Income Tax Appellate Tribunal - Chennai
Neyveli Lignite Corporation Ltd., ... vs Department Of Income Tax on 29 May, 2012
IN THE INCOME-TAX APPELLATE TRIBUNAL
'A' BENCH, CHENNAI.
Before Shri Abraham P. George, Accountant Member &
Shri Challa Nagendra Prasad, Judicial Member
I.T.A. Nos. 219, 220 & 221, 981 and 982/Mds/2009
Assessment Years : 1995-96, 96-97, 97-98, 98-99 and 99-2000
&
I.T.A. Nos. 1458 and 1459/Mds/2011
Assessment Years: 1993-94 and 94-95
The Assistant Commissioner of M/s. Neyveli Lignite Corporation Ltd.,
Income Tax/ The Deputy Vs. Corporate Office, P.O. Neyveli 607801
Commissioner of Income Tax, Cuddalore District.
Large Taxpayer Unit , [PAN: AAACN1121C]
Chennai - 600 101.
(Appellant) (Respondent)
Appellant by : Shri Shaji P. Jacob, Addl. CIT
Respondent by : Shri R. Vijayaragahavan, Advocate
Date of Hearing : 29.05.2012
Date of pronouncement : 18.07.2012
ORDER
PER BENCH These seven appeals of the Revenue for the assessment years 1993- 94 to 1999-2000 are directed against three different consolidated orders of the Commissioner of Income Tax (Appeals) Large Taxpayer Unit, Chennai dated 29.08.2008, 30.01.2009 and 23.06.2011 for different assessment years. Shri Shaji P. Jacob, Addl. CIT represented on behalf of the Revenue 2 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 and Shri R. Vijayaragahavan, Advocate represented on behalf of the assessee.
2. The common ground in all these Revenue's appeals, except in the appeals for the assessment years 1993-94 and 1994-95, is that the Commissioner of Income Tax (Appeals) erred in holding that the expenses incurred on Life Extension Program (LEP) of Thermal Power Station I (TPS-
I) and expenditure on rejuvenation of Bucket Wheel Excavators (BWE) are allowable as revenue expenditure. The common ground in the appeals of the Revenue for the assessment years 1993-94 and 1994-95 is only in respect of expenses incurred on Life Extension Programme (LEP) of Thermal Power Station I (TPS-I).
3. The facts of the case are that the assessee is a public sector undertaking engaged in the business of generation of electricity and mining of Lignite. The assessee incurred expenditure on TPS-I and rejuvenation of BWE during these assessment years and claimed such expenditure as revenue expenditure allowable under section 37 or as current repairs under section 31(i) of the Income Tax Act. The Assessing Officer while completing these assessments under section 143(3) for all the assessment years from 1993-94 to 1999-2000 disallowed the said expenditure incurred on TPS - I and rejuvenation of BWE treating as capital expenditure as against the claim 3 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 of the assessee as revenue expenditure or expenditure allowable as current repairs.
4. On appeal, the Commissioner of Income Tax (Appeals) confirmed the assessments made by the Assessing Officer treating the said expenditure as capital expenditure and allowing depreciation.
5. On further appeal to this Tribunal by the assessee, this Tribunal by its order dated 25.01.2007 in I.T.A. Nos. 1836 & 1837/Mds/02 and 658, 1109, 1368 & 1369/Mds/03 for the assessment years 1995-96 to 2000-01 restored the matter to the file of the Assessing Officer with a direction to decide the issue de novo in accordance with law after providing adequate opportunity to the assessee of being heard. Relevant portion of the order is as under:
"2. I.T.A. No.: 1836 & 1837/Mds/02 and 658, 1109, 1368 & 1369/Mds/03:
In the appeals filed by the assessee the first common issue relates to he allowability of expenditure on repairs and replacement. During the relevant assessment years assessee carried out repairs and replacement of the parts and claimed that the repairs were in the nature of replacement of plant and machinery. It was also stated that these items were not new machinery and repairs and replacements did not bring into existence any asset of enduring nature. Therefore, the expenditure incurred towards the repairs and replacement be allowed as a revenue expenditure. Reliance was placed on the decision of the jurisdictional High Court rendered in the case of CIT v. Janakiram Mills Ltd. (275 ITR 403) (Mad.). In this case Hon'ble High Court has held as under:
"Where there has been no capacity addition and the replacement has been made only to restore the machinery to its original state of efficiency so that the entire integrated manufacturing unit which is considered as a profit-making apparatus functions efficiently and 4 I.T.A. Nos Nos. 219-
219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 produces quality products, the concepts of "current repairs", "modernization" and "expenditure laid out or expended wholly and exclusively for the purpose of the business" have to be interpreted following the principle of updating construction taking note of the business needs and commercial expediency especially in a competitive business environment created by the globalization and not by applying old concepts of what is capital and what is revenue."
In view of the aforesaid decision, it is necessary to see the nature of repair undertaken by the assessee, whether the expenditure was incurred in the capital field or in the revenue field. We find that the Revenue authorities have not examined the issue in the right perspective. The admissibility of the claim is to be examined on the touchstone of the guiding principles laid down by the Hon'ble jurisdictional High Court in the case of Janakiram Mills Ltd., supra. We, therefore, set aside the impugned order on this count and restore it to the file of the AO with direction to decide it de novo in accordance with law after providing adequate opportunity to the assessee of being heard."
Similar direction is given by this Tribunal in its order dated 20.02.2008 in I.T.A. Nos. 656 & 657/Mds/2003 for the assessment years 1993-94 and 1994-95 also.
6. Pursuant to the above order of this Tribunal, the Assessing Officer passed consequential orders under section 154/143(3) read with section 254 of the Income Tax Act for the assessment years 1993-94 to 2000-01.
7. The Assessing Officer while completing the assessments, pursuant to the directions of this Tribunal, once again disallowed the expenditure incurred on repairs to machinery i.e., TPS-I and rejuvenation of BWE treating it as capital expenditure on the grounds that there is increase in production/power generation capacity of the units due to this expenditure incurred on TPS-I/BWE. The Assessing Officer observed that it is a one-time 5 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 expenditure undertaken at the end of the life span of the asset with a view to give the asset a new life. The Assessing Officer also observed that in the decision of the Hon'ble Jurisdictional High Court in the case of CIT v.
Janakiram Mills Ltd. [275 ITR 403], the Hon'ble High Court considered the expenditure as revenue in nature on the ground that there is no increase in the production capacity. However, in the case of present assessee, according to the Assessing Officer there is increase in production/power generation capacity and therefore the expenditure of repairs and replacement claimed by the assessee is capital in nature. The Assessing Officer also observed that the expenditure incurred by the assessee did not fall within the meaning of current repairs under section 31(1). The Assessing Officer placed reliance on the decision of the Hon'ble Supreme Court in the case of CIT v. Saravana Spinning Mills (P) Ltd. [293 ITR 201].
