TaxTMI 
TaxTMI 
2026 (2) TMI 1357
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.... facts and in the circumstances, the appellate order passed by ld. NFAC is erroneous and unsustainable on facts and in law. 2. The Id. NFAC erred in sustaining the action of the AO in treating the expenditure on (i) Roller and Structures, (ii) Scrap Rails, (iii) Conveyor Belt and (iv) Track Cross amounting to Rs. 7,51,71,282 as capital expenditure, contrary to the nature of expenditure being revenue, and allowing only depreciation on the said expenditure. 3. The findings of the ld. NFAC in this regard in his/her order is factually and legally incorrect and cannot be sustained. For these and other grounds that may be urged, it is prayed that the appeal may be allowed. 3. The brief facts of the case are that the assessee, M/s. Nuziveedu Swathi Coastal Consortium is a joint venture, engaged in the business of civil contracts and more particularly executing sub-contracts for main contractor. During the year under consideration, the assessee continued the execution of the sub-contract work of executing an EPC Turnkey Contract i.e. 'Construction of Tunnel including Construction of Head Regulator and Excavation of Approach Channel of Veligonda Project in Prak....
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....ising the expenditure incurred on construction of railway track and conveyor belt system and allowed the depreciation thereon. The assessee challenged the order of the Ld. CIT(A) by filing appeal before the Tribunal and the ITAT, Hyderabad 'A' Bench vide its combined order dated 26.10.2021 in appeals in ITA Nos.609 to 611 and 1511/Hyd/2019 for the A.Ys 2013-14 to 2018-19 restored the issue to Assessing Officer relating to the issue of capitalising expenditure incurred on construction of railway track and conveyor belt system to the Assessing Officer for fresh verification. 5. During the second round of proceedings, the Assessing Officer called upon the assessee to file relevant evidences and justify the expenditure incurred for rollers and structures, scrap rails and track, conveyor belt system and ventilation ducting as revenue in nature and also file its objections if any for treatment of said expenditure as capital in nature. In response the assessee submitted that the expenditure incurred for rail track, conveyor belt and ventilation ducting are not capital in nature which gives enduring benefit to the assessee, but used as a consumable in the process of earning income and t....
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....ess or any mechanical operation or process the machinery apparatus or fixtures by which a business, is carried on or the fixtures and tools necessary to carry on any trade on mechanical business. 9.2 As per the information by way of paper news submitted by the assessee it had brought a high level machine "Tunnel Boring Machine (TBM) in the year 2008 for an amount of Rs. 128 crores and used for drilling the work. And rail track is used for the movement of the machine TBM. Therefore, as per the definition of the plant, the machinery apparatus or fixtures by which a business is carried on or the fixtures and tools necessary to carry on such business is also be included in the definition of the 'Plant'. 9.3 Further, the rails so purchased are used for the purpose of mode of movement for goods as well as personnel as the tunnel progresses and also for the excavation of the material. The Rails which are purchased for the purposes of laying down the Rail Tracks will be in use for a period of more than 1 year. In the assessee's case the contract work was commenced in the year 2007 and still going on till the financial year relevant to the A.Y. 2015-16. Therefo....
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....airing the assets that generate revenue are revenue expenditures because these costs support the business's ongoing operations and have no impact on the asset's lifespan. Therefore, the expenditure for repairing and maintenance are recurring in nature. These expenditures are upkeep of capital assets in their usual condition. These the expenditure incurred towards repairs are allowed in the present case. 9.8 Further, it is seen from the depreciation schedule filed along with the return of income that the assessee has claimed depreciation @ 15% on 'Tunnel Boring Machine'. Besides, TBM, the Rail tracks, conveyor belt, ventilation ducting and fish plates are all utilising in excavation work. Therefore, these items are nothing but- apparatus or fixtures to the machinery, through which an excavation work can be carried on. Therefore, the expenditure incurred towards acquisition of the assets viz Rail track, Rollers and Structures, conveyor Belt, ventilation ducting and Fish plates needs to be capitalized: 9.9 The contention of the assessee that while passing the assessment order for the A.Y. 2016-17, the issue of allowing as revenue expenditure is consid....
