TaxTMI 
TaxTMI 
2012 (10) TMI 751
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....es incurred on Life Extension Program (LEP) of Thermal Power Station I (TPSI) and expenditure on rejuvenation of Bucket Wheel Excavators (BWE) are allowable as revenue expenditure. The common ground in the appeals of the Revenue for the assessment years 1993-94 and 1994-95 is only in respect of expenses incurred on Life Extension Programme (LEP) of Thermal Power Station I (TPS-I). 3. The facts of the case are that the assessee is a public sector undertaking engaged in the business of generation of electricity and mining of Lignite. The assessee incurred expenditure on TPS-I and rejuvenation of BWE during these assessment years and claimed such expenditure as revenue expenditure allowable under section 37 or as current repairs under section 31(i) of the Income Tax Act. The Assessing Officer while completing these assessments under section 143(3) for all the assessment years from 1993-94 to 1999-2000 disallowed the said expenditure incurred on TPS - I and rejuvenation of BWE treating as capital expenditure as against the claim of the assessee as revenue expenditure or expenditure allowable as current repairs. 4. On appeal, the Commissioner of Income Tax (Appeals) confirmed the ....
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....e right perspective. The admissibility of the claim is to be examined on the touchstone of the guiding principles laid down by the Hon'ble jurisdictional High Court in the case of Janakiram Mills Ltd., supra. We, therefore, set aside the impugned order on this count and restore it to the file of the AO with direction to decide it de novo in accordance with law after providing adequate opportunity to the assessee of being heard." Similar direction is given by this Tribunal in its order dated 20.02.2008 in I.T.A. Nos. 656 & 657/Mds/2003 for the assessment years 1993-94 and 1994-95 also. 6. Pursuant to the above order of this Tribunal, the Assessing Officer passed consequential orders under section 154/143(3) read with section 254 of the Income Tax Act for the assessment years 1993-94 to 2000-01. 7. The Assessing Officer while completing the assessments, pursuant to the directions of this Tribunal, once again disallowed the expenditure incurred on repairs to machinery i.e., TPS-I and rejuvenation of BWE treating it as capital expenditure on the grounds that there is increase in production/power generation capacity of the units due to this expenditure incurred on TPS-I/BWE. Th....
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....al Power Station I (TPS*I) and expenditure on Rejuvenation of Bucket Wheel extractors as revenue expenditure. 4) The amounts were initially treated as capital by the Appellant, but claims for revenue expenditure were made during the course of assessment proceedings in regard to Assessment year 1995*96. In regard to Assessment year 1996-97 and 1997-98 the claims were made in the return of income. The claim was disallowed on the ground that the expenditure is capital in nature by the learned Assessing Officer. The reason adduced by the Assessing Officer was that the expenditure had resulted in enduring advantage to the Appellant and the issue was squarely covered by the decision of Supreme Court in the case of Balliammal Naval Kishore Vs CIT (224 ITR 414). 5) The Appellant went on appeal for the AY 95-96 & 96*97 before the learned CIT (Appeals) and vide orders dated 25.09.2002, the learned CIT (Appeals) disposed of the appeal rejecting the claim of the Appellant. The reasons adduced were :- a) There was considerable planning and execution involved in the execution of the LEP b) The expenditure was a one time expenditure covering the Plant I which had outlived it....
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....High Court in the case of Jankiram Mills Ltd; supra" . 9) The learned assessing officer in his orders passed pursuant to the direction of the Honourable Tribunal has again disallowed the claim holding that the expenditure in question resulted in enduring advantage. The reasons adduced were that there was increase in production capacity. The expenditure is not current repairs and hence not covered by Sec 31 (i) and the decision of Supreme Court in the case of CIT Vs Saravana Spinning Mills Ltd 293 ITR 201 was applicable. Hence the Appellant has filed the present appeals. 10) On behalf of the Appellant it is forcefully submitted as under:- a) The addition made by the Assessing Authority was primarily on the basis that there has been increase in production capacity. The Appellant submits that there was no increase in production capacity due to the expenditure as is demonstrated by the figures for generation of electricity from the period of commencement of the LEP and the year of completion thereof. b) The production of TPU I and Mines during the years were as under: S.No. Particulars of Year Production Mine- 1. Lignite (Lakh Tonnes) T.P.S.-I Gross (M.U.) T.P.S.-....
