Income Tax Appellate Tribunal - Mumbai
Metro Ispat Pvt. Ltd, Mumbai vs Department Of Income Tax on 20 August, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES 'A' : MUMBAI
BEFORE SHRI D. MANMOHAN, HON'BLE VICE PRESIDENT
And
SHRI R.K. PANDA, ACCOUNTANT MEMBER
ITA. No. 4069/Mum/2008
Assessment Year 2005-2006
ACIT, Cir. 6 (3) M/s. Metro Ispat Pvt. Ltd.
Mumbai - 020. vs. Mumbai - 010
(Appellant) (Respondent)
For appellant : Shri Lalchand
For respondent : Shri Uttam Chand Bothra
ORDER
PER D. MANMOHAN, V.P.
1. This appeal, filed at the instance of Revenue, is directed against the Order of the CIT(A)-VI, Mumbai and it pertains to the assessment year 2005-2006.
2. Two issues were urged before us. Facts concerning the issues on hand are stated in brief. The assessee-company is engaged in the business of manufacture of round bars. According to the learned Counsel appearing on behalf of the assessee, the end product is known as "TMT Bars". For the year under consideration, it declared business income of Rs.51,54,180/- after setting-off carried forward loss and hence, profit declared being less than the income chargeable under section 115JB of the Act, the assessee-company declared book profit of Rs.2.05 crores.
3. During the course of assessment proceedings, the Assessing Officer noticed that the assessee claimed a sum of Rs.58,05,278/- as deduction referable to the replacement of chilled rolls, fire bricks, pedestal fans, exhaust fans, air-filter units and cable 2 lines. They were shown as repairs to plant and machinery and repairs to electrical maintenance. The Assessing Officer observed that assessee incurred capital expenditure under the aforementioned heads and the expenditure gives assessee an enduring benefit in which event it cannot be treated as 'current repairs'. He accordingly disallowed the claim of deduction but allowed depreciation on the aforementioned items.
4. Aggrieved, assessee-company preferred an appeal before the CIT(A) contending, inter alia, that the impugned expenditure is revenue in nature and hence, ought to have allowed deduction. As could be noticed from the statement of facts and grounds of appeal filed before the CIT(A), the case of the assessee was that chilled rolls are mainly used in producing a particular size of round bars. During the course of production, the chilled rolls get damaged and it has to be replaced by new chilled rolls and in some cases with minor repairs the same can be re-used. The assessee followed the practice of treating them as "stores" and the value of rolls, which are although used but are in good condition, are shown as closing stock which has become opening stock for the next year and so on. In other words, items which were to be replaced, are reduced from the closing stock. Similarly assessee replaced fire bricks in furnace at frequent intervals. In the case of rolling mills, furnace is installed with the help of fire bricks which help in tolerating high degree of temperature. During the course of time, these bricks are some times broken or damaged and therefore, the same have to be replaced by way of repairs. For repairing the furnace, bricks are purchased and used to repair the furnace. Thus the expenditure is purely of revenue nature. Similarly the assessee incurred expenditure on repair/replacement of cable line work, air- filter units, pedestal fan and exhaust fans which are also of revenue nature since expenditure is incurred at frequent intervals.
35. It could thus be seen that the assessee claimed deduction of expenditure under section 37 of the Act (revenue expenditure) but not as current repairs. Learned CIT(A) accepted the contention of the assessee by observing as under :
3.3. "I have duly considered the submissions of the A.R. and I find that the A.O. has treated the expenditure on repairs to plant and machinery as capital in nature without bringing anything on record to show that these expenditure has been incurred for bringing any asset into existence. I find that these are mere replacements of part of plant and machinery and cannot be treated as capital in nature. Similarly, the electrical repairs is also part of current repairs and hence cannot be treated as capital. The A.O. is directed to delete this addition.
These grounds of appeal are allowed."
6. Aggrieved, Revenue is in appeal before us contending, inter alia, that the impugned expenditure cannot be treated as revenue expenditure in the light of decision of the Apex Court in the case of CIT vs. Saravana Spinning Mills P. Ltd. (2007) 293 ITR 201. Learned D.R. adverted our attention to the Order of the Assessing Officer to highlight that each chilled roll is a separate item in itself which gives the assessee an enduring benefit. Similarly expenditure on pedestal fans etc., are also capital in nature. Since the items replaced/purchased gives the assessee an enduring benefit, in the light of decision of the Apex Court in the case of Saravana Spinning Mills Ltd. (supra), any expenditure incurred for replacing of an independent and separate machine within the factory premises should not be treated as "current repairs" and has to be treated as capital expenditure.
