C/TAXAP/307/2008 ORDER IN HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 307 of 2008 PRECISION WIRES INDIA LIMITED Versus ASSISTANT COMMISSIONER OF INCOME TAX Appearance: MR TUSHAR P HEMANI WITH MS ADITI SHETH ADVOCATES (2790) for Appellant(s) No. 1 MR. VARUN K. PATEL(3802) for Opponent(s) No. 1 CORAM: HONOURABLE MR. JUSTICE J. B. PARDIWALA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 11/02/2020 ORAL ORDER (PER : HONOURABLE MR. JUSTICE J. B. PARDIWALA) 1 This Tax Appeal under Section 260A of Income Tax Act, 1961 [for short, 'the Act, 1961'] is at instance of assessee and is directed against order passed by Income Tax Appellate Tribunal, Ahmedabad Bench 'D', Ahmedabad dated 9th February 2007 in ITA No.1967/Ahd/2001 for A.Y. 1997 98. 2 This Tax Appeal came to be admitted on following two substantial questions of law: [i] Whether, in facts and circumstances of case, Income Tax Appellate Tribunal was right in law in not allowing claim of bad debt when assessee has admittedly written off debt in its books of accounts? Page 1 of 13 Downloaded on : Thu Feb 27 14:41:34 IST 2020 C/TAXAP/307/2008 ORDER [ii] Whether, in facts and circumstances of case, order of Income Tax Appellate Tribunal was perverse inasmuch as it records incorrect fact that debt has become bad after 31/03/1997? [iii] Whether, in facts and circumstances of case, Income Tax Appellate Tribunal was right in law in holding that expenditure incurred on replacement of Plant and Machinery is capital expenditure? [iv] Whether, in facts and circumstances of case, Income Tax Appellate Tribunal was right in law in treating expenditure incurred on Dies and Tools, which are in nature of consumable, as capital expenditure? 3 It appears from materials on record that assessee filed its return of income dated 28th November 1997 declaring total income at Rs.2,72,40,280/ . Later, order came to be passed under Section 143(1)(b) of Act, 1961 dated 29th April 1998 giving consequent effect of CIT(A)'s order in A.Y. 1996 97 for year under consideration. 4 Assessing Officer passed order dated 5th October 1999 under Section 143(3) of Act, 1961. Assessing Officer disallowed claim of assessee in treating expenditure incurred on replacement of plant and machinery as revenue expenditure. It also disallowed treating expenditure incurred on dies and tools which are in nature of consumable as revenue expenditure. 5 assessee being dissatisfied with order of assessment preferred appeal before CIT(A), Baroda. On first substantial question of law, CIT(A) recorded following findings: 7 next ground of appeal relates to disallowance of Page 2 of 13 Downloaded on : Thu Feb 27 14:41:34 IST 2020 C/TAXAP/307/2008 ORDER Rs.6,43,741/ on account of repairs and maintenance expenses. During course of hearing ld. Counsel for appellant brought to my notice that in one of units fire broke out on 7.7.96 on account of which lot of damage was caused to plant and machinery in factory premises. In order to make good those damages repair work was carried out in plant and machinery by replacement of damaged parts and expenses incurred on that should have been allowed by assessing officer as revenue expenses. But assessing officer treated those expenses as capital expenditure and added same after allowing depreciation on same. In this connection he further pleaded that since by repairing plant and machinery, no new asset has come into existence, treatment given by assessing officer is not correct. To support his arguments he quoted before me following decisions: 1. CIT vs. Grand Hotel 189 ITR 153 154 (All.) 2. CIT vs. Southern Publications Ltd. 211 ITR 397 (Mad) 3. C.R. Corera and Brothers vs. CIT 49 ITR 188, 195 (Mad) 4. Hanuman Motor Service vs. CIT 66 ITR 88 (Mysore) 5. CIT vs. Coimbatore Motor Transport Society 70 ITR 165 In all above decisions, issue has been decided on identical facts in favour of assessee. He, therefore, pleaded that ld. Assessing officer was not justified in disallowing repair expenses treating same as of capital nature and addition made in this regard should be deleted. 