TaxTMI 
TaxTMI 
2022 (4) TMI 642
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....No.1534/Ahd/2009 and C.O.No.117/And/2009 relevant to the Asst. Year 2006-07 are taken as lead case for disposal of the above batch of appeals. 3. The grounds of appeal raised by Revenue read as under: "1. On the facts and circumstances of the case and in law, the learned C1T(A) erred in deleting the addition on account of Rs. 3,83,02,228/- made on account of capital, expenditure irrespective of the facts huge expenditure towards spare parts which extended the life time, relying on the decision in the case of Ballimal Naval Kishor v/s. PIT 224 ITR 414 (SC) and the decision of Hon. Supreme Court in the case of CIT(A) vs. Saravana Spinning Mills Pvt. Ltd. (2007) 293 ITR 201 (SC). 2. On the facts and circumstances of the case and in law, the learned CIT(A) erred in allowing deduction U/S.80IA irrespective of the fact that the assessee had claimed the said deduction in view of subsequent change of its opinion in respect of this claim. The necessary condition of section 801A to submit the report on or before the due date of filing of return of income was not fulfilled by the asessee. Further, in view of section 80IA(5) the assessee was required to set off previous year brought forwa....
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....he AO observed that some of the expenses were capital in nature. The assessee classified the spares as capital spares in the books and therefore the claim was not allowable as revenue expenditure. The AO issued a show cause notice to the assessee as to why the claim of capital spares on replacement of parts amounting to Rs. 708.61 lakhs should not be disallowed as the expenditure was capital in nature. In reply, the assessee submitted some of the parts of the plant and machines require replacement on achieving the fixed rated life. Replacement of such parts in no way increased the power generation capacity of the plant but only recouped the last efficiency to some extent. The assessee is compulsorily required to replace such parts based on the criteria of repairs interval hours prescribed by the original equipment manufacturer. The assessee further submitted that by making replacement there is no increase in the power generation capacity. By consuming the spares worth Rs. 4.50 crores, there is no impact of increasing the utility of fixed assets having base of Rs. 889.93 crores. It was also submitted that the parts replaced are not independent machines by itself. These machines can ....
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....r more part(s) of a capital asset would constitute revenue expenditure and not capital expenditure. If preservation of the capital asset entails replacement of worn-out parts, such expenses would be revenue in nature. 4.2.2 Regarding the expenditure incurred by the appellant, it is apparent from the nature of the parts replaced that these are small parts of large machines, which may require replacement on being worn out. By incurring expenditure on purchase of items, no new assets came into existence which were capable of producing any saleable item. The parts replaced are useful only when attached to the main machine. Accordingly, it is held that expenditure on replacement of such parts is revenue in nature. Even if the items in question are classified as capital assets there is no doubt regarding the fact that such items are spare parts of larger machine. Such machine would require replacement of worn out parts from time to time. Since immediate availability of spare part is necessary for replacing the worn out part without causing undue loss of production, the assessee has carried a stock of such capital spare parts. The entire expenditure incurred on maintaining such inventor....
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....entially passive income requiring no efforts on the part of the assessee. The next part namely of financial expenses are concerned the assessee submitted it had not made any investments during the year in the assets yielding the tax free income. The AO had not accepted submissions of the assessee and following the rationale of the assessment orders for the Asst. Years 2004-05 & 2005-06, disallowed 10% namely, Rs. 6,53,607/- of the exempt income under S.14A of the Act. 8.2. The learned CIT(A) has held that the issue relating to disallowance under s.14A of the Act had become contentious issue and conflicting judgments were available. Special Bench of the ITAT has examined in detail in the case of ITO vs. Daga Capital Management Pvt. Ltd. 119 TTJ 289, wherein Hon'ble ITAT has held that so far as the onus is concerned, the burden lies on the assessee to prove that the expenditure was incurred in the taxable business operations and not in the exempt income operations. Secondly, it has been held that Parliament in its wisdom had enacted section 14A with retrospective effect from 01.04.1962 in order to clarify the already existing position that only those expenses could be claimed which ....
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....er Finance Corporation of Rs. 2,49,82,597/-which was not paid as per the provisions of section 43B of the Act should not be disallowed. The assessee replied that the provision of Section 43B of the Act is not applicable to the above expenditure. The assessee submitted that since the due date of payment of interest to Power Finance Corporation is 21.11.2007 (relating to A.Y.2007-08) whereas the due date of filing of return of income was 31.10.2007, the provisions of Section 43B of the Act fails to cover such situation. Further, the assessee submitted that the above interest is only accrued during the year and not due for the payment in view of the terms of the loan and the same could not fall within the meaning of term "any sum payable" as occurring in Section 43B of the Act and relied upon the Explanation 2 to Section 43B of the Act. The said explanation provides that "any sum payable" means a sum for which the assessee incurred liability in previous year even though such sum might not have been payable within that year under the relevant law. The said explanation is however applicable only to clause (a) of Section 43B of the Act. The assessee therefore claimed that the law itself ....
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....tems while computing taxable income as held by the Hon'ble Supreme Court in the case of Kedarnath Jute Manufacturing Co Ltd - 82 ITR 363. Thus the book entries are not conclusive for determining the nature of expenditure. The provisions of law prevail over the book entries. Accordingly, consumption of spares being only replacement of spare parts would qualify under the head "current repairs" and treated as Revenue Expenditure. The Ld AR submitted before the Bench a "Technical Write Up" about the machinery and also details of spares consumed at regular intervals for various assessment years as follows: Technical Write up Stage # 1 Bucket Kit- General Electric, USA- G.E.Fr.6 Gas Turbine G.E.Fr.6 (ms6001B) Gas Turbine is 3 Stage turbine having set of Nozzle, Bucket and Shroud in each stage. Bucket set is assembled on turbine rotor in inverted fur-tree slots provided on rotor. Stage # 2 Bucket Kit consists of 92 buckets which when assembled on the rotor forms a series like wheel. The basic function of Buckets is to convert the heat energy of hot flue gases in to mechanical energy and thereby driving the coupled generator, which generates the POWER. Stage # 3 Due to high working ....
