IN HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 12 of 2002 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER ================================================================ 1 Whether Reporters of Local Papers may be allowed to see judgment ? 2 To be referred to Reporter or not ? 3 Whether their Lordships wish to see fair copy of judgment ? 4 Whether this case involves substantial question of law as to interpretation of Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to civil judge ? ================================================================ GOBIND GLASS & INDUSTRIES LTD.....Appellant(s) Versus DY.C.I.T.(ASSTT)....Opponent(s) ================================================================ Appearance: MR JP SHAH, with MANISH J SHAH, ADVOCATE for Appellant(s) No. 1 MRS MAUNA M BHATT, ADVOCATE for Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Date : 21/11/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1. This is appeal by appellant- assessee, seeking to challenge order of learned ITAT (for short, Tribunal ), Dated : 17.05.2001, in ITA No.250/Ahd/1995, whereby, Page 1 of 9 HC-NIC Page 1 of 9 Created On Fri May 06 17:10:26 IST 2016 O/TAXAP/12/2002 JUDGMENT Tribunal allowed appeal of revenue. 2. brief facts of case are that assessee, herein, carried out certain repairing in old furnace, amounting to Rs.4,21,35,827/-. assessee, while filing return of income, claimed deduction of aforesaid amount. AO disallowed aforesaid amount and thereby rejected claim of assessee for deduction. Being aggrieved thereby, assessee preferred appeal before learned CIT(A), who partly allowed appeal of assessee. revenue, hence, carried matter before Tribunal in further appeal, wherein, Tribunal passed impugned order. Hence, present appeal at instance of assessee. 3. At time of admission, following questions of law were framed by this Court for consideration; (1) Whether on facts and in circumstances of case, Rs.4,20,66,275=00 spent on furnace is deductible revenue expenditure under section 37(i) of Income Tax Act, 1961? (2) If reply to question No.1 is in negative, whether said expenditure is allowable under section Page 2 of 9 HC-NIC Page 2 of 9 Created On Fri May 06 17:10:26 IST 2016 O/TAXAP/12/2002 JUDGMENT 31(i) even if it is capital expenditure? 4. Mr. Shah, learned Advocate for assessee, submitted that Tribunal committed error in passing impugned order, by holding that expenditure incurred by assessee was capital expenditure. He, further, submitted that Tribunal ought to have appreciated fact that assessee had merely carried out repairing of old furnace and had not installed new one. He submitted that in view of provisions of Section 31(i) of Act, Tribunal ought to have held that, though, expenditure incurred by assessee was capital in nature, it is allowable. 5. In support of his submissions, Mr. Shah, placed reliance on decision of Apex Court in "CIT VS. SARAVANA SPINNING MILLS P. LTD." [2007] 293 ITR 2001 (SC). He, therefore, prayed that appeal be allowed. 6. On other hand, Mrs. Bhatt, learned Advocate for respondent-revenue, supported impugned order and submitted that Tribunal was justified in passing impugned order. In support of her submission, she placed reliance on decision of Apex Court in "BRITANNIA INDUSTRIES LTD. VS. CIT & ANR.", [2005] 278 ITR 546, wherein, Apex Court held that Page 3 of 9 HC-NIC Page 3 of 9 Created On Fri May 06 17:10:26 IST 2016 O/TAXAP/12/2002 JUDGMENT expenses incurred towards repairs under Section 30 and 32 of Act and maintenance expenses are not allowable in respect of gas house. She, hence, prayed that appeal being devoid of merit, be dismissed. 7. Heard, learned Counsels for parties and perused material on record as well as orders passed by CIT(A) and Tribunal. Before proceeding with matter, here, it would be relevant to note that it is settled principle of law that amount of money spent on repairs alone cannot be factor to determine whether expenditure would fall under current repair or not, but, it is nature of repair, which is carried out by assessee, which is to be looked into so far as deduction is concerned. In instant case, repairing of furnace was carried out and certain parts, such as refractories etc., were replaced with view to obtain consistency in production. learned CIT(A), while partly allowing appeal of assessee, considered various decision of Apex Court and other High Courts and recorded finding of fact that furnace was old and it required repairs for better performance. CIT(A), further, recorded that there was no increase in production capacity due to aforesaid repairs. CIT(A) in Paras-9 to 11 of Page 4 of 9 HC-NIC Page 4 of 9 Created On Fri May 06 17:10:26 IST 2016 O/TAXAP/12/2002 JUDGMENT its order, further, held as under; 9. Another aspect to be considered is as to whether appellant should have accounted for material