IN THE HIGH COURT OF GUJARAT
R/Tax Appeal No. 181 Of 2019
PRINCIPAL COMMISSIONER OF INCOME TAX
M/s GUJARAT NARMADA VALLEY FERTILIZERS AND CHEMICALS LTD
J B Pardiwala & A C Rao, JJ
Dated: July 08, 2019
Appellant Rep by: Mr Varun K Patel(3802)
Respondent Rep by: None
Income Tax – Capital expenses – Replacement of Rotor assembly – Revenue expenditure
THE assessee incurred expenses of consumption and replacement of stores and spares. For the return of the relevant AY, these expenditures were claimed as revenue expenditure. The AO, during the assessment proceeding, restricted the claim by treating it as capital expenditure after allowing some depreciation. This disallowance was on the ground that items were in the nature of independent machine giving enduring benefit to the assessee.The CIT(A) deleted the additions disallowance made by the AO. The ITAT refused to interfere with the findings of the CIT(A).
On hearing the appeal, the High Court held that, the issue is in the case of the very same assessee is already rendered in – 2019-TIOL-1283-HC-AHM-IT by this Court. Following such ruling, the appeal is dismissed.
Revenue’s Appeal dismissed
Pr. Commissioner of Income Tax, Vadodara-3 vs M/s Gujarat Narmada Valley Fertilizer and Chemicals Ltd. – 2019-TIOL-1283-HC-AHM-IT
Per: J B Pardiwala:
1.00. This Tax Appeal under section 260(A) of the Income Tax, Act, 1961 (for short “the Act, 1961) is at the instance of the revenue and directed against the order passed by the Income-tax Appellate Tribunal in ITA No.1060/Ahd/2015 dated 27/09/2018 for the year 2003-04.
2.00. The revenue has proposed the following questions:-
“(a). Whether in the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in treating the expenditure incurred by the assessee on replacement of Rotor assembly, Impeller assembly, Gas Chromatograph, Relay and control Panel as revenue expenditure instead of capital expenses?”
3.00. The findings recorded by the CIT are regards the proposed question referred to above reads as under :-
4.3. I have given my careful consideration to the facts of the case, the reasons recorded by the AO and submission made by the appellant. From the details submitted by the appellant it is seen that Rotor assembly valued at Rs.13,294,744 and the Impeller assembly valued at Rs.25,20,570 are only a part of X-701 and X-103 Turbines respectively. Expenditure on replacement of Rotor assembly has already been treated as revenue expenditure by CIT(A) in the Department. In view of these facts and the decisions quoted by the appellant it is held that the expenditure on replacement of Rotor assembly and Impeller assembly is allowable as a revenue expenditure because it is only for replacement of existing parts of the Turbines and no new asset has come into existence.
Similarly, the expenditure on purchase of Gas chromatograph (Rs.12,44,744/-) and the Relay and control panel board (Rs.1,32,44,486/-) has been incurred for replacement of existing assets which had become obsolete/got damaged and their replacement was necessary to restore the existing facilities to the original state of efficiency. Replacement does not enhance the capacity of existing facilities. Replacement of control panel has already been held to be a revenue expenditure by CIT(A) in the appellants own case for A.Y.2010-11. In view of these facts and the decisions quoted by the appellant it is held that the expenditure on replacement of Gas chromatograh and relay and control panel board is allowable as a revenue expenditure. According the AO is directed to delete the addition of Rs.2,31,99,073 to the total income of the appellant.”
3.00. The findings recorded by the CIT are regards the proposed question referred to above reads as under :-
“4.8. I have considered the facts of the case, submissions of the appellant and order u/s 143(3) r.w.s. 254 and also the remand report of the AO. First of all, the AO in the order u/s 143(3) r.w.s. 254 of the IT Act has not brought out any material on record to establish that the various parts of machine as described in earlier paragraph of this appeal order were independent machine giving enduring benefit to the appellant. The direction of Hon’ble lTAT, Ahmedabad as given by it in ITA No. 1464/Ahd/2007 in the case of appellant was very clear. As per the Hon’ble ITAT, Ahmedabad on perusal of assessment order in which it has been written that Rotor Assembly is a part of X-701 Turbine, was broken and was required to be replaced by new Rotor to run Turbine. As per the Hon’ble ITAT, Ahmedabad its justification was given before the AO also. As per the Hon’ble ITAT, Ahmedabad similarly, that the gas chrornatoqraph, the matter required examination whether the parts so replaced were independent machine or were parts which required to be fitted in place of broken parts of the Turbine. As per the Hon’ble ITAT, Ahmedabad the clear findings were required to be given by the AO which were not available in the order of the AO. Considering these facts the Hon’ble ITAT, Ahmedabad remanded the matter to the file of the AO with direction to examine the issue and decide the same de novo but by affording reasonable opportunity of being heard to the appellant. Though, this direction was given by the Hon’ble ITAT, Ahmedabad in the case of appellant for AY 2003-04 while deciding the similar issue as per ground of appeal no.8. As in the case of appellant the issue is similar for the year under consideration also and therefore as per direction of Hon’ble ITAT, the AO was required to examine the issue and to decide