8. On appeal, the Commissioner of Income Tax (Appeals) held that there is no increase in production capacity in the case of the assessee and the Assessing Officer wrongly presumed that there is increase in production capacity and there was only replacement of parts of equipments and overhauling of equipments, there was no enduring advantage to the assessee to treat the expenditure in the capital field. While coming to this conclusion, the Commissioner of Income Tax (Appeals) considered various decisions including the decision of the Hon'ble Supreme Court in the case of 6 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 CIT vs. Saravana Spinning Mills (P) Ltd. [293 ITR 201] and passed a detailed order as under:
"1) The Appellant Neyveli Lignite Corporation Ltd is a public sector undertaking carrying on the business of generation of electricity. The Appeals relate to Assessment years 1995·96, 1996-97 and 1997-98 and involve common issues and, hence, are proposed to be disposed off through a common order.
2) The appeals have been filed against the order passed by the Assessing Officer pursuant to direction of the Honourable Income Tax Appellate Tribunal vide order in ITA Nos.1836 & 1837/Mds/02 and 658, 1109, 1368 & 1369/Mds/03 for Assessment years 1995·96, 1996·97, 1997·98, 1998-99, 1999-2000 & 2000·01 dated 25/01/07.
3) The points in appeal relate to the claim of expenses incurred on Life Extension Program (LEP) of Thermal Power Station I (TPS·I) and expenditure on Rejuvenation of Bucket Wheel extractors as revenue expenditure.
4) The amounts were initially treated as capital by the Appellant, but claims for revenue expenditure were made during the course of assessment proceedings in regard to Assessment year 1995·96.
In regard to Assessment year 1996-97 and 1997-98 the claims were made in the return of income. The claim was disallowed on the ground that the expenditure is capital in nature by the learned Assessing Officer.
The reason adduced by the Assessing Officer was that the expenditure had resulted in enduring advantage to the Appellant and the issue was squarely covered by the decision of Supreme Court in the case of Balliammal Naval Kishore Vs CIT (224 ITR 414).
5) The Appellant went on appeal for the AY 95-96 & 96·97 before the learned CIT (Appeals) and vide orders dated 25.09.2002, the learned CIT (Appeals) disposed of the appeal rejecting the claim of the Appellant. The reasons adduced were :-
a) There was considerable planning and execution involved in the execution of the LEP
7 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11
b) The expenditure was a one time expenditure covering the Plant I which had outlived its utility
c) There was substantial replacement involved.
d) The expenditure had increased the production capacity after the program of repairs.
6) The learned CIT (Appeals) distinguished the cases relied upon by the appellant as under:-
a) In the case of CIT Vs Seraikella Glass Works (P ) Ltd 157 ITR 584 the case was one that involved deductibility of expenditure incurred year after year.
b) The decision in the Cultural Enterprise Corporation Vs CIT 196 ITR 488 dealt with a situation of repairs to house property. In CIT Vs Ram Nagar Sugar Mills Ltd 21 ITR 191 the replacement was a boiler by a new one which was exactly similar to the boiler replaced.
c) There was also no increase in production capacity of the sugar mills.
Further boiler of a sugar mills cannot be compared to boiler of a power plant
d) The learned cn (Appeals) drew support from the decision in CIT Vs Dharbanga Sugar Co Ltd ,29 ITR 21 wherein it was held that if there is replacement of entire or substantially the whole machinery there is no question of repair. In the case of CIT Vs North Oil Mills Company Limited 140 ITR 173 the Kerala High Court had held as capital replacement expenditure on engines with higher HP as the efficiency of the boats was considerably enhanced.
7) The Appellant proceeded in appeal to the Honorable Tribunal and relied upon the decision of the jurisdictional High court in the case of CIT Vs Janakiram Mills Ltd 275 ITR 403 where in it was held that expenditure on replacement of carding system by high production cards was revenue in nature.
8) The Honourable Tribunal however remitted the issue to the Assessing officer with the direction to consider the matter afresh in the light of the decision of the Madras High Court decision cited by the Appellant.
While restoring the file to the assessing officer, the Honorable. ITAT observed as follows:-
8 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 "In view of the decision rendered by the jurisdictional of High Court in the case of CIT Vs Jankiram Mills Ltd. (275 ITR 403) it is necessary to see the nature of repair undertaken by the Assesses, whether the expenditure was incurred in the capital field or revenue field. We find that the revenue authorities have not examined the'" issue in the right perspective. The admissibility of the claim is to be- examined on the touchstone of the guiding principles laid down by the Hon'ble jurisdictional High Court in the case of Jankiram Mills Ltd; supra"
.
9) The learned assessing officer in his orders passed pursuant to the direction of the Honourable Tribunal has again disallowed the claim holding that the expenditure in question resulted in enduring advantage. The reasons adduced were that there was increase in production capacity. The expenditure is not current repairs and hence not covered by Sec 31 (i) and the decision of Supreme Court in the case of CIT Vs Saravana Spinning Mills Ltd 293 ITR 201 was applicable.
Hence the Appellant has filed the present appeals.
10) On behalf of the Appellant it is forcefully submitted as under:-
a) The addition made by the Assessing Authority was primarily on the basis that there has been increase in production capacity. The Appellant submits that there was no increase in production capacity due to the expenditure as is demonstrated by the figures for generation of electricity from the period of commencement of the LEP and the year of completion thereof.
b) The production of TPU I and Mines during the years were as under:
S.No. Particulars Production Mine- T.P.S.-I T.P.S.-I of Year 1. Lignite (Lakh Gross Net (M.U.) Tonnes) (M.U.) 1 1990-91 75.45 3861.58 3449.03 2 1991-92 81.12 4027.07 3556.56 3 1992-93 65.05 2831.56 2493.17 4 1993-94 61.45 2371.3 2079.04 5 1994-95 67.08 3108.56 2709.34 6 1995-96 72.68 3190.82 2777.88 7 1996-97 72.81 3151.8 2764.84 8 1997-98 75.01 3447.29 3031.91 9 1998-99 75.42 3772.99 3312.36
9 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11
c) The copies of the Annual reports for the declaration of the above has been submitted during the hearing.
d) It is submitted from the detailed statement stated above it would be seen that in so far as TPU I is concerned the generation of electricity which was 3861.58 million units in the financial year 90-91 had been remained at the same level in the subsequent financial years upto 1998-1999 (subject to shut down for repairs). The AR has submitted the set of director's report's copy.
e) It would also be seen that in the subsequent year the production had not exceeded the same. It was therefore submitted that the basis of the disallowance by the Assessing Authority regarding increase in production capacity was ill-founded.
f) It is further submitted that the Capacity of the TPU I as declared in the annual accounts, which always remains at 600 MW, testifies to the point.
g) Also it would be seen that even in regard to mines, the production that was 75.45 lakh tons had only been sustained at the same level.
h) It was therefore submitted that the substratum for the disallowance stands dislodged.
11) In so far as the LEP expenditure is concerned, the Appellant had also furnished a technical report from their experts according to which the following points emerge:
a) The TPU I unit had operated over 35 years and the plant had developed· problems.
b) A team of Soviet experts were called in to conduct residual life studies who had reported the requirement of repairs and recommended action for safe operation of the plant. (copy of the report was placed on record).
