Income Tax Appellate Tribunal - Mumbai
Saurashtra Ferrous P. Ltd, Mumbai vs Ito Wd 9(2)(2), Mumbai on 8 December, 2017
1
Sourashtra Ferrous P Ltd
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "E", MUMBAI
Before Shri Joginder Singh(JUDICIAL MEMBER)
AND
Shri G Manjunatha (ACCOUNTANT MEMBER)
I.T.A No.8806/Mum/2011)
(Assessment year:2008-09)
Sourashtra Ferrous P Ltd vs ITO, Wd 9(2)(2), Mumbai
93-C, Mittal Tower
Nariman Point
Mumbai-400 021
PAN : AAJCS0160P
APPELLANT RESPONDEDNT
I.T.A No.549/Mum/2012)
(Assessment year:2008-09)
ITO, Wd 9(2)(2), Mumbai vs Sourashtra Ferrous P Ltd
93-C, Mittal Tower
Nariman Point
Mumbai-400 021
PAN : AAJCS0160P
APPELLANT RESPONDEDNT
Assessee by Shri B.V. Jhaveri
Revenue by Shri Praveen Kumar
Date of hearing 24-10 -2017
Date of pronouncement 08-12-2017
ORDER
Per G Manjunatha, AM :
These cross appeals filed by the assessee as well as revenue are directed against the order of the CIT(A)-20, Mumbai dated 30-11-2011 and it pertains to AY 2008-09. Since facts are identical and issues are common, these appeals 2 Sourashtra Ferrous P Ltd were heard together and are disposed of by this common order, for the sake of convenience.
2. The brief facts of the case are that the assessee company filed its return of income for the assessment year 2008-09 on 26-09-2008 declaring total loss of Rs.3,15,83,056. The case was selected for scrutiny and notices u/s 143(2) and 142(1) were served on the assessee alongwith a questionnaire. In response to the notices, the authorized representative of the assessee appeared from time to time and furnished details, as called for. The assessment was completed u/s 143(3) on 27-12-2010 determining total income at Rs.49,36,78,420, interalia making additions / disallowances towards share application money u/s 68 of the Income-tax Act, 1961, disallowance of depreciation on assets, disallowance of interest u/ s36(1)(iii) and u/s 43B, disallowance of repairs and maintenance being capital expenditure, addition towards excise duty u/s 145A, disallowance of expenses u/s 40(a)(ia) and addition towards shortfall in production of goods.
3. Aggrieved by the assessment order, assessee preferred appeal before CIT(A). Before the CIT(A), assessee filed written submissions on various additions / disallowances made by the AO. The CIT(A), for the detailed reasons recorded in his order dated 30-11-2011 deleted additions made by the AO towards share application money u/s 68, disallowance of depreciation on fixed assets, disallowance of interest u/s 36(1)(iii) and u/s 43B, addition made by the AO towards excise duty u/s 145A, addition on account of excise duty credits in balance-sheet u/s 145(3), addition towards expenses u/s 40(a)(ia) for 3 Sourashtra Ferrous P Ltd failure to deduct tax at source u/s 194C and addition made on account of shortfall in production by rejecting books of account u/s 145A of the Act. However, the CIT(A) has allowed partial relief in respect of addition made by the AO towards disallowance of repairs and maintenance expenditure being capital in nature and allowed relief of Rs.15,86,633 and confirmed balance amount of Rs.2,08,21,467. Thus, the CIT(A) has partly allowed appeal filed by the assessee. Aggrieved by the order of CIT(A), the assessee as well as the revenue are in appeal before us.
4. The revenue has raised the following grounds of appeal:-
1. On the facts and in the circumstances of the case and law, the Ld. CIT(A) erred in deleting the addition made on account of share application money amounting of Rs. 8,51,26,250/- within the meaning of section 68 of the Act..
2 On the facts and in the circumstances of the case and law, the CIT(A)erred in deleting the addition made on account depreciation amounting of Rs.3,81 07,407/-, within the meaning of section 32 of the Act.
3. On the facts and in the circumstances of the case and law, the Ld. CIT(A) erred in deleting the addition made on account of disallowance of interest amounting of Rs.1,80,13,928/- within the meaning of section 37(1) of the Act.
4. On the facts and in the circumstances of the case and law, the CIT(A) erred in deleting the addition made on account of disallowance of lnterest amounting of Rs.8341,111/- within 'the' meaning of Explanation 3D to the section 4313(e) of the Act:
5. On the facts and in the circumstances of the case and law, the Ld. CIT(A) erred in deleting the addition made on account of disallowance of repairs & Maintenance being Capital expenditure of Rs.15,86,633/- without providing an opportunity in accordance to the Income tax rule 46A.
6. On the facts and in the circumstances of the case and law, the CIT(A) erred in deleting the addition made on account of excise duty towards cost of stock amounting of Rs 42 30,010/- within the meaning of section 145A of the Act. .
7. On the facts and in the circumstances of the case and law, the Ld. CIT(A) erred in deleting the addition made on account of 4 Sourashtra Ferrous P Ltd excise credits in the balance sheet amounting of Rs.12,91,55,8191- within the meaning of section 145(3) of the Act.
8. On the facts and in the circumstances of the case and law, the Ld CIT(A) erred in deleting the addition made on account of disallowance of j expenses amounting of within the meaning of Section 40(a)(ia) of the Act.
9. On the facts and in the circumstances of the case and law, the Ld. CIT(A) erred in deleting the addition made on account of reduction of production amounting of Rs.21,65,77,838/- by rejecting the books of account ' u/s.145 of the Act.
10. On the facts and in the circumstances of the case and law, the Ld CIT(A) erred in admitting additional evidences despite submitting remand report and against Rule 46A IT rules 1962
11. The appellant prays that the order of the CIT(A) on the grounds be set aside and that of the Assessing Officer be restored."
