Income Tax Appellate Tribunal - Hyderabad
A.P. Gas Power Corporation Ltd., ... vs Department Of Income Tax on 18 December, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A" : HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND
SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA.No. 452 & 310/Hyd/2009
Assessment Years 2003-04 & 2005-06
DCIT, Circle 1 (1) vs. M/s. AP Gas Power Corporation
Hyderabad. Ltd. Hyderabad
PAN AABCA9105C
(Appellant) (Respondent)
ITA.No.324/Hyd/2009
Assessment Year 2005-06
M/s. AP Gas Power vs. DCIT, Circle 1 (1)
Corporation Ltd. Hyderabad Hyderabad.
PAN AABCA9105C
(Appellant) (Respondent)
For Revenue : Mr. P. Somasekhar Reddy
For Assessee : Mr. V. Sivakumar
Date of Hearing :18.12.2013
Date of pronouncement : 07.02.2014
ORDER
PER SAKTIJIT DEY, J.M.
These three appeals are filed by both by the department and assessee against separate orders of the CIT(A) while the appeal relating to the A.Y. 2003-2004 is filed by the department , there are cross-appeals for the assessment year 2005-2006 by assessee. Since issues are common and the assessee is the same, these are clubbed and heard together and are being disposed of by this consolidated order.
Ϯ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
ITA.No.310/Hyd/2009 - A.Y. 2005-06 (Revenue Appeal)
2. Since the CIT(A) has passed substantive order for the assessment year 2005-2006, for the sake of convenience, we will deal with the facts as involved in assessment year 2005-2006. The department altogether has raised 9 grounds. Grounds No.1 and 9 are general in nature and therefore, it need not be adjudicated and hence, they are dismissed.
3. In Ground Nos.3 to 5 the department has challenged the action of the CIT(A) in deleting the addition made due to disallowance of expenditure of Rs.20,21,46,278/-.
4. Briefly the facts are, the assessee is a company engaged in generation of power. For the assessment year under dispute, the assessee had filed its return of income on 28.10.2005 declaring income of Rs.22,48,47,450/-. Initially the return was processed under section 143(1) of the Act. Subsequently, the assessment was reopened under section 147 of the Act. During the re-assessment proceedings, the Assessing Officer while examining the final accounts of the assessee, noticed that an amount of Rs.26,95,28,370/- was claimed as expenditure towards repairs and maintenance of plant and machinery. On further verification, he noted that the expenditure claimed was towards installation/ refurbishment/ replacement of altogether new part/new asset to the major plant of gas turbines as per the requirement as capital asset having enduring benefit. The Assessing Officer therefore, asked the assessee to explain as to why the expenditure shall not be treated as capital expenditure since it does not come within the meaning of current repairs as find place under section 31(i) of the Act. In response to the querry made by the Assessing Officer the assessee filed a detailed reply submitting therein ϯ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
the reason for replacement of certain part and expenditure connected with refurbishment of such parts. It was submitted that the expenditure was incurred only for replacing/repairing certain parts of power generation equipment without which the power generation cannot achieve its rated capacity. It was submitted by the assessee that gas turbines require maintenance periodically and unless repair and replacement of worn-out parts is carried out at regular intervals, power generation will come to a halt affecting the continuity of business. It was submitted by the assessee that by such repair/replacement of parts, no capital asset of enduring nature came into existence nor the capacity of the turbine is enhanced. It was submitted that since the expenditure was incurred only for carrying out the business of the company smoothly and efficiently without any hindrance, such expenditure incurred has to be allowed as current repairs under section 31(1) of the Act and cannot be considered as a capital expenditure. The Assessing Officer however, did not accept the explanation of the assessee. By placing reliance on the decision of the Hon'ble Supreme Court in the case of Saravana Spinning Mills P. Ltd. and others 293 ITR 201, it was held that since the replacement made by the assessee resulted in an enduring benefit, the expenditure incurred cannot be considered as towards current repairs but is a capital expenditure. He further was of the view that if assessee's contention is accepted, then assessee will have unhindered and continuous generation of power with efficiency and effectiveness without installing new turbine at all by only replacing major parts of the turbine at one go in regular intervals and claiming such expenditure as current repairs. This according to the Assessing Officer, will make the ϰ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
provisions of section 31(i) redundant. With the above said observation, the Assessing Officer disallowed an amount of Rs.20,21,46,278/- by treating it as capital expenditure.