utilised in repairs as its closing stock. In this regard Representative of appellant point out that materials to be utilised in carrying out repairs were not stocked anywhere but during period furnace is cooled, furnace structure of refractories is constructed away from furnace site to find out whether refractories supplied by manufacture s are as per specifications given in drawing. If they require further recutting and finishing same are carried out and they are kept ready for use in cold repairs work. All these activities which are necessary part of cold repair exercises are done much prior to actual lying of refractories into furnace. These total exercises had been carried out before 31.3.1991 and, therefore, process of using material is carrying out replacement of refractories had started and total refractories had been used in these process. In this regard, representative of appellant produced necessary photographs, showing laying of refractories, having formed holes with minor tolerances wherein steel material are used to keep them in position. In view of fact that all refractories had been used in process of repairs during year under consideration, same are not required to be included in closing stock. Page 5 of 9 HC-NIC Page 5 of 9 Created On Fri May 06 17:10:26 IST 2016 O/TAXAP/12/2002 JUDGMENT 10. In view of above discussion, expenses on repairs has to be allowed as deduction during assessment year 1992-92. 11. Assessing Officer has made passing remark that assessee could not produce all bills. representative of appellant claimed that this statement is not correct as by letter dated 25th February, 1994, summary of cold repair expenses from ledger having six pages of zerox copy was submitted to Assessing Officer. relevant paragraph 3 of said letter read as follows:- 3. As regards details of cold repairs expenses, we enclosed herewith at Annexure-C in tabular form expenses incurred on cold repairs for accounting year 1990-91 with narrations. relevant evidence for arrival of refractories at site of factory is also available in form of vouchers of shipping agents and copies of bill of lading which are collectively attached at Annexure-D. original bills/vouchers of salaries paid to masons engaged in cold repairs work are also available for your satisfaction. representative of applicant, therefore, produced before me copies of vouchers and bills. After going through all vouchers and bills, it is seen that only following five vouchers are not available:- Page 6 of 9 HC-NIC Page 6 of 9 Created On Fri May 06 17:10:26 IST 2016 O/TAXAP/12/2002 JUDGMENT Sr. Sr. No. Name of Amt. Rs. No. In Party List 1 7 Miscellaneo 100-00 us Expenses 2 97 Maithan 37309-60 Ceramics Ltd. 3 51 Freight 13941-00 payment by cheque 4 57 Out of cash 233-10 expenses for Feb.91, voucher for Rs.233-10 is not traceable. 5 89 Out of cash 8028-00 expenses of March, 91 voucher for Rs.8028/- is not traceable. 69611-70 As all vouchers but above mentioned five vouchers have been produced and verified, therefore, total Page 7 of 9 HC-NIC Page 7 of 9 Created On Fri May 06 17:10:26 IST 2016 O/TAXAP/12/2002 JUDGMENT expenses of cold repair works are treated as allowed except Rs.69611/- mentioned above. Therefore, appeal on this ground is allowed for sum of Rs.42066275/- (Rs.421135887 (-) Rs.69612). In result, appeal on this ground is partly allowed. 8. As against this, Tribunal, while passing impugned order, has recorded that expenses in question incurred by assessee on dismantling old furnace and construction of new furnace are clearly capital in nature, which is not supported by factual matrix. 9. Apex Court in "CIT VS. SARAVANA SPINNING MILLS P. LTD."(Supra),wherein, Apex Court held that to decide applicability of section 31(i) test is not whether expenditure is revenue or capital in nature, which test has been wrongly applied by High Court, but whether, expenditure is "current repairs". Apex Court, further, held that basic test to find out as to what would constitute current repairs is that expenditure must have been incurred to "reserve and maintain" already existing asset and object of expenditure must not be to bring new asset into existence or to obtain new advantage. We are, hence, of opinion that present appeal deserves to be allowed. In view of above discussion, decision relied on by Page 8 of 9 HC-NIC Page 8 of 9 Created On Fri May 06 17:10:26 IST 2016 O/TAXAP/12/2002 JUDGMENT Mrs. Bhatt in "BRITANNIA INDUSTRIES LTD. VS. CIT & ANR." (Supra) shall not apply to facts of case on hand. 10. In result, present appeal is ALLOWED. impugned order passed by Tribunal, Dated : 17.05.2001, is QUASHED and set aside and order of CIT(A) is restored. No order as to costs. (K.S.JHAVERI, J.) (K.J.THAKER, J) UMESH Page 9 of 9 HC-NIC Page 9 of 9 Created On Fri May 06 17:10:26 IST 2016 Gobind Glass & Industries Ltd. v. Dy. C.I.T. (Asstt.)