The following have been given as the objective of the Study:
i) To carry out 100% metal control ( analysis of metal condition) of those parts failures which are systematically observed in
10 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 world practice on analogous equipment, and, as a rule lead to grave consequences.
ii) To evaluate the reliability of the boiler drums, main steam pipe lines, pipes of water walls, steam super heaters and economizers of the turbine equipment.
iii) To work out the recommendation.
iv) The results of the3 study on Metal control has been reported as under:
1. Steam super heater pipes -
Cuttings were made from the steam superheater pipes which were subjected to visual inspection and metallographic examination.
All the cuttings on the inner side were covered with a layer of scale, the maximum thickness of which (1 mm) was observed on the pipes of the outlet stage of the convective super heater. On the outer side of the pipes there was a layer of dense deposits with the thickness upto 2.5 mm. The wall thickness and outer diameters of the pipes deviated from the rated dimensions negatively upto 10-15%. In all the cuttings the structure, consists of ferrite and carbides arranged both as a kind of chains on the boundaries of the grains and inside them. The above stated miorostructure condition of the cuttings and availability of thick scale reveal durable overheat of the pipes above the rated value. The availability of durable overheat is accompanied by consequent pipe failures with non-significant increase of the diametre and small thinning of the edge in the place of breakage. It was observed more than once on Boilers 8A, 8B, 4, 7 and others. The described above miorostructure for steel 12 XIMØ is characterized by rejecting signs which reduce the durable strength limit more than two times compared with the initial condition.
2. Super Heater Header Operation -
It is possible to leave in, operation the superheator headers operating at temperature more than 450°C under the following conditions;
- welding bench marks for measuring residual deformation and diameters of each pipe;
11 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11
- the measurement should be repeated after 7000 hours of operation at rated steam parameters;
·if the rate of creep measured after 7000 hours is less than 1.5 X 10 % /hour the further operation of the headers is possible with periodical control every 25-30 thousand hours.
However, it is preferable to replace the headers. In this case supply of steam super heaters in blocks is possible. It will ensure their high quality manufacture and reliable operation.
3. Connecting boiler pipes -
The above stated boiler pipes were subjected to analysis according to the present standards. As a result, it was determined.
- Transfer pipes of Ø109 x 10 mm and Ø133 x 10 mm could be left in operation. However, absence of residual deformation measurements does not give a definite picture about their residual resources and metal condition; more than 70% of uprisers from steel 20o Ø135 and Ø108 ram do not meet strength requirements on their actual wall thickness; more than 90% of water down comers do not meet strength requirements.
4. DRUMS In the shells, bottoms, welding joints, openings, investigated, sections of the drum of Boiler 9B non acceptable defects were not detected. The drum is suitable for durable operation if the results of periodical control are positive. In Boiler 9A drum in the near weld zone of the welding joint 23 in the inner side a crack was detected having a length of 420 mm and depth up to 3 mm. After eliminating the crack and grinding the metal it is recommended to carry out control of the above stated welding joint after two years of the drum operation. In case of positive results of the control the drum is suitable for durable operation with periodical control every 25-30 thousand hours. In Unit N1 boiler drum non continuous lamination of the shell between welding Joints J4 and J5 was detected. After 7000 hours of the, drum operation it is recommenced to carry out metal control of the above stated shell and after comparing the results of this control with those of 1989 to take a decision about the suitability of the drum for further operation. The Soviet specialist, on his behalf, will prepare a request to the plant manufacturer of the drum concerning the possibility of its operation with the above stated defect.
12 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11
5. Main Steam pipe Lines -
The main steam pipe lines supplied with the boilers by the plant manufacturer can be left for durable operation (for a total life expenditure up to 180· 200 thousand hours). The rest of the main steam pipes exhausted their resources. It is proved by the increase of their diametre up to 275 mm, reduction of the bend evality almost upto 0 % the wall thickness of the bends of the main steam pipe lines of Unit N9 does not meet the requirements of strength for the period of operation upto 150 thousand hours and that of Unit N1 up to 200 thousand hours.
6. 100% of feed water pipes of Ø108 x 7 mm.
7. Casing and other parts of the turbines subjected to control according to the worked out programme are suitable for further operation with periodical control every 25-30 thousand hours. In addition to the control stated in the programme it is recommended to carry out control of the HP rotor boroscopic opening for absence .of defects and non-permissible value of residual deformation.
12) In so far as Rejuvenation of bucket wheel excavators are concerned the Appellant's technical experts were called for hearing and a technical note has been submitted by them. The following points emanated out of the same.
c) The bucket wheels rejuvenated were installed between 1960 and 1966.
d) The equipments had worked round the clock for excavation of overburden and lignite.
e) All equipments had to work in open atmosphere subjective atmospheric corrosion.
f) The structural parts had thinned out due to the above.
g) There were replacement of only parts like crawler pad, crawler frames, track gear box, self aligning track etc all part of the bucket wheel extractor.
h) There was also repairs to secondary structures etc, steering tiller, undercarriage, turntable etc. 13 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11
i) It was therefore submitted there was no replacement of any old plant with a new one but only replacement of parts of a machine.
j) A diagram of the bucket wheel excavator was given and part of the same were identified to drive home the point that the replacements carried out were parts of the bucket wheel excavator which is a single equipment.
k) It was therefore submitted that the expenditure were in the nature of repairs accordingly admissible as deduction under Sec 31 (1) or 37 (1).
l) It would be seen from the technical report that there was only replacement of components and overhauling of equipments.
m) It was submitted that the expenditure was incurred to sustain production under safe operating conditions and hence the expenditure would be in the revenue domain.
n) It was emphasized that the safe continued operation of the plant was in jeopardy and hence the expenditure was incurred to enable the assessee to continue to carry on the business and accordingly the expenditure was revenue expenditure.
o) The appellant also produced a technical write up on the nature of work carried out which has been reproduced below:
TECHNICAL WRITE UP FOR THE REJUVENATION OF BWEs 1144/1145/1193 The 700 Ltrs. BWEs (1144/1145/1193 & 1198) were erected and commissioned between 1960 & 1966. These BWEs are deployed in the Lignite corporation mines for excavation of overburden / lignite. These equipments have worked round the clock except during the time of regular maintenance i breakdown and planned stoppage. Also these equipments worked in the open atmosphere, which is corrosive in nature with respect to the steel structures.
Due to the above atmosphere the structural parts of these equipments have thinned out. Also because of the continuous working these equipments, some parts of these equipments have been subjected to dynamic loading and
14 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 also the parts have been subjected to tension and compression which might change the properties of material.
In view of the above conditions, the output of the machine have depleted gradually. In order to bring back the output of the machine close to the original these machines have been rejuvenated to give a new lease of life.
The particulars of the work carryout during the rejuvenation with reference to the drawing is submitted herewith. The number indicated within bracket below is the part referred in the above drawing.
The details of the item replaced
(i) Crawler frame assembly (2) The crawler frame consists of crawler pad, crawler frame, track gear box.
Crawler Pad:
The crawler pads is the item on which the total machine is moving for handling overburden / lignite during the excavation and as mine face advances. These items are always having contact with soil which is mostly slushy in nature depending upon the area where it is working. Due to the condition of the soil as well as working atmosphere this item will corrode and get elongated and hence needs replacement in the normal conditions at appropriate interval. During the rejuvenation these items were replaced.