5. The assessee being aggrieved of such disallowance, challenged the same in an appeal filed before the CIT(A). In course of hearing of appeal before the CIT(A), it was contended by the assessee that the expenditure incurred was towards cost of nozzles, buckets, shrouds, bearings, transition pieces and combustion liners which are parts of gas turbines. It was submitted that the expenditure was incurred only for replacement of unserviceable parts of gas turbine without which the power generation cannot be achieved at the rated capacity. The assessee submitted that there is no enhancement of capacity on account of the replacement of parts. The expenditure was incurred only for smooth operation of business activity and cannot be considered as a capital expenditure. The assessee submitting the details of gas turbine assembly contended that the gross block of plant and machinery was Rs.571.14 crores and the repairs incurred during the year was only Rs.26.95 crores which works out to roughly Rs.4.72% of the block. It was submitted that such expenditure incurred for replacement of parts was only to preserve and maintain the power generation unit which is an already existing asset and it does not bring any new asset into existence or any new advantage. It was submitted that the expenditure is a recurring expenditure depending on the wear and tear of the machinery and cannot be considered as a capital expenditure. The assessee distinguishing the facts in case of CIT vs. Saravana Spinning Mills (supra) relied upon by the Assessing Officer submitted that there is no asset replaced by the assessee as in case of Saravana Spinning Mills (supra) ϱ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
which was considered by the Hon'ble Supreme Court. It was submitted that what the assessee has replaced is not the entire gas turbine but only a few parts thereof.
6. It was contended by the assessee on the other hand that there are decisions of different High Courts and Tribunal which have held that if the expenditure incurred is for replacement/repair of worn out parts and not of the entire machinery, then, it is a revenue expenditure. It was further contended that probably the Assessing Officer has come to his conclusion that the expenditure is capital in nature considering the quantum of expenditure laid out. However, that cannot be a reason for disallowing the expenditure. It was further contended by the assessee that even after repairs/refurbishment of the parts, the assessee's power generation capacity remained at 272 MW as before and there was no increase either in the installed capacity or generation of power which proves the fact that what was replaced were only parts of the turbine and the existing asset was not replaced. It was further contended by the assessee that similar type of expenditure of plant and machinery had been incurred earlier in the financial year 1998-1999 to 2002-2003 and were allowed by the department. The assessee also furnished the details of expenditure claimed in those financial years and allowed by the department. It was thus contended that, these figures would show that the expenditure incurred is a recurring expenditure which is necessary and required for effective running of the gas turbines. It was submitted by the assessee that since in the assessee's case, the production process is an integrated one and only some of the parts of the machinery is repaired or replaced that did not result in coming into existence of any new asset. The expenditure was incurred ϲ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
simply to preserve and maintain the existing asset. In this context, the assessee relied upon the decision of the Hon'ble Karnataka High Court in the case of Sagar Talkies 173 Taxman 12.
7. The CIT(A) after considering the submissions of the assessee vis-à-vis the materials available on record, noted that the Assessing Officer has made the disallowance primarily relying on the decision of the Hon'ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills (supra). The CIT(A) on going through the decision of the Honble Supreme Court in the case of Saravana Spinning Mills (supra) noted that in the facts of that case the High Court had held that the process of converting fibre to yarn was one continuous interlinked process by which output from various intermediate stages of production (cutting, combing, draw frame silver and roving) cannot be sold or marketed or used for any other purpose. Hence, the High Court held that the entire textile mills should be considered to be as one continuous process plant commencing from the blow room to the winding section. The Hon'ble Supreme Court considering the aforesaid facts and going into the details of functioning of each department in the textile mill observed that blow room, carding, combing, drawing, roving, spinning and winding are different departments/divisions in textile mills. In each department/ divisions, there are several machines. Each of the above department perform different functions and functioning of each department/division produces a different output which is carried forward to the next department/division having different machines therein. The Hon'ble Apex Court further observed that if a part of the machine of any of the department is repaired, then, that repair will come within the connotation ϳ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
of current repair since they are effected for preserving and maintaining of the asset. In this context the Hon'ble Supreme Court held that it cannot be said that the textile mills constitute a single plant as it is one continuous process of manufacture from blow room to the winding section. The Hon'ble Supreme Court held that unlike the case of a continuous casting machine in Steel Industry wherein under one continuous integrated process raw material is put in and the finished product in the nature of steel or iron or aluminum comes out. The Hon'ble Supreme Court, therefore, interpreting the expression 'current repairs' held that object behind section 31(1) is to preserve and maintain the asset and not to bring in a new asset.
