Gujarat High Court
The Principal Commissioner Of Income ... vs Gujarat Industries Power Company Ltd on 1 August, 2022
Author: Bhargav D. Karia
Bench: N.V.Anjaria, Bhargav D. Karia
C/TAXAP/350/2022 ORDER DATED: 01/08/2022
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 350 of 2022
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THE PRINCIPAL COMMISSIONER OF INCOME TAX, VADODARA 1
Versus
GUJARAT INDUSTRIES POWER COMPANY LTD.
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Appearance:
MR.VARUN K.PATEL(3802) for the Appellant(s) No. 1
for the Opponent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIA
and
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
Date : 01/08/2022
ORAL ORDER
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. This appeal is filed under section 260A of the Income Tax Act, 1961 [for short 'the Act,1961'] by the Revenue feeling aggrieved by the common order dated 28.02.2022 passed by the Tribunal in ITA No. 1109/AHD/2010 for the assessment year 2007-08.
2. The Revenue has proposed the following substantial questions of law:
"(a) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT is justified in upholding the decision of the Ld. CIT(Appeals) in deleting the addition of Rs. 3,66,94,613/- made on Page 1 of 10 Downloaded on : Sat Dec 24 22:29:18 IST 2022 C/TAXAP/350/2022 ORDER DATED: 01/08/2022 account of disallowance of expenditure incurred on capital stores and spares claimed as revenue expenditure instead of capital expenditure?
(b) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT is justified in upholding the decision of the Ld. CIT(Appeals) in deleting the addition of Rs. 3,66,94,613/- holding that the replacement of spares in the machineries would be allowable as revenue expenditure only, without appreciating the fact that the assessee itself classified the stores and spares as capital spares in its books of accounts and the replacement cycle of such stores and spares has resulted in enduring benefit to the assessee and accordingly the expenditure incurred on such stores and spares are in the nature of capital expenditure?
3. The assessee is engaged in generation of power in form of electricity. For the assessment year 2007-08, the Assessing Officer disallowed the revenue expenditure claimed by the assessee for replacement of parts of machinery by treating the same as capital expenditure and claim of deduction under section 80IA of the Income Tax Act, 1961 [For short 'the Act,1961']. The Assessing Officer disallowed the replacement cost of parts of machinery on the ground that the same is of capital nature.
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4. The Assessing Officer also disallowed additional claim under section 80IA of the Act,1961 on the ground that the assessee neither obtained or filed audit report nor claimed deduction under section 80IA of the Act, 1961 at the time of filing the original return of income and the assessee is required to set off of previous year brought forward losses for the said unit under section 80IA(5) of the Act,1961 but the same was not done by the assessee and therefore, the claim made by the assessee was rejected by the Assessing Officer.
5. Being aggrieved, the assessee preferred appeal before the CIT(Appeals). The CIT(Appeals), considering the decisions of the Hon'ble Supreme Court and High Court, held that the replacement of parts of a larger machine would not amount to creation of a new asset or incurring of capital expenditure and it would be a revenue expenditure as the manufacturing activity is carried on by the machine comprising of various parts and where one or more of the parts is replaced, it would not amount to replacement of the whole.
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6. The CIT (Appeals) relied on the decision of the Hon'ble Supreme Court in case of CIT vs. Sarvana Spinning Mills Pvt. Ltd reported in 293 ITR 201.
7. With regard to disallowance of claim under section 80IA of the Act, 1961, CIT(A) held that filing of audit report is procedural in nature and if the same is submitted before finalization of assessment, the legal requirement would be satisfied as held by this Court in case of CIT vs. Gujarat Oil and allied Industries reported in 201 ITR 325. Regarding computation of profit in conformity with the provision of section 80IA of the Act, 1961, the CIT (Appeals) followed the decision of the Chennai Bench of the Tribunal in case of Mohan Breweries and Distiller Ltd vs. ACIT reported in 114 TTJ 532 wherein it is held that initial assessment year is the year in which the assessee first opts to be governed by the deduction provisions and not the year of manufacture. Accordingly, the CIT (Appeals) allowed the appeal filed by the assessee on both the grounds.
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8. The Tribunal, after considering the submissions made by both the sides and the technical write up submitted by the assessee together with details of spares consumed at regular interval for various assessment years and the case laws relied by the assessee, arrived at a finding that the replacement of parts in a machinery is treated as not capital but revenue in nature for the following reasons.
