IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: `A' NEW DELHI
BEFORE SMT DIVA SINGH, JUDICIAL MEMBER
AND
SHRI T.S.KAPOOR, ACCOUNTANT MEMBER
I.T.A .No.-906/Del/2013
(ASSESSMENT YEAR-2009-10)
Bharat Gears Ltd., vs ACIT,
512, Surya Kiran Building, 19, Central Circle-II,
K.G.Marg, New Delhi New Delhi.
PAN-AAACB4860G
(APPELLANT) (RESPONDENT)
I.T.A .No.-1371/Del/2013
(ASSESSMENT YEAR-2009-10)
DCIT, vs Bharat Gears Ltd.,
Central Circle-11, 512, Surya Kiran Building,
New Delhi. 19, K.G.Marg, New Delhi
(APPELLANT) PAN-AAACB4860G
(RESPONDENT)
Appellant by: Sh. M.K.Madan, CA
Respondent by: Smt. A. Mishra, CIT DR &
Y.Kakkar, DR
ORDER
PER DIVA SINGH, JM
These cross appeals have been filed by the Revenue and the assessee against
the order dated 18.12.2012 of CIT(A)-XXXI pertaining to 2009-10 assessment
years on the following grounds respectively:-
In ITA No-1371/Del/2013
1. "The order of Ld. CIT(A) is not correct in law and facts.
2. On the facts and in the circumstances of the case, the commissioner of
Income Tax(A) has erred in deleting the addition of made by AO
2 I.T.A .Nos.-906 & 1371/Del/2013
amounting to Rs.31,76,827/- on account of treatment of expenditure on
repair of plant and machinery as capital expenditure.
3. The appellant craves leave to add, amend any/all the grounds of appeal
before or during the course of hearing of the appeal."
In ITA No-906/Del/2013
1. "That the order passed by the Ld. CIT(A)-XXXI is bad in law & on facts.
2. (a) That the Ld. CIT(A) has erred in confirming disallowance of
Rs.1,07,200/- on account of Leave encashment u/s 43B of the Income Tax
Act, 1961.
(b) That the Assessee craves, leaves to alter, amend, vary, add any
grounds of Appeal."
2. Right at the outset it was submitted by the Ld. AR that in ITA No-
906/Del/2013 filed by the assessee the amount mentioned in Ground No-2(a) needs
to be corrected as on account of a typographic error the amount stated
inadvertently is Rs.1,07,200/- whereas the correct amount should be
Rs.10,72,200/-. The said fact it was submitted would be borne out from para 3.2.1
of the CIT(A) and also evident from the last page of the assessment order wherein
the addition of the said amount has been made by the AO. The statement of the
Ld. AR was found to be correct and not disputed by the Sr. DR who on perusing
the orders concurred with the submissions made. Accordingly the correction of
the amount mentioned in ground 2(a) by way of typographic error is allowed to be
carried out.
3. A perusal of the record shows that the assessee returned an income of
Rs.9,40,80,294/- which was processed u/s 143(1) of the Income Tax Act, 1961
and thereafter selected for scrutiny. Consequently notice u/s 143(2) followed by
notice u/s 142(1) alongwith the questionnaire etc. were issued and considering the
arguments of the assessee two additions were made in terms of para 3.3 and 4.1 of
the assessment order amounting to Rs.31,76,827/- and Rs.10,72,000/- respectively.
As a result of this the returned income was assessed at Rs,9,83,29,121/-.
3 I.T.A .Nos.-906 & 1371/Del/2013
4. The assessee challenged these additions in appeal before the CIT(A) who
confirmed the addition of Rs.10,72,000/- and qua the addition of Rs.31,76,827/-
relief was granted. Aggrieved by this both the assessee and the department are in
appeal before the Tribunal.
