2014 (2) TMI 1409 - AT - Income Tax

Tribunal rules in favor of assessee, expenses treated as revenue, not capital.

The Tribunal upheld the CIT(A)'s decisions in favor of the assessee on all issues, including the treatment of expenditures as revenue expenses rather than ... Nature of expenditure - capital or revenue expenses - expenditure incurred was towards repair/replacement of cost of nozzles, buckets, shrouds, bearings, transition pieces and combustion liners which are parts of gas turbines - HELD THAT:- There is no replacement of the gas turbine as a whole but certain repair and replacement to some of the parts of the gas turbine, which does not result in bringing into existence a new asset of enduring nature, rather, the repair and maintenance are of recurring nature and essentially required for smooth running of business of the assessee i.e, generation of power. The other decision of the Hon’ble Supreme Court relied upon by the learned D.R. in the case of CIT V/s. Sri Mangayarkarasi Mills (P) Ltd. [2009 (7) TMI 17 - SUPREME COURT] also following the decision in the case of CIT V/s. Saravana Spinning Mills [2007 (8) TMI 16 - SUPREME COURT] has laid down the same proposition of law. On the other hand, the decisions relied upon by the assessee as noted in the order of the CIT(A) clearly supports the view that the expenditure incurred by the assessee cannot be treated as capital expenditure. Thus we direct the Assessing Officer to delete the addition made on account of disallowance of expenditure. Addition on account of social welfare expenditure - Revenue or capital expenditure - HELD THAT:- A perusal of the assessment order makes it clear that the Assessing Officer admits the fact that the community hall is in the control of Village Panchayat as its ultimate asset. In such view of the fact it cannot be held that it is a capital expenditure as there is no capital asset created by the assessee for it. That besides, as has been rightly held by the CIT(A) social welfare expenditures incurred by a company helps in improving the working with the native people of the nearby area and it also improves the condition of the area inhabited by its employees and others. Therefore, such social welfare expenditures are to be allowed as business expenditure. As in Karnataka Financial Corporation [2009 (12) TMI 410 - KARNATAKA HIGH COURT] held that the amount spent by the Corporation towards development of model villages has to be considered as expenditure incurred towards his business promotion and therefore, allowable as a business expenditure. Therefore, considering the totality of facts and circumstances, we are of the view that the CIT(A) was justified in deleting the addition. Addition of prior period expenditure - A.O. held that as the expenditure has apparently accrued and chargeable to those years as per the clauses of term loan agreement between the parties and the expenditure is apparently interest and penal interest for nonpayment/ deferment by the assessee, the same is not an expenditure allowable for the year - HELD THAT:- After going through the order of the CIT(A) we do not find any infirmity in his finding. As can be seen from the facts on record, the payment of interest on term loan was because of a settlement reached with the bank. It is not the case of the Assessing Officer that the interest paid was either claimed or allowed as expenditure in the earlier years. Therefore, the deduction certainly can be allowed under section 43B of the Act when the amount was actually paid by the assessee. CIT(A) having found that the assessee has paid an amount during the year out of the total expenditure the same has rightly been allowed as a deduction. Accordingly, we confirm the order of the CIT(A) and dismiss the ground raised by the department. Addition of claims raised towards surcharge - HELD THAT:- Reasoning of the CIT(A) that the assessee had taken unilateral decision for waiver of the surcharge is not correct. That besides, when A.P. Transco is contesting the levy of surcharge, which is very much evident from its letter under reference, and demanding for withdrawal of the levy there is no other option on the part of the assessee but to waive the surcharge levied. In this view of the matter, we are of the view that CIT(A) was not justified in rejecting the claim of the assessee. We, therefore, direct the Assessing Officer to allow the expenditure since the decision to waive the surcharge is taken during the financial year relevant to the assessment year under dispute and the amount has been written off during the year in the books of the assessee. The ground raised is therefore, allowed. Issues Involved:1. Deletion of addition made due to disallowance of expenditure of Rs. 20,21,46,278/-.2. Deletion of addition made on account of expenditure of Rs. 19,70,990/-.3. Deletion of an amount of Rs. 45,92,009/- out of the total disallowance of Rs. 60,54,821/- as prior period expenditure.4. Disallowance of Rs. 37,46,363/- as prior period expenditure.Issue-wise Detailed Analysis:1. Deletion of Addition Made Due to Disallowance of Expenditure of Rs. 20,21,46,278/-:The department challenged the CIT(A)'s action in deleting the addition made due to disallowance of expenditure of Rs. 20,21,46,278/-. The assessee, a power generation company, claimed this amount as expenditure towards repairs and maintenance of plant and machinery. The Assessing Officer (AO) treated this expenditure as capital expenditure, citing that it resulted in an enduring benefit and relied on the Supreme Court's decision in Saravana Spinning Mills P. Ltd. However, the CIT(A) noted that the expenditure was for replacing parts of gas turbines, which are essential for maintaining the power generation capacity and did not enhance the capacity or create a new asset. The CIT(A) observed that the power generation process is a continuous and integrated one, unlike the textile mill in Saravana Spinning Mills, and hence, the expenditure should be treated as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, stating that the repairs were necessary for the smooth operation of the business and did not result in a new asset of enduring nature.2. Deletion of Addition Made on Account of Expenditure of Rs. 19,70,990/-:The AO disallowed the expenditure of Rs. 19,70,990/- incurred by the assessee for constructing a community hall, treating it as capital expenditure. The assessee argued that the community hall was for the benefit of its employees and the local community, which indirectly benefited its business. The CIT(A) allowed the expenditure as revenue expenditure, relying on various judicial precedents that allowed similar social welfare expenditures as business expenses. The Tribunal upheld the CIT(A)'s decision, noting that the expenditure improved working relations with the local community and the conditions of the area inhabited by the employees, thus qualifying as business expenditure.3. Deletion of an Amount of Rs. 45,92,009/- Out of the Total Disallowance of Rs. 60,54,821/- as Prior Period Expenditure:The AO disallowed the interest expenditure of Rs. 60,54,821/- related to earlier years, arguing it should have been claimed in those years. The assessee contended that the interest was paid during the year under consideration and should be allowed under section 43B of the Act. The CIT(A) allowed Rs. 45,92,009/- as it was paid during the relevant financial year and disallowed the remaining Rs. 14,62,812/-. The Tribunal upheld the CIT(A)'s decision, stating that the interest paid during the year is allowable under section 43B.4. Disallowance of Rs. 37,46,363/- as Prior Period Expenditure:The AO disallowed the waiver of surcharge amounting to Rs. 37,46,363/- as prior period expenditure. The assessee argued that the surcharge was considered as income in earlier years and was waived during the year under consideration based on a request from A.P. Transco. The CIT(A) sustained the disallowance, stating it was a unilateral waiver without justification. However, the Tribunal found that the waiver was based on a request from A.P. Transco and a decision by the assessee's Board, thus justifying the waiver. The Tribunal directed the AO to allow the expenditure as it was written off during the relevant financial year.Conclusion:The Tribunal dismissed the revenue's appeals in ITA.No.310/Hyd/2009 and ITA.No.452/Hyd/2009 and allowed the assessee's appeal in ITA.No.324/Hyd/2009, confirming the CIT(A)'s decisions on all issues.