7.1 After hearing appellant's counsel and after going through material on record, I am inclined to accept argument of appellant's counsel that since repairs have been carried out in order to replace damaged parts of plant and machinery and since no new asset has come into existence, addition made by treating repair expenses as of capital nature, is not justified. Taking this plea into consideration and also following above mentioned decisions of various High Courts on this point (supra), I hold that addition is not justified and same stands deleted. However, assessing officer is directed to withdraw amount of depreciation allowed on it. 6 Revenue being dissatisfied with aforesaid findings recorded by CIT(A) went in appeal before Tribunal. Tribunal disturbed aforesaid findings recorded by CIT(A) and while allowing appeal of Revenue held as under: 23 So far as disallowance out of repair and maintenance is concerned, brief facts of case as have been revealed from records are that Page 3 of 13 Downloaded on : Thu Feb 27 14:41:34 IST 2020 C/TAXAP/307/2008 ORDER Assessing Officer, during course of assessment proceedings, came to know that assessee had claimed amount of Rs.6,43,741/ in expenses claimed under head repair and maintenance , but on verification, it was found that once enamelling machine was destroyed in fire on 07/07/1996 which was reconstructed by assessee by incurring aforesaid amount. 24 It was, in view of above facts and circumstances of case, that Assessing Officer considered expenditure in capital nature. CIT(Appeals), on other hand, considered same as Revenue nature. 25 Having considered totality of facts and circumstances of case, we are of opinion, that CIT(Appeals) was not justified in accepting assessee's claim that reconstructing machine lost due to fire had not resulted in giving into being new asset. order of CIT(Appeals) is, therefore, set aside and that of Assessing Officer is restored. 7 Thus, it appears that Tribunal considered expenditure incurred on replacement of plant and machinery as capital expenditure on premise that one enamelling machine was destroyed due to fire and same came to be reconstructed by assessee by incurring expenses to tune of Rs.6,43,741/. 8 Ms. Aditi Sheth, learned counsel appearing for appellant vehemently submitted that Tribunal committed serious error in holding that expenditure incurred on repair of machine as capital expenditure. According to Ms. Sheth, having regard to fact that no new asset could be said to have been created by assessee, expenditure incurred could be said to be towards revenue expenditure. argument proceeds on footing that as machine was damaged, it had to be repaired. In such circumstances, it could not be said that object of assessee in incurring expenses in repairing machine was with view to bringing new asset into existence. 9 In such circumstances referred to above, learned counsel would submit that CIT(A) was right in holding that expenditure Page 4 of 13 Downloaded on : Thu Feb 27 14:41:34 IST 2020 C/TAXAP/307/2008 ORDER incurred for repairs of machine was in nature of revenue expenditure and such finding of fact could not have been disturbed. 10 Ms. Sheth, in support of her submissions, has placed strong reliance on two decisions of this High Court: (1) Gobind Glass & Industries Ltd vs. DCIT [Tax Appeal No.12 of 2002 decided on 21st November 2014] and (2) Additional Commissioner of Income Tax vs. Desai Brothers [1977] 108 ITR 14 (Guj). 11 On other hand, Mr. Varun Patel, learned counsel standing counsel appearing for Revenue, while opposing this appeal, vehemently submitted that no error, not to speak of any error of law could be said to have been committed by Tribunal in holding that expenditure incurred by assessee on repairs of machines is capital expenditure. Mr. Patel would submit that Tribunal being final fact finding authority, this Court may not disturb finding of fact recorded by Tribunal that machine got extensively damaged. entire machine had to be repaired or renovated. Mr. Patel would submit that having regard to materials on record, it could be said that repairing undertaken by assessee was with view to bringing into existence new asset or with view to have substantial replacement or renovation. 