8. The CIT(A) applying the aforesaid test laid down by the Hon'ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills (supra) observed that the nature of expenditure on any repairs claimed to have been effected has to be viewed as a whole and in the proper perspective in order to determine whether such repairs has only had the effect of restoring the machinery to its original condition or whether they have introduced any additional advantage or features which have improved its income earning capacity, in otherwords, a new asset has been brought into existence. He further observed that as per the observations of the Hon'ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills (supra) the allowability of expenditure on repairs and maintenance may vary from industry to industry and business to business. An expenditure which may not be current repair for a textile industry can be a current repair in case of steel industry. Therefore, what is to be seen is, whether the plant and machinery on which the expenditure is claimed is part of one ϴ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
continuous and integrated process of production or it pertains to any specific division or department of the industry with a separate identifiable marketable product as its output. Examining the facts of the assessee's case in the aforesaid perspective, the CIT(A) noted that the production process of the assessee is, generation of electric energy using combined cycle plant envisaging a gas turbine plus unfired steam generator. At one end of the turbine assembly, natural gas/naphtha is fed into the combustor which burns with atmospheric air sucked in by the rotating compressor raising the temperature of mixture of air and fuel and this high energy mixture flows to the turbine and moves blades of the gas turbine developing mechanical energy and rotates the electrical generator to produce electrical energy. Thus the entire process of production or generation of electricity is one unified and integrated process and there is no intermediate marketable product. He therefore, was of the view that the assessee's case is different from the facts of CIT V/s. Saravana Spinning Mills (supra) where different departments produced separate identifiable product whereas, in case of the assessee the process of production is one continuous and integrated. He further going through the details submitted by the assessee noted that there is a regular inspection at specific intervals as recommended by the original equipment manufacturer/ supplier of the heavy duty gas turbine. In this context the CIT(A) referred to the periodical inspection needed to be carried out as recommended by the equipment manufacturer as below:
ϵ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
SI.
Fired Type of
No Year
hours inspection
.
Combustion
1 1 8000
Inspection
2 2 16000 - do -
Hot gas path
3 3 24000
inspection
Combustion
4 4 32000
inspection
5 5 40000 - do -
6 6 48000 Inspection
9. From the aforesaid maintenance chart, the CIT(A) inferred that the repair carried out by the assessee is pre-
determined and necessitated by the regular inspections that are compulsorily to be carried out after operation of the turbine for a certain number of hours. He further noticed that during the year under dispute, the cost of repairs and maintenance claimed as expenditure pertains to three gas turbines namely gas turbine-1, gas turbine-2, supplied by M/s. BHEL and 172 MW - 112 MW gas turbine supplied by M/s. Sumitomo Corporation, Japan. He further noted that the Assessing Officer has taken into consideration the cost of two stage two buckets which were replaced costing Rs.2.62,84,177/-. The assessee contended before the CIT(A) that the said buckets needed replacement as the existing set had already exhausted its utility life and cannot be refurbished. Similarly, certain nozzles and bearings etc., were refurbished during the regular inspection. As regards Gas turbine-2, nozzles kits, shrouds, second stage buckets were either refurbished or replaced and the total cost was Rs.79,52,326/-. As regards 172 MW stage-3, nozzle kits were apparently replaced costing 17.04 crores.
ϭϬ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
10. After going through the detailed submission along with graphical presentation of the Turbine Assembly filed by the assessee, the CIT(A) noted that buckets, nozzle kits etc., are part of one complete integrated turbine assembly. The bucket or nozzle kits or shrouds cannot function independently giving rise to an independent product/by- product which can be sold in the market. He observed that even the Assessing Officer has not pointed out in the assessment order as to whether the item refurbished or replaced and claimed under the repair and maintenance cost are capable of generating any independent product as was analyzed by the Hon'ble Supreme Court in the case of Saravana Spinning Mills. Thus, considering the submissions of the assessee and after analyzing the observations of the Hon'ble Supreme Court in the case of Saravna Spinning Mill, the CIT(A) was of the view that the case of the assessee is not squarely covered by the decision of Hon'ble Supreme Court firstly because the power generation plant is an integrated plant unlike the Textile Mill as was pointed out by the Apex Court and secondly there is no intermediate marketable product in the process of production. The CIT(A) observed that, assessee's case is rather covered by the observation of the Hon'ble Supreme Court in respect of a continuous casting machine or the case of an air conditioning machine. Thus by replacing or refurbishing the buckets, nozzle assembly etc., the assessee is not replacing the entire machinery i.e., the gas turbine assembly which is an integrated unit. The repair of replacement is rather to preserve and maintain the existing unit.