47. On the other hand, learned Counsel submitted that chilled rolls and fire bricks cannot be treated as an independent machinery or plant in the factory premises and thus it cannot be considered as a replacement of an independent machine. Adverting our attention to page 72 of the paper book learned Counsel submitted that the process of manufacture of TMT bars is such that an independent item of chilled roll/forged roll/fire brick/air-filter etc., cannot be treated as a separate machine. While explaining the nature of process, vide letter dated 20th August, 2007 the assessee explained before the Assessing Officer as under :
"The manufacturing process of TMT Bars is very simple. The raw material like Ingots, Billets, Blooms, Ship- breaking plats are required in TMT process. The said material is feeded in furnace with pusher type arrangement. They are heated there at 1200c temperature. The ingots, billets are slowly forwarded and then taken out from other end of the furnace in a red hot condition. Then they are passed through different rolling mill stands where their shape changes. The ingots get converted into Bars and their length increase. Less the diameter more the length. After leaving the last rolling mill stand (Finishing Stand) the bar is passed through special cooling pipe system where it is rapidly quenched for a short-time depending on the size of bars and the rolling speed. The rolling stand, which is cut to cooling bed length, is fed to the cooling bed and finishing the final touch to the bars. In this process, the Round bars get different high strength from nearly the same steel grades. After this process, the finished product is called TMT Bars."5
8. He submitted that the raw material such as ingots, billets, etc., once fed in furnace cannot be kept aside even for a shorter duration till the finished product is taken out from the other end since any gap between the initial process and the final process would result in reduction of temperature which inturn reduces the heat of the ingots and thus becomes unfit for converting them into the desired shape. It could thus be seen that unlike the case of Saravana Spinning Mills Ltd. (supra) the so-called independent machinery which was replaced by the assessee cannot be treated as independent in its working since they are part of the whole process apart from the fact that they do not give any enduring benefit to the assessee and bearing in mind the need to replace at frequent intervals the assessee treated them as "stocks". In this regard, he adverted our attention to page Nos. 7, 56, 57 of the paper book wherein it is shown that the expenditure is incurred on these items at frequent intervals. Page 58 is with regard to electrical maintenance which is in the nature of routine maintenance expenditure. He thus submitted that there is no evidence to show that the replaced items have given the assessee an enduring advantage, on the contrary some rolls are replaced every two months. He also adverted our attention to page 13 of the paper book to submit that under identical circumstances expenditure incurred by the assessee was allowed as revenue expenditure in the immediately preceding assessment years. He also referred to the decision of Hon'ble Delhi High Court in the case of CIT vs. Eagle Theatres (1987) 165 ITR 93 (Del.) wherein the Court observed that expenditure incurred on replacing old electrical wiring with new electrical wiring would not give raise to the assessee an enduring benefit and hence such expenditure has to be treated as revenue in nature. Similarly in the case of CIT vs. Atherton West & Co. Ltd. (1971) 82 ITR 352 expenditure incurred on replacement of cotton bowls in textile mills, becoming unserviceable due to wear and tear, was considered as 6 revenue in nature. Learned Counsel has also referred to the decision of the Hon'ble Supreme Court in the case of CIT vs. Ramraju Surgical Cotton Mills & Ors. (2007) 294 ITR 328 to submit that the decision in the case of Saravana Spinning Mills (P) Ltd. (supra) was rendered in the context of Section 31 of the Act wherein the Court has not properly examined the tests to be applied in respect of a claim under section 37 of the Act and in the said context the Court observed that in the event of replacing an old worn-out item of machinery or even a new machinery, the same can be allowed as revenue expenditure provided there is no increase in the production capacity by virtue of such replacement. In other words, the Apex Court indicated that merely because an expenditure gives the assessee an enduring advantage, it cannot be treated as capital expenditure if such expenditure was incurred only in the form of replacement of machinery without any increase in the production capacity. Learned Counsel submitted that in the instant case there is no increase in the production capacity and the complex nature of the manufacturing process necessitates the assessee to replace chilled rolls, fire bricks etc., at regular intervals and since the replaced parts are merely part of the whole machinery which is necessary for continuous process of bringing out the end product, from the stage of feeding of raw material in the form of ingots, billets etc., expenditure incurred thereon has to be treated as revenue in nature. Similarly expenditure on cable line work etc., and replacement of minor items such as exhaust fan etc., cannot be treated as capital expenditure in the circumstances of the case. He thus strongly supported the Order of the learned CIT(A).
9. We have heard the rival submissions and carefully perused the record. As could be noticed from the material papers the assessee considered chilled rolls as inventory and it is not clear as to whether it was claimed as current repairs or revenue expenditure.
7Page 13 of the paper book however shows that it was shown under the head "machinery maintenance". The Assessing Officer was under the impression that it was claimed as 'current repairs", bearing in mind the fact that chilled rolls/fire bricks etc., were replaced. Therefore, the Assessing Officer rejected the claim of the assessee and considered it as capital expenditure, presumably bearing in mind the decision of the Apex Court in the case of Saravana Spinning Mills Pvt. Ltd. (supra). However, the plea of the assessee before the CIT(A) was that it was a revenue expenditure. It was also shown before us that it was a continuous process right from the stage of feeding the raw material to the manufacture of TMT bars as end product. It is not in dispute that in the immediately preceding years, the Assessing Officer accepted it as revenue expenditure and allowed the claim of deduction. Under these circumstances, we are of the view that the expenditure incurred on replacement of chilled roll/fire bricks/forged rolls cannot be treated as capital expenditure though it may not fall within the description of 'current repairs'. In other words, the learned CIT(A) was justified in considering the claim of deduction under section 37 of the Act. Similarly expenditure incurred on replacement of pedestal fan, exhaust fan and cable line etc., cannot be treated as bringing into existence of any new asset of enduring advantage since by replacing of such items the production capacity has not enhanced. Bearing in mind the nature of expenditure we are of the view that the learned CIT(A) was justified in treating the expenditure as revenue in nature. We therefore, dismiss ground No.1 of the Revenue.