Crawler Frames:
These BWEs consisting of 6 Nos. of crawler frames on which the parts meant for movement of the machine are assembled (such as rollers, gear boxes etc). The parts of these items gets thinned out due to prolonged exposure to the atmospheric condition and working in the slushy soil. Also this structural part develops cracks because of continuous working. This item was replaced with the new one keeping the skeleton of the item for subsequent modifications.
Track gear box:
The gear box is the prime mover for the track system in the machine. It was replaced totally as a unit.
15 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458-
1458-1459/M/11
(ii) Self Aligning track:
This item is used to assemble two Nos. of crawler frames to complete set of crawler frames (self aligning track). The working condition of this item is also similar to that of crawler frames. Hence this structure was also seen to have thinned out and got damaged. This item was re-used after repair and strengthening sufficiently.
(iii) Tower frame completes including pulley mast (4) :
The tower frame is also called as pylon. In the course of working, the soil gets accumulated in the bottom portion of 'this item. Because of the nature of the soil, this portion has also become thinner. This item is one the critical item on which most of the upper parts of the bucket wheel are mounted. Hence it was totally replaced instead of repair/strengthening and however in the course of replacement certain improvement were adopted.
(iv) Bucket wheel boom complete:
It is consisting of receiving conveyor, bucket wheel and buckets.
Receiving conveyor (6), Bucket wheel (7) and Buckets (9) :
The receiving conveyor is also a structural parts, handling the material excavated with the help of buckets. These parts were replaced considering the prolonged usage due to wear and tear.
(v) Discharge boom complete (8):
The material excavated by the bucket wheel is being handled through the receiving conveyor and loaded in the discharge boom conveyor which is in turn transported to conveyor system and it is dumped in the dumping yard. This part is also (discharge boom complete) subjected to continuous load and also gets corroded due to atmospheric condition. In view of the above, this part was also replaced with new one.
(vi) Mail slewing ball race and main slewing gear box shell (12):
The upper part of the bucket wheel excavator (Super structure) is mounted on the under carriage through turn table. Between these two parts a ball race is provided for rotating the super structure. As the ball race is continuously rotating with .the super structure this part gets worn out due to wear and tear and hence it was replaced.
16 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 The slew gear box shell is the one on which the drive parts of the slew gear box is assembled. This gear box shell got damaged due to prolonged use and hence it was strengthened and reused.
(vii) Bucket wheel boom hoist winch drum (13):.
The bucket wheel hoist winch drum is for hoisting / lowering the bucket wheel boom for excavation of overburden/lignite. The bucket wheel boom and hoist winch are connected with a rope which is used for hoisting / lowering operation. The hoist winch drum and rope were replaced due to wear and tear as these are most critical part of the equipment.
The course of rejuvenation the following parts were replaced / repaired
(i) Secondary structures like walk way and stair case for under carriage, turn table, Bucket wheel boom, discharge boom, intermediate boom and counter weight boom.
(ii) Motor foundation and motor covers for all the drivers.
(iii) Cabin and houses (20) In addition to the above the following components have been repaired and re- used :
(i) Steering tiller (FST and RST):
These items are used to assemble and connect two Nos. of crawler frames to complete set of crawler frames. The working condition of these item were also similar to that of crawler frames. Hence these structures have also become thinned out and damaged. These items were re-used after repair and strengthening.
(ii) Under carriage (1):
The under carriage is a part on which the total super structure is mounted. With reference to the under carriage, the super structure is revolving for excavation. As already submitted this part is also subjected to various load while in operation and also the soil accumulation will be there on the top portion of the part which are exposed. This soil has the tendency to corrode the top plate of this item. The condition of the item was totally bad 17 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 and required lot of repairs. Hence it was repaired and strengthened and used.
(iii) Turn table (3):
The turn table was repaired and strengthened due to is prolonged, thinning out of plates and damage of structures.
(iv) Counter weight boom and box (10):
The counter weight boom is a part, which is used for the balancing the machine while in operation. The counter weight boom was repaired and strengthened considering the years it has worked and the various loads subjected on this item during the operation. This structures have got weakened and hence were used after sufficient strengthening.
(v) Intermediate structure:
The discharge boom is supported between turn table and counter weight boom through this structure. The structure was also repaired / strengthened and used.
On overall basis, it is submitted that in the rejuvenation of BWEs, only major overhaul and repair works were carried out. The replaced parts were the part of the BWE and were not capable of working independently."
12) While the facts relating to LEP and BWE rejuvenation were as stated above it was submitted that the disallowance was made by the learned Assessing Authority on the basis of decision of the Supreme Court in the case of Sarvana Spinning Mills Ltd. 293 ITR 201.
13) In so far as the case relied upon by the learned Assessing officer, the Appellant submits that the decision in Saravana Spinning Mills ibid related to a case where there was complete replacement of old machinery. Further Supreme Court had specifically said that they are not pronouncing any decision on the admissibility of deduction under Sec 37 (I).The Appellant relies upon the decision of CIT Vs Renu Sagar Power Co Ltd 298 ITR 94 (All) where a replacement of turbine rotor was held to be revenue in nature. The Appellant further cites upon the decision of the jurisdictional court in the case of CIT Vs Rane Madras Limited 293 ITR 459 wherein it was held that even expenditure on a new factory was held as revenue. The Appellant
18 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 submits that its case is far superior to that one involved in the decision.
14) The learned Assessing officer placed further reliance on the following cases in support of the stand that the expenditure both in regard to LEP and for Rejuvenation of Bucket wheel Excavators were capital in nature a. (i) Balliammal Naval Kishore and another Vs CIT 224 ITR 414 (S C)
(ii) Assam Bengal Cement Co. Ltd (27 ITR 34) (SC)
(iii) Chellapalli Sugar ltd (98 ITR 167)(SC)
(iv) Chabirani Agro Industrial Enterprises ltd (191 ITR 226) (Pat) b. The Appellant submits that the decision of Supreme Court in Assam Bengal Cement company relates to granting of lease rights for limestone mines granted in respect of new quarries and hence the same is not applicable to the case of the Appellant. In so far as the reliance placed on Challapalli Sugar case, the Appellant that it related to expenditure during construction period and hence not on all fours with the case of the Appellant. In regard to the decision of the Patna High Court in the case of Chhabirani Agro Industrial Enterprises Limited. vs Commissioner Of Income-Tax 191 ITR 226 (Patna), it is submitted that the case relates to bank guarantee commission paid for acquiring new machinery. In the instant case, the facts involve repair and rejuvenation done already existing plants not resulting any new capacity. The decision of the Supreme Court in Balliammal Naval Kishre and Another again is different on facts. In that case there was conversion of Ginning Factory into a Cinema Theatre.
It is therefore vehemently argued that the cases cited do not have any relevance to the issue in appeal.
c. I have considered the above submissions and summarized reasons listed as under:-
d. The entire disallowance seems to have proceeded on the assumption that there has been increase in production capacity. It is clear from material on record, that there has been no increase in power generation or lignite mined. Actually the production has increased if compared to immediately preceding years where due to the repair/overhauling required the production had gone down severely. But if the same is compared with F.Y. 1990-91 and 1991-92, it is found that the production has not enhanced. Moreover, repairs were required as the production machineries were facing several break- downs like that on account of maintenance/wear and tear.