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....urbine equipment. iii) To work out the recommendation. iv) The results of the3 study on Metal control has been reported as under: 1. Steam super heater pipes - Cuttings were made from the steam superheater pipes which were subjected to visual inspection and metallographic examination. All the cuttings on the inner side were covered with a layer of scale, the maximum thickness of which (1 mm) was observed on the pipes of the outlet stage of the convective super heater. On the outer side of the pipes there was a layer of dense deposits with the thickness upto 2.5 mm. The wall thickness and outer diameters of the pipes deviated from the rated dimensions negatively upto 10-15%. In all the cuttings the structure, consists of ferrite and carbides arranged both as a kind of chains on the boundaries of the grains and inside them. The above stated miorostructure condition of the cuttings and availability of thick scale reveal durable overheat of the pipes above the rated value. The availability of durable overheat is accompanied by consequent pipe failures with non-significant increase of the diametre and small thinning of the edge in the place of breakage. It was observed more ....
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.... 7000 hours of the, drum operation it is recommenced to carry out metal control of the above stated shell and after comparing the results of this control with those of 1989 to take a decision about the suitability of the drum for further operation. The Soviet specialist, on his behalf, will prepare a request to the plant manufacturer of the drum concerning the possibility of its operation with the above stated defect. 5. Main Steam pipe Lines - The main steam pipe lines supplied with the boilers by the plant manufacturer can be left for durable operation (for a total life expenditure up to 180* 200 thousand hours). The rest of the main steam pipes exhausted their resources. It is proved by the increase of their diametre up to 275 mm, reduction of the bend evality almost upto 0 % the wall thickness of the bends of the main steam pipe lines of Unit N9 does not meet the requirements of strength for the period of operation upto 150 thousand hours and that of Unit N1 up to 200 thousand hours. 6. 100% of feed water pipes of Ø108 x 7 mm. 7. Casing and other parts of the turbines subjected to control according to the worked out programme are suitable for further ....
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....WEs are deployed in the Lignite corporation mines for excavation of overburden / lignite. These equipments have worked round the clock except during the time of regular maintenance i breakdown and planned stoppage. Also these equipments worked in the open atmosphere, which is corrosive in nature with respect to the steel structures. Due to the above atmosphere the structural parts of these equipments have thinned out. Also because of the continuous working these equipments, some parts of these equipments have been subjected to dynamic loading and also the parts have been subjected to tension and compression which might change the properties of material. In view of the above conditions, the output of the machine have depleted gradually. In order to bring back the output of the machine close to the original these machines have been rejuvenated to give a new lease of life. The particulars of the work carryout during the rejuvenation with reference to the drawing is submitted herewith. The number indicated within bracket below is the part referred in the above drawing. The details of the item replaced (i) Crawler frame assembly (2) The crawler frame consists of crawler p....
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.... (v) Discharge boom complete (8): The material excavated by the bucket wheel is being handled through the receiving conveyor and loaded in the discharge boom conveyor which is in turn transported to conveyor system and it is dumped in the dumping yard. This part is also (discharge boom complete) subjected to continuous load and also gets corroded due to atmospheric condition. In view of the above, this part was also replaced with new one. (vi) Mail slewing ball race and main slewing gear box shell (12): The upper part of the bucket wheel excavator (Super structure) is mounted on the under carriage through turn table. Between these two parts a ball race is provided for rotating the super structure. As the ball race is continuously rotating with .the super structure this part gets worn out due to wear and tear and hence it was replaced. The slew gear box shell is the one on which the drive parts of the slew gear box is assembled. This gear box shell got damaged due to prolonged use and hence it was strengthened and reused. (vii) Bucket wheel boom hoist winch drum (13):. The bucket wheel hoist winch drum is for hoisting / lowering the bucket wheel boom for e....
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....and repair works were carried out. The replaced parts were the part of the BWE and were not capable of working independently." 12) While the facts relating to LEP and BWE rejuvenation were as stated above it was submitted that the disallowance was made by the learned Assessing Authority on the basis of decision of the Supreme Court in the case of Sarvana Spinning Mills Ltd. 293 ITR 201. 13) In so far as the case relied upon by the learned Assessing officer, the Appellant submits that the decision in Saravana Spinning Mills ibid related to a case where there was complete replacement of old machinery. Further Supreme Court had specifically said that they are not pronouncing any decision on the admissibility of deduction under Sec 37 (I).The Appellant relies upon the decision of CIT Vs Renu Sagar Power Co Ltd 298 ITR 94 (All) where a replacement of turbine rotor was held to be revenue in nature. The Appellant further cites upon the decision of the jurisdictional court in the case of CIT Vs Rane Madras Limited 293 ITR 459 wherein it was held that even expenditure on a new factory was held as revenue. The Appellant submits that its case is far superior to that one involved in the ....