11. Following the principles laid down by the Hon'ble Supreme Court in the case of CIT V/s. Ramaraju Surgical ϭϭ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
Cotton Mills 294 ITR 328 (SC), Cochin Company vs. CIT 67 ITR 199 and Saravana Spinning Mills held that expenditure incurred by the assessee on repairs and maintenance were with a view to preserve and maintain the existing asset and not to obtain a new asset or a new advantage. The CIT(A) concluded that the Assessing Officer was not justified in disallowing the expenditure on repairs and maintenance claimed by the assessee. More so, when similar expenditure in earlier years had been allowed by the department. Accordingly, the CIT(A) directed to delete the disallowance claimed by the assessee.
12. Being aggrieved by the aforesaid order of the CIT(A), the Revenue is in appeal before us. The learned D.R. strongly supporting the reasoning of the Assessing Officer submitted that the expenditure for repairs and maintenance was towards acquiring an asset of enduring nature. Therefore, it cannot be treated as revenue expenditure. The learned D.R. submitted that by replacing/repairing the parts of the machine, the active life is enhanced. Therefore, it results in an enduring benefit. The learned D.R. referring to the annual report of the company submitted that as revealed from the Director's report, during the impugned assessment year the assessee has undertaken major maintenance programme of all the three gas turbines by incurring an expenditure of Rs.26.95 crores in comparison to repairs and maintenance carried out in the previous assessment year to the tune of Rs.7.88 crores. It was therefore, contended that the quantum jump in the incurring of expenditure would show that the assessee has incurred huge expenditure in replacement of parts which has given a new lease of life to the plant and machinery. Therefore, it is in the nature of capital expenditure. The learned D.R. ϭϮ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
referring to the accounting standard, at page 23 of the paper book submitted by the department, contended that while deciding whether subsequent expenditure resulted in an increase in the future benefit from the asset or not, both the increase in the benefits per annum as well as increase in benefits through extension of the life of the asset have to be recognized. Even if there was no increase in the annual capacity, but if the life of the asset was substantially increased, then, it would be taken as increase in the future benefits from the concerned asset beyond its previously assessed standard of performance. Hence, it should be treated as a capital expenditure.
13. The learned D.R. relying upon the decision of the Hon'ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills Pvt. Ltd.(supra) and the decision of Hon'ble Supreme Court in the case of CIT V/s. Sri Mangayarkarasi Mills (P) Ltd. 315 ITR 114 submitted that when there are more than one division and if each division is capable of producing some product independently, then, refurbishing or replacing parts in one division, would amount to capital expenditure as each division can be exploited commercially. He therefore, submitted that the Assessing Officer was correct in treating the expenditure incurred as 'capital expenditure' eligible for depreciation at the prescribed rate.
14. The learned A.R. referring to a booklet authored by David Balevic, Steven Hartman and Ross Youmans on operation and maintenance of Heavy Duty Gas Turbine submitted that for preserving component life and optimizing maintenance cost of periodical and well planned maintenance programme is required to be followed. He submitted that, some ϭϯ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
of the parts of the gas turbine due to natural wear and tear need to be repaired/replaced after a fixed hour of operation. This repair/replacement of parts is of recurring nature and have to be undertaken periodically, but that does not mean that the entire gas turbines are replaced. The learned A.R. reiterating the submissions made before CIT(A) contended that when the department has allowed such expenditure in earlier year there is no reason why it should be disallowed in the impugned year. The learned A.R. strongly supporting the finding of the CIT(A) submitted that after considering all aspects of the matter, CIT(A) has directed the Assessing Officer to delete the addition made. Hence, there is little scope for interfering with the order of the CIT(A).
