Income Tax Appellate Tribunal - Indore
M.P. Warehousing & Logistic ... vs Department Of Income Tax on 20 December, 2011
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IN THE INCOME TAX APPELLATE TRIBUNAL,
INDORE BENCH, INDORE
BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER
AND
SHRI R.C. SHARMA, ACCOUNTANT MEMBER
ITA Nos.130 to 133/Ind/2012
AYs: 2005-06 to 2008-09
ACIT-2(1), Bhopal .....Appellant
V/s.
M/s. M.P. Warehousing &
Logistic Corporation Ltd., Bhopal
PAN - AADCM 7742 B .....Respondent
Date of hearing 2.5.2012
Date of pronouncement 3.5.2012
Department by Shri Keshave Saxena, CIT/DR
Assessee by Shri M.K. Sharma, CA
ORDER
PER JOGINDER SINGH, judicial member
This bunch of four appeals by the revenue is filed against the common order dated 20.12.2011 of the learned Commissioner of Income Tax (Appeals)-I, Bhopal on the following common grounds:-
"On the facts and in the circumstances of the case, the ld. CIT(A) erred in: -
1. deleting the addition of Rs.67,58,381, Rs.57,42,716/-, Rs.65,93,548/- and Rs.58,49,314/-, respectively, made on account of overhead expenditure on construction treating it as a revenue expenses, when the assessee has not substantiated its 2 claim regarding the expenditure being of revenue nature by producing records showing the nature of expenditure.
2. deleting the addition of Rs.26,41,725/-, Rs.12,24,593/-, 38,75,551, and Rs.1,62,950/-, respectively, made on account of bad debts when necessary condition for allowance of claim of 'bad debts' as provided u/s 36(2)(i) of the I.T. Act, 1961 has not been fully satisfied."
2. So far as ground no. 1 on account of overhead expenditure on construction is concerned, the crux of arguments of the learned CIT DR is in support to the assessment order, for which our attention was specifically invited to para 4 of the assessment order and the findings contained therein. Reliance was placed upon the decision in CIT vs. Hi-line Pens (P) Limited; 306 ITR 182 (Del) and CIT v. Saravana Spinning Mills Private Limited (293 ITR 201) (SC). On the other hand, the learned counsel for the assessee defended the impugned order by submitting that the assessee is a statutory Corporation and the learned CIT(A) was quite justified in treating the expenses as revenue.
3. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee is a statutory Corporation established under Warehousing Corporation Act, 1962. The assessee declared total income of Rs.7,29,42,230/- in its return filed on 27.10.2005 which was assessed as such. Subsequently, notice u/s 148 was issued on 21.4.2009 and assessment u/s 143(3)/147 of the Act was completed on 21.12.2009 3 at an income of Rs.10,91,63,740/-. The return for the A.Y. 2006-07 declaring income of Rs.13,33,95,970/- was filed on 18.11.2006 and the assessment was framed on the same income. Subsequently, notice u/s 148 was issued on 29.5.2009 and the assessment was completed at total income of Rs.14,59,43,290/- u/s 143(3)/147 of the Act on 21.12.2009. Likewise, for the A.Y. 2007-08 total income was declared at Rs.4,31,02,879/- and for the A.Y. 2008-09 the income was declared at Rs.57,87,790/-. The assessments were framed at total income of Rs.5,35,71,980/- and Rs.6,31,99,050/-, respectively. The learned AO made the addition on account of overhead expenses and treated the expenditure of capital nature which is summarised as under :-
S.No. A.Y. Amount claimed
in P&L Account
as Revenue
Expenditure
1 2005-06 6758381
2 2006-07 57,42,716
3 2007-08 65,93,548
4 2008-09 58,49,314
3.1 Before the learned AO, the stand of the assessee was that the assessee has already capitalised the actual expenditure pertaining to construction activity of the fixed asset on the basis of consistent accounting practices, followed by the assessee by further claiming that 4 total overhead expenses on construction was Rs.78,22,681/- out of which the amount of Rs.10,64,300/- was capitalised as per accounting policy and the balance was charged to profit and loss account. The crux of the stand of the assessee, during assessment proceedings, was that the apportionment of overhead expenditure was as per accounting policy consistently followed by the assessee Corporation. The position of overhead expenditure/construction is summarised as under :-
Asstt.Year Total overhead Amount Amount
Expenditure capitalised (in claimed in P&L
Construction (in rupees) account as
rupees) Revenue
expenditure (in
rupees)
2005-06 78,22,681 10,64,300 6758381
2006-07 85,81,916 28,39,200 57,42,716
2007-08 94,45,428 28,51,700 65,93,548
2008-09 1,05,71,619 23,27,162 58,49,314