the same de novo after affording reasonable opportunity of being heard to the appellant. But instead of giving clear finding in the order u/s 143(3) r.w.s. 254 of the Act after bringing the materials on record, the AO has given very general findings in such order. Further, in the remand report also the AC has not brought out any material on record to establish that the assertion of the appellant/Chartered Engineer that the parts of the machine are not independent machine but are parts of main Unit was incorrect. The AO during the course of remand proceeding had deputed the Inspectors of his office for identifying the place of fittings of the parts in the Plant and Machinery of the appellant company and to observe its function. The AO in his remand report has discussed the technical aspect of Assembly of Turbine Rotor, Gear Shaft with Gear Part and Nozzle Ring on the basis of report of the Inspectors and has finally stated that these items/parts are not complete equipment but a part of main equipment i.e. Steam Turbine. As per the AO the replacement of these items as carried out due to the breakdown of the Turbine Shaft and repairs of the damaged parts were not possible. As per the AO it was informed to him that with such repairs of the part, plant operations could be sustained and there was no increase in capacity of the machines/plant. As per the AO from what was visible, the assembly of Turbine Rotor, Gear Shaft with Gear Part and Nozzle Ring are not independent parts capable of functioning of independently as they form internal parts of a big machinery viz. Steam Turbine X-1301. Thus, during the course of remand proceedings as a result of physical verification of the site of the appellant, it has been found that the assembly of Turbine Rotor, Gear Shaft with Gear Part and Nozzle Ring are not independent parts capable of functioning of independently. Thus, it can be said that the AO in his remand report has accepted the fact that Turbine Rotor, Gear Shaft with Gear Part and Nozzle Ring are not independent parts capable of functioning of independently. Considering all these facts, it is held that the expenditure incurred by the appellant on account of replacement of Turbine Rotor, Gear Shaft with Gear Part and Nozzle Ring are not capital expenditure as the same cannot be treated as independent machinery in itself and they are not capable of functioning independently. In view Of this, the A0 is directed to treat the expenditure incurred on these Turbine Rotor, Gear Shaft with GEAR Part and Nozzle Ring as revenue expenditure and accordingly allowed the same.
4.9. As regards another part i.e. 415V, 3000AMP, 3PH – 40W PMCC for CHP, the AO in his remand report has not given definite finding by bringing the materials on record. On the basis of report of the Inspectors, the A0 after discussing technical aspect of this part of machine in his remand report has finally stated that this part was not visible outside but looked like whole system and the whole system was looking renovated. As per the AO it was observed that the whole panel was replaced with new panel and it looked like an independent Unit capable of functioning independently viz. Coal Handling Plant. On the other hand, the appellant in its rejoinder to the remand report has mainly stated that the panel is not the Coal Handling Plant but it is one of equipments machineries which constitute the Coal Handling Plant. As per the appellant a panel cannot function independently as Coal Handling Plant. As per the appellant, the deduction in the case of similar panel being panel C-1600 has been allowed by CIT(A) for AY 2010-11. The appellant had relied upon decisions of Hon’ble Supreme Court in the case of Sarvana Spinning Mills – 2007-TIOL-147-SC-IT. It is submitted by the appellant that old panel was required to be replaced due to deterioration in insulation material, (Hylem Base) obsoletion of pares and discontinuation of such panel from product range thereby non availability of spare support from OEM. As per the appellant further the panel has also been subject to many flashover in past necessitating replacement of panel. The submission of the appellant as made in its rejoinder to the remand report and which is reproduced in earlier paragraph of this appeal order is found to be tenable. It is stated that my predecessor i.e. earlier CIT(Appeals)- 3, Vadodara in his appeal order in appeal no. CAB(A)-3/271/14-15 dated 05/01/2015 as passed for AY 2003-04 in the case of appellant in connection with the set-aside issue has allowed the expenditure on the Relay and Control Panel Board. The Ld. CIT(A) in this referred order has held that the expenditure on Relay and Control Panel Board has been incurred for replacement of existing assets which had become obsolete/damaged and their replacement was necessary to restore the existing facilities to the original state of efficiency. Similar is the case of the appellant for the year under consideration. In my opinion, old panel was required to be replaced due to deterioration in insulation material, (Hylem Base) obsoletion of spares and discontinuation of such panel from product range and such replacement does not enhance the capacity of existing facilities and therefore the expenditure incurred on replacement of this panel is allowable as revenue expenditure. In view of the this the AO is directed to allow the expenditure incurred on replacement of panel i.e. 415V, 3000AMP, 3PH 40W PMCC for as revenue expenditure.”
In result, the appeal of the appellant is partly allowed.”
