2005 (12) TMI 235 - AT - Income Tax

Appeal partially allowed, specific expenses recognized as revenue, 100% depreciation on machinery parts upheld.

The ITAT partially allowed the appeal, disallowing most share capital issue expenses as revenue expenditure but allowing specific working capital and ... Business Expenditure Issues:1. Allowability of expenses related to the issue of share capital as revenue expenditure.2. Claim of 100% depreciation on machinery parts and repairs.Issue 1: Allowability of Share Capital Issue Expenses:The appeal by the Department challenged the CIT(A) order allowing only a portion of the share expenses claimed by the assessee as revenue expenditure. The AO contended that expenses incurred in connection with the issue of share capital are of capital nature. The Revenue relied on decisions by the Rajasthan High Court and the Supreme Court to support their argument that such expenses are capital in nature. The Department argued that expenses related to share capital issue are directly linked to expanding the company's capital base and are capital expenditure. On the other hand, the Authorized Representative argued that if the purpose of enhancing capital was to have more working funds for the business, the expenses should be considered revenue expenditure. The ITAT concluded that most expenses were related to share capital issue and disallowed them as revenue expenditure, except for a specific project appraisal fee. The ITAT found that expenses related to working capital and public issue were revenue in nature, while share capital issue expenses were capital in nature.Issue 2: Claim of 100% Depreciation on Machinery:The Department contested the deletion of an addition made for claiming 100% depreciation on certain machinery parts and repairs. The AO treated the expenditure as capital, allowing only 25% depreciation, resulting in a disallowance. The CIT(A) allowed 100% depreciation, stating that since each item was below Rs. 5,000, it was eligible for full depreciation. The ITAT considered arguments from both sides, with the Authorized Representative highlighting that all machinery together formed a single unit and no new assets were created in the replacement process. The ITAT agreed with the Authorized Representative, allowing 100% depreciation on the machinery parts as they were integral to the functioning of the spinning unit. The ITAT relied on a decision by the Madras High Court, emphasizing that the expenditure was revenue in nature and essential for the business's operation. The ITAT rejected the argument that each part being below Rs. 5,000 did not qualify for full depreciation, as the parts were part of a larger integrated system and not standalone units.In conclusion, the ITAT partially allowed the appeal, disallowing most share capital issue expenses as revenue expenditure but allowing specific working capital and public issue-related expenses as revenue. Additionally, the ITAT upheld the claim for 100% depreciation on machinery parts and repairs, emphasizing their integral role in the functioning of the spinning unit and their necessity for business operations.