TaxTMI 
TaxTMI 
2022 (4) TMI 642
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed in these appeals are recurring in nature for all the assessment years, since for the sake of brevity ITA 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 fu....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... includes interest under s.234B & 234C. 6.1. First issue regarding Replacement of parts in machineries treated as capital in nature. On scrutiny of the repairs & maintenance expenses debited in the books, the 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the material time. They are effected to preserve and maintain the asset, viz., air-conditioner or a carding machine." 4.2.1 Hence, judicial opinion is quite clearly articulated to the effect that replacement of one or 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 avai....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l and administrative expenses attributable to earning such income should not be disallowed under s.14A of the Act. In reply, the assessee contended that there were no administrative expenses were incurred since the tax free income was essentially 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s made to SVADES and DEEP to that extent relief was allowed and balance amount was confirmed. 11. Issue No.6 relates to claim of disallowance under S.43B of the Act. The AO required the assessee to explain as to why the interest payable to Power 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 i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Accounting method or accounting treatment whether statutorily prescribed under any law or otherwise cannot override the provisions of the Income Tax Act. Further Classification of items in the books is not relevant for deciding the treatment of such items 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 bucke....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or Gas Turbine 3,11,38,001 Stage - 1 Bucket Kit - Cutter tooth along with set of hardware for Gas Turbine spare 2,30,61,292 Stage - 2 Nozzle Kit with inter-stage rush seals for FR - 9 Gas Turbine 9,79,20,788 Stage - 2 Bucket Kit, Cutter teeth design for FR - 9 Gas Turbine 6,88,20,943 2005-06 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 o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....enance costs. The said book let further specifically notifies the parts which require careful attention and maintenance are those associated with the combustion process together with those exposed to the hot gases discharged from the combustion system. This include combustion liners, end caps, fuel nozzles assemblies, cross fire tubes, transition pieces, turbine nozzles, turbine stationery shrouds and 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 allowe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g nature and essentially required for smooth running of business of the assessee i.e, generation of power. The other decision of the Hon'ble Supreme Court relied upon by the learned D.R. in the case of CIT V/s. Sri Mangayarkarasi Mills (P) Ltd. 315 ITR 114 also following the decision in the case of CIT V/s. Saravana Spinning Mills (supra), has laid down the same proposition of law. On the other hand, the decisions 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....enditure incurred by the assessee cannot be treated as capital expenditure but Revenue expenditure only. i. Thus, applying the same logic to the facts of the assessee's case, it can be said that there is no replacement of the gas turbine as a whole but certain repair and replacement to some of the parts of the gas turbine, which does not result in bringing into existence a new asset of enduring nature, rather, the repair and maintenance are of recurring nature and 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. 2....
X X X X Extracts X X X X
X X X X Extracts X X X X
....see, he shall be entitled to claim deduction u/s 801A for ten consecutive years beginning from the year in respect of which he has exercised such option subject to the fulfillment of conditions prescribed in the section. Hence, the term 'initial assessment year' would mean the first year opted for by the assessee for claiming deduction u/s 801A. However, the total number of years for claiming deduction should not transgress the prescribed slab of fifteen or twenty years, as the case may be and 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 foll....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... comprising of dividend income and interest on tax free bond. However there were no administrative expenses were incurred since the tax free income was essentially 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 adhoc disallowance of 10% on the exempt income under S.14A of the Act made by the AO is against law and the CIT[A] 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.....