ahmedabad dismissed the Revenue's appeal on both issues, upholding the CIT(A)'s decisions regarding the disallowance of machinery repair expenses and bad debts. The judgments were based on detailed analysis of the nature of expenses, legal precedents, and evidence provided by the assessee.