The learned AO also observed that no details, in respect of overhead expenditure, were claimed in profit and loss account and the apportionment of overhead expenditure between construction and other activities was not supported by necessary details. Accordingly, the learned AO disallowed such expenses, claimed as revenue expenditure, and treated the same as of capital nature. 3.2. On appeal, the learned CIT(A) considered the written submissions (as mentioned in para 5.3 of the impugned order) and concluded as under :-
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"5.4 I have carefully considered the submission of the appellant and findings of the Assessing Officer in assessment orders. I have also gone through the submission made by the appellant made by Assessing Officer in respect of claim of such overhead expenses. First of all it is noticed that the observation of the Assessing Officer that no detail was furnished in respect of overhead expenditure charged in P & L account and also the detail as to how the apportionment of overhead expenditure between construction and other activity was made is factually incorrect. In fact the appellant has submitted complete detail of such claim and also as to how such expenses are apportioned between capital and revenue expenses. On perusal of submission filed by the appellant during the assessment proceedings as also during the appellate proceedi9ng it is noticed that the appellant corporation is engaged in the business of storage of food grains and for such work they have to construct various Godowns. To carry out such construction work of Godowns for their main business of construction and maintenance of ware houses, the corporation is having competent technical staff including Chief Engineer, Superintendent Engineers, Junior Engineers, Managers, Accountant, Junior Accountants, L.D.C. etc. Such manpower is titled as construction division and the expenditure incurred on salary and other established expenses is booked as construction overheads. It is stated that this construction division attend all construction work of new godowns as well as other works relating to the corporation mainly repairs and maintenance of existing godowns. It is further stated that the construction of Godown takes about six months and complete detail of actual man days utilised on construction work are maintain in respect of each unit of construction i.e. Godown accordingly the map days devoted on the construction work are quantified and that portion of total expenditure on account of salary and other expenses of such technical man power including Engineers and staff is apportioned and capitalised. The other expenses which have been incurred on the salaries and other items on such technical man power which is not relating to the construction of the godown is diverted and claimed as revenue expenditure. Therefore, the essentially the so called overhead expenses is the expenses on account of dedicated team of Engineer and other staff who are doing construction work of Godwn. The position of yearwise overhead expenses and expenses treated as of capital nature forming part of construction of Godown and revenue expenditure 6 claimed in a P.&L. account is summarised at page no. 5 para 5.2.
It is also stated that the detailed chart of apportionment of overhead expenses was furnished before the Assessing Officer during the Asst. Proceedings. It is also noticed that this practice of apportionment of overhead expenses on account of salary bill of the construction staff is being consistently followed. The facts and circumstances discussed above will indicate that the expenses attributable to the construction work of new Godowns has been systematically apportioned by way of maintaining a record of counting of man days devoted by such staff on the construction work. The detailed facts discussed above will indicate that the socalled overall expenses is incurred on salary and other allowances of the construction division. The appellant has capitalised that portion of expenditure which has been incurred on construction of new Godowns. The remaining expenditure which has been incurred mainly on the staff attending the work relating to repairs and maintenance of existing godowns has been claimed as revenue expenditure. The expenditure incurred on repairs and maintenance on existing godowns numbering more than one thousand cannot said to be of capital nature. In the given facts and circumstances I do not find any irregularity in the claim of the appellant for remaining expenses claimed as revenue expenditure inasmuch as from such expenses neither any new assets has come into existence nor the appellant has derived enduring benefit from such expenses. Therefore, the addition made by the Assessing Officer in respect of A.Y. 2005-06, 2006-07, 2007-08 and 2008-09 amounting to Rs.6758381/-, 57,42,716/-, 65,93,548/- and 58,49,314/- are hereby deleted."