5. The first issue that came up for our consideration from revenue's appeal is addition made on account of share application money amounting to Rs.8,51,26,250 within the meaning of section 68 of the Act. The facts with regard to the impugned addition are that during the year under consideration, the assessee company has allotted share capital with share premium to M/s Great Value Company Ltd of Mauritius. The assessee has received a sum of Rs.8,51,26,250 from M/s Great Value Company Ltd of Mauritius in the financial year relevant to assessment year 2007-08. The assessee has allotted equity share of Rs.10 each at a premium of Rs.190 per share. During the course of assessment proceedings, the AO called upon the assessee to furnish complete details of source of funds, nature of receipts, statutory approval and justification for basis of charging share premium. The assessee was also asked to explain as to why the amounts should not be treated as unexplained credits u/s 68 of the Act. In response to specific question, the assessee, vide letter dated 15-12-2010 5 Sourashtra Ferrous P Ltd furnished confirmation from subscriber, nature of receipt of capital reserve, CA's certificate and basis of premium alongwith intimation filed with RBI, copies of Board Resolutions, for issue of share capital and for charging premium, copies of application received from the subscriber and copies of statutory forms filed with Registrar of companies. The AO, after considering relevant submissions and also considering various facts observed that the assessee company has totally failed to justify issue of shares and also charging share premium from time to time. The AO further observed that the assessee has not been able to prove beyond reasonable doubt the creditworthiness of the party and genuineness of transaction. Although the assessee has submitted address of shareholder, copy of share application form and other details, the same by itself is not enough to prove the genuineness of transaction of old creditworthiness of allottee. The AO further observed that the assessee has failed to justify charging a huge premium of Rs.190 per share without establishing determination of the value of share. The AO further observed that though the assessee has filed various details to justify valuation of share, such valuation is stated to be obtained as per the request of the management and also the basis of valuation as stated to be on the basis of management projection of finance for the period from FY 2007-08 to 2011-12. These finances are only projections and estimates and without reference to any past records and audited financial statements of the assessee company. The value has not conducted any due diligence or no independent verification of the facts and the figures 6 Sourashtra Ferrous P Ltd provided in the data given by the management. Though the assessee has followed discounted cash flow method for valuation of shares which is based on the project financials of the company for the next five financial year years, therefore, there is no reason given by the assessee to justify charging premium of Rs.190 per share. All these sequence of events show that the purported share application money received from M/s Great Value Company Ltd of Mauritius and allotment of equity shares with huge premium of Rs.190 is not a genuine transaction and accordingly opined that the assessee has failed to establish genuineness of transactions and creditworthiness of the parties and hence, made addition towards share application money received from M/s Great Value Company Ltd of Mauritius u/s 68 of the Income-tax Act, 1961.
6. The Ld. DR submitted that the Ld.CIT(A) erred in deleting addition made by the AO towards share application money without appreciating the facts that the assessee has failed to discharge onus cast upon it u/s 68 of the Act, by discharging genuineness of transactions and creditworthiness of the parties. The Ld.DR further submitted that though the assessee has furnished relevant details to prove identity of the share application money, the sequence of events clearly establishes the fact that the assessee is not able to justify charging huge premium of Rs.190 per share, therefore, the AO was right in taxing share application money received from M/s Great Value Company Ltd of Mauritius u/s 68 of the Act. The Ld.DR further submitted that merely discharging identity by filing confirmation from subscriber and furnishing bank details for having 7 Sourashtra Ferrous P Ltd transferred fund through banking channel will not be a sufficient compliance of section 68 of the Act. To escape from the clutches of provisions of section 68 of the Act, the assessee has to prove identity, genuineness of transaction and creditworthiness of the parties. In this case, no doubt, the assessee has discharged identity of the party, but failed to prove the genuineness of transactions and creditworthiness of the parties. Therefore, the AO was right in making addition u/s 68 of the Act, and his order should be upheld.
7. The Ld.AR for the assessee, on the other hand, supported the order of the CIT(A) and submitted that the AO was completely misconstrued the facts of the case to make addition u/s 68 in respect of share application money received from M/s Great Value Company Ltd of Mauritius in the financial year relevant to AY 2007-08. The Ld.AR further submitted that the assessee has received share application money of Rs.8,51,26,250 on three occasions, i.e. on 18-04- 2006; 27-12-2006; and 31-03-2007 which is evident from the fact that the said money has been credited into HDFC Bank Ltd, Lower Parel Branch in US$. The assessee has filed various details including application filed before RBI for approval of allotment of equity shares to non-resident alongwith foreign inward remittance certificate. Therefore, there is no reason for the AO to doubt the genuineness of transactions. The Ld.AR further submitted that various details have been filed before the AO to justify charging premium. Assuming for a moment that the assessee has not justified charging premium, it is irrelevant for the purpose of making addition u/s 68, as the section speaks about identity, 8 Sourashtra Ferrous P Ltd genuineness of transaction and creditworthiness of the parties. The assessee has discharged all three ingredients of section 68 and hence, the CIT(A) has rightly deleted addition made by the AO and his order should be upheld. The Ld.AR referring to the decision of Delhi High Court in the case of CIT vs Usha Stud Agricultural Farm 301 ITR 385 (Del) and the decision of the Apex Court in the case of CIT vs P Mohanakala 291 ITR 228 submitted that addition cannot be made towards credits received in the earlier year u/s 68 of the Income-tax Act, 1961.
8. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The facts with regard to the receipt of share application money in the financial year relevant to AY 2007-08 has not been disputed by the lower authorities. In fact, this issue has been examined in the assessment proceedings of A.Y. 2007-08. The assessee has filed relevant evidences to prove receipt of money in the financial year relevant to AY 2007-08. As per the Foreign Inward Remittance certificate filed by the assessee and issued by HDFC Bank Ltd, Lower Parel Branch, the assessee has received share application money from M/s Great Value Company Ltd of Mauritius on 08-04-2006, 27-12-2006 and 31-03-2007. The assessee also filed various details including share application form, confirmation from subscriber, CA's certificate for valuation of shares, application filed with RBI for approval of allotment of equity shares to NRI, Board resolution for charging premium and statutory form filed with registrar of companies for increase in share capital 9 Sourashtra Ferrous P Ltd and allotment of equity shares. The AO has not disputed all these evidences filed by the assesee. The AO is only on the point that the assessee is not able to justify huge premium of Rs.190 per share with any evidence. According to the AO, the sequence of events establishes an undoubted conclusion that the purported transactions with M/s Great Value Company Ltd of Mauritius is not a genuine transaction and accordingly, the assessee has failed to prove genuineness of transactions and creditworthiness of the parties.
9. The provisions of section 68 provide for additions where any sum is found credited in the books of account of an assessee maintained for any previous year and the assessee, offers no explanation about the nature and source thereof, or the explanation offered by him is not in the opinion of the AO satisfactory, the sum so credited may be charged to income-tax as income of the assessee of that previous year. A plain reading of section 68 makes it clear that any sum found credited in the books of account of the assessee shall be treated as income of the assessee of that previous year, if the assessee fails to prove identity, genuineness of transactions and creditworthiness of the parties. If credits are not pertaining to the relevant period or if the credits are carried forward from previous financial year, then no addition can be made u/s 68 of the Act, in respect of credits appearing in the books of account. This legal proposition is supported by the decision of Hon'ble Delhi High Court in the case of CIT vs Usha Stud Agricultural Farm Ltd (supra), wherein it was held that the AO was incorrect in making addition towards credit balances in the accounts of the assessee brought 10 Sourashtra Ferrous P Ltd forward from earlier years u/s 68 of the Act. In this case, the assessee has received share application money in the financial year relevant to AY 2007-08 and converted such share application money into share capital by allotting equity shares during the relevant financial year 2007-08. Therefore, we are of the view that the AO was incorrect in making addition towards share application money received in the earlier financial year for the year, under consideration, u/s 68 of the Act.
10. Having said so, let us examine whether, on the facts and in the circumstances, the AO was right in treating share application money as unexplained credit u/s 68 of the Income-tax Act, 1961. The assessee has filed various details to discharge its onus cast u/s 68 of the Act, to prove identity, genuineness of transaction and creditworthiness of the parties. The assessee has received share application money from M/s Great Value Company Ltd of Mauritius through proper banking channel and the evidence of which has been furnished before the AO. The assessee also filed details of application filed before the RBI for approval of allotment of equity shares to non resident. The assessee also filed Foreign Inward Remittance certificate issued by HDFC Bank Ltd, Lower Parel Branch, which contains the name and address of the subscriber. The assessee also filed confirmation letter from the subscriber wherein the subscriber has confirmed subscription of share capital in the assessee company. The assessee also filed copies of Board Resolution authorising issue of share capital alongwith share premium. The assessee also 11 Sourashtra Ferrous P Ltd filed certificate from CA for valuation of shares and statutory form filed with Registrar of companies for allotment of equity shares. All these evidences were filed before the AO. The AO has not made an attempt to investigate on the identity, capacity and genuineness of the transaction and creditworthiness of the parties which is material, when one has to invoke section 68 of the Act. By merely holding that the assessee has not been able to prove the same beyond reasonable doubt will not suffice, when there is no adverse material with the AOs possession to justify it. The assessee has discharged its initial onus and it was for the AO to come up with something incriminating / adverse material to shift the onus back to the assessee. The assessee has pointed out that subscription to share capital was received in the financial year 2006-07 relevant to AY 2007-08 in response to a query from the AO. The assessment for AY 2007-08 was completed u/s 143(3) where the assessee was specically addressed all queries raised calling for various details by the then AO. The assessee has filed various details to explain receipt of share application money and allotment of equity shares and also filed break up of money received from M/s Great Value Company Ltd of Mauritius and allotment of equity shares. Thereafter the assessment was completed u/s 143(3) by the AO wherein the addition in respect of share application money was accepted. During current assessment proceedings also, the assessee has filed various details to prove identity of the subscriber, genuineness of the transaction and the creditworthiness of the subscriber. The assessee also filed all necessary evidence right from Foreign 12 Sourashtra Ferrous P Ltd Inward Remittance certificate to application filed with Forex department of RBI to justify allotment of equity shares and receipt of share application money from M/s Great Value Company Ltd of Mauritius. Once the initial burden cast upon the assessee to prove the identity, genuineness of transactions and creditworthiness of the parties is established, then it is for the AO to prove otherwise with necessary evidences. In this case, the AO, without bringing any cogent material on record, simply made addition by doubting the transaction only on the basis of higher share premium charged by the assessee to conclude that transaction is not genuine. Therefore, we are of the considered view that there is no reason of whatsoever to make addition towards share application money received from M/s Great Value Company Ltd of Mauritius in the financial year 2006-07 relevant to AY 2007-08, in the impugned assessment year, that too, when the assessee has proved all the three ingredients of section 68 of the Act. The Ld.AO, except for finding fault with the evidence filed by the assessee and disbelieving the same has not been able to add any evidence or information to come to the conclusion that the assessee has not received share application money from the subscriber. The CIT(A), after considering all the evidences filed by the assessee, has rightly deleted addition made by the AO. We do not see any reason to interfere with the order of the Ld.CIT(A), who has dealt with all the facts elaborately and has rightly come to the conclusion that the addition u/s 68 cannot be invoked in the year under consideration. Hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by 13 Sourashtra Ferrous P Ltd the revenue.