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....05-06 Stage - 1 Bucket Kit along with set of hardware for Gas Turbine 3,35,44,305 Stage - 1 Bucket Kit - Cutter tooth along with set of hardware for Gas Turbine spare 2,30,61,292 2006-07 Compressor Rotor Blade GT Fr. 6 1,63,26,126 Compressor Stator Blade GT Fr. 6 2,19,65,961 Entr Arm (Excitor) 67,69,358 2007-08 Stage - 1 Nozzle Arrangement for GT FR - 6 1,06,01,677 Stage - 1 Bucket Kit for GT FR - 6 3,25,68,456 2008-09 Stage - 1 Nozzle -Fr-6 Gas Turbine 3,07,10,000 Stage - 2 Bucket for GT FR - 6 2,30,21,000 14.1. The second fold of argument of the Ld. Counsel for the assessee is that the spares consumed during the year under the consideration does not give enduring benefit to the assessee nor it increases the life or capacity of the machines and therefore are in nature of current repairs allowable as revenue expenditure. The assessee being in the business of generation and distribution of power requires specialized machines for generating power. Some of the parts of the machines require replacement from time to time on being used for fixed number of hours. The number of hours after which the machines are to be repl....
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.... turbine buckets. The said book let mentions about periodic inspection and repair/refurbish/replacement of the aforesaid parts of the gas turbine. It also mentions that when the parts are not repairable, they are to be replaced. From this, it is very much clear that the entire gas turbines are not replaced but some 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. 199899 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 complet....
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....isions relied upon by the assessee as noted in the order of the CIT(A) clearly supports the view that the expenditure incurred by the assessee cannot be treated as capital expenditure. In the aforesaid view of the matter, we do not find any reason to interfere with the findings of the CIT(A) in this regard. We therefore, 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/-. 14.3. Per contra the Ld DR appearing for the Revenue could not bring any contrary view on the above preposition but however contented that when the assessee itself claimed the above expenses in its books of account as "Capital" now cannot claim the same as "Revenue" and relied upon the order passed by the Assessing Officer and prayed for confirming the addition since it is recurring in nature. 15. We have given our thoughtful consideration on the materials placed before us namely Technical Write Up, Details of spares consumed at regular intervals for various Asst. years and the case laws relied by the assessee. We need not labour ourself in coming to a conclusion that the Replacement of parts in ....
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....essentially required for smooth running of business of the assessee i.e, generation of power. j. Therefore we have no hesitation in holding that the replacement of spares in the machineries would be allowable as Revenue expenditure only and addition made by the AO is directed to be deleted. Thus the Department ground is rejected. 16. Issue No.2 relates to additional claim under section 80IA of the Act. The L d Counsel for the assessee submitted that there is no dispute that the Assessee has satisfied all the conditions for claiming deduction u/s 80IA of the Act. Only reason for disallowing the claim of Assessee is non-furnishing of audit report along with the return of income. Referring to page nos. 247 to 274 of the paper book the Ld AR stated that the Audit Report was filed before completion of the Assessment. Thus, it is settled law that filing of report during the pendency of assessment proceedings is sufficient compliance for claiming deduction u/s 80IA of the Act and relied on the judgement of the jurisdictional High Court in the case of Gujarat Oil and Allied Industries - 201 ITR 325. 17. The Ld AR further submitted that regarding the issue of set off of losses as per se....
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....d the period of claim should be availed in continuity. The Assessing Officers are, therefore, directed to allow deduction u/s 80IA in accordance with this clarification satisfied that all the prescribed conditions applicable in a particular case are duly satisfied. Pending litigation on allowability of deduction u/s 80 IA shall also not be pursued to the extent it relates to interpreting 'initial assessment year' as mentioned in subsection (5) of that section for which the Standing Counsels/D.R.s be suitably instructed." 17.2. In reply, the Ld DR appearing for the Revenue admitted that the above Circular No.1/2016 issued by the CBDT has put to end all the issues following the judgement rendered by the High Court of Madras in the case of Velayuthasamy Spinning Mills. 18. We have given our thoughtful consideration on the materials placed before us the issue is now settled by the Circular No.1/2016 issued by the CBDT that an assessee who is eligible to claim deduction u/s 80IA has the option to choose the initial/first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen (or twenty) years, as prescribed under that sub-sec....
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....is also not correct in directing to adopt Rule 8D, since the assessment years are prior to the introduction Rule 8D. In the absence of any administrative expenses and no barrowed funds for such investments, the question of disallowance u/s.14A is unwarrented. 21. Per contra the Ld DR appearing for the Revenue accepted that many rulings by various Court on this issue and however supported the orders of the lower authorities. 22. We have given our thoughtful consideration on the materials placed before us, the issue is now settled by the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. Vs- Commissioner of Income Tax, New Delhi reported in [2018] 91 taxmann.com 154 (SC) wherein it clearly held that Rule 8D is prospective in nature and could not have been made applicable in respect of assessment years prior to 2007 when this rule was inserted w.e.f. March 24, 2008 vide Income Tax (Fifth Amendment) Rules, 2008. Further jurisdictional High Court in the case of Principal Commissioner of Income-tax-4 Vs- Sintex Industries Ltd. reported [2017] 82 taxmann.com 171 (Gujarat) wherein it is clearly held that the Expenditure incurred in relation to income not includible in total inco....