3.3. If the aforesaid finding of the learned CIT(A), conclusion drawn in the assessment order and the assertion made by the learned respective counsel are kept in juxtaposition and analysed, admittedly, the chart of apportionment of overhead expenses was duly furnished by the assessee during the assessment proceedings as well as first appellate stage. There is a finding in the impugned order that the 7 construction work of new godowns has been systematically apportioned by way of maintaining a separate record and the assessee has capitalised that portion of expenditure which has been incurred for construction of new godowns. There is another finding that the assessee is having more than 1000 godowns for which expenditure was incurred on repairs and maintenance, consequently, we are in agreement that the expenses so incurred cannot be of capital nature because neither any new asset was created nor any benefit of enduring nature was derived by the assssee.
3.4 During hearing the learned CIT DR placed reliance on the decision from Hon'ble Delhi High Court in CIT v. Hi-line Pens Private Limited (supra) wherein on the issue of business expenditure on account of repairs and renovation of rented premises, the expenditure was incurred towards false ceiling, fixing tiles, replacing glasses, wooden partitions, replacement of electrical wiring, earthing, replacement of GI pipes, etc. so as to make the premises more conducive to business activity. It was held that such expenses clearly falls within the expression "repairs to the premises" and the same was held to be allowed as deduction u/s 30(a)(i) of the Act. If the ratio laid down by the Hon'ble High Court is applied to the facts of the present appeal, we find that there is a clear finding in the impugned order that the assessee made the apportionment of the expenses incurred for construction of new godown and repairing and maintenance of old 8 one, therefore, this judicial pronouncement rather helps the assessee. Another decision relied upon by the learned CIT DR is from Hon'ble Apex Court in Saravana Spinning Mills (P) Limited (supra) wherein machines were replaced in the textile mill. It was held that for taking the benefit of deduction u/s 31(i) of the Act, the expenditure must have been incurred to preserve and maintain the existing asset and no new asset should come into existence or to obtain a new advantage. We are of the humble opinion that since the assessee incurred the expenditure for repairing and maintaining the old godowns, therefore, neither new asset came into existence nor any benefit of enduring nature was obtained by the assessee, consequently, this judicial pronouncement also may not help the revenue.
3.5 Section 31(i) of the Act limits the scope of allowability of expenditure as deduction in respect of repairs made to machinery, plant or furniture by restricting it to the concept of "current repairs". Admittedly, all repairs are not current repairs to decide the applicability of section 31(i), the primary test is not whether the expenditure is revenue or capital in nature. The basic test to find out as to what would constitute current repair is that the expenditure must have incurred to "preserve and maintain" an already existing asset and the object of expenditure must not be to bring a new asset into existence or to obtain a new advantage. "Repair" implies the existence of a part of the machine/plant or furniture which has mal- 9 functions. The entire machine/plant or furniture, if replaced, the expenditure, so incurred did not fall within the meaning of current repairs. The object of repair and maintenance is to preserve and maintain existing asset and not to bring a new asset into existence. The ratio laid down by Hon'ble Bombay High Court in New Shorock Spinning & Mfg. Co. Ltd. Vs. CIT; 30 ITR 338 (Bom), CIT v. Saravana Spinning Mills Private Limited (relied upon by the learned CIT DR), Ballimal Navalkishore v. CIT; 224 ITR 141 (SC), CIT v. Choughule & Company Private Limited (214 ITR 523) (Bom.) supports our view. The Full Bench of Hon'ble Andhra Pradesh High Court in the case of Nathmal Bankatlal Parikh & Company v. CIT (1980) 122 ITR 168 (AP) (FB) even went to the extent that the necessary factor is to be decided by the assessee. The propositions that emerges from the decided cases is summarised as under :-
(i) The amount should be paid/expanded on
account of current repairs
(ii) "Current repairs" means repair undertaken in normal course of user for the purposes of preservation, maintenance or proper utilisation or for restoring to its original condition.
