TaxTMI 
TaxTMI 
2013 (5) TMI 750
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....ts return of income on 29-10-2004 showing total loss of Rs.7,36,79,224. Case was selected for scrutiny and thereafter the assessment was framed u/s. 143(3) vide order dated 26-12-2006 and the total loss was determined at Rs.5,78,75,272/-. 4. Aggrieved by the order of A.O. assessee carried the matter before CIT (A) and CIT (A) vide order dated 29-5-2008 partly allowed the appeal of the assessee. 5. Aggrieved by the aforesaid order of CIT (A), Revenue is now in appeal before us. Before us the Revenue has raised following two effective grounds:- "1. On the facts and circumstances of the case, the Ld. CIT(A) erred in directing the Assessing Officer to delete Rs.72,57,271/- being diminution in value of inventory even though the assessee could not substantiate its claim and had not included the landed cost in case of talc and marble lumps. 2. The Ld. CIT (A), erred in allowing expenditure of Rs.33,44,209/- on repairs of plant and machinery, considering it as revenue nature even though in note at para 11 to the audit report it was mentioned that the expenditure on repairs of plant and machinery caused enduring benefit to the assessee." First ground....
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....rried the matter before the CIT (A). Before CIT (A) the assessee interalia submitted that one of the major customers had informed that the material supplied by the assessee was contaminated with fungal growth which resulted in poor quality of product. The assessee also got technical report prepared and examined the possibility of removing the fungus. However, it was reported that the stockpile of calcite, china clay had deteriorated in quality to a great extent and the removal of impurity was very costly. Even after removal of impurity some fungal growth would still remain, as a result of which the usage of such contaminated raw materials would be hazardous particularly for application in plastics industry. The stock of raw materials had been hypothecated to banks and other financial institutions. This matter was brought to the notice of the bankers and the assessee company requested the banks for restructuring of its debts. Banks with the other financial institutions agreed to undertake the verification of inventory by third party auditors and based on their report the stock was revalued. CIT (A) after considering the submissions of the assessee and placing reliance on the various....
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....the appellant, there can be no issue regarding the legality of the action. At most a case could be made out that the correct net realizable value was not adopted. 3.2.1. In the instant case, the assessee has adduced convincing documentary evidence in support of the averments made as above. The correspondence with M/s. ICI Ltd. clearly brings out the fact that the fungal growth in assessee's stockpile of raw material was brought to notice and adverse consequences flowed therefrom. Secondly, the laboratory report shows fungal microbacterial growth in stock of raw materials. Thirdly, a report from an independent expert Dr. Dhanjay Sant, consultant and geologist, also brings out the fact that the stockpile of raw materials had become unfit for use as raw material by the assessee company due to fungal growth. Fourthly, the other important stake-holders in the company, viz. SBI, Exim Bank of India, IDBI and SIDBI had a joint meeting under the chairmanship of the lead manager of the consortium (IDBI). As per minutes of the meeting dated 26-3-2004 of the Corporate Debt Restructuring Cell, IDBI, it has been recorded that all the banks/financial institutions have agreed to re....
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....nted out to the reply of assessee to its Banker which is at page No.178 of the paper book wherein it was submitted that the raw materials were of non perishable nature and can be used even after substantial lapse of time. The Ld. D.R. further submitted that this submission of the Managing Director was at variance with the submission made before the CIT (A) wherein it has been stated that the raw materials cannot be used for manufacturing process. He further submitted that though the exercise for analyzing the stock has been carried out the purpose of Bank, valuation adopted by the Bank cannot be adopted for the purpose of Income Tax. He further submitted that the review made by the bank was for the limited purpose of review of the credit facilities only. He further submitted that the assessee has written off the amounts in two years i.e. A. Y. 2004-05 and 2005-06. He further submitted that the valuation report of the Chartered Accountant was received after the close of the year. Further the C.A. is not a Registered Valuer and therefore the Valuation Report submitted by him cannot be relied upon. He thus supported the order of A.O. 10. The Ld. A.R. on the other hand submitted tha....