"a. For a power generating company, these bucket spares are in the nature of consumables' spares only notwithstanding its high cost.
b. The buckets are designed with special profile of airfoil cross section for efficient energy conversion.
c. Due to high working temperature of around 800' C and high speed of the turbine (5100 RPM), this component is the most critical in the turbine and failure of this component may lead to catastrophic damage to the machine.
d. It is also seen from the Original Equipment Manufacturer namely BHEL/General Electric, USA have very categorically prescribed the operating life of the above bucket which helps to ensure trouble free operation and to avoid any catastrophic damage to the machine.Page 5 of 10 Downloaded on : Sat Dec 24 22:29:18 IST 2022
C/TAXAP/350/2022 ORDER DATED: 01/08/2022 e. Further it is also stated that by replacement of the buckets on completion of 48000 hours of continuous operation the power generation capacity is neither increased nor is the power plant efficiency or life of the plant gets increased.
f. The cost of the Gas Turbine parts such as Buckets and Nozzles are high primary due to very special metallurgy and manufacturing process provided by the manufacturer out side India and the assessee company procures the same by import and thus attracts custom duty, air freight, insurance etc. g. Further the replacement of parts is Capital or Revenue is No more Res integra based on the observation made by the Hon'ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills and Commissioner of Income Tax V/s. Sri Mangayar karasi Mills (P) Ltd. 315 ITR 114 wherein held that when certain parts of an air-conditioner or a T.V. is replaced, it does not amount to replacement of entire unit.
h. Thus this issue is already dealt by the co-ordinate Benches of ITAT, Hyderabad in the case of DCIT - VsAP Gas Power Corporation Ltd wherein after detailed discussion held that expenditure incurred by the assessee cannot be treated as capital expenditure but Revenue expenditure only.
i. Thus, applying the same logic to the facts of the assessee's case, it can be said that there is no replacement of the gas turbine as a whole but certain repair and replacement to some of the parts of the gas turbine, which does not result in bringing into existence Page 6 of 10 Downloaded on : Sat Dec 24 22:29:18 IST 2022 C/TAXAP/350/2022 ORDER DATED: 01/08/2022 a new asset of enduring nature, rather, the repair and maintenance are of recurring nature and essentially required for smooth running of business of the assessee i.e., generation of power.
j. Therefore we have no hesitation in holding that the replacement of spares in the machineries would be allowable as Revenue expenditure only and addition made by the AO is directed to be deleted. Thus the Department ground is rejected."
9. With regard to disallowance under section 80IA of the Act, 1961, the Tribunal followed the decision of this Court in case of CIT vs. Gujarat Oil and allied Industries (supra) considering the fact that the audit report was filed by the assessee before completion of the assessment. The Tribunal, relying upon the aforesaid decision of this Court, held that it is settled law that filing of tax audit report during pendency of assessment proceedings is sufficient compliance for claiming deduction under section 80IA of the Act, 1961.
10. With regard to the issue of set off of losses as per section 80IA(5) for computation of income of eligible unit, the issue Page 7 of 10 Downloaded on : Sat Dec 24 22:29:18 IST 2022 C/TAXAP/350/2022 ORDER DATED: 01/08/2022 of initial assessment year is considered by the Tribunal on the basis of material placed before it and Circular No. 1/2016 issued by the CBDT that an assessee who is eligible to claim deduction under section 80IA of the Act has the option to chose initial/first year from which it may desire to claim for ten consecutive years, out of slab of fifteen (or twenty )years as prescribed under that sub-section. The said circular also clarified that once such initial assessment year has been adopted by the assessee, the assessee would be entitled to claim deduction under section 80IA for ten consecutive years beginning from the year in respect of which the assessee has exercised such option subject to fulfillment of conditions prescribed in the section. Therefore, the term "initial assessment year" would mean, the first year opted for by the assessee for claiming deduction under section 80IA with a rider that total number of ten years for claiming deduction should not transgress the prescribed slab of fifteen or twenty years as the case may be and the period of claim should be availed in continuity.
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11. Following the aforesaid circular, SLP filed by the department was also dismissed against the decision of Madras High Court in case of Assistant Commissioner of Income-tax, Tirupur vs Velayuthasamy Spinning Mills (P) Ltd reported in [2016] 76 taxmann.com 176 holding that loss in earlier year to initial year already absorbed against the profit of other business cannot be notionally brought forward and set off against the profit of eligible business as no such mandate is provided under section 80IA(5) of the Act, 1961. The Tribunal, following the decision of the Apex Court and the Circular No. 1/2016 issued by the CBDT, rejected the appeal filed by the Revenue allowing the claim of deduction under section 80IA of the Act in favour of the assessee.
12. Considering the above findings of fact arrived at by the Tribunal with regard to the claim of the assessee for the cost of spare parts as revenue expenditure as well as the deduction under section 80IA of the Act, 1961 in view of the CBDT Circular No. 1/2016 dated 15.02.2016 as well as the decision Page 9 of 10 Downloaded on : Sat Dec 24 22:29:18 IST 2022 C/TAXAP/350/2022 ORDER DATED: 01/08/2022 of the Apex Court in case of CIT vs. Sarvana Spinning Mills Pvt. Ltd (supra) and Velayuthasamy Spinning Mills (P) Ltd (supra), we are of the opinion that no question of law much less any substantial question of law proposed or otherwise arises from the impugned order of the Tribunal. The Appeal accordingly stands dismissed.
(N.V.ANJARIA, J) (BHARGAV D. KARIA, J) JYOTI V. JANI Page 10 of 10 Downloaded on : Sat Dec 24 22:29:18 IST 2022