11. The next issue that came up for our consideration is addition made by the AO towards disallowance of depreciation amounting to Rs.381,07,407 within the meaning of section 32 of the Act. The AO disallowed depreciation claimed by the assessee @50% of actual depreciation on the ground that assets were put to use for less than 180 days which is evident as per the note 'credits for excise duty availed on capital goods purchased from M/s Anjaneya Ispat, Millennium Metal,Sashwat International Ltd, etc. The treatment of excise duty in the books of account in respect of assets capitalised clearly shows that installation was done in the month of March, 2008 and the assets in question have been used for less than 180 days. It is the contention of the assessee that the assets purchased and put to use for more than 180 days and less than 180 days were furnished to the AO with copies of bills. The assessee further contended that the AO, only on the basis of entries in the books of account in respect of treatment of input credit for excise duty in the month of March has come to the conclusion that all assets are put to use for less than 180 days and hence, assessee is eligible for 50% of actual depreciation without appreciating the bills and other evidences filed.
12. Having heard both the sides and considered material available on record, we find that the assessee has filed various details which is enclosed in paper book pages 124 to 143 which includes details of assets purchased bill-wise and treatment in its books of account. On perusal of details filed by the assessee, we 14 Sourashtra Ferrous P Ltd find that the assessee has rightly classified assets purchased and put to use for more than 180 days and assets purchased and put to use for less than 180 days. This is further supported by bills. The AO, without appreciating facts, only on the basis of input credits for excise duty claimed in the month of March has come to the conclusion that all assets are purchased and put to use for less than 180 days.. The assessee has filed depreciation chart as per which it has capitalised plant & machinery and other asses of Rs.13,12,87,037 before 30th September, 2007. There is no evidence to the contrary in the AOs possession that plant & machinery was put to use after 30th September, 2007 except input credit availed in March, 2008 which is not relevant as per section 32 is concerned. The CIT(A), after considering relevant details has rightly deleted addition made by the AO and hence, we are inclined to uphold the findings of CIT(A) and reject ground raised by the revenue.
13. The next issue that came up for our consideration is disallowance of interest amounting to Rs.1,80,13,928 u/s 36(1)(iii) and 37(1) of the Act. The AO disallowed interest paid on term loan on the ground that the assessee has borrowed term loan for acquisition of capital asset which is in the nature of capital expenditure. The AO further observed that except interest on term loan all interest expenditure are incurred for business as working capital requirements. The self admission of the assessee proves that term loan on which interest is paid has not been utilised towards working capital requirements. As such interest paid on term loan is not a revenue expense, but 15 Sourashtra Ferrous P Ltd in the nature of capital expenditure. Accordingly, interest of Rs.1,80,13,928 has been disallowed. The CIT(A), after considering the explanation of the assessee and also relying upon the provisions of section 36(1)(iii) deleted addition made by the AO towards disallowance of interest by holding that the issue is whether interest payment is in respect of capital asset or not is irrelevant insofar as section 36(1)(iii) is concerned. The assessee is not claiming deduction on its borrowed funds, but on the corresponding interest paid on which has commenced production in the financial year 2006-07. It is obvious that the AO has confused himself on this issue and not understood the law in proper perspective.
14. The Ld.DR submitted that the Ld.CIT(A) erred in deleting addition made by the AO towards interest paid on term loan without appreciating the fact that the assessee has borrowed term loan for the purpose of acquisition of capital assets, therefore, the AO was right in disallowing interest u/s 36(1)(iii) and 37(1) of the Act. The Ld. AR, on the other hand, strongly supported the order of the Ld.CIT(A).
15. We have heard both the parties, perused the materials available on record and gone through the orders of authorities below. It is an admitted fact that the assessee has borrowed term loan from banks for the purpose of acquiring capital asset and such term loan has been borrowed in the previous year relevant to AY 2007-08. The AO has disallowed interest paid on term loan on the ground that it is in the nature of capital expenditure but not a revenue expenditure used for 16 Sourashtra Ferrous P Ltd the purpose of business. We do not find any merit in the findings of the AO for the reason that as per the provisions of section 36(1)(iii) interest paid on loans borrowed for the purpose of business of the assessee is deductible irrespective of the fact that whether it is borrowed for the purpose of working capital or for acquisition of capital assets. Whether the assessee has taken term loan for acquisition of capital asset or working capital is irrelevant as long as such interest is paid after commencement of production. In this case, admittedly, the production activity of the assessee has been commenced in the previous year relevant to AY 2007-08. This fact has not been disputed by the revenue. Therefore, we are of the view that there is no reason for the AO to disallow interest paid on term loan by holding that it is in the nature of capital expenditure. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO. We do not find any error in the order of the CIT(A), hence, reject ground raised by the revenue.
16. The next issue that came up for our consideration is disallowance of interest paid on cash credit accounting to Rs.83,41,171 u/s 43B(e) of the Act. The AO disallowed interest on the ground that from the copy of bank statement filed in support of proof of payment of interest it was seen that the bank has debited interest to the CC account on regular intervals and thereby increased the debit balance in the account, as a result, the interest component on the loan has been converted into further loan or enhanced utilisation of cash credit limit. By debiting interest amount, the loan liability towards bank only increases by way 17 Sourashtra Ferrous P Ltd of debit balance in the bank account which is clear and evident from the bank statement. This amounts to conversion of interest liability into a further loan. The assessee has not complied with the provisions of section 43B(e) and Explanation 3D thereto. Such interest is also not actually paid before filing return of income u/s 139(1). As such interest claimed in the P&L Account representing interest expenses towards cash credit account is inadmissible.
17. The Ld.DR submitted that the CIT(A) deleted addition made by the AO towards interest paid on CC account without appreciating the fact that the assessee has converted interest expenses into further loan without there being any actual payment of interest to bank which squarely covered within the provisions of Explanation 3D to section 43B(e) of the Act.
18. The Ld.AR for the assessee, on the other hand, submitted that the CIT(A) was rightly deleted addition as the provisions of section 43B(e) Explanation 3D has no application to interest paid to bank on account of interest accrued on CC account as it does not amount to conversion of interest into loan account.