5. Addressing first the facts relevant to the issue agitated by the assessee in its
appeal, it is seen that on account of the following reasoning the addition was made
by the AO:-
4. "During the course of assessment proceedings, the assessee company
was specifically required to furnish details in respect of payments made an
account of leave encashment and provisions made on this account. Complete
details were filed and the same had been examined. It has been taken to
notice that during the financial year some of the amount provided on this
account had not actually been paid. Total amount in this regard debited to
the books of accounts is Rs.77.20Lacs out of which payment of Rs.66.48 Lacs
have been made during the relevant financial year 2008-09. The assessee
company in reply dated 25.03.2011, has submitted that it has been adequately
disclosed in the Tax Audit Report that disallowance has not been made on the
basis of decision of Kolkatta High Court in the case of Exide Industries Ltd.
vs. UOI (292 ITR 470) relying upon the decision of Apex Court in the case of
Bharat Earth Movers (245 ITR 428). The reply filed by the assessee company
has been examined and considered. Reliance place by the assessee on the
judgement of Hon'ble Kolkatta High Court in the case of Exide Industries is
of no help to the assessee as the Department has filed SLP against his
decision which has been admitted by the Apex Court. It is pertinent to
mention here that Ld. Commissioner of Income Tax, Central-1, New Delhi, in
the case of the assessee company for the assessment year 2008-09, had
observed as under:-
"It is a fact that Assessing Office had not disallowed the provision of
leave encashment and this act of the Assessing officer was erroneous
because the date of the decision of the Hon'ble Supreme Court is
08.05.2009 and the order of the Assessing Officer was passed much
after this date i.e.20.04.2010. The Assessing office was duty bound to
make efforts to know about the fate of the SLP filed against the
judgement of Hon'ble High Court in the case of M/s Exide Industries
Limited vs Union of India (292 ITR 470) which the Assessing Officer
failed to do. Hence the order passed by the Assessing Officer is
erroneous on this account. The order of the Assessing Officer is also
prejudicial to the interest of revenue....Therefore, the Assessing
Officer is directed to disallow the claim of allowance of provision of
leave encashment and modify the assessment order accordingly.
4 I.T.A .Nos.-906 & 1371/Del/2013
4.1. Keeping in view the findings of the Ld. CIT, C-1, New Delhi while
completing the re-assessment proceedings for the assessment year 2007-08
and 2008-09, amount debited to the books of accounts on account of leave
encashment payments and provisions was disallowed under section 148 and
263 respectively. Therefore, relying on my own assessment completed as
mentioned supra, an amount of Rs.10.72 lac is considered as not allowable
and is added to the income of the assessee company for the assessment year
2009-10. Penalty proceedings under section 271(1)(c) of the Income Tax Act,
1961 are hereby initiated."
6. In appeal before the First Appellate Authority on behalf of the assessee it
was argued that the claim is disclosed in the tax audit report and has been made on
the basis of the decision of the Kolkata High Court in the case of Exide Industries
Ltd. vs Union of India 292 ITR 470 (Cal.). Reliance was placed upon the order of
the Tribunal in assessee's own case pertaining to 2008-09 assessment years
wherein the following direction had been reproduced:-
3.2.2. "In a written as well as oral submissions made before the undersigned,
the AR has drawn the attention to the order of ITAT for Assessment
Year 2008-09 in the assessee's own case, where ITAT had given the
following directions to the assessing officer:-
"Coming to the direction of the CIT(A) that the AO has to disallow the
claim of allowance of provision for leave encashment, we vacate these
directions in view of the interim orders of the Hon'ble Supreme Court
extracted above. The AO is directed to follow the directions of the
Hon'ble Supreme Court and dispose of the matter de novo in
accordance with law, without being influenced by the order of the
CIT."
6.1. It was also contended that the AO has not given effect to the ITAT's order.
7. Considering the same the issue was concluded by the CIT(A) in the
following manner:-
3.2.4. "I have examined the facts of the case as well as the submissions of the
appellant. With due respect, I note that ITAT has not expressed its view
as to whether the disallowance under 43B on the issue was called for or
not. ITAT has merely directed the AO to follow the directions of the
Hon'ble Supreme Court.
5 I.T.A .Nos.-906 & 1371/Del/2013
3.2.5. The directions of Hon'ble Supreme while admitting departments SLP
against the order of Hon'ble Kolkata High Court in the case of Exide
Industries Ltd. is reproduced below:-
"We further make it clear that the assessee would, during the pendency
of civil appeal pay tax as if section 43B(f) is on the statues book but at
the same time it would be entitled to make its claim in its return."
3.2.6. From the above remarks of the Hon'ble Supreme Court, it is evident
that it has not consented to operationalise the decision of Hon'ble
Kolkata High Court which had held the provision as unconstitutional.