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....ard to TPU I was intended to ensure continued operation of the power plant; total replacement of the plant would have resulted in disproportionately high expenditure. What were replaced were parts of integrated plant for generation of power and there was no replacement of machinery as a whole. f. As rightly observed by tMe Appellant, the case of Saravana Spinning Mills related to claim under Sec 31 (i) and did not decide allowability of expenditure under Sec 37 (1) under which also the appellant had staked its claim under which also the appellant had staked its claim. g. The report by the Soviet Engineers produced by the Appellant testify to the state of disrepairs of the plant. h. Also in regard to the expenditure on Bucket wheel Rejuvenation the expenditure is one incurred for replacement of parts and not replacement of the bucket wheel excavator in toto. i. The Supreme Court in the case of Saravana Spinning Mills Ltd (293 ITR 201) dealt with this issue as follows:- "The point for consideration is, whether the modernization/current/ repair expenditure is allowable as 'revenue expenditure', as claimed by the assessees or the replacement of cards/blow room machinery/....
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....l appeals wrongly tagged with the present batch which will be decided separately by us as they concern with section 37(1). Hence we do not wish to express any opinion on applicability of section 37(1). However, in this case it has been pointed out by the appellant and not strongly controverted by the AO on the basis of evidence that it is not the replacement of a new machine but it is that of replacement of parts of machinery or overhauling of old and worn out equipments and hence allowable as revenue expenditure as clearly borne out by the facts brought on record by the Appellant. j. The decision of the Allahabad High Court in the case of CIT vs Renu Sagar Power Company ltd., ( 298 ITR 94) which has considered the decision of Supreme Court in Saravana Spinning Mills Ltd ( 293 ITR 201) also supports the case of the Appellant. In that case the High Court observed as under: "The Tribunal has recorded a finding that the turbine rotor is an essential part of the turbo generator set. It is not an independent machinery or plant. The turbine rotor on its own independent functioning cannot generate electricity. It is being used in the turbo generator set as its essential part. On the....
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....ld constitute current repairs is that the expenditure must have been incurred to 'preserve and maintain' an already existing asset, and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage. " So far as the decision relied upon by learned standing counsel for the Department is concerned, the same is distinguishable on the facts. In that case, the question whether certain expenditure incurred by the assessee on knives and loses in the material period qualified for capital allowance under section 16(3) of the Finance Act, 1954. On the facts it was found that the knives are not parts of the machine. Each knife is a separate tool or implement designed to be used in conjunction with the machine. On these facts it was held that replacement of knives was the capital expenditure. In the case on hand the factual position is quite different. It has been found by the Tribunal as a fact that turbine rotor is a part of turbo generator set. The turbine rotor does not function independently. It is a part of turbo generator set. j. On a detailed reviews of the facts and circumstances, I am of the view that since there has been no increase ....
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.... on the decision of the Hon'ble Supreme Court in the case of Saravana Spinning Mills (P) Ltd. (supra), Bharat Gears Ltd. v. CIT [337 368 (Del.)], CIT v. Madura Coats 205 TAXMAN 357/19 (Mad), CIT v. M/s. Rane Brake Linings Ltd. T.C.(A) No. 71 & 72 of 2008 dated 25.04.2011, CIT vs. Universal Cold Storage Ltd. T.C.(A) No. 39 of 2008 dated 08.11.2011 and submitted that in view of these decisions, the expenditure incurred on LEP of TPS-I and rejuvenation of BWE were correctly treated as capital expenditure by the Assessing Officer and allowed depreciation as applicable. 11. The counsel for the assessee submitted that the assessee had power generation plant installed in the year 1962 to 1970 consisting of 9 units. The power generation plant cumulatively accounted for 600MW of capacity. The counsel submitted that the assessee had erected one boiler for each 50MW of power generation and the boilers worked for 12 years. The counsel submitted that each boiler consists of several parts in it and each boiler is a separate machine by itself. The counsel submits that in the LEP programme of TPS-I, what the assessee incurred was the expenditure on replacement of only certain parts of the boile....