19. Having heard both the sides and considered material available on record, we find that the AO has made additions towards interest on CC account without appreciating the facts in right perspective whether such interest falls within the ambit of setion 43B(e) Explanation 3D of the Act. The provisions of section 43B(e) provides for disallowance of interest on loans or advances if such interest is not paid on or before the due date of furnishing return of income. Further Explantion 3D explains the position of law provided in section 43B(e) 18 Sourashtra Ferrous P Ltd so as to clarify the position of interest actually paid or interest converted into loan or advances. In this case, admittedly, the assessee has paid interest on cash credit account which has been debited by the bank on regular intervals. We further notice that such interest has been paid by the assessee on or before due date of furnishing return u/s 139(1) of the Act. Therefore, we are of the considered view that the AO was completely erred in disallowing interest on CC account u/s 43B(e) of the Act. The CIT(A), after considering relevant submissions has rightly deleted addition made by the AO. We do not see any error in the order of the CIT(A); hence, we are inclined to uphold the order of the CIT(A) and reject ground raised by the revenue.
20. The next issue that came up for our consideration is addition made by the AO towards excise duty (PLA) of Rs.42,30,010 shown as loans and advances. The AO made addition towards excise duty being personal ledger account balance shown in the loans and advances on the ground that the assessee has failed to include excise duty for valuation of closing stock. The AO further observed that the assessee has paid excise duty on the raw materials and that part of raw-material which has not utilised is appearing on the closing stock. Such closing stock of raw material has to be adjusted with the unutilised Modvat credit. However, the assessee has failed to make any adjustment towards unutilised Modvat credit while valuing closing stock, therefore, made addition of Rs.42,30,010. The CIT(A) deleted addition made by the AO by holding that the AO's conclusions are without any basis that excise duty has not 19 Sourashtra Ferrous P Ltd been included in the value of closing stock. The assessee has made advance payment of excise duty which has been kept in PLA account after all adjustments towards input credit and excise duty payable. The AO, without appreciating the fact only on suspicion and surmises made addition by invoking provisions of section 145. The assessee has furnished a certificate from auditors wherein they have clarified that the impugned sum has been included in the valuation of closing stock. The AO has ignored all evidences filed by the assessee to make addition towards PLA balance. There is nothing on record to show that excise duty has not been included in the value of closing stock, therefore, he deleted the addition made by the AO.
21. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. Admittedly, the assessee has shown Rs.42,30,010 in the asset side of the balance-sheet under the head 'Personal Ledger Account'. The AO made addition towards PLA balance on the ground that the assessee has not made suitable adjustments towards unutilised Modvat credit for valuation of closing stock. We do not find any merit in the findings of the AO for the reason that there is nothing on record to indicate that the assessee has not considered unutilised input tax credit for valuation of closing stock. The assessee has furnished a certificate from the auditors to the effect that closing stock has been valued including excise duty. We further notice that amount shown in PLA account is nothing but advance payment of excise duty which has been kept in the loans and advances in the 20 Sourashtra Ferrous P Ltd asset side of the balance-sheet. The AO without appreciating the facts made addition to PLA balance on suspicion and surmise without bringing any material on record to show that this represents unutilised Modvat credit which has not been considered for valuation of closing stock. The CIT(A), after considering submissions of the assessee has rightly deleted addition made by the AO. We do not find any error in the order of the CIT(A); hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by the revenue.
22. The next issue that came up for our consideration is addition made by the AO towards excise duty credits in the P&L Account for Rs.12,91,55,890 within the meaning of section 145(3) of the Act. The AO disallowed excise duty collected on the ground that as per the amended provisions of section 145A, all taxes and duties collected are required to be included in sales and shall be routed through P&L Account. The assessee has not shown excise duty collected of Rs.12,91,55,890 though such treatment is necessarily to be given as per the provisions of section 145(1) of the Act. The AO, further observed that the assessee, by way of disclosure in the notes to accounts, have already recognised excise duty collected as its income and only for the purpose of tax payment it sought to differ. It is clearly not acceptable in mercantile system of accounting. Therefore, the AO made addition by invoking provisions of section 145(3) of the Act.
23. The Ld.CIT(A) deleted addition made by the AO by holding that this 21 Sourashtra Ferrous P Ltd amount relates to goods sold, further strengthens the case that it does not relate to closing stock. An item sold can by no stretch of imagination be part of the closing stock inventory. The entire excise duty collected from the customers has been paid to excise department and there is no adverse comment in tax audit report regarding 43B. It is a fact that assessee has claimed its unit to be exempt entity and if that issue is decided in its favour and refund received, then it will become income u/s 41(1) of the IT Act. It appears that the AO got carried away by the notes to accounts to hold that income has become receivable. In this case, the assessee, instead of debiting the excise duty paid to P&L Account and crediting excise duty collected to P&L Account has routed through balance- sheet Account; however, for the purpose of disclosure in the financial statements shown excise duty collected as a separate item by reducing from the gross sales. This presentation is in accordance with the provisions of section 145(1) of the I.T. Act, 1961 and the AO was incorrect in adding excise duty collected as income of the assessee.
24. The Ld.DR submitted that the Ld.CIT(A) erred in deleting addition made on account of excise credits in the balance-sheet within the meaning of section 145(3) of the Act without appreciating the fact that the assessee has not routed excise duty through its P&L Account though such treatment is mandatory in nature as per the provisions of section 145(1) of the Act. The AO has brought out clear facts that it is in the nature of income accrued to the assessee. However, the assessee has failed to recognised excise duty collected as income 22 Sourashtra Ferrous P Ltd and hence, the AO was right in making addition and his order should be upheld.