In directing M/s Exide Industries Ltd. to pay the taxes as if S. 43B(f) is
on the statue book, I am of the opinion that section 43B(f) is very much
effective as on date.
3.2.7. I am not in agreement with the AR's argument that once the assessee
adds back on his own the unpaid provision and pays tax, there could
not be any further claim. If one is to interpret the directions of the
Hon'ble Supreme Court, one of the options available to the assessee
could be that he pays the taxes but makes a claim in the computation of
income. However, it is upto the assessee to decide what procedure he
would follow in the matter. That would be only a matter of procedure.
3.2.8. In this background I hold that if one goes by the spirit of Supreme
Court's remarks as above, prima facie, the Hon'ble Supreme Court was
not in agreement with the decision of Hon'ble High Court of Kolkata,.
In this background I uphold and confirm the disallowance made by the
AO as the wordings of Section 43B(f) are very clear and the amount
debited without actual payment during the year cannot be allowed as a
deductions."
8. Aggrieved by this the assessee is in appeal before the Tribunal. The Ld. AR
inviting attention to the order of the Tribunal in assessee's case in ITA No-
1523/Del/2011 dated 21.09.2012 submitted that the direction given by the ITAT
wherein the order dated 08.02.2011 u/s 263 which had been upheld deserves to be
followed and the Apex Court has categorically held that the assessee may pay tax
and thereafter make the claim in its return which has been done as such the same is
allowable.
9. The Ld. Sr. DR, Ms. Y.Kakkar submitted that the Apex Court has simply
said that the tax must be paid and the claim may be put forth. It does not mean
6 I.T.A .Nos.-906 & 1371/Del/2013
that the claim has to be allowed without examination. The facts of the assessee's
case it was submitted pertain to 2009-10 assessment years and currently we are in
2014-15 financial year as such it was her submission that let the issue go back
directing the assessee to place full facts on record and demonstrate considering the
provision what amount has actually been paid. It was her submission that
deciding the issue without reference to material and relevant facts would be of no
purpose and the issue as such may be restored.
10. We have heard the rival submissions and perused the material available on
record. It is seen the that no doubt the position on facts was influx during the time
when the return was filed however with the passage of time the position on facts
qua the issue under consideration would have crystallized. Consideration of these
relevant facts heeding to the request of the Ld. Sr. DR that qua the provisions it is
necessary to see what amount was actually paid as per the HR policy of the
assessee, the issue is restored to the AO who shall necessarily take into
consideration the decision of the Apex Court wherein the SLP is pending. The AO
accordingly is directed to consider the issue de novo after giving the assessee a
reasonable opportunity of being heard.
11. In the result the appeal of the assessee is allowed for statistical purposes.
12. Although the Revenue has raised three grounds however Ground No-1 and 3
the Ld. CIT DR stated require no adjudication and the sole issue agitated is
Ground No-2. The relevant facts qua the same, it is seen are addressed by the AO
in para 3 to 3.3. A perusal of the same shows that the AO called for complete
details in respect of the claim of re-conditioning of plant & machinery expenses.
In response thereto the assessee submitted as per record letter dated 25.03.2011.
Considering the same (specific para 6 and sub-para (a) to (g) thereof) the AO
observed that the total amount on account of re-conditioning of plant & machinery
works out to Rs.37,37,444/-. On behalf of the assessee in the assessment
7 I.T.A .Nos.-906 & 1371/Del/2013
proceedings it was contended that the expenditure was incurred on account of
current repairs consequently no disallowance was required to be made. The AO
was of the view that the said issue had been considered in detail and at great length
in 1994-95 assessment year wherein the addition made by the AO which was
deleted by the CIT(A) was confirmed by the ITAT and the same has been
challenged before the High Court where the issue was pending. He allowed
depreciation at the permissible rate and held the expenditure to be capital in
nature.
12.1. The specific finding is reproduced hereunder:-
3.2. "As for the expenses of the year under assessment is concerned, the
assessee has furnished details in respect of various plant and machinery,
detailing scope of work done, copies of bills etc. Vide the reply dated
25.03.2011, the assessee has tried to explain that the impugned expenditure
was of revenue nature. It has been argued on behalf of the assessee that the
expenditure incurred is to restore the operational efficiency of the machines
and hence, the same is of revenue in nature. However, as discussed above,
assessee's contention is not accepted as the issue relating to repair of
machines is before the Hon'ble Jurisdictional High Court for assessment year
1994095. Accordingly, the entire amount of expenditure of Rs.37,37,444/- is
held as capital expenditure and the same is hereby added in the income of the
assessee company for the assessment year 2009-10. However an amount
equivalent to 15% of the amount of Rs.37,37,444/- is allowed on account of
depreciation allowance to the assessee company as per Income Tax Rules,
1962. Penalty proceedings under section 271(1)(c) of the Income tax Act,
1961 are hereby initiated.