4.00. The aforesaid findings recorded by the CIT came to be affirmed by the tribunal holding as under :-
“9. We have heard the rival contentions and find that the issue is covered by the earlier orders of ITAT in ITA No.1363/Ahd/2013 dated 17.05.2018 for A.Y.2009-10 and earlier orders as mentioned in the order of Tribunal in para 13 to 17 which reads as under:
“13. Brief facts of the case are that the assessee incurred expenses of consumption and replacement of stores and spares of Rs.9,548.68 lakhs and claimed the same as revenue expenditure. However, out of that, the Assessing Officer (AO) has disallowed Rs.3,00,96,651/- treating it as capital expenditure after allowing the depreciation of Rs.45,14,498/- thereon. The AO has made disallowance of net amount Rs.2,55,82,153/- on the ground that the items are in the nature of independent machine and average life span is 5 years or more and in one item life span is 20 years which suggests that these items can be used independently.
14. The assessee went in to appeal before the CIT(A). The CIT(A) after examining the facts of the case and items of machinery to replace component and relying on various case laws examined the explanation of the assessee and on the basis of explanation furnished by the assessee, deleted the additions disallowance made by the AO.
15. Being aggrieved, the Revenue has filed this appeal before us. The Id.CIT-DR strongly relied on the orders of the AO.
16. On the other hand, the Id.Counsel for the assessee submitted that the issue is covered by earlier years order of ITAT in assessee’s own case for A.Y.2008-09. Further in the past A.Y.2000-01, 2002-03 when the matter restored to A0 it was accepted as revenue expenditure by AO in set-aside proceedings (page 8 of CIT(A) order) and the Authorised Representative (AR) has placed reliance on the decision as relied on by the CIT(A) in para 4.3 of his order.
17. We have considered the facts and perused material available on record and found that the AO has accepted this issue in its set-aside assessment order for A.Y.1999-2000 passed u/s.143(3) read with section 250 of the Act dated 29.12.2009 (paper book, page 630 para 4.5 of the order). Since, the revenue has accepted this issue in the set-aside assessment proceedings, therefore, we do not find any infirmity in the order of CIT(A). Accordingly, this ground of Revenue is dismissed.”
10. Since the issue is covered against the revenue by the above order of tribunal. Therefore, following the same issue is dismissed against the revenue. Further, reliance placed in the case of Sri Mangayarkasi Mills (P) Ltd (supra) is not applicable, as in that case replacement of old machinery with new machinery was treated as capital expenditure, whereas, in the instant case, there is replacement of damaged parts of Turbine and machinery, hence, facts are distinguishable. Therefore, the appeal of the revenue in respect of Ground Nos.1 to 3 is dismissed.”
5.00. Having heard the learned counsel appearing for the parties and having gone through the materials on record, the proposed question is no longer res-integra in view of the judgement of this Court in the case of the very same assessee rendered in Tax Appeal No.1360 of 2018 decided on 29/04/2019 = 2019-TIOL-1283-HC-AHM-IT. We may quote the relevant observations made by the Co-ordinate Bench of this Court in this regard :
“4. It emerges from records that the manufacturing facility of the appellant included fertilizers and chemical plants complex wherein fertilizers like Urea and Ammonium Nitro phosphate and chemicals like Ammonia, Formic Acid, Acetic Acid, Weak Nitric Acid, Concentrated Nitric Acid and Methanol were manufactured. Various plants and equipment were in continuous operation in corrosive and acidic atmosphere. It was found that no new assets were created in the process of replacement of worn out parts. There was no capacity addition. The replacement of components of old machinery was made to bring to its original state of efficiency so that the entire integrated manufacturing unit which was considered as a profit making apparatus functions efficiently to its capacity and produces quality products. The CIT (Appeals) after perusing the paper book which contains the details like name of the main plant or machinery to which the replaced component pertains, cost of replaced component, cost of total plant and past history of disallowance and appellate decision in past in respect of similar components and the facts which were explained with the help of diagram/process chart showing that replaced component is part of the main plant. The CIT (Appeals), therefore found from the details of additions to that the fixed assets that addition of independent machinery has already been capitalised and claim is made only for depreciation. Thereafter, the CIT (Appeals) on the above facts found that the expenditure claimed as revenue expenditure is in respect of components of the machinery which cannot be treated as the independent machinery in itself as they are not capable of functioning independently. It was further held that the chemical and fertilizer plant was very large plant within which again there are large machines and within the machine there are components requiring replacement due to wear and tear, that was different plants within the fertilizers and chemical plant. Reference was also made to past history of disallowance wherein the Tribunal had set aside the issue to the Assessing Officer for the assessment years 1998-99 to 2002-03, who in turn accepted the explanation furnished by the appellant in de novo assessment proceedings and no additions were made. On perusal of the facts noted by the CIT (Appeals) as well as affirmed by the Tribunal, it is clear that question (a) raised by the revenue is a pure question of fact and in the absence of any perversity being pointed out in the concurrent findings of fact recorded by the Tribunal, does not give rise to any question of law.”
6.00. In view of the above, no further adjudication is required in the present Tax Appeal. The same is dismissed accordingly.
(Paras are numbered as per the original text: Editor)