25. The Ld.AR for the assessee, on the other hand, strongly supported the order of the CIT(A) and submitted that the Ld.AO failed to appreciate the presentation of accounts to make addition to excise duty collected on the ground that excise duty is not routed through P&L Account and such treatment is in violation of the provision of section 145(1) of the Act. Even going by the method of the AO, if the sales figures were to be increased by the amount of excise duty, on the same parity of reasoning, the amount of excise duty paid by the assessee is required to be debited to the P&L Account. Secondly, the said excise duty is paid before the year and, therefore, the same cannot be disallowed. The CIT(A), after considering relevant facts has righty deleted the addition and his order should be upheld.
26. We have heard both the parties, perused the materials available on record and gone through the orders of authorities below. Admittedly, the assessee has shown excise duty collected on sales net of excise duty in its financial statements. The assessee has followed a method wherein the excise duty collected and paid has been routed through balance-sheet; however, shown excise duty collected as a separate item in P&L Account. The AO misconstrued the facts to make addition only on the basis of notes to accounts given in the financial statements wherein the assessee has stated that the company being qualified as an exemption unit made an application under the Central Excise Notification No.39/2001 and on receipt of the exemption certificate, the 23 Sourashtra Ferrous P Ltd company will be eligible for refund of excise duty paid and the same will be accounted for as and When received. The AO, on the basis of notes to accounts came to the conclusion that excise duty collected is in the nature of receipt accrued to the assessee, but the assessee has failed to recognise it as income. We do not find any merit in the findings of the AO for the reason that the assessee has collected excise duty on sales and paid the same to the excise department which is evident from the fact that the assessee has routed its excise duty collected on sales and payment of excise duty through balance-sheet. The assessee, for the purpose of disclosure of accounts in accordance with provisions of section 145(1) shown sales net of excise duty in the P&L Account. The AO misconstrued the facts to make addition towards excise duty collected. Therefore, we are of the considered view that the CIT(A) was right in deleting addition made towards excise duty. We do not find any error in the order of the CIT(A). Hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by the revenue.
27. The next issue that came up for our consideration is addition made on account of disallowance of expenses amounting to Rs.33,00,944 within the meaning of section 40(a)(ia) of the Act. The AO made addition towards transportation charges paid to M/s Delhi Assam Roadways Corporation Ltd on the ground that the assessee has failed to deduct tax at source u/s 194C of the Act. The AO further observed that in response to specific query, the assessee 24 Sourashtra Ferrous P Ltd has submitted a certificate u/s 197 of the Act, submitted by the party for non deduction of tax at source. On going through the copy of the said certificate issued on 24-03-2008, it was observed that the said certificate was valid for the period 29-02-2008 to 31-03-2008. The copy of the said certificate was received by the assessee through an email on 17-12-2010. The above date clearly shows that the assessee had obtained the certificate from the party only when the question was raised regarding TDS and allowability of expenses u/s 40(a)(ia) of the Act. As per section 194C, the assessee is required to make TDS on transportation charges, but failed to deduct TDS, therefore, the AO opined that expenses are inadmissible u/s 40(a)(ia) of the Act. It is the contention of the assessee that it has paid gross amount of Rs.6,23,99,417 to M/s Delhi Assam Roadways Corporation Ltd and deducted TDS of Rs.12,24,764 for the period from 01-04-2007 to 20-02-2008. The payee has furnished certificate issued u/s 197 of the Act, for non deduction of tax at source for the period from 29-02- 2008 to 31-03-2008, therefore, it has not deducted TDS on payment made for the above period of Rs. 33,00,944. Therefore, the AO was incorrect in disallowing expenses u/s 40(a)(ia), even though such payment is not liable for TDS u/s 194C in view of the certificate furnished by the deductee.
28. Having heard both the sides and considered material on record, we find that the CIT(A) has recorded a categorical finding to the effect that the impugned payment of Rs.33,00,944 is covered by the certificate furnished by the assessee u/s 197 of the Act, for non deduction of tax at source u/s 194C. 25
Sourashtra Ferrous P Ltd The AO, without appreciating the facts, simply disallowed transportation charges u/s 40(a)(ia) even though the assessee has furnished valid certificate issued u/s 197 of the Act. We do not find any error in the findings of the CIT(A); hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by the revenue.
29. The next issue that came up for our consideration is addition made by the AO on account of reduction in production of pig iron amounting to Rs.21,65,77,838 by rejecting books of account u/s 145 of the Act. The AO has dealt with the issue of addition on account of reduction in production assessee at paras 10 to 10.3 on pages 12 to 15 of the assessment order. The AO compared the consumption of raw materials with the production of finished goods for AY 2007-08 and found that the production has been reduced by 7.75% which in quantity worked out to 11,788 metric tonnes which was valued at Rs.21,65,77,838. The AO observed that there is a reduction in production of finished goods and the assessee has not been able to explain reduction in production with necessary evidences. The AO further observed that though the assessee sought to explain the difference in production of finished products attributable to quality of raw materials utilised for production of pig iron and generation of by-product, there is no basis in the generation of by-products and production of pig iron. As such generation of by-product has appeared for the first time in the books of account of the assessee. The AO further observed that the alleged moisture and generation of fines has been accounted for only in the 26 Sourashtra Ferrous P Ltd current year and neither in the past or future records of the assessee shows such items, hence the same is without any basis and documentary evidence. Moreover, the assessee being a manufacturing industry is required to disclose the consumption ratios with regard to the yield, wastage, by-products, etc in the tax audit report as well as in the return. The tax audit report, however, does not show the yield of finished product percentage of it, shortage / excess, if any, and the relevant columns are kept blank. This itself shows that there is no such data or record maintained as on the date of tax audit. It is only when specific queries were raised, the assessee, with a view to avoid the crucial question has filed the cooked up details which are not backed by any genuine evidences. Though the assessee claims fines sold constitute 14.60% of total raw-material purchased and moisture and ash reduction of 3%, it is without any evidence and documentary support. The assessee stated to have sold 22,675 m.t. of fines at a sale value of 8.73 crores in 2007-08 which is included in the sales in P&L Account. This works out to an average sale price of Rs.3853 per m.t. whereas the purchase of coal from the sister concern works out to Rs.10,192 to Rs.14,038 per m.t.. Though assessee claims to have raised a debit note to the supplier of raw materials towards moisture and ash content of quantity of 5742.27 m.t. for an amount of Rs.6.48 crores, the said debit note is not supported by any documentary evidence. Therefore, the AO opined that the assessee was not able to explain difference in production of pig iron when compared to previous financial year and hence rejected books of account u/s 27 Sourashtra Ferrous P Ltd 145(3) and estimated production loss at 11,738 M.T. and worked out total value at Rs.21,65,77,838 and treated it as unaccounted sales for the year.