10. This leaves us with ground No. 2 which reads as under :
2. "On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the disallowance of interest of Rs.6,22,902/- made by the A.O. u/s. 40(A) (2) of I.T. Act as per details given in the body of the assessment order."8
11. Admittedly the assessee borrowed sums from relatives and outsiders and paid interest @ 18% p.a. as against 12% charged by banks. Therefore, by invoking the provisions of Section 40A(2) of the Act, the Assessing Officer considered the interest payment @ 12% p.a. as reasonable and the balance of 6% treated as excessive and unreasonable. He accordingly disallowed a sum of Rs.6,22,902/-.
12. Aggrieved, assessee contended before the learned CIT(A) that certain parties, to whom the interest was paid at 18%, were not relatives within the meaning of Section 40A (2) of the Act though the Auditor's Report mistakenly mentions so. It was further contended that Banks give loans upon obtaining adequate security whereas other creditors and relatives have given loans to the assessee without any security and thus, the difference in interest rate between the banks and unsecured creditors is reasonable. Reliance was placed upon several case law to submit that payment of interest up to 24% on unsecured loans can be considered as reasonable since, unsecured loans cannot be treated on par with bank loans. Having regard to the submissions of the assessee, learned CIT(A) deleted the addition by observing as under :
4.3. "....... The bank rates are not comparable to the rates applicable in the open market. The AR has been able to show that they are paying interest to others also @ 18%. So it is not a case of discrimination between relatives and others. Hence, the provisions of section 40A(2)(b) are not applicable to the facts of the case. In the case of ITO vs. K.S. Bhasin, 17 TTJ (Gau) 134, it was held that bank rate can not be taken as a guide since bank require pledge of property. Accordingly, I direct the AO to delete this addition."9
13. Aggrieved, Revenue is in appeal before us. Learned D.R. adverted our attention to page 4 of the assessment order to highlight that substantial amount was borrowed from Directors and relatives whereas learned CIT(A) was wrongly of the opinion that Directors were not 'relatives'. He thus submitted that the learned CIT(A) has not appreciated the facts in the correct perspective.
14. On the other hand, learned Counsel appearing on behalf of the assessee adverted our attention to pages 70, 75 to 78 of the paper book to submit that the assessee obtained unsecured loans from outsiders also, who were wrongly specified as relatives, and interest was paid to them at 18%. Similarly unsecured loans were obtained from the Directors and other relatives @ 18% p.a. Interest paid @ 18% cannot be held to be excessive merely because bank charges lesser rate of interest ; disallowance is not called for merely by comparing it with the bank loans which follow strict norms in granting loans. He thus strongly supported the Order of the learned CIT(A).
15. We have carefully considered the rival submissions and perused the record. It is not in dispute that the assessee paid interest on unsecured loans (obtained from outsiders) and interest paid thereon, varying from 12% to 18% to outsiders, was claimed as deduction and accepted by the Assessing Officer. Such being the case, merely because few loans were taken from the "relatives", interest paid @ 18% cannot be held to be excessive and unreasonable. Having regard to the facts and circumstances of the case, we do not find any infirmity in the Order of the learned CIT(A). Accordingly, ground No.2 is rejected. Other grounds urged before us are general in nature and therefore, do not require independent consideration.
16. In the result, appeal filed by the Revenue is dismissed.
10 ITA. No. 4069/Mum/2008Order pronounced in the open Court, on this the 17th day of December, 209.
Sd/- Sd/- (R.K. PANDA) (D.MANMOHAN) ACCOUNTANT MEMBER VICE PRESIDENT Mumbai, Date 17th December, 2009. VBP/- Copy to
1. ACIT, Circle 6 (3), Room No. 522, 5th Floor, Aayakar Bhavan, M.K. Road, Mumbai - 20.
2. M/s. Metro Ispat Pvt. Ltd. 3rd Floor, Potia Industrial Estate, Reay Road, Darokhana, Mumbai - 400 010 PAN AAABCM-8021-H
4. CIT(A)-VI, Mumbai
5. CIT, City-VI, Mumbai
6. D.R. 'A' Bench, Mumbai.
7. Guard File.
(True copy) By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.
SNo Date Initials
1 Draft dictated on 15-12-2009 Sr.P.S.
2. Draft Placed before author 16-12-2009 Sr.P.S
3. Draft proposed & placed before the Second Member V.P.
4. Draft discussed/approved by Second Member A.M
5. Approved Draft comes to the Sr.PS/PS Sr.P.S
6. Kept for pronouncement on Sr.P.S
7. File sent to the Bench Clerk Sr.P.S
8. Date on which file goes to the Head Clerk
9. Date of Dispatch of Order