15. We have heard the submissions of the parties and perused the orders of the revenue authorities as well as other materials placed on record. It is quite evident from the facts emanating from record that the expenditure incurred of Rs.20,21,46,278/- which is subject matter of disallowance was towards repair/replacement of nozzles, buckets, shrouds, bearings, pieces and combustion liners which are parts of the three gas turbines utilized for generating power. It is also a fact that the power generation plant consists of two systems i.e., gas turbines and generating unit. As can be noticed from the process of generation of power as discussed by the CIT(A) in his order, there is no intermediate product in the generation of power. It is also a fact on record that the replaced/repaired parts were relating to three gas turbines. A book let submitted by the assessee regarding operation and maintenance of heavy duty gas turbine clearly shows that a well planned maintenance programme is required for getting the maximum equipment availability and optimization of maintenance costs.
ϭϰ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
The said book let further specifically notifies the parts which require careful attention and maintenance are those associated with the combustion process together with those exposed to the hot gases discharged from the combustion system. This include combustion liners, end caps, fuel nozzles assemblies, cross fire tubes, transition pieces, turbine nozzles, turbine stationery shrouds and turbine buckets. The said book let mentions about periodic inspection and repair/refurbish/ replacement of the aforesaid parts of the gas turbine. It also mentions that when the parts are not repairable, they are to be replaced. From this, it is very much clear that the entire gas turbines are not replaced but some of its parts are either repaired or replaced as per the maintenance requirement. It is to be noted from the detailed discussion made by the CIT(A) that the assessee has submitted the details of periodic inspection to be made as recommended by the equipment manufacturer. Further it is a fact to be taken note of that the assessee has been claiming such expenditure towards replacement of nozzle, shrouds, buckets etc., from the F.Y. 1998-99 and all along the department has allowed such expenditure. This fact has not been controverted by the learned D.R. It is also a fact that out of the total block of the assets relating to gas turbines of Rs.517 crores, the repair and maintenance to the extent of Rs.20,21,46,278/-. Therefore, considering the quantum of expenditure, it cannot be said that there is replacement of the entire gas turbine so as to bring into existence a completely new asset resulting in enduring benefit to the assessee. It is a further fact on record that the assessee's contention that there is no enhancement of capacity of the gas turbines or generation of power after replacement/ repair of the part of the gas turbines remains uncontroverted.
ϭϱ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
Therefore, in the aforesaid circumstances, it cannot be said that the expenditure incurred by the assessee in repair/ replacement of the parts of the gas turbine, has resulted in bringing into existence of an asset of enduring benefit to the assessee so as to treat it as capital expenditure. So far as the decision in the case of CIT V/s. Saravana Spinning Mills (supra) is concerned, the CIT(A) has clearly brought out the distinguishing features. It is to be noted that in the case of CIT V/s. Saravana Spinning Mills, there is a clear observation of the Hon'ble Supreme Court that the Textile Plant consists of different departments having its own independent plants and machinery which produce different intermediate products. However, in the case of the assessee there is no such intermediate products which requires independent and separate plants and machinery. On the contrary, what the assessee has replaced is certain parts of the gas turbines and the gas turbines as a whole have not been replaced. Therefore, in this context the observation made by the Hon'ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills rather favours the assessee. Because the Hon'ble Supreme court in the said decision has held that when certain parts of a air- conditioner or a T.V. is replaced, it does not amount to replacement of entire unit. Therefore, 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 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. The other decision of the Hon'ble Supreme Court relied upon by the ϭϲ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
learned D.R. in the case of CIT V/s. Sri Mangayarkarasi Mills (P) Ltd. 315 ITR 114 also following the decision in the case of CIT V/s. Saravana Spinning Mills (supra), has laid down the same proposition of law. On the other hand, the decisions relied upon by the assessee as noted in the order of the CIT(A) clearly supports the view that the expenditure incurred by the assessee cannot be treated as capital expenditure. In the aforesaid view of the matter, we do not find any reason to interfere with the findings of the CIT(A) in this regard. We therefore, confirm the order of the CIT(A) and direct the Assessing Officer to delete the addition made on account of disallowance of expenditure to the tune of Rs.20,21,46,278/-.
16. The second issue as raised in Ground No.7 is with regard to order of the CIT(A) directing the Assessing Officer to delete the addition made on account of expenditure of Rs.19,70,990/-.