12 In such circumstances referred to above, Mr. Patel prays that first substantial question of law as framed by this Court may be answered in favour of Revenue and against assessee. ANALYSIS: 13 In Desai Brothers (supra), assessee claimed deduction of expenditure incurred for replacing petrol engine by diesel engine in its truck which was being used in business. assessee claimed that Page 5 of 13 Downloaded on : Thu Feb 27 14:41:34 IST 2020 C/TAXAP/307/2008 ORDER said replacement cost was in fact expenses for current repairs. ITO rejected claim of assessee. AAC held that cost of replacement was only cost of repairs to machinery and claim was allowed under Section 31 of Act, 1961. In reference, this Court held as under: 14. very fact that assessee was required to replace unserviceable petrol engine was by itself clear indication as to nature of expenses. unserviceable state of petrol engine could be result of continuous use of truck in business and necessity for replacing such unserviceable petrol engine had arisen out of continuous use of asset, namely, truck in question. In that view of matter, we are, therefore, not inclined to accept submission of Mr. Kaji on behalf of revenue that replacement of diesel engine would achieve advantage of permanent endurance to business of assessee firm in sense of bringing into existence capital asset. Mr. Kaji relied on decision of Andhra Pradesh High Court in R. B. Shreeram & Co. (P.) Ltd. v. Commissioner of Income tax [1968] 67 ITR 428 (AP) where court held that expenditure incurred in replacing petrol engine of truck by diesel engine is capital expenditure, inasmuch as it is incurred for creation of advantage of enduring benefit and forms part of assets of undertaking, and assessee was, therefore, entitled to development rebate under section 10(2)(vib) of Indian Income tax Act, 1922, on cost of diesel engine. Andhra Pradesh High Court has followed decision of Supreme Court in Commissioner of Income tax v. Mir Mohammad Ali [1964] 53 ITR 165 (SC) and held that not only diesel engines have been held to be machinery but also expression installations would include and apply when machinery is inducted or introduced. This decision of Andhra Pradesh High Court, therefore, for same reasons on which we have held about non application of decision of Supreme Court in Mir Mohammad Ali s case [1964] 53 ITR 165 (SC) would not be of any assistance to revenue. 15. Mr. Kaji, therefore, attempted to persuade us that this was case of substantial replacement and, therefore, would not come within terms of section 31(1) where only expenses incurred in connection with current repairs can be allowed as deduction. In New Shorrock Spinning and Manufacturing Co. Ltd. v. Commissioner of Income tax [1956] 30 ITR 338 (Bom) Bombay High Court considered what is difference between repairs and renewal and quoted with approval following observation of Lord Justice Buckley in Lurcott v. Wakely and Wheeler [1911] 1 KB 905, 923 (CA) : Page 6 of 13 Downloaded on : Thu Feb 27 14:41:34 IST 2020 C/TAXAP/307/2008 ORDER "'Repair' and 'renew' are not words expressive of clear contrast. Repair always involves renewal; renewal of part; of subordinate part Repair is restoration by renewal or replacement of subsidiary parts of whole. Renewal, as distinguished from repair, is reconstruction of entirety meaning by entirety not necessarily whole but substantially whole subject matter under discussion." 16. Chief Justice Chagla, as he then was, referred to two advertent trends amongst different High Courts and preferred to adopt view pronounced by Patna High Court in Commissioner of Income tax v. Darbhanga Sugar Company Ltd. [1956] 29 ITR 21 (Pat) and by Madras High Court in Commissioner of Income tax v. Sri Ram Sugar Mills Ltd. [1952] 21 ITR 191 (Mad). facts in New Shorrock Spinning and Manufacturing Co. Ltd.'s case [1956] 30 ITR 338 (Bom) were illustrative where assessee company which was textile company spent sum of Rs. 30,557 for replacing certain parts in 646 looms and claimed amount of expenditure for current repairs under section 10(2)(v). parts which were replaced were lighter in weight and were such as could be easily lifted and conformed to international labour standard and were superior to old device. These parts were replaced after period of 60 years. court followed well established canon of construction of all taxing statutes, charge should be made less heavy against assessee if reasonable interpretation of language used by legislature leads to that conclusion. In opinion of court, expression, "current repairs" used in section 10(2)(v) means expenditure on buildings, machinery, plant or furniture which is not for purpose of renewal or restoration which is only for purpose of preserving or maintaining already existing asset, which does not bring new asset into existence or does not give to assessee new or different advantage, and they must be repairs which are attended to as and when need for them arises. Bombay High