3.3. Accordingly addition on this account is worked out as under:-
Amount of expenditure considered of capital nature 3737444/-
Less:-Depreciation allowed @ 15% 560617/-
Amount to be added in income of the assessee 3176827/-"
13. Aggrieved by this the assessee went in appeal before the First Appellate
Authority. Before the CIT(A), it was contended that no doubt in 1994-95 the
Hon'ble High Court had confirmed the addition however in the consolidated order
for 1994-95, 2005-06 & 2006-07 the Hon'ble High Court had also confirmed the
deletion of addition made by the ITAT on similar issue and the Hon'ble High
8 I.T.A .Nos.-906 & 1371/Del/2013
Court had also infact mentioned that from 1995-96 onwards to 2004-05 assessment
year, similar disallowance made by the AO had been deleted by the ITAT which
has been accepted by Revenue.
13.1. It would be appropriate to extract the submissions advanced from para 3.1.4
of the impugned order at this stage:-
"The Hon'ble ITAT has distinguished the facts of 94-95 with that of subsequent
years on the ground that in that year Machine had become unfit for production
and by subsequent reconditioning carried out it resulted in imparting useful
life to an old & unfit machine. It is further submitted that cost of repair of the
machine in the year 94-95 was approximately 80 lakhs. The facts as stated in
1994-95 are different from the current year in as much as:-
1. That no Machine had become unfit for production and was lying
idle.
2. That the nature of the repair clearly demonstrates that expenses
consist of
(i) Overhauling & replacement of worn out parts (U & V axis)
of Gear Grinding Machine-rectifying the variation in output
profile.
(ii) Repairing of Spindle assembly of HMT Internal Grinder.
(iii) Repairing of valves of SL-31 Lappers.
(iv) Scrapping and alignments.
The expenses were incurred to restore the operational efficiency of
Machines and smoothen the flow of production. Some of the worn out parts
are replaced. Copies of the bills of repair filed in Assessment proceedings are
also enclosed. Assessing Officer has not brought out any evidence on record
to say that the nature of the repairs as per 94-95 is same as that of year under
Assessment."
13.2. Apart from the above the assessee also made the following submissions:-
3.1.5. "He has also submitted the copies of the bills and vouchers supporting
the expenditure incurred which were filed before the AO vide there letter dated
25.03.2011. The AR stated that from these facts it would be clear that no new
asset has come into existence. Expenses have been incurred to restore the
operational efficiency of the machines. No machine has been discarded and
nor had remained idle. No repair had become overdue. He has therefore
argued on the basis of the order of ITAT for A.Y.2006-07 and 2007-08, that the
expenditure is very much of revenue nature."
14. Considering these submissions the CIT(A) came to the following
conclusions:-
9 I.T.A .Nos.-906 & 1371/Del/2013
3.16. "I have examined the issue as decided by ITAT and Hon'ble High
Court of Delhi. The expenditure incurred by the assessee for the current year
under the above head is as follows. These details have been noted from the
submissions made by the assessee before the assessing officer vide his letter
dated 25.03.2011.
1. Repair of Gear Grinding machines - Tag 400 Rs.28,45,732/-
2. Repair of HMT Internal Grinder - Rs.13,650/-
3. Repair of WMW Internal Grinder - Rs.30,385/-
4. Repair of Sl-3 Lappers - Rs.4,65,000/-
5. Repair of Bore Grinder IG-140 - Rs.74,434/-
6. Repair of Micromatic Grinder - Rs.2,36,500/-
7. Repair of SKL-2 Lapper - Rs.2,36,500/-
Total - Rs.37,37,444/-
3.1.7. From the above it is seen that the expenditure has been incurred
towards repair of the machines. There is no evidence that any of these
machines were lying idle or were in broken-down condition. AR has
categorically stated that none of the machines were lying idle or had become
unfit for production. In these circumstances the facts of the current
assessment year do not appear to be same as those for A.Y. 1994-95. AO has
made additions merely stating that on the similar issue for A.Y. 1994-95 ITAT
has confirmed the addition and the matter was pending before High Court of
Delhi. He has not mentioned that for all the subsequent years upto 2006-07,
ITAT has deleted the additions.