17. Briefly the facts relating to the issue are, during the assessment proceedings, the Assessing Officer noticed that the assessee has debited an amount of Rs.19,70,990/- as social welfare expenses. When the Assessing Officer asked the assessee to explain why the expenditure incurred has not been treated as capital expenditure, the assessee contended that the plant of the assessee is located in Vijjeswaram, West Godavari District and was set up in 1990. People residing in surrounding villages, public representatives, Government Offices have been requesting the assessee to undertake some local development work which benefits the public in the nearby villages of the factory. The Board of the assessee company after discussions, decided to construct a community hall in Maddur village near the factory to be used for various purposes for the ϭϳ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
public as well as employees of the factory. As per the decision of the Board, the community hall was constructed and handedover to Maddur Panchayat Sarpanch to be used by the public with the understanding that preference shall be given to employees of the assessee company for use of the community hall. It was therefore, submitted that since construction of community hall is for the benefit of the employees of the assessee company, the expenditure incurred is allowable as deduction. The Assessing Officer however, was not convinced with the explanation of the assessee. The Assessing Officer held that when the expenditure incurred is for construction of a capital asset i.e., community hall which is also in the legal possession and control of Village Panchayat, the expenditure incurred by the assessee cannot be allowed as a revenue expenditure. He further held that the contention of the assessee that its employees will be allowed to use the asset is no way connected to the business activity of the assessee and is not related to the business of the assessee. Accordingly, he held that the expenditure incurred being capital in nature, is not allowable as a deduction. The assessee challenged the disallowance before the CIT(A).
18. The CIT(A) after considering the submissions of the assessee in the light of the ratio laid down in various decisions, deleted the addition by holding as under :
"4.1. I have gone through the fact of the case and the submission of the appellant. I have also gone through the decision relied upon by the appellant. In the case of Nalco, it was held that expenditure incurred on rehabilitation of employees and other persons who were displaced when the assessees' plant was constructed and other expenses incurred in peripheral development work are allowable ϭϴ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
as business expenditure. The Hon'ble ITAT Cuttack Bench relied on the following decisions:
(i) CIT Vs Madras Refineries Ltd (266 ITR 117) (Mad.)
(ii) HPCL Vs DCIT (92 TTJ 168) (Mumbai)
(iii) CIT Vs Rupsa Rice Mills(104 ITR 249) (Orissa)
(iv) Orissa Forest Dev.Corp. Vs CIT 80 ITD 300 (Cut.) A some what similar issue was decided by ITAT Mumbai 'D' Bench in the case of DCIT Vs BSES Ltd (113 TTJ 227). In that case the assessee company had incurred expenditure on construction of toilets, borewells, schools and colleges to improve the working relations with the native people and to improve the condition of the area inhabited by its employees and others. The Hon'ble ITAT following the decision of Hon'ble Karnataka High Court in the case of Mysore Kirloskar Ltd Vs CIT (61 CTR 265) held that the expenditure towards community development is allowable as business expenditure. Similarly ITAT, Kolkata Special Bench in the case of JCIT Vs ITC Ltd.(112 ITO 57)' has held that social responsibility expenses are allowable expenditure. Thus, relying on the aforesaid decisions, the AD is directed to delete the disallowance of Rs.19,70,990/- made in the assessment order.
19. We have heard the parties and perused the materials available on record. There is no dispute to the fact that the assessee has incurred the expenditure of Rs.19,70,990/- for construction of a building to be used as a community hall by the villagers as well as by the employees of the assessee company. The only issue is, whether the expenditure incurred is to be allowed as a revenue expenditure as claimed by the assessee or is a capital expenditure as held by the Assessing Officer. A perusal of the assessment order ϭϵ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
makes it clear that the Assessing Officer admits the fact that the community hall is in the control of Village Panchayat as its ultimate asset. In such view of the fact it cannot be held that it is a capital expenditure as there is no capital asset created by the assessee for it. That besides, as has been rightly held by the CIT(A) social welfare expenditures incurred by a company helps in improving the working with the native people of the nearby area and it also improves the condition of the area inhabited by its employees and others. Therefore, such social welfare expenditures are to be allowed as business expenditure. In case of CIT V/s. Karnataka Financial Corporation 326 ITR 355, the Hon'ble Karnataka High Court held that the amount spent by the Corporation towards development of model villages has to be considered as expenditure incurred towards his business promotion and therefore, allowable as a business expenditure. Therefore, considering the totality of facts and circumstances, we are of the view that the CIT(A) was justified in deleting the addition of Rs.19,70,990/-.