Court in said case also emphasised question as to when building, machinery, plant or furniture requires repairs and when need arises that question must be decided not by any academic or theoretical test but must be decided by test of commercial expediency. It cannot be said, therefore, that when assessee replaced unserviceable petrol engine with diesel engine it was intending to bring into existence either new asset or to achieve advantage or benefit to itself for permanent endurance, nor can it be said that it was substantially replacing machinery. It is no doubt true that there was no material on record before Tribunal as to what would be price or cost of new truck. But, none less, assessee could not have been able to purchase new truck from amount which it spent in replacement. This very question arose before Mysore High Court in Hanuman Motor Service v. Commissioner of Income tax [1966] 67 ITR 88 Page 7 of 13 Downloaded on : Thu Feb 27 14:41:34 IST 2020 C/TAXAP/307/2008 ORDER (Mys), where transport operator claimed expenses incurred by him in replacement of petrol engine with diesel engine as current repairs under section 10(2)(v). court held in that case that what was really being done was to preserve and maintain already existing asset and expenses were not incurred to bring new asset into existence or to obtain new or fresh advantage to business of assessee. In that view of matter, therefore, we do not think that object of assessee in incurring expenses in replacement was with view to bringing into existence new asset or was with view to have substantial replacement or renovation, but it appears that assessee was motivated in making expenses by object of preserving and maintaining asset for purpose of use in business. We are, therefore, of opinion that, in facts and circumstances of case, Tribunal was right in holding that expenditure incurred for replacing petrol engine by diesel engine was in nature of revenue expenditure for current repairs to machinery of assessee. In that view of matter, therefore, we answer question referred to us in affirmative and against revenue. Commissioner of Income tax will pay costs of this reference to assessee. 14 Applying aforesaid dictum as laid in Desai Brothers (supra), we have no hesitation in coming to conclusion that Tribunal committed error in holding that expenditure incurred on replacement of plant and machinery is capital expenditure. 15 In such circumstances, we answer first substantial question of law in favour of assessee and against Revenue. 16 Now, coming to second substantial question of law, CIT(A) held as under: 10 next ground of appeal relates to disallowance of Rs.4,50,207/ being tools and dies written off. ld. Counsel for appellant brought to my notice that there are two types of dies ussed bythe appellant during process of production. first die is Tungsten dies which are used for drawing thicker size of copper wires and prices of which range from Rs.300/ to Rs.1,500/ maximum for each die. second types of dies are diamond dies required for drawing intermediary and thinner size of copper wires. Actually these dies though named diamond dies are not made of diamonds but are made of steel or brass with small industrial diamond fix. These diamond dies require Page 8 of 13 Downloaded on : Thu Feb 27 14:41:34 IST 2020 C/TAXAP/307/2008 ORDER polishing every week and generally crack due to mechanical pressure and other processing constraints and are oftenly replaced during year as matter of stores and spares. Placing these facts before me, ld. Counsel for appellant pleaded that since these dies are very often replaceable items and are being replaced from year to year, same amount to revenue expenditure. To support his argument he quoted before me, following decisions: 1. CIT vs. Mysore Spun Concrete P. Ltd 194 ITR 159 (Kar.) 2. CIT vs. Lake Palace Hotel 227 ITR 561 (Raj.) In these decisions, on identical facts, issue has been decided in favour of assessee. He, therefore, pleaded that ld. Assessing officer was not justified in making addition of these dies treating same as of capital nature and addition made should be deleted. 