19 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 e. The entire expenditure on Life Extension Programme in regard to TPU I was intended to ensure continued operation of the power plant; total replacement of the plant would have resulted in disproportionately high expenditure. What were replaced were parts of integrated plant for generation of power and there was no replacement of machinery as a whole.
f. As rightly observed by tMe Appellant, the case of Saravana Spinning Mills related to claim under Sec 31 (i) and did not decide allowability of expenditure under Sec 37 (1) under which also the appellant had staked its claim under which also the appellant had staked its claim.
g. The report by the Soviet Engineers produced by the Appellant testify to the state of disrepairs of the plant.
h. Also in regard to the expenditure on Bucket wheel Rejuvenation the expenditure is one incurred for replacement of parts and not replacement of the bucket wheel excavator in toto.
i. The Supreme Court in the case of Saravana Spinning Mills Ltd (293 ITR 201) dealt with this issue as follows:-
"The point for consideration is, whether the modernization/current/ repair expenditure is allowable as 'revenue expenditure', as claimed by the assessees or the replacement of cards/blow room machinery/ combing machinery, etc., are to be considered as 'capital expenditure', as claimed by the Revenue?" It was clarified from the fact of the case it was discussed as" from the facts, it is clear that blow room, carding, combing, drawing, roving, spinning and winding are different departments/divisions in a textile mill. In each department/division there are several machines. Each of the above departments/divisions performs different functions and the functioning of each department/ division produces a different output which is carried forward to the next department/ division having different machines therein. For example, in the blow room there are different beaters (machines) which open the raw cotton and remove the dirt there from. That cotton is forwarded to the carding department in which there are carding machines equipped with auto levelers which produce sliver which is then carried forward to the combing department.
For example, in the case of continuous casting machine in the steel industry we have one continuous integrated process under which scrap (raw material) is put in and what comes out is steel or iron or
20 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 aluminium. Another example, in the case of a "pasteurization plant"
we have three chambers and ducts. In the first milk is collected, in the second it is heated and in the third it is cooled. Duct carries hot and cold water. The raw material is raw milk, the end product is the pasteurized milk. In the heat chamber there is the heater. In the cooling chamber we have a cooling plant which has a concept similar to air-condition plant. Such a process is one integrated process. Therefore, the Tribunal and the High Court erred in holding that the manufacturing process in the textile mill is one continuous integrated process".
Accordingly the Apex court has held in this case, "that the Assessing Officer was right in holding that each machine including the ring frame was. an independent and separate machine capable of independent and specific function and, therefore, the expenditure incurred for replacement of the new machine would not come within the meaning of the words "current repairs". Further, the Supreme Court observed whether an expenditure is revenue or capital in nature would depend an the facts of each case. We do not wish to express any opinion an the applicability of section 37(1) in the present case. There were certain civil appeals wrongly tagged with the present batch which will be decided separately by us as they concern with section 37(1). Hence we do not wish to express any opinion on applicability of section 37(1).
However, in this case it has been pointed out by the appellant and not strongly controverted by the AO on the basis of evidence that it is not the replacement of a new machine but it is that of replacement of parts of machinery or overhauling of old and worn out equipments and hence allowable as revenue expenditure as clearly borne out by the facts brought on record by the Appellant.
j. The decision of the Allahabad High Court in the case of CIT vs Renu Sagar Power Company ltd., ( 298 ITR 94) which has considered the decision of Supreme Court in Saravana Spinning Mills Ltd ( 293 ITR 201) also supports the case of the Appellant. In that case the High Court observed as under:
"The Tribunal has recorded a finding that the turbine rotor is an essential part of the turbo generator set. It is not an independent machinery or plant. The turbine rotor on its own independent functioning cannot generate electricity. It is being used in the turbo generator set as its essential part. On these findings recorded by the Tribunal a question arises- Whether the expenditure incurred on the
21 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 change/replacement of turbine rotor is a revenue expenditure or capital expenditure".
Considered the respective submissions of learned counsel for the parties.
We find that the controversy stands concluded by the judgment of this court in the case of CfT v. Kanodia Cold Storage [1975] 100 ITR 155 wherein it has been held as follows:
"Replacement of worn out parts does not by itself bring in a new asset. In considering the nature of an expenditure one should consider the productive unit as a whole and not pick out parts therein which are new. If the productive unit to the assessee remains the same but a part of it which has become unsuitable for its use is replaced by something which makes it possible for the existing set up to function efficiently, the cost incurred on such replacement would be revenue expenditure." (emphasis supplied) The CIT v. Saravana Spinning Mills P. Ltd. [2007]293 ITR 201 (SC); [2007] 10 JT 111 (SC), while interpreting the words "current repairs" in section 31 of the Income-tax Act, it has been held as follows:
" ... If an autoleveler is to be repaired then that repair would come within the connotation of the words 'current repairs' because it is a part of the carding machine. Even if in a given case, replacement of an autoleveler could come within the connotation of the words 'current repairs' if the old part is not available in the market. It is a 'current repairs' because the carding machine remains an asset without any change even after repair or replacement of the autoleveler. To give an example, a compressor is an important part of an air-condition machine. Repair of the compressor will come in the connotation of the words 'current repairs' in section 31 (i) of the said Act because the assessee does not replace the air-condition machine. At the highest, he replaces a part of the air-condition machine. So is the case of the picture tube in a television set, when the picture tube is replaced the television set is not replaced, therefore, such repairs alone can come within the connotation of the words 'current repairs' in section 31(i) of the said Act as it stood at the material time. They are effected to preserve and maintain the asset, viz., airconditioner or carding machine ....
The basic test to find out as to what would constitute current repairs is that the expenditure must have been incurred to 'preserve and
22 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 maintain' an already existing asset, and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage. "
So far as the decision relied upon by learned standing counsel for the Department is concerned, the same is distinguishable on the facts. In that case, the question whether certain expenditure incurred by the assessee on knives and loses in the material period qualified for capital allowance under section 16(3) of the Finance Act, 1954. On the facts it was found that the knives are not parts of the machine. Each knife is a separate tool or implement designed to be used in conjunction with the machine. On these facts it was held that replacement of knives was the capital expenditure. In the case on hand the factual position is quite different. It has been found by the Tribunal as a fact that turbine rotor is a part of turbo generator set. The turbine rotor does not function independently. It is a part of turbo generator set.
j. On a detailed reviews of the facts and circumstances, I am of the view that since there has been no increase in production capacity as wrongly presumed by the officer and since the expenditure related to safe operation of TPU I as also there was only replacement of parts of equipments and overhauling of equipments, there was no enduring advantage to the Appellant that had accrued in the capital field. The case laws relied upon the by the Assessing officer during the hearing are all distinguishable on fact and hence not applicable to the issues in this appeal.
k. I therefore hold that the expenditure in question is allowable as revenue in all the years.
After consideration of all the submissions on all the grounds the appeals are allowed."