20. The third issue as raised in ground No.8 is with regard to CIT(A) deleting an amount of Rs.45,92,009/- out of the total disallowance of Rs.60,54,821/-. As prior period expenditure for the period from 1990 to 2004. The A.O. held that as the expenditure has apparently accrued and chargeable to those years as per the clauses of term loan agreement between the parties and the expenditure is apparently interest and penal interest for non- payment/deferment by the assessee, the same is not an expenditure allowable for the year.
ϮϬ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
21. In course of the appeal proceedings before the CIT(A), the assessee contended that it has availed rupee form loan from UTI vide agreements dated 06.03.1990 and 18.12.1991. As per the said agreement, there was an option for the institutions to convert part of the loan to equity and to increase the interest waived by it if the shares of the company are not listed in the stock exchange. When UTI proposed to exercise its option to convert part of its loan to equity, assessee explained its difficulty in lifting its shares in stock exchange. After negotiations with UTI, it was finally agreed to waive the additional 1% interest on the condition that assessee shall pay interest upto 31.12.2000 and from 01.12.2001 at specific rate which resulted in payment of further interest amounting to Rs.60,54,821/-. It was submitted that as the interest was never claimed as deduction earlier, it should be allowed as deduction under section 43B as the actual payment was made during the year. The CIT(A) after considering the submissions of the assessee held as under :
"5.3. I have gone through the facts of the case and the submission of the appellant. It is not disputed by the A.O. that the amount of Rs.60,54,821/- claimed by the appellant relates to payment of interest on term loan. The AO has disallowed the interest on the ground that the same pertain to earlier years and should have been claimed in those years. The appellant on the other hand states that the interest expenditure claimed is allowable in the year .under consideration u/s 43B of the Act since the same has been paid during the year. The A.O. has no where stated that the expenditure of interest was earlier claimed in any assessment year. As per section 43B certain deduction are to be allowed only on actual payment notwithstanding anything contained in any other provisions of the Act.
Ϯϭ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
Interest payable on any loan or borrowing from any public financial institution in accordance with the terms and conditions of the agreement governing the loan. In my view if the appellant has claimed to have paid the interest during the year under consideration, it will be eligible for deduction u/s 43B. However, in the written submission filed during the appellate hearing, it has been submitted that out of Rs.60,54,821/-, Rs.45,92,009/- was paid on 13-03-2005 and 14,62,812/- was paid in 24-05-2005. Accordingly, even as per the contention of the appellant only Rs.45,92,009/- will be eligible for deduction u/s 43B since the same has been paid during the FY relevant to AY 05-06. Accordingly, the AO is directed to allow Rs.45,92,009/- u/s 43B.
22. We have heard the parties and perused orders of the revenue authorities and material available on record. After going through the order of the CIT(A) we do not find any infirmity in his finding. As can be seen from the facts on record, the payment of interest on term loan was because of a settlement reached with the bank. It is not the case of the Assessing Officer that the interest paid was either claimed or allowed as expenditure in the earlier years. Therefore, the deduction certainly can be allowed under section 43B of the Act when the amount was actually paid by the assessee. In the given circumstances, the CIT(A) having found that the assessee has paid an amount of Rs.45,92,009/- during the year out of the total expenditure of Rs.60,54,821/- the same has rightly been allowed as a deduction. Accordingly, we confirm the order of the CIT(A) and dismiss the ground raised by the department.
ITA.No.324/Hyd/2009 - A.Y. 2005-06 :
23. The issue pertaining to the aforesaid appeal of the assessee is, disallowance of Rs.37,46,363/- as a prior period ϮϮ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
expenditure. Briefly, the facts are that the during the assessment proceeding, the Assessing Officer noticed that the assessee claimed a deduction of Rs.37,46,363/- towards waiver of expenditure relating to prior period in the year under consideration. When asked the assessee's A.R. contended that the amount in question which was offered as income in earlier years, is waived now and claimed by the assessee as prior period expenditure. The Assessing Officer, however, did not accept the contention of the assessee by opining that the assessee being power generation and selling company, it is getting surcharged for delay in clearing power supply bills by purchaser of bulk power. He further held that it is a Government company M/s. A.P. Transco which is the purchaser of bulk power and the surcharge is payable as per the terms of agreement between the parties. He therefore, held that the waiver of this amount is similar to writing off of a good/outstanding debt in the books of the assessee and claiming the same as a prior period expenditure as it is being on account of sales of earlier year and is not an allowable claim as claimed by the assessee.