10.1 After hearing appellant's counsel and after going through material on record, I am convinced with his arguments that since expenses incurred on these dies is for replacement of damaged dies, same amounts to revenue expenditure. Taking this plea into consideration and also following decisions of Karnataka as well as Rajasthan High Courts (Supra), I hold that addition made is not justified and same stands deleted. However, assessing officer is directed to withdraw depreciation allowed on it. 17 Thus, CIT(A) took view that expenditure incurred by assessee on dies and tools in nature of consumable is revenue expenditure. Tribunal disturbed aforesaid finding of fact recorded by CIT(A) holding as under: Coming to issue relating to addition of Rs.4,50,207/being aim on account of written off tolls and dies to this extent, CIT(Appeals) deleted addition by observing as under: 10.1. After hearing appellant s counsel and after going through material on record, I am convinced with his arguments that since expenses incurred on these dies is for replacement of damaged dies, same amounts to revenue expenditure. Taking this plea into consideration and also following decisions of Karnataka as well as Rajasthan High Courts (Supra), I hold that addition made is not justified same stands deleted. However, assessing officer is directed to withdraw depreciation allowed on it. 29 After careful consideration of rival submissions and facts and Page 9 of 13 Downloaded on : Thu Feb 27 14:41:34 IST 2020 C/TAXAP/307/2008 ORDER circumstances of case and in view of decision of ITAT Ahmedabad Bench having held in case of Gujarat Alluminium Extrusion Ltd. in ITA No.1 19/Ahd/ 1991, dated 06/12/1995, that dies 3 and tools were capital asset, we are of opinion that Assessing Officer was quite justified in considering expenditure on this account as of capital in nature. So far as decisions relied upon by assessee, such as, in case of CIT v/.s. Mysore Spun Concret Pipe Pvt. Ltd. (194 ITR 159) [Kar] and in case of CIT v/s Needle Industries (India) Ltd.(245 1TR 556) [Mad] are concerned, same being relating to expenditure incurred on moulds being distinguishable on facts are of no help to assessee. We, therefore , set aside order of CIT (Appeals) and restore order of Assessing Officer. 18 Ms. Sheth, learned counsel appearing for appellant vehemently submitted that Tribunal committed serious error in holding that expenditure incurred on dies and tools which are in nature of consumable as capital expenditure. Ms. Sheth would submit that reliance placed by Tribunal on decision of ITAT in Gujarat Alluminium Extrusion Ltd in ITA No.119/Ahd/1991 dated 6th December 1995 is misconceived. It is pointed out that decision in Gujarat Alluminium (supra) was rendered for A.Y. 1986 87 when patterns, dies and templates were mentioned under machinery and plant in Old Appendix I (applicable for assessment years 1984 85 to 1987 88) in part III (ii)D(10). It is further pointed out that in old Appendix I (applicable for assessment year 1988 89 to 2002 03) which is applicable in present case, dies find no mention. In such circumstances, it is submitted that finding of Assessing Officer that dies form part of Appendix I is not correct. 19 In support of aforesaid submissions, Ms. Sheth has placed reliance on following decisions: [1] Principal Commissioner of Income tax, Central, Surat vs. Banco Aluminium Ltd [2018] 93 taxmann.com 52 (Gujarat) [2] Commissioner of Income tax vs., Sunbeam Auto Ltd [2018] 89 Page 10 of 13 Downloaded on : Thu Feb 27 14:41:34 IST 2020 C/TAXAP/307/2008 ORDER taxmann.com 191 (Delhi). 20 Mr. Varun Patel, learned standing counsel appearing for Revenue would submit that no error, not to speak of any error of law could be said to have been committed by Tribunal in taking view that expenditure incurred on dies and tools which are in nature of consumable as capital expenditure. 21 Mr. Patel would submit that purchase of dies and moulds would bring into existence permanent or enduring advantage to assessee. 22 In such circumstances referred to above, Mr. Patel prays that second substantial question of law as formulated by this Court may be answered in favour of Revenue and against assessee. 