(iii) Current repairs do not mean only petty repairs or repairs necessitated by wear and tear during the particular year.
(iv) Such repairs should not bring into existence nor obtain a new asset or different advantage
(v) Neither the quantum of expenditure nor the fact that in the process of repair there was substantial replacement of the parts of the machine or ship is decisive of the true nature of the expdnditure.
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(vi) The original cost of the asset is not at all relevant for ascertainment of the true nature of the expenditure on repairs.
(vii) The replacement cost of the asset may, however, at times be used as indicator of the true character of expenditure. If the expenditure on repair added to the written down value or disposal value exceeds the replacement cost of the asset, a presumption is possible that it is not a revenue expenditure but expenditure of capital nature. Such a presumption, of-course, would be rebuttable.
(viii) The expression "current" preceding "repairs" appears to have been used by the legislature with a view to restricting the allowance to expenditure incurred for preservation and maintenance thereof in its current state in contradiction to that incurred on any improvement or an addition thereto.
We are in agreement to a proposition that total replacement of damaged machinery/ship or an asset may not constitute repair. Our view is supported by the decision in DCIT v. STN Textiles Limited; 257 ITR 171 (Ker.) but substitution of old/worn out parts of a machine/building/factory etc. is an expenditure of deductible nature, meaning thereby for claiming the deduction under the provisions of this Act, no new asset should come into existence and the expenditure must have been incurred on the existing asset. In view of these facts and judicial pronouncements, we find no infirmity in the stand of the CIT(A), on this issue, it is affirmed.
4. The next ground pertains to deleting the addition on account of bad debts. The stand of the learned CIT DR is that necessary conditions of allowance for claiming bad debts as provided u/s 36(1)(vii)/36(2) of the Act were not satisfied by the assessee. On the 11 other hand, the learned counsel for the assessee defended the impugned order.
4.1 We have perused the record available on record and considered the arguments advanced by the learned respective counsel. The learned AO made the addition on account of bad and doubtful debt which is summarised as under :-
Sl.No. A.Y. Rs.
1 2005-06 2641725
2 2006-07 1224593
3 2007-08 3875551
4 2008-09 162950
We find that the learned AO made the addition on account of bad debts on the plea that the assessee did not furnish the details of bad debts written off whereas the claim of the assessee was that this finding of the AO is incorrect as the complete details/written off bad debt were duly charged to profit and loss account and were furnished before the AO. The CIT(A) gave categorical finding that necessary details are very much evidenced from the balance sheet as well as from books of accounts and deleted the addition which is under challenge before the Tribunal.
4.2 If the totality of facts are analysed, there is uncontroverted finding in the impugned order that the assessee in fact write off the 12 bad debt in its books of accounts. We find that after 1.4.1989, it is not necessary for the assesee to establish that the debt in fact has become irrecoverable, it is enough if the bad debt is written off as irrecoverable in accounts of the assessee. The effect of amendment to section 36(1)(vii) read with section 36(2) with effect from 1.4.1989 is only that for claiming deduction the assessee is not required to establish that the debt has become bad in previous year and mere writing of the debt or part thereof, as irrecoverable, is substantial compliance of the same. Our view is fortified by the decision from Hon'ble Apex Court in TRF Limited v. CIT; 323 ITR 397 (SC), CIT v. Auto Meters Limited; 292 ITR 345 (Del), CIT v. Smt. Nilopher I. Singh; 309 ITR 233 (Del) and Kashmir Trading Company v. DCIT; 291 ITR 228 (Raj.). In view of these facts and judicial pronouncements, we find no infirmity in the stand of the learned CIT(A). It is affirmed.
Finally, the appeals of the Revenue are dismissed. This order was pronounced in the open Court on 3.5.2012 Sd sd (R.C. SHARMA) (JOGINDER SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Date: 3.5.2012 Copy to: Appellant/Respondent/CIT/CIT(A)/DR/Guard File