9. The Revenue filed appeals before us contending that the Commissioner of Income Tax (Appeals) failed to appreciate that the expenditure incurred on TPS-I is a one-time expenditure undertaken at the end of the life span of the asset with a view to give it a new life and such expenditure is undoubtedly in the capital field and same analogy applies to rejuvenation of BWE.
23 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11
10. The counsel for the Revenue submits that the name of the programme i.e. Life Extension Programme of TPS-I itself suggests that the assessee is extending the life of the machinery i.e. TPS-I, which brings enduring advantage to the assessee and therefore, the expenditure incurred on such life extending programme is definitely in the capital field. The counsel submits that due to the life extension programme of TPS-I and rejuvenation of BWE increases the efficiency and life of the machinery. The counsel submits that the expenditure incurred on these machinery is not repairs as the magnitude of the expenditure incurred on these programmes is to the tune of `.252.46 crores during the assessment years 1993-94 to 99-2000.
The counsel for the Revenue invited our attention to page 62 to 63 of paper book filed by the assessee containing technical write up on LEP of TPS-I and submitted that it is an extensive repairs and replacement of various machineries and they are not replacement of parts of machinery. He also invited our attention to page 72 to 76 of paper book containing a Note on expenditure of rejuvenation of BWE of Mine - I claimed as revenue expenditure and submitted that the assessee has replaced various machineries and therefore, they are not parts of machinery, which can be allowable as revenue expenditure. The counsel placed reliance on the decision of the Hon'ble Supreme Court in the case of Saravana Spinning Mills (P) Ltd. (supra), Bharat Gears Ltd. v. CIT [337 368 (Del.)], CIT v.
24 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 Madura Coats 205 TAXMAN 357/19 (Mad), CIT v. M/s. Rane Brake Linings Ltd. T.C.(A) No. 71 & 72 of 2008 dated 25.04.2011, CIT vs. Universal Cold Storage Ltd. T.C.(A) No. 39 of 2008 dated 08.11.2011 and submitted that in view of these decisions, the expenditure incurred on LEP of TPS-I and rejuvenation of BWE were correctly treated as capital expenditure by the Assessing Officer and allowed depreciation as applicable.
11. The counsel for the assessee submitted that the assessee had power generation plant installed in the year 1962 to 1970 consisting of 9 units. The power generation plant cumulatively accounted for 600MW of capacity. The counsel submitted that the assessee had erected one boiler for each 50MW of power generation and the boilers worked for 12 years. The counsel submitted that each boiler consists of several parts in it and each boiler is a separate machine by itself. The counsel submits that in the LEP programme of TPS-I, what the assessee incurred was the expenditure on replacement of only certain parts of the boiler and certain parts were overhauled wherever necessary. Referring to page 62 of paper book filed for the assessment year 1998-99, the counsel submits that the technical write-up was given by the experts about the functioning of the boilers and need for replacement of parts of boilers and the list of parts, which were replaced and overhauled.
The counsel submits that all the machinery items appearing in the technical report which were either replaced or overhauled and they are only parts of 25 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 the boilers and none of these parts are capable of functioning independently.
Similarly, the counsel also invited our attention to page 72 to 76 consisting of a technical write-up for rejuvenation of BWE and submitted that the items appearing in the list at page 76 of paper book are only the parts of BWE and not the entire unit of BWE was replaced. The counsel for the assessee submits that the replacement of parts of boiler and BWE are only to preserve and maintain the existing asset and by incurring expenditure on such replacement of parts and overhauling of parts does not bring any enduring advantage to the assessee so as to treat the expenditure as capital expenditure. The counsel submits that by incurring the expenditure on LEP of TPS-I and rejuvenation of BWE, there was no increase in production/ power generation capacity. The counsel submitted that these facts were demonstrated with figures and therefore the main contention of the Assessing Officer that there is increase in capacity of production/power generation is without any basis. The counsel submitted that the Assessing Officer was not correct in holding that such expenditure is capital in nature.
The counsel submitted that the quantum of expenditure is not the criteria to decide whether such expenditure is either capital or revenue incurred towards current repairs. The counsel submitted that the total replacement cost of the project shall be `.4 crores per MW and in such case the total replacement cost of all 9 power generation units of the assessee constituting 600 MW will be `.2400 crores and the expenditure incurred on replacement 26 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 and overhauling of parts of machinery over a period of 7 years was about `.252 crores only.
12. The counsel submits that in the case of Saravana Spinning Mills (P) Ltd. (supra), the Hon'ble Supreme Court has decided the issue in favour of the Revenue because what was replaced by the assessee was ring frames, which are independent machinery unlike in assessee's case, where the assessee replaced only parts of boilers, which are not capable of functioning independently. The counsel submits that the Hon'ble Supreme Court in the case of Saravana Spinning Mills (P) Ltd. (supra) held that there are various sections in the spinning mill and each machinery including ring frame was independent and separate machinery capable of functioning independently and scientifically. Therefore, it was held that the expenditure incurred for replacement thereof would not come within the meaning of "current repairs".
The counsel submits that the decision of the Hon'ble Supreme Court in fact, supports its case as the Hon'ble Supreme Court held that when an expenditure was incurred to preserve and maintain already existing asset and such expenditure is not bringing any new asset into existence or obtaining new advantage such expenditure is allowable as current repairs.
The counsel submits that in its case, since only the parts of the boilers and BWE system were replaced and not the boiler or BWE system itself, the expenditure incurred was only to preserve and maintain the boiler and the 27 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 BWE system, which are existing assets and no new asst is coming into existence and no new advantage was obtained by way of replacement of parts of the existing assets. Therefore, he contended that the expenditure is only in the nature of current repairs and are allowable as deduction.
13. The counsel for the assessee further submitted that the Commissioner of Income Tax (Appeals) considering all the aspects of the matter especially whether there is any increase in capacity of production/power generation, whether the machinery replaced by the assessee are parts of the machinery i.e. TPS-I and BWE and whether there is any enduring advantage to the assessee by such replacement of machinery, held that the claim of the assessee that expenditure incurred for current repairs is allowable as revenue expenditure. The counsel for the assessee placed reliance on the following decisions in support of the above contention:
ACIT v. M/s. Metro Ispat Pvt. Ltd. 2010-TIOL-194-ITAT-Mum CIT v. Chowgule and Co. Pvt. Ltd. [214 ITR 523 (Bom)] CIT v. Jafarbhai Akbarali and Bros. [211 ITR 496 (Bom.)] CIT v. Co-operative Sugars Ltd. [235 ITR 343(Ker.)] CIT v. Seraikella Glass Works (P.) Ltd. [157 ITR 584(Pat.)] B and A Plantations and Industries Ltd. v. CIT [251 ITR 455(Gauhati)] CIT v. Renu Sugar Power Co. Ltd. [298 ITR 94 (All)] Cultural Enterprises Corporation v. CIT [196 ITR 488(Cal)] CIT v. Malhotra Industrial Corporation [254 ITR 635 (P&H)] ACIT v. M/s. Kannappan Iron & Steel Co. Pvt. Ltd. in I.T.A. No. 1951/Mds/2009 DCIT v. M/s. Lasik Centre (India) P. Ltd. in I.T.A. No.1480/Mds/2011 28 I.T.A. Nos Nos. 219-
219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11
14. We have heard both sides, considered the materials available on record and perused the orders of lower authorities and reliance placed on the case law by the counsels. The assessee is engaged in generation of electricity and mining of lignite installed power generation plants consisting of 9 units for generation of 600 MW power. During the assessment years 1993-94 to 99-2000, the assessee incurred the following expenditure towards replacement of various components in boilers and components of BWE under the LEP programme starting from the assessment year 1993-94 to 1999-2000 and the year-wise breakup for such expenditure is as under:
Asst. years Amount (`.)