23 In decision of this Court in Banco Aluminium Ltd (supra), this Court observed as under: 4. Insofar as treatment of consumption of machinery spares as capital expenditure in respect of which addition of Rs.90,72,160/ had been made is concerned, Commissioner (Appeals) noted that such expenditure was in relation to eight items. After considering submissions of assessee, Commissioner (Appeals) observed that some of items were neither towards repair nor did same appear to be towards replacement of worn out parts as claimed by assessee. Such items appeared to be fresh additions to plant and machinery and some items appeared to be capable of independent functioning. He, therefore, was of view that such items constituted capital expenditure and could not be considered to be towards current repairs and accordingly held that items No.3, 4, 7 and 8 valued at Rs.13,49,877/ were rightly considered to be capital in nature, and accepted assessees contention that expenditure was towards small items which were spares or towards repairs, were expenditure in nature of revenue expenditure. 7. perusal of record shows that both Tribunal and Commissioner (Appeals) have recorded concurrent findings of facts to effect that dies and tools as well as machinery spares were Page 11 of 13 Downloaded on : Thu Feb 27 14:41:34 IST 2020 C/TAXAP/307/2008 ORDER consumable in nature and have accordingly held expenditure to be revenue in nature. fact that in earlier years such expenditure had been treated as revenue expenditure by revenue has also been taken into consideration. Having regard to concurrent finding of facts recorded by Commissioner (Appeals) and Tribunal, it cannot be said that conclusion arrived at by Tribunal that expenditure incurred on dies and tools and machinery spares was revenue in nature, suffers from any legal infirmity so as to give rise to any question of law, much less, substantial question of law warranting interference. appeal, therefore, fails and is accordingly dismissed. 24 In Sunbeam (supra), Delhi High Court held as under: 6. We do not think that any substantial question of law on this aspect/issue arises from decision of Tribunal. It has been factually found and that too concurrently by CIT (Appeals) and Tribunal that purchase of dies and moulds did not bring into existence any permanent or enduring advantage to assessee. It has been found that due to continuous use they wear out fast and further any minor defect in mould on account of continuous use such as chipping or cracking would render them useless. In any case longevity of moulds and dies is not substantial as held by Tribunal and they have to be replaced frequently to ensure quality of product. Moreover, moulds have to be produced to suit requirements of particular customer and after order is met, they become useless and ultimately have to be destroyed to prevent misuse or manufacture of fakes. It has also been found by appellate authorities that expenditure on replacement of dies and moulds was earlier allowed by income tax authorities as revenue expenditure. These are factual findings recorded by Tribunal which are not disputed before us by revenue on basis of any evidence or material. It is well settled that any expenditure on replacement or repairs to plant and machinery which does not bring into existence any enduring or permanent advantage in capital field is allowable as revenue expenditure. Tribunal has only applied this settled legal position to undisputed facts found. Therefore no substantial question of law arises for our consideration. appeals on this point are accordingly dismissed. 25 We take notice of fact that while disturbing finding of fact recorded by CIT(A), Tribunal has not assigned any good reason. Tribunal straightway proceeded to disturb such finding by placing reliance on decision of ITAT in case of Gujarat Alluminium (supra), as discussed above. expenditure incurred on dies and tools Page 12 of 13 Downloaded on : Thu Feb 27 14:41:34 IST 2020 C/TAXAP/307/2008 ORDER is recurring revenue expenditure and no capital asset of enduring benefit comes into existence more so because dies need to be replaced often. 26 In our opinion, second substantial question of law stands squarely covered by decision in case of Banco (supra) and Sunbeam (supra) and we propose to follow ratio of both decisions. 27 In overall view of matter, we have reached to conclusion that Tribunal committed error in passing impugned order. appeal preferred by assessee succeeds and is hereby allowed. impugned order passed by Tribunal is hereby quashed and set aside. 28 Both substantial questions of law are answered in favour of assessee and against Revenue. order passed by Revenue Tribunal is quashed and set aside to extent of two substantial questions of law. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) CHANDRESH Page 13 of 13 Downloaded on : Thu Feb 27 14:41:34 IST 2020 Precision Wires India Limited v. Assistant Commissioner of Income-tax