2022 (8) TMI 671 - AT - Income Tax

Appeal partially allowed: Expenditure on Rolling Mill Rolls deemed revenue.

M/s Ambica Alloys & Steel India Ltd. Versus Dy. Commissioner of Income Tax, Circle-1 (1) (1) Ahmedabad

The appeal was partly allowed. Ground 1 regarding the depreciation claim on electric installation was dismissed as withdrawn. Ground 2, concerning the ... Nature of expenditure - Disallowance of expenditure under the 'head repairs and maintenance'- AO rejected the assessee's contention and held that the assessee is eligible to claim depreciation on the rolling mills @80% and assessee is not eligible to claim deduction thereof as revenue expenditure - Whether replacement of parts of an existing machinery in the course of their working will be a revenue expenditure? - assessee company is engaged in manufacturing of steel products - HELD THAT:- In view of the consistent position taken by various Courts/Tribunals, we are of the considered view that the assessee in the instant set of facts is eligible to claim deduction of expenditure on purchase of Rolling Mill Rolls as revenue expenditure. The only reason why the claim of a revenue expenditure of the assessee was sought to be disallowed was that since the Income Tax Act specified rate of 80% for claim of depreciation in respect of the above assets, the assessee was not eligible to claim the same as revenue expenditure. We note that in the instant set of facts, the revenue has not been able to independently bring anything on record to substantiate that any enduring benefit accrued to the assessee by way of incurring this expenditure on purchase of Rolling Mill Rolls. Accordingly, in our considered view, in the instant set of facts assessee is eligible to claim deduction of expenses as revenue expenditure. In the result, ground of the assessee's appeal is allowed. Issues Involved:1. Depreciation claim on electric installation.2. Disallowance of expenditure under the 'head repairs and maintenance' for Rolling Mill Rolls.Detailed Analysis:Ground 1: Depreciation Claim on Electric Installation- Issue: The assessee claimed depreciation at the rate of 15% on electric installation, which was contested by the lower authorities.- Resolution: The counsel for the assessee did not press this ground. Therefore, it was dismissed as withdrawn/not pressed.Ground 2: Disallowance of Expenditure under 'Head Repairs and Maintenance'- Issue: The assessee claimed Rs. 20,63,537/- as revenue expenditure for the purchase of Rolling Mill Rolls, which was disallowed by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)], treating it as capital expenditure eligible for depreciation at 80%.- Facts: The assessee, engaged in manufacturing steel products, argued that the Rolling Mill Rolls were consumables requiring frequent replacement due to wear and tear, thus qualifying as revenue expenditure.- AO's Observations: The AO noted that the rolls provided an enduring benefit and were listed under tangible assets eligible for 80% depreciation, thus treating the expenditure as capital in nature.- CIT(A)'s Observations: CIT(A) upheld the AO's decision, emphasizing that frequent replacement does not change the capital nature of the expenditure, and the accelerated depreciation rate of 80% already accounted for the short lifespan of the rolls.- Assessee's Argument: The assessee cited various case laws, including the Calcutta Tribunal decision in DCIT v. M/s. Jindal India Ltd., arguing that the frequent replacement of rolls did not result in an enduring benefit and should be treated as revenue expenditure.- Tribunal's Analysis:- Case References: The Tribunal referred to several cases, including DCIT v. M/s. Jindal India Ltd., CIT v. Malhotra Industrial Corpn., and Commissioner of Income Tax-4 Vs. Super Cassettes Industries Ltd., where similar expenditures were treated as revenue in nature due to frequent replacements and lack of enduring benefit.- Key Observations: The Tribunal noted that the rolls are integral parts of the machinery, frequently replaced, and do not increase production capacity or provide an enduring benefit. The mere listing of rolls under the depreciation schedule does not automatically classify the expenditure as capital.- Conclusion: The Tribunal concluded that the expenditure on Rolling Mill Rolls should be treated as revenue expenditure, allowing the assessee's claim.Judgment:- Outcome: The appeal was partly allowed. Ground 1 was dismissed as withdrawn, and Ground 2 was allowed, treating the expenditure on Rolling Mill Rolls as revenue expenditure.- Pronouncement: The order was pronounced in the open court on 27-07-2022.