TaxTMI 
TaxTMI 
2014 (2) TMI 1409
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....her has raised 9 grounds. Grounds No.1 and 9 are general in nature and therefore, it need not be adjudicated and hence, they are dismissed. 3. In Ground Nos.3 to 5 the department has challenged the action of the CIT(A) in deleting the addition made due to disallowance of expenditure of Rs. 20,21,46,278/-. 4. Briefly the facts are, the assessee is a company engaged in generation of power. For the assessment year under dispute, the assessee had filed its return of income on 28.10.2005 declaring income of Rs. 22,48,47,450/-. Initially the return was processed under section 143(1) of the Act. Subsequently, the assessment was reopened under section 147 of the Act. During the re-assessment proceedings, the Assessing Officer while examining the final accounts of the assessee, noticed that an amount of Rs. 26,95,28,370/- was claimed as expenditure towards repairs and maintenance of plant and machinery. On further verification, he noted that the expenditure claimed was towards installation/ refurbishment/ replacement of altogether new part/new asset to the major plant of gas turbines as per the requirement as capital asset having enduring benefit. The Assessing Officer therefore, aske....
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....in an appeal filed before the CIT(A). In course of hearing of appeal before the CIT(A), it was contended by the assessee that the expenditure incurred was towards cost of nozzles, buckets, shrouds, bearings, transition pieces and combustion liners which are parts of gas turbines. It was submitted that the expenditure was incurred only for replacement of unserviceable parts of gas turbine without which the power generation cannot be achieved at the rated capacity. The assessee submitted that there is no enhancement of capacity on account of the replacement of parts. The expenditure was incurred only for smooth operation of business activity and cannot be considered as a capital expenditure. The assessee submitting the details of gas turbine assembly contended that the gross block of plant and machinery was Rs. 571.14 crores and the repairs incurred during the year was only Rs. 26.95 crores which works out to roughly Rs. 4.72% of the block. It was submitted that such expenditure incurred for replacement of parts was only to preserve and maintain the power generation unit which is an already existing asset and it does not bring any new asset into existence or any new advantage. It was....
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....173 Taxman 12. 7. The CIT(A) after considering the submissions of the assessee vis-à-vis the materials available on record, noted that the Assessing Officer has made the disallowance primarily relying on the decision of the Hon'ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills (supra). The CIT(A) on going through the decision of the Honble Supreme Court in the case of Saravana Spinning Mills (supra) noted that in the facts of that case the High Court had held that the process of converting fibre to yarn was one continuous interlinked process by which output from various intermediate stages of production (cutting, combing, draw frame silver and roving) cannot be sold or marketed or used for any other purpose. Hence, the High Court held that the entire textile mills should be considered to be as one continuous process plant commencing from the blow room to the winding section. The Hon'ble Supreme Court considering the aforesaid facts and going into the details of functioning of each department in the textile mill observed that blow room, carding, combing, drawing, roving, spinning and winding are different departments/divisions in textile mills. In each depa....
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....roduct as its output. Examining the facts of the assessee's case in the aforesaid perspective, the CIT(A) noted that the production process of the assessee is, generation of electric energy using combined cycle plant envisaging a gas turbine plus unfired steam generator. At one end of the turbine assembly, natural gas/naphtha is fed into the combustor which burns with atmospheric air sucked in by the rotating compressor raising the temperature of mixture of air and fuel and this high energy mixture flows to the turbine and moves blades of the gas turbine developing mechanical energy and rotates the electrical generator to produce electrical energy. Thus the entire process of production or generation of electricity is one unified and integrated process and there is no intermediate marketable product. He therefore, was of the view that the assessee's case is different from the facts of CIT V/s. Saravana Spinning Mills (supra) where different departments produced separate identifiable product whereas, in case of the assessee the process of production is one continuous and integrated. He further going through the details submitted by the assessee noted that there is a regular inspectio....
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....f Saravana Spinning Mills. Thus, considering the submissions of the assessee and after analyzing the observations of the Hon'ble Supreme Court in the case of Saravna Spinning Mill, the CIT(A) was of the view that the case of the assessee is not squarely covered by the decision of Hon'ble Supreme Court firstly because the power generation plant is an integrated plant unlike the Textile Mill as was pointed out by the Apex Court and secondly there is no intermediate marketable product in the process of production. The CIT(A) observed that, assessee's case is rather covered by the observation of the Hon'ble Supreme Court in respect of a continuous casting machine or the case of an air conditioning machine. Thus by replacing or refurbishing the buckets, nozzle assembly etc., the assessee is not replacing the entire machinery i.e., the gas turbine assembly which is an integrated unit. The repair of replacement is rather to preserve and maintain the existing unit. 11. Following the principles laid down by the Hon'ble Supreme Court in the case of CIT V/s. Ramaraju Surgical [1] Cotton Mills 294 ITR 328 ( SC), Cochin Company vs. CIT 67 ITR 199 and Saravana Spinning Mills....