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.... cost of removal of impurity was very costly and further it was not possible to completely remove fungal growth. CIT (A) apart from considering the aforesaid submission and also considering the documentary evidence like lab report, correspondence from customers, report of independent expert has given a finding that the stock was contaminated by fungal microbacterial growth which necessitated for revaluation of stock duly supported by sound technical and commercial reasons. The aforesaid finding of CIT(A) could not be controverted by Revenue by bringing any contrary material on record. Thus considering the totality of the aforesaid facts and relying on the aforesaid decisions of Hon. High Court find no reason to interfere with the order of CIT(A) and thus uphold his order on this ground. thus this ground of Revenue is dismissed. Second ground is with respect to expenditure of Rs.33,44,209/- on repairs of plant and machinery. 12. Assessing Officer observed that assessee had debited expenses of Rs.33,44,209/- as an Extra ordinary items in its profit and loss account. The assessee submitted that the aforesaid expenses were incurred for repairs of plant and machinery at its Bhuj p....
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....sult only in replacement of part of the whole plant and hence it is in the nature of revenue expenses. The expenditure incurred in replacement is not of material consideration but what is material is the nature of the machine which is replaced. If the machine is part of the plant, though it may be capable of carrying on independent activity yet it might still be part of the whole plant. The test is the end product. If the machine replaced gives the end product and is the only process that is involved, the expenditure incurred would definitely be a capital expenditure. However, in the reverse situation, it would constitute revenue expenditure. Similarly, Madras High Court has held in CIT vs. Tanjavore Textile Mills, 253 ITR 138 that expenditure on replacement of worn out parts of machinery is expenditure of revenue character as it is meant to keep the business without break-down of machinery and not expenditure incurred for starting a new business. Here, what was replaced was only a part of the whole plant. That part was not capable of producing the end product which was sold but only facilitated in its manufacture. Hence, in my opinion the A.O. was not correct in treating the expen....
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....mpany in its notes to accounts has very clearly stated that on refurbishment, machinery capacity would increase and its useful life and performance of the machine was also likely to improve substantially. He thus submitted that when the assessee itself was of the view that the expenditure would increase the capacity and useful life, the expenses therefore cannot be considered to be of Revenue in nature. He however, submitted that CIT (A) has relied on the decision of Madras High Court in the case of CIT vs. Tanjavore Textile Mills 253 ITR 138 which was decided prior to insertion of Explanation-3 to Sec.31 and therefore not applicable to the facts of the present case. He thus submitted that the expenses were in the nature of capital and therefore, the action of the A.O. be upheld. 16. The Ld. A.R. on other hand submitted that the assessee has debited the net amount of Rs.33,44,209/- to Profit and loss account. He further submitted that the insurance claim that was received in subsequent year has been offered as income. In the alternate he submitted that if the expenditure are treated as capital expenditure, the assessee should be granted depreciation. 17. We have heard the riv....
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....of ITA No.2804/Ahd/2008. 22. We have heard both the parties. It is an undisputed fact that the facts of the case in the year under appeal are identical to that of A.Y. 2004-05. CIT (A) also while deciding the issue held that the facts and issue of the present appeal are identical to that of A.Y. 2004-05 and therefore followed his own order. We also for the reasons spelt out in para-11 hereinabove decide the issue in favour of assessee and dismiss the ground of Revenue. Thus this ground of Revenue is dismissed. We first take up second ground with respect to deletion of addition of Rs.61,77,200/-. 23. Assessing Officer observed that the assessee had written off slow /non-moving stock worth Rs.6.59 crores, which consists of Rs.4,81,44,087/- lying at various sites of the assessee and stock of Rs.1,78,28,557/-being the material rejected by the customers and abandoned at the site of customers. The assessee was asked to submit its justification and substantiate its claim. Assessee interalia submitted that the material lying at the customers site was rejected by the customers as the material was found to be unacceptable. Further it was not commercially viable proposition to bring bac....