3.1.8. From the facts available, it cannot be said that the expenditure
incurred towards repair of machines was capital in nature. The major
expenditure from among the list of repairs at para 4.1.6 above, i.e.
Rs.28,45,732/- relate to the repair of gear grinding machine. Out of this,
Rs.17.51 lacs relates to living expenses of the representative who had come
from USA for repairing the machine and Rs.10,94,662/- relates to the spares.
It has been stated that the machine had started having variation in profile
which was rectified by overhauling and replacement of U and V Axes which
traces the grinding wheel as per the grinding requirement of the part to be
ground. There is always a thin line between what is capital expenditure and
what is revenue expenditure. In the instant case, it is clear that the machines
have been repaired by spending a considerable amount. However, the
quantum of the money spent on repairs alone cannot be a ground for treating it
as capital expenditure; when the expenditure itself is in the nature of current
repairs. Since the appellant has been able to make out a case that the facts are
different for the current assessment year as compared to that of 1994-95, there
is no reason to sustain this disallowance.
3.1.9. Considering above facts, I do not find any merit in the disallowance
made by the AO. All similar disallowances made for subsequent A.Ys on the
ground that ITAT upheld the disallowance of 1994095 have been deleted either
10 I.T.A .Nos.-906 & 1371/Del/2013
by ITAT/Hon'ble High Court and have reached finality (subject to the
department's stand on the latest decision for A.Y. 2005-06 and 2006-07). The
addition made by treating the expenditure on repairs as capital expenditure is,
therefore, deleted."
15. Aggrieved by this the Revenue is in appeal before the Tribunal
16. Ld. CIT DR, Ms. A.Misra placing reliance on the AO submitted that the AO
relying upon the fact that the issue in 1994-95 assessment year was pending before
the Jurisdictional High Court has held the expenditure to be capital as such
disallowed the same.
17. Ld. AR on the other hand heavily relying upon the impugned order and the
factual position that apart from 1994-95 wherein the machine was lying unfit for
production and by the reconditioning carried out the old machinery was made fit
for production as such since the machine lying unfit was not in use the Tribunal
and the Court held the expenditure to make it fit was to be taken as capital
expenditure. Referring to the facts of the present case it was argued the
expenditure is categorically and patently revenue expenditure and the machines
were not lying idle and unfit for production and infact the expenditure pertains
only to their repairs. Accordingly the expenditure it was argued has rightly been
held by the CIT(A) as allowable expenditure for repair.
18. The appeal was fixed for clarification as qua the evidence of expenditure the
respective stand was found to have not been addressed. However on the date of
hearing the Ld. AR took the stand that the evidence has not been doubted by the
AO, consequently the department has not questioned this, as the AO has treated
the expenditure as capital expenditure relying on the view taken in 1994-95 and
since the issue under challenge was whether the expenditure was Capital or
Revenue the factum of expenditure having been incurred has never been in any
doubt. The said position was concurred with by the Ld. CIT DR.
11 I.T.A .Nos.-906 & 1371/Del/2013
19. We have hard the rival submissions and perused the material on record. On
a careful consideration thereof, we find that there is no similarity established by the
Revenue with the facts taken into consideration by the Tribunal and the Hon'ble
High Court in 1994-95 A.Year. Nothing has been placed before us to show that
the machines were lying idle or had become unfit for production and infact no
argument in that line has been advanced by the Revenue. Accordingly in the afore-
mentioned peculiar facts and circumstances of the case which we have brought out
in detail in the earlier part of this order, we are of the view that the arguments of
the Revenue have no merit. Being satisfied by the reasoning and finding arrived at
in the impugned order, the departmental ground is dismissed.
20. In the result, appeal of the Revenue is dismissed and the appeal of the
assessee is allowed for statistical purposes.
The order is pronounced in the open court on 18th of July 2014.
Sd/- Sd/-
(T.S.KAPOOR) (DIVA SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated:- 18/07/2014
*Amit Kumar*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
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