30. It is the contention of the assessee that the AO was erred in estimating production loss on the basis of production percentage of previous financial year without appreciating the fact that production cannot be at equal level at all times and it depends upon various parameters including quality of raw materials used for production of pig iron. The assessee further submitted that it has purchased coal which is having a FV content of 63% when compared to average FV content of 66% in 2006-07 which is the main reason for reduction in production of pig iron. The assessee further submitted that during the year under consideration it is generated 22,675 m.t. of fines and sold for a value of Rs.8.73 crores which is included in sales in the P&L Account. The assessee further submitted that due to moisture and ash content in LAM coke, there is a reduction of 5,742 m.t. which is included in consumption of raw materials. If you take into account sale of fines and moisture and ash content, then net consumption of raw material work out to 42.39% which is on par with previous year's percentage of 42.23% and hence, there is no change in production percentage of finished goods in terms of quantity. The AO, without appreciating the facts in right perspective and also without bringing any cogent material on record in his possession that the assessee has sold goods outside the books of account or there is excess stock found in the possession of the assessee, made addition only on the basis of suspicion and surmises on the basis 28 Sourashtra Ferrous P Ltd of comparison of production figures of previous financial years.
31. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The Ld.CIT(A) has dealt with this issue at paras 10 to 10.3.1.11 on pages 16 to 27 of his order, wherein he has extracted written submissions of the assessee as well as the point-wise explanation of the assessee to the observation of the AO in the assessment order. The Ld.CIT(A) also extracted in the form of a table remand report of the AO as well as counter comments of the assessee in respect of the remand reports dated 04-07-2010 and 08-08-2010. The Ld.CIT(A) at para 10.3.1. and 10.3.2 held that the AO had not given adequate opportunity and, therefore, additional evidence filed in the course of appellate proceedings and furnished to the AO is to be admitted as evidences. The CIT(A) has elaborately discussed the issue on merits and held that the assessee has made out a case of explaining iron ore fines generated at the time of handling iron ores in segments. It is a kind of by-product of iron ore and not a separate raw material which has been sold. The CIT(A) further observed that if by-product of iron ore fines sold by assessee and the reduction in quantity of coke due to moisture and ash content is considered for the purpose of calculation of consumption of raw materials, the percentage of production of finished goods achieved by the assessee is in comparison with previous year's percentage of production of finished goods and, therefore, the AO was incorrect in estimating the production loss on the basis of previous year's figures. The relevant portion of the CIT(A)'s order is 29 Sourashtra Ferrous P Ltd extracted below:-
10.3.8 To sum up, "fines" are generated at the time of handling the iron ore in stockyards and at the time of operating in handling plant and is a waste or by product of raw material. The iron ore fines of 22675.970 MT so generated were sold through M/s.Canara Overseas Ltd a company an exporters of such fines. The transportation of fines was arranged by M/s.Canara Overseas Ltd on which the appellant had no control. About 84% exports were made to China and the consideration has been credited to the Profit & Loss Account. The documentary evidence including sale bills, export docum.ants, auditor's certificate are placed on record and no discrepancy or adverse comments has been noticed. As such, the appellant's stand that said difference of 7.57% is on account of inclusion of iron fines is acceptable. The revised yield is worked out as below:-
Particulars 2007-08 2006-07
Raw materials Quantity (MT) Quantity (MT)
IRON ORE 92389.437 56678.440
COKE 44126.989 28027.588
DOLOMITE 4630.073 3529.000
QUARTZITE 1157.467 1093.464
LIMESTONE 6113.781 3637.159
MANGANESE ORE 452.791 361.509
HYDRATED LIME POWDER 325.791 -
PET COKE 5859.210 -
155055.393 93327.160
Less : Sale of Fines 22675.970 -
Less : Moisture & Ash -
deduction
Net Consumption 126637.176 93327.160
As per assessee
Finished Goods 2007-08 2006-07
Quantity (MT) Quantity (MT)
Cast Iron 34,037
30
Sourashtra Ferrous P Ltd
Pig Iron Articles 39715.975 27410.323
Skull 3293.885 3636.952
Slag 10678.278 8330.413
53688.138 39411.725
Yield (%) 42.39 42.23
10.3.9 Thus, even if the second issue of "moisture" in coal is not
taken into account then also the yield is comparable.
10.3.10 However, the issue of moisture has also
addressed. It is fact that moisture content is a factor while purchasing the coal from sister concern or any other concern. It is an integral part of coal. The moisture and ash content in LAM Coke depends upon the quality of it and will never he uniform. The appellant had filed a copy of extract taken from Website in respect of the details of a public company M/s.Vedanta (Sesa Goa Group) which indicates that moisture and ash and volatile content exceeds over 20%. However, the same will never be uniform and will vary on the quality, the process of which it has to be treated including manual pinching of coke employed by the appellant to cool it down and treated it in the range of around 5000 degree Celsius. In the above background, the moisture content taken at 3.70% by the appellant and mentioned by the Assessing Officer as a credit in calculation of yield by the appellant is very reasonable."