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....machinery or tools and required to fix the above machine and thus, the same is in the nature of capital asset which gives enduring benefit to the assessee. Therefore, he held that the Assessing Officer has rightly treated the expenditure incurred for rollers and structures, railway track, conveyor belt and ventilation ducting as capital in nature and allowed depreciation as per law. Thus, rejected the explanation of the assessee and upheld the additions made by the Assessing Officer. The relevant findings of the Ld. CIT(A) are as under : 4.1 I have gone through the case (record submission of the appellant and other documents. The case has meandered through a series of litigation and has finally come at this stage. The earlier assessment has gone through the stage of 1st and 2nd appeal and, the present order was passed u/s 143(3) r.w.s 254 on 21.01.2022, as the Hon'ble ITAT had set aside the assessment on certain points. 4.2 Ground No. 1 & 2 :- Vide these grounds, appellant has challenged the addition made by the AO by Capitalizing the following expenses, claimed as revenue by the appellant. The AO had considered these expenses to be capital in nature and has d....
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....es released during excavation. The appellant has given various reasons as to why the above expenses on the concerned items should be treated as revenue expenses. The reasons given by the appellant are being discussed one by one, in the succeeding paragraphs. 4.2.4 It is claimed that the expenses on the above items were incurred, year on year, depending on length of the tunnel excavated. It is further stated that the scrap rail and tracks are meant to be kept abandoned in the tunnel as part of the project. The above argument of the appellant has no relevance in deciding as to whether the same is of revenue nature or capital. It is obvious that as the work of excavation of tunnel proceeds further, the length of rollers, scrap rails, conveyor belt, tracks etc. will also increase and the above expenses shall be incurred and added on a year to year basis. The mere fact that these expenses were incurred year on year has no bearing on deciding the issue of their enduring nature or otherwise. Notwithstanding the fact that more and more meters of above items were added with the progress of the tunnel excavation work, the fact cannot be lost sight of that the rails, conveyor belts e....
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....s not per-se change their nature or changes the enduring nature of their utility. The ventilation ducting is required for movement of air into the tunnel to keep the air breathable and safe. The ventilation ducting is used only for movement of air and apparently there is little scope of too much of wear and tear or damage by movement of air. The appellant has also not been able to bring out any material evidence to suggest otherwise in this regard. As stated already the work of excavation of tunnel cannot proceeds without breathable air and hence, the ducting laid down once has to be used for the entire length of the project, which incidentally in this case is 15 years as admitted by the appellant itself. Accordingly, this argument of the appellant is also without substance. 4.2.7 The appellant has claimed that the ventilation ducting does not have any resale value and they have to be abandoned at the site itself and has enclosed pictures of certain abandoned items to prove its point. It is claimed that the pictures enclosed are that of rollers, conveyor belts and ventilation ducting abandoned at the site. The above point is also immaterial again to determine the issue tha....
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....e items as revenue expenditure on the same analogy that they were left as scrap and abandoned at the site itself. 4.2.10 Finally, the appellant has claimed that the above items have been treated by the AO as revenue expenses and no disallowance in this regard was made for AY 2016-17. The above point was raised by the appellant in the course of assessment also and was rightly answered by the AO that the conclusions drawn for AY 2016-17 cannot be claimed as a precedent for other assessment years has it is well established that the principles of Res-judicata is not applicable in the case of taxation proceedings and each AY is treated as a separate proceeding. I agree with the stand taken by the AO and hence this ground of appeal is also devoid of any merit. Accordingly, these grounds of appeal are dismissed. 9. Aggrieved by the order of Ld. CIT(A), the assessee is now in appeal before the Tribunal. 10. The learned counsel for the assessee, Sri A.V. Raghuram, Advocate submitted that the Ld. CIT(A) erred in sustaining the additions made by the Assessing Officer towards disallowance of revenue expenditure incurred on roller and structures, scrap rails, railway track, conve....
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....mply upheld the reasons given by the Assessing Officer. Therefore, he prayed that the additions made by the Assessing Officer should be deleted. In this regard, he relied upon the decisions of Hon'ble Supreme Court in the case of CIT Vs. Madras Auto Service (P) Ltd. (1998) 233 ITR 468 (SC). The learned counsel also relied upon the decision of Hon'ble Supreme Court in the case of CIT Vs. Associated Cement Companies Ltd. (1988) 172 ITR 257 (SC). 11. The learned CIT-DR Smt. U Mini Chandran, on the other hand, supporting the orders of Ld. CIT(A) submitted that, whether the expenditure incurred by the assessee is capital in nature or revenue in nature must be decided based on the nature of asset created by the assessee, but not based on the nature of business carried out by the assessee. She submitted that the assessee has installed railway track which is not a scrap rails or a temporary one. The railway track gives enduring benefit to the assessee which lasts for more than 7 to 8 years as claimed by the assessee itself. She further submitted that the assessee has also installed conveyor belt and ventilation ducking which are permanent in nature and gives enduring benefit for....