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....was replaced by the assessee was ring frames, which are independent machinery unlike in assessee's case, where the assessee replaced only parts of boilers, which are not capable of functioning independently. The counsel submits that the Hon'ble Supreme Court in the case of Saravana Spinning Mills (P) Ltd. (supra) held that there are various sections in the spinning mill and each machinery including ring frame was independent and separate machinery capable of functioning independently and scientifically. Therefore, it was held that the expenditure incurred for replacement thereof would not come within the meaning of "current repairs". The counsel submits that the decision of the Hon'ble Supreme Court in fact, supports its case as the Hon'ble Supreme Court held that when an expenditure was incurred to preserve and maintain already existing asset and such expenditure is not bringing any new asset into existence or obtaining new advantage such expenditure is allowable as current repairs. The counsel submits that in its case, since only the parts of the boilers and BWE system were replaced and not the boiler or BWE system itself, the expenditure incurred was only to preserve and main....
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....(Rs..) 1993-94 10,22,63,348/- 1994-95 39,35,07,774/- 1995-96 22,65,86,642/- 1996-97 27,78,53,677/- 1997-98 56,84,06,076/- 1998-99 48,23,92,595/- 1999-2000 47,35,92,595/- Total 252,46,02,707/- The assessee claims this expenditure as allowable deduction either under section 31(i) or under section 37 of the Income Tax Act. The Assessing Officer completed the assessment rejecting the claim of the assessee and treating the said expenditure as capital expenditure on the ground that the assessee has incurred huge expenditure on TPS-I under LEP and on rejuvenation of BWE and this expenditure brought enduring benefit to the assessee, especially there is increase in the production/power generation capacity of the assessee and therefore, is in the nature of capital. The contention of the Assessing Officer was that this is one time expenditure at the end of life span of the asset with a view to give new life. Therefore, the expenditure did not fall within the meaning of "current repairs" under section 31(i) of the Act. The Commissioner of Income Tax (Appeals) in his common order for the assessment years 1995-96 to 1997-98 elaborately dealt with various issues....
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....rts of the boiler got exhausted. Considering the ageing of units and for safe operation of the equipments at rated steam parameters, the Life Extension Programme works in all units were carried out from April 1992 to March 1999 in phased manner with the approval of Govt. of India. The components subjected to creep damage namely super heaters, main steam lines etc. and high pressure valves, economisers and other allied pipe lines lost their healthiness were replaced in full, where as other high pressures parts namely water walls & feed water lines and other parts, after inspection were partially replaced to the extent required. Boilers The following components were replaced completely in boilers: 1. Super heaters with their headers and inter connecting pipes. 2. Main steam line. 3. Upriser and Down comer pipes. 4. Economiser and their transfer-pipes. 5. Boiler condenser and de super heater. 6. High pressure valves. 7. Compensators of Air and Gas ducts. 8. Rear side water wall. The following components were replaced partially after inspection; 1. Front water wall and si....
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....of the Bucket Wheel excavator is enclosed" 15. It could be seen from the above technical write-ups, the whole exercise of the LEP of TPS-I and rejuvenation of BWE is for replacement of certain parts of boilers/BWE only. The assessee has not replaced the entire boiler/BWE and what was replaced was only the parts of boiler/BWE. These parts of the boiler/BWE are not capable of functioning independently and this fact is not in dispute. In our view, these expenditures were incurred only to replace certain parts of boiler/BWE and overhauling of the parts in boiler and is only to preserve and maintain the existing assets i.e. boiler/BWE and there is no enduring advantage obtained on replacement of such parts of existing assets. The assessee also demonstrated that there is no increase in production/ generation of power capacity and therefore, the observations of the Assessing Officer that there is increase in production capacity appears to be misplaced. 16. In the assessment order, the Assessing Officer himself stated that, if a new plant is to be installed, the cost of such new plant would be about Rs..4.5 crores per MW and in such case the total project cost would come to Rs..2700 ....
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....ands concluded by the judgement of this Court in the case of Commissioner of Income Tax Vs. Kanodia Cold Storage [1975]100 ITR 155 wherein it has been held as follows(headnote): "Replacement of worn out parts does not by itself bring in a new asset. In considering the nature of an expenditure one should consider the productive unit as a whole and not pick out parts therein which are new. If the productive unit to the assessee remains the same but a part of it which has become unsuitable for its use is replaced by something which makes it possible for the existing set up to function efficiently, the cost incurred on such replacement would be revenue expenditure." The Commissioner of Income-tax Vs. M/s. Saravana Spinning Mills Pvt. Ltd.[2007] 293 ITR 201(SC); [ 2007] 10 JT 111(SC), while interpreting the words "current repairs" in Section 31 of the Income-tax Act, it has been held as follows (page 208):- ".......... If an autoleveler is to be repaired then that repair would come within the connotation of the word "current repairs" because it is a part of the Carding Machine. Even if in a given case, replacement of an Autoleveler could come within the connotation of the word ....