32. The AO has made addition towards estimated production loss on the basis of comparison of production of finished goods percentage of financial years 2006-07 to 2007-08 and found 7.75% reduction in production of pig iron. The AO has rejected explanations offered by the assessee to justify reduction in production loss which is attributable to quality of raw material being LAM coke used for production of pig iron which is having lesser content of FV when compared to previous year coke used for production of pig iron. The assessee 31 Sourashtra Ferrous P Ltd also explained that it has generated 22675 m.t. of iron ore fines as a by-product while handling coke in stock yards and production process which has been sold for a value of Rs.8.73 crores. The assessee also explained that due to less moisture and ash contents, there is a reduction in quantity of 5742 m.t. in consumption of raw materials, and if both sale of fines quantity of 22675 m.t.
and moisture and ash content of 5742 m.t. are considered, then the production percentage of pig iron works out to 42.39% which at par with 42.23% achieved in the previous financial year. The assessee has furnished relevant supporting documents for generation of by-product called iron ore fines and sale by furnishing various evidences. The assessee has exported 84% of by-product to China which has been handled by M/s Canara Overseas Ltd, a public limited company which is evident from the fact that the said company has filed letter deated 07-01-2008 which appointed its own transporters by the name, M/s Ashapura Cargo Carriers. The fact that an amount of Rs.8.73 crores has been credited in the P&L Account on account of export of by-product is not disputed by the lower authorities. The assessee has also filed auditor's certificate to support its case.
33. Coming to the issue of moisture content in coal used for production of pig iron moisture and ash content is an integral part of coal which depends upon quality of LAM coke. The moisture and ash content will never be uniform. The assessee had filed a copy of extract taken from website in respect of details of public company, M/s Vedanta which indicates that moisture and ash and 32 Sourashtra Ferrous P Ltd volatile content exceeds over 20%. In the above background, the moisture content taken by the assessee at 3.7% and mentioned by the assessee as a credit in calculation of yield is very reasonable.
34. The AO has made addition on estimated production loss without there being any cogent materials in his possession that the assessee has sold finished goods outside the books of account or the assessee is carrying stock in excess of stock shown in its books of account. The AO has not disputed books of account produced by the assessee which were subjected to audit. The AO has also overlooked the basic fact that the finished products of the assessee are excisable and no finished goods are removed without payment of excise duty. There is nothing on record to suggest that excise authorities have contemplated any action on so-called suppressed production and there is not an iota of evidence to suggest that the assessee has sold produce of finished goods, outside books of account. In the absence of any incorrectness as to books of account and stock registers, merely on the basis of comparison of production percentage of finished goods addition cannot be made for production loss, despite, the assessee explains the reasons for such production and also filed reconciliation explaining the shortfall. Therefore, we are of the view that the AO was incorrect in making addition towards estimated production loss. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO. We do not find any error or infirmity in the order of the CIT(A) and hence, we are inclined to uphold the order of the CIT(A) and dismiss the ground raised by 33 Sourashtra Ferrous P Ltd the revenue.
35. The next issue that came up for our consideration from assessee's appeal as well as revenue's appeal is disallowance of repairs and maintenance to plant and machinery being capital in nature. The AO has disallowed repairs and maintenance to plant and machinery for Rs.2,24,08,100 on the ground that expenditure is in the nature of capital expenditure which gives enduring benefit to the assessee. The AO further observed that the assessee has repaired blast furnace which was installed in the previous financial year with a capital cost of Rs.5,38,32,142. The function of the same is directly related to yield of production and its failure which compelled the assessee to re-align the same with durable yield efficient and energy efficient with fire bricks. The repair cost with reference to the original cost of the machines is about 40% and that itself shows that the asset has been totally revamped for better production, increase yield, etc. The blast furnace is the core component of the machinery used in the unit and the volume of repair which enhanced the life of the machinery and its utility is clearly a capital expenditure. The assessee derived enduring benefit for the rest of the life of the machinery by undertaking this repair which is evident from the fact that the asset installed was new one and the repairs carried out by the assessee is only an improvement of the asset, therefore, total expenditure incurred under the head 'repairs and maintenance' to plant & machinery is in the nature of capital expenditure cannot be allowed as deduction u/s 30(1) or 37(1) of the Income-tax Act, 1961. It is the contention of the 34 Sourashtra Ferrous P Ltd assessee that the company has incurred repairs and maintenance for repairing blast furnace which was damaged due to pressure reactor which operates at a temperature of above 2300 degree centigrade. The blast furnace consists of steel shell which is lined with refractory bricks internally. The shell is continuously cooled by water spray evaporation cooling system from outside. A refractory was installed in the year 2005. Since the size of the furnace of Chinese design is put up for the first time in the country and the same was not functioning properly resulting in yield going down, the assessee has carried out necessary repairs to keep the blast furnace intact to achieve better production. Therefore, it cannot be considered as reconstruction of new asset or brought any new asset to hold the expenditure incurred as capital expenditure.
36. The Ld.AR referring to paper book submitted that expenses of repair consists of fire bricks which is major component of repair expenditure which has been purchased from Saswat International Ltd and cost of each bricks is in the range of Rs.113 to 209 which clearly shows that it is a part of repair of existing blast furnace, but not bringing into existence of a new asset which gives enduring benefit to the assessee. The Ld.AR also furnished copies of pictures of the machine to argue that it is an integrated production process in which blast furnace is one of the parts of the production system which required repairs as it was not giving intended results, therefore, the assessee has carried out necessary repairs. The AO never disputed the fact that the assessee has not created any new asset. The AO made disallowance only on the ground that total cost 35 Sourashtra Ferrous P Ltd incurred for repair and maintenance worked out to 40% of existing machine. The AR further submitted that cost incurred for repairs and maintenance is not a relevant factor for deciding whether it is capital or revenue in nature but what is relevant is whether the assessee has restored already existing plant and machinery or created new plant & machinery which gives enduring benefit