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....nditure which gives enduring benefit to the assessee. Further, the expenditure incurred by the assessee are fundamentally temporary, site specific and non-enduring beyond the life of the specific contract. Therefore, in our considered view, the true test for determining whether the expenditure is revenue or capital, hinges on the nature of an advantage obtained. If the expenditure brings into existence an asset or an advantage of an enduring nature for core business structure of the assessee, it is capital in nature. Conversely, if it is incurred for a smooth and efficient running of the existing business structure or to facilitate the current trade operations, then it is revenue in nature. In the instant case, the railway tracks and conveyor belts were not acquired to create a permanent asset for the business as a whole, nor did they expand the core capacity i.e. the ability to execute more contracts for the assessee. They were merely tools of the trade, acquired pro-tempore and used exclusively and necessarily for the execution of a single, specific contract of tunnelling work. It is not the case of the Assessing Officer that railway track installed by the assessee is a permanent....
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....ot give any enduring benefit. As already stated in earlier part of this order, in order to treat an expenditure is revenue or capital, one has to consider the nature of business of the assessee and expenditure from a commercial point of view, what advantage did the assessee gets by constructing a railway track or conveyor belt or ventilation duct in a site which belongs to somebody else and spending money for construction. The assessee gets only business advantage by deploying the above temporary structures in the work site which does not result in any enduring benefit to the assessee. Temporary railway track, conveyor belt and ventilation duct system created by the assessee in the process of boring a tunnel by using a TBM machine cannot be treated as plant and machinery or an asset which gives enduring benefit to the assessee. In our considered view, while dealing with the issue of whether a particular expenditure is capital or revenue, one has to keep in mind whether the outgoing expenditure is so related to the carrying on or the conduct of the business, that it may be regarded as an integral part of the profit earning process and not for acquisition of an asset or a right of a ....
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....sam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, West Bengal (27 ITR 34). In that case, the appellant-company had acquired from the Government of Assam lease of certain lime-stone quarries for a period of 20 years for the purpose of manufacture of cement. The lessee had, inter alia, agreed to pay an annual sum during the whole period of the lease as a protection fee and in consideration of that payment, the lessor undertook not to grant to any person any lease, permit or prospecting licence for lime-stone. This Court examined tests laid down in various cases for distinguishing between capital expenditure and revenue expenditure. One of the standard tests now in use was laid down in the case of Atherton v. British Insulated and Helsby Cables Ltd. ([1925] 10 Tax. Cases 155). It said : "When an expenditure is made, not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capita." Whether by spending the money an....
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....cases where the assessee, by expending money, created and asset of an enduring nature. However, the asset so created did not belong to the assessee. In such a situation the courts have held that the expenditure was for better carrying on of the business of the assessee and could be allowed as revenue expenditure, looking to the circumstances of each of those cases. Thus in Lakshmiji Sugar Mills Co. P. Ltd. v. Commissioner of Income-tax, New Delhi (82 ITR 376) the assessee company was carrying on the business of manufacture and sale of sugar. It paid to the Cane Development Council certain amounts by way of contribution for the construction and development of roads between various sugarcane-producing centres and the sugar factories of the assessee. The roads remained the property of the Government. This Court held that the expenditure was not of a capital nature and had to be allowed as an admissible deduction in computing the profits of the assessee's business. The expenditure was incurred for the purpose of facilitating the running of the assessee's motor vehicles and other means employed for transportation of sugarcane to its factories. In the case of L.H. Sugar ....
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....nements, this Court said that the expenditure was incurred merely with a view to carry on the business of the company more efficiently by having a contented labour force. All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as a revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expense has been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also, since the asset created by spending the said amounts did not belong to the assessee but t he assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure." 15. In this view of the matter and considering the facts and circumstances of....