24. Being aggrieved of such disallowance, the assessee preferred an appeal before the CIT(A). It was contended before the CIT(A) that during the period November, 2002 to March, 2004 a surcharge of Rs.51,02,271/- was levied on the bills raised on A.P. Transco. Out of the same, Rs.37,46,363/- pertain to the period November, 2002 to 31st March, 2004. It was contended that on a request from A.P. Transco the assessee has taken the decision to waive the surcharge in its meeting held on 19.01.2005. It was submitted that since the surcharge was already considered as income in earlier years, the same was waived by the assessee and claimed as Ϯϯ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
deduction during the assessment year under dispute. The CIT(A) however, sustained the addition by holding as under :
"5.4. As regards claim of expenditure of Rs.37,46,363/-, it is nothing but a unilateral waiver of income which was earlier admitted by the appellant and is claimed as an expenditure during the year under consideration. The appellant has not put forth any evidence justifying, waiver of such income. Accordingly, I do not find any ground to interfere with the finding of the AO. In other words, the disallowance of Rs.37,46,363/- made by the AO is confirmed. This ground of appeal is partly allowed".
25. We have heard the parties and perused the materials on record. As can be seen from the extracted portion from the order of the CIT(A) he has disallowed the claim of the assessee by holding that it is an unilateral waiver of income which was earlier admitted by the assessee and the assessee has not putforth any evidence justifying waiver of such income. However, it is the contention of the learned A.R. that the Board took a decision to waive the surcharge in response to a written request made by A.P. Transco vide its letter dated 16.12.2003 copy of which is placed at page 30 of paper book. On a perusal of the aforesaid letter, it is to be noted that A.P. Transco in the said letter has objected to the levy of surcharge by stating that there is no clear provision in the MOU for levying surcharge. It is further mentioned in the said letter that as per the minutes of extraordinary general meeting of the assessee company held on 08.09.2003, assessee company had taken a decision to drop the levy of surcharge on A.P. Transco. Hence, it was requested by A.P. Transco not to raise/include the surcharge claimed in the bills and to withdraw whatever claims raised towards surcharge till date. In pursuance to the aforesaid Ϯϰ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
letter, the Board has taken a decision vide minutes of meeting dated 19.01.2005 to waive the surcharge of Rs.51,02,271/- charged upto December, 2004 which includes the amount of Rs.37,46,363/- from November, 2002 to 31st March, 2004. Therefore, the reasoning of the CIT(A) that the assessee had taken unilateral decision for waiver of the surcharge is not correct. That besides, when A.P. Transco is contesting the levy of surcharge, which is very much evident from its letter under reference, and demanding for withdrawal of the levy there is no other option on the part of the assessee but to waive the surcharge levied. In this view of the matter, we are of the view that CIT(A) was not justified in rejecting the claim of the assessee. We, therefore, direct the Assessing Officer to allow the expenditure of Rs.37,46,363/- since the decision to waive the surcharge is taken during the financial year relevant to the assessment year under dispute and the amount has been written off during the year in the books of the assessee. The ground raised is therefore, allowed.
ITA.No.452/Hyd/2009 - A.Y. 2003-04 (Revenue's Appeal)
26. The issue raised in ground Nos. 2 to 5 are identical to the issue raised in ground Nos. 2 to 5 of Revenue's appeal in ITA.No.310/Hyd/2009. Facts being identical, and issue being common, following our finding in the said appeal of the department as contained in para No.15 of the order, we dismiss the grounds of the revenue in this appeal also by sustaining the order of the CIT(A).
27. To sum-up, ITA.No.310/Hyd/2009 and ITA.No. 452/Hyd/2009 of the Revenue are dismissed and ITA.No.324/Hyd/2009 of the assessee is allowed.
Ϯϱ ITA.No.310, 452 & 324/H/2009 M/s. AP Gas Power Corporation, Hyd.
28. Order pronounced in the open Court on 07.02.2014.
Sd/- Sd/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Date 07th February, 2014 VBP/- Copy to :
1. DCIT, Circle 1 (1), 4th Floor, Aayakar Bhavan, Hyderabad.
2. M/s. AP Gas Power Corporation Ltd., 2nd Floor, Secretariat, Hyderabad. PAN AABCA9105C
3. CIT(A)-II, Hyderabad
4. CIT-I, Hyderabad
5. D.R. ITAT, 'A' Bench, Hyderabad.