1993-94 : 10,22,63,348/-
1994-95 : 39,35,07,774/-
1995-96 : 22,65,86,642/-
1996-97 : 27,78,53,677/-
1997-98 : 56,84,06,076/-
1998-99 : 48,23,92,595/-
1999-2000 : 47,35,92,595/-
Total : 252,46,02,707/-
The assessee claims this expenditure as allowable deduction either under section 31(i) or under section 37 of the Income Tax Act. The Assessing Officer completed the assessment rejecting the claim of the assessee and treating the said expenditure as capital expenditure on the ground that the assessee has incurred huge expenditure on TPS-I under LEP and on rejuvenation of BWE and this expenditure brought enduring benefit to the assessee, especially there is increase in the production/power generation capacity of the assessee and therefore, is in the nature of capital. The 29 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 contention of the Assessing Officer was that this is one time expenditure at the end of life span of the asset with a view to give new life. Therefore, the expenditure did not fall within the meaning of "current repairs" under section 31(i) of the Act. The Commissioner of Income Tax (Appeals) in his common order for the assessment years 1995-96 to 1997-98 elaborately dealt with various issues and the issue of increase in production capacity and came to the conclusion that there is no increase in production/power generation capacity and placing reliance on the decision of the Hon'ble Supreme Court in the case of CIT vs. Saravana Spinning Mills P. Ltd. (supra) held that the expenditure was not incurred in the capital field and allowable as deduction.
For better understanding the nature of expenditure incurred, it is necessary to reproduce the technical write-up of TPS-I of LEP at page 62 to 63 and Note on rejuvenation of BWE at page 76 of the paper books, which reads as under:
"TPS-I: LEP - TECHNICAL WRITE UP Electricity is generated from 600MW Thermal Power Station-I, Neyveli, having nine Units consisting of boilers, turbines, generators & transformers. The steam, generated in boiler drives steam turbine which coupled with generator generates electric power.
Neyveli Thermal Power Station-I (NTPS-I) has an installed capacity of 600MW consisting of six 50MW units and three 100 MW units. The 50 MW units have one boiler each and 100MW units have two boilers each. The entire equipments of 600MW had been supplied, erected and commissioned by M/s. Technoprornexport (TPE), Russia from 1962 to 1970 in three stages on turnkey basis.
30 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 During the year 1989, the Residual Life Assessment (RLA) studies in two units (units 1 & 9) were carried out by M/s TPE, Russia as approached by NLC since almost all the units had crossed 1.3 lakhs service hours and experiencing frequent failures in high pressure parts due to ageing. The Russian specialists conducted various tests and studied elaborately. Based on the study results, they recommended for operation of the equipment with reduced steam parameters up to the end of 1991 and the possibility of further operation of the equipment at rated steam parameters only after replacement of the corresponding parts and groups.
The high pressure parts of boilers namely Super heaters and main steam line are subjected to creep damage due to reaching of service life of around 180000 running hours, and the water walls & economisers are subjected to corrosion and erosion. Other parts namely air heaters, ducts and auxiliary equipments like pulverised fuel burners, mills, draft fans etc. are subjected to corrosion erosion, wear and tear. Thus, the performance of boilers and safe operating life of critical pressure parts of the boiler got exhausted.
Considering the ageing of units and for safe operation of the equipments at rated steam parameters, the Life Extension Programme works in all units were carried out from April 1992 to March 1999 in phased manner with the approval of Govt. of India.
The components subjected to creep damage namely super heaters, main steam lines etc. and high pressure valves, economisers and other allied pipe lines lost their healthiness were replaced in full, where as other high pressures parts namely water walls & feed water lines and other parts, after inspection were partially replaced to the extent required.
Boilers The following components were replaced completely in boilers:
1. Super heaters with their headers and inter connecting pipes.
2. Main steam line.
3. Upriser and Down comer pipes.
4. Economiser and their transfer-pipes.
5. Boiler condenser and de super heater.
6. High pressure valves.
7. Compensators of Air and Gas ducts.
8. Rear side water wall.
The following components were replaced partially after inspection;
31 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11
1. Front water wall and side water walls.
2. Boiler drum internals.
3. Air heaters.
4. Feed water pipe line.
5. Boiler shield plates and hydraulic seal.
6. Lignite pulverizing system.
The following equipments were overhauled:
1. Induced and Forced draught fans.
2. Belt feeders
3. Slag conveyors.
4. Ash handling system.
Turbine, Generator and Transformer:
These major equipments were overhauled with the replacement of worn out parts.
Thus the works under LEP of the units of Thermal Power Station-I are comprised of full and partial replacement and overhaul/ repair of main equipments."
NOTE ON EXPENDITURE OF REJUVENATION OF BUCKET WHEEL EXCAVATOR (BWE) OF MINE-I CLAIMED AS REVENUE:
Rejuvenation of Bucket Wheel Excavator (BWE ) of Mine-I:
A brief write-up regarding the works carried out with details of expenditure under this furnished below:
The following critical items are replaced:
(i) Crawler Pads
(ii) All the six crawler frames with drives assemblies (for 3 tracks) including the mechanical components.
(iii) Traverse box of self-aligning track
(iv) Tower frame completes including pully mast
(v) Bucket wheel boom complete
(vi) Discharge Boom complete
(vii) Main slewing ball race and main slewing gear box shell
(viii) Bucket Wheel Boom hoist winch drum
(ix) All the host winch ropes 32 I.T.A. Nos Nos. 219-
219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 The following non-critical items are replaced:
(i) Secondary structures like walk way and stair case for under carriage, turn table, Bucket Wheel boom, discharge boom, intermediate boom and counter weight boom.
(ii) Motor foundation and Motor covers for all the drivers.
(iii) Cabin and houses.
The following components have been repaired:
(i) Steering tiller (FST and RST)
(ii) Under carriage
(iii) Turn table
(iv) Counter weight boom and Box
(v) Intermediate structure
It may be noted that Rejuvenation of Bucket Wheel Excavators involves repairs / replacement of certain critical worn out parts, none of the part is independent nature of working. All the replaced and repaired items are forming part of the single machine called Bucket wheel excavator and in that process the machine is brought to its original Condition and it does not result in a new asset. Diagrams showing the parts of the Bucket Wheel excavator is enclosed"
15. It could be seen from the above technical write-ups, the whole exercise of the LEP of TPS-I and rejuvenation of BWE is for replacement of certain parts of boilers/BWE only. The assessee has not replaced the entire boiler/BWE and what was replaced was only the parts of boiler/BWE. These parts of the boiler/BWE are not capable of functioning independently and this fact is not in dispute. In our view, these expenditures were incurred only to replace certain parts of boiler/BWE and overhauling of the parts in boiler and is only to preserve and maintain the existing assets i.e. boiler/BWE and there is no enduring advantage obtained on replacement of such parts of 33 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 existing assets. The assessee also demonstrated that there is no increase in production/ generation of power capacity and therefore, the observations of the Assessing Officer that there is increase in production capacity appears to be misplaced.