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....rned D.R. relying upon the decision of the Hon'ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills Pvt. Ltd.(supra) and the decision of Hon'ble Supreme Court in the case of CIT V/s. Sri Mangayarkarasi Mills (P) Ltd. 315 ITR 114 submitted that when there are more than one division and if each division is capable of producing some product independently, then, refurbishing or replacing parts in one division, would amount to capital expenditure as each division can be exploited commercially. He therefore, submitted that the Assessing Officer was correct in treating the expenditure incurred as 'capital expenditure' eligible for depreciation at the prescribed rate. 14. The learned A.R. referring to a booklet authored by David Balevic, Steven Hartman and Ross Youmans on operation and maintenance of Heavy Duty Gas Turbine submitted that for preserving component life and optimizing maintenance cost of periodical and well planned maintenance programme is required to be followed. He submitted that, some [1] of the parts of the gas turbine due to natural wear and tear need to be repaired/replaced after a fixed hour of operation. This repair/replacement of parts is of rec....
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....ome of its parts are either repaired or replaced as per the maintenance requirement. It is to be noted from the detailed discussion made by the CIT(A) that the assessee has submitted the details of periodic inspection to be made as recommended by the equipment manufacturer. Further it is a fact to be taken note of that the assessee has been claiming such expenditure towards replacement of nozzle, shrouds, buckets etc., from the F.Y. 1998-99 and all along the department has allowed such expenditure. This fact has not been controverted by the learned D.R. It is also a fact that out of the total block of the assets relating to gas turbines of Rs. 517 crores, the repair and maintenance to the extent of Rs. 20,21,46,278/-. Therefore, considering the quantum of expenditure, it cannot be said that there is replacement of the entire gas turbine so as to bring into existence a completely new asset resulting in enduring benefit to the assessee. It is a further fact on record that the assessee's contention that there is no enhancement of capacity of the gas turbines or generation of power after replacement/ repair of the part of the gas turbines remains uncontroverted. Therefore, in the afore....
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....herefore, confirm the order of the CIT(A) and direct the Assessing Officer to delete the addition made on account of disallowance of expenditure to the tune of Rs. 20,21,46,278/-. 16. The second issue as raised in Ground No.7 is with regard to order of the CIT(A) directing the Assessing Officer to delete the addition made on account of expenditure of Rs. 19,70,990/-. 17. Briefly the facts relating to the issue are, during the assessment proceedings, the Assessing Officer noticed that the assessee has debited an amount of Rs. 19,70,990/- as social welfare expenses. When the Assessing Officer asked the assessee to explain why the expenditure incurred has not been treated as capital expenditure, the assessee contended that the plant of the assessee is located in Vijjeswaram, West Godavari District and was set up in 1990. People residing in surrounding villages, public representatives, Government Offices have been requesting the assessee to undertake some local development work which benefits the public in the nearby villages of the factory. The Board of the assessee company after discussions, decided to construct a community hall in Maddur village near the factory to be used for....
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....ols and colleges to improve the working relations with the native people and to improve the condition of the area inhabited by its employees and others. The Hon'ble ITAT following the decision of Hon'ble Karnataka High Court in the case of Mysore Kirloskar Ltd Vs CIT (61 CTR 265) held that the expenditure towards community development is allowable as business expenditure. Similarly ITAT, Kolkata Special Bench in the case of JCIT Vs ITC Ltd.(112 ITO 57)' has held that social responsibility expenses are allowable expenditure. Thus, relying on the aforesaid decisions, the AD is directed to delete the disallowance of Rs. 19,70,990/- made in the assessment order. 19. We have heard the parties and perused the materials available on record. There is no dispute to the fact that the assessee has incurred the expenditure of Rs. 19,70,990/- for construction of a building to be used as a community hall by the villagers as well as by the employees of the assessee company. The only issue is, whether the expenditure incurred is to be allowed as a revenue expenditure as claimed by the assessee or is a capital expenditure as held by the Assessing Officer. A perusal of the assessment ....
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....in payment of further interest amounting to Rs. 60,54,821/-. It was submitted that as the interest was never claimed as deduction earlier, it should be allowed as deduction under section 43B as the actual payment was made during the year. The CIT(A) after considering the submissions of the assessee held as under : "5.3. I have gone through the facts of the case and the submission of the appellant. It is not disputed by the A.O. that the amount of Rs. 60,54,821/- claimed by the appellant relates to payment of interest on term loan. The AO has disallowed the interest on the ground that the same pertain to earlier years and should have been claimed in those years. The appellant on the other hand states that the interest expenditure claimed is allowable in the year .under consideration u/s 43B of the Act since the same has been paid during the year. The A.O. has no where stated that the expenditure of interest was earlier claimed in any assessment year. As per section 43B certain deduction are to be allowed only on actual payment notwithstanding anything contained in any other provisions of the Act. Interest payable on any loan or borrowing from any public financial inst....
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....g power supply bills by purchaser of bulk power. He further held that it is a Government company M/s. A.P. Transco which is the purchaser of bulk power and the surcharge is payable as per the terms of agreement between the parties. He therefore, held that the waiver of this amount is similar to writing off of a good/outstanding debt in the books of the assessee and claiming the same as a prior period expenditure as it is being on account of sales of earlier year and is not an allowable claim as claimed by the assessee. 24. Being aggrieved of such disallowance, the assessee preferred an appeal before the CIT(A). It was contended before the CIT(A) that during the period November, 2002 to March, 2004 a surcharge of Rs. 51,02,271/- was levied on the bills raised on A.P. Transco. Out of the same, Rs. 37,46,363/- pertain to the period November, 2002 to 31st March, 2004. It was contended that on a request from A.P. Transco the assessee has taken the decision to waive the surcharge in its meeting held on 19.01.2005. It was submitted that since the surcharge was already considered as income in earlier years, the same was waived by the assessee and claimed as [1] deduction during the asse....