16. In the assessment order, the Assessing Officer himself stated that, if a new plant is to be installed, the cost of such new plant would be about `.4.5 crores per MW and in such case the total project cost would come to `.2700 crores for 600 MW. If that is the case, the expenditure incurred for the replacement of parts of machinery i.e. TPS-I/BWE in all these seven assessment years i.e. 1993-94 to 1999-2000 was about 252 crores and this is not even 10% of the total project cost.
17. Therefore, we should not go by the quantum of expenditure incurred by the assessee in deciding the issue of whether such expenditure is allowable as deduction as current repairs/revenue expenditure or such expenditure is a capital expenditure.
18. When the assessee is claiming the expenditure as allowable deduction under section 31(i) of the Act, what is to be seen is that by way of incurring the expenditure on replacement of parts of machinery, overhauling the machinery whether it was incurred to preserve and maintain an already existing asset or such expenditure was incurred to bring a new asset into 34 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 existence or to obtain a new advantage. In this case, we see that the expenditure on replacement of parts of boiler/BWE was incurred only to preserve and maintain the existing assets and object of incurring such expenditure was not to bring a new asset into existence. The Hon'ble Allahabad High Court in the case of CIT v. Renu Sugar Power Co. Ltd. [298 ITR 94], almost on similar circumstances, following the decision of the Hon'ble Supreme Court in the case of CIT v. Saravana Spinning Mills (P) Ltd. (supra) held that the turbine rotor is a part of the Turbo Generator Set and expenditure incurred by the assessee on replacement of one turbine rotor on account of current repairs is allowable as revenue expenditure. The facts in this case are that the assessee is a captive power plant and had 2 thermal power plant of generating capacity with 67.5 MW each. The assessee claimed expenditure of `.1,05,44,904/- as the cost of the turbine rotor, which was disallowed by the Assessing Officer treating as capital expenditure. It was found by the Tribunal that the turbine rotor was an essential part of turbo generator set and it was not an independent machinery or plant. The turbine rotor of its own independent functioning could not generate electricity. Therefore, it was held that the assessee was entitled to deduction, which was affirmed by the Hon'ble Allahabad High Court. While affirming the order of the Tribunal, the Hon'ble Allahabad High Court observed as under:
35 I.T.A. Nos Nos. 219-
219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 "We find that the controversy stands concluded by the judgement of this Court in the case of Commissioner of Income Tax Vs. Kanodia Cold Storage [1975]100 ITR 155 wherein it has been held as follows(headnote):
"Replacement of worn out parts does not by itself bring in a new asset. In considering the nature of an expenditure one should consider the productive unit as a whole and not pick out parts therein which are new. If the productive unit to the assessee remains the same but a part of it which has become unsuitable for its use is replaced by something which makes it possible for the existing set up to function efficiently, the cost incurred on such replacement would be revenue expenditure."
The Commissioner of Income-tax Vs. M/s. Saravana Spinning Mills Pvt. Ltd.[2007] 293 ITR 201(SC); [ 2007] 10 JT 111(SC), while interpreting the words "current repairs" in Section 31 of the Income-tax Act, it has been held as follows (page 208):-
".......... If an autoleveler is to be repaired then that repair would come within the connotation of the word "current repairs" because it is a part of the Carding Machine. Even if in a given case, replacement of an Autoleveler could come within the connotation of the word "current repairs" if the old part is not available in the market. It is a "current repair" because the Carding Machine remains as an asset without any change even after repair or replacement of the autoleveler. To give an example, a Compressor in an important part of an Air-condition Machine. Repair of the Compressor will come in the connotation of the word "current repairs" in Section 31 (i) of the said Act because the assessee does not replace the Air-condition Machine. At the highest, he replaces a part of the Air-condition Machine. So is in the case of the picture tube in a Television Set, when the picture tube is replaced the Television Set is not replaced, therefore, such repairs alone can come within the connotation of the word "current repairs" in Section 31(i) of the said Act as it stood at the material time. They are effected to preserve and maintain the asset, viz. air-conditioner or carding machine......
The basic test to find out as to what would constitute current repairs is that the expenditure must have been incurred to "preserve and maintain" an already existing asset, and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage."
36 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 So far as the decision relied upon by the learned standing counsel for the department is concerned, the same is distinguishable on facts. In that case the question whether certain expenditure incurred by the assessee on knives and losses in the material period qualified for capital allowance under section 16(3) of the Finance Act, 1954. On facts it was found that the knives are not parts of the machine. Each knife is a separate tool or implement designed to be used in conjunction with the machine. On these facts it was held that replacement of knives was the capital expenditure. In the case on hand the factual position is quite different. It has been found by the Tribunal as a fact that Turbine Rotor is a part of Turbo Generator Set. The Turbine Rotor does not function independently. It is a part of Turbo Generator Set.
In view of the above discussion, we do not find any error in the order of the Tribunal. The Tribunal was justified in holding that the expenditure by the assessee on the replacement of one Turbine Rotor amounting to `. 1,05,44,904/- was on account of current repairs and as such it was revenue expenditure."
19. The case law relied on by the counsel for the Revenue in the cases of Bharat Gears Ltd. v. CIT [337 368 (Del.)], CIT v. Madura Coats 205 TAXMAN 357/19 (Mad), CIT v. M/s. Rane Brake Linings Ltd. T.C.(A) No. 71 & 72 of 2008 dated 25.04.2011, CIT vs. Universal Cold Storage Ltd. T.C.(A) No. 39 of 2008 dated 08.11.2011 are distinguishable on facts and the ratio of these decisions are not applicable to the facts of the assessee's case since in the assessee's case, what was replaced was only the parts of machinery and the expenditure was incurred only to preserve and maintain the existing assets and therefore, the expenditure on such repairs is allowable as deduction under current repairs. Hence the case law relied on by the Revenue are of no help. Therefore, following the decision of the Hon'ble Supreme Court in the case of CIT v. Saravana Spinning Mills P. Ltd. (supra), 37 I.T.A. Nos Nos. 219- 219-221, 981- 981-982/M/09 & I.T.A. Nos. 1458- 1458-1459/M/11 we sustain the order of the Commissioner of Income Tax (Appeals) in allowing the expenditure on replacement/overhauling of TPS-I/BWE as deduction. The grounds raised by the Revenue are dismissed on this issue for all the assessment years from 1993-94 to 1999-2000.
20. In the result, the appeals of the Revenue are dismissed.
Order pronounced on Wednesday, the 18th July, 2012 at Chennai.
Sd/- Sd/- (ABRAHAM P. GEORGE) (CHALLA NAGENDRA PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, the 18.07.2012 Vm/- To: The assessee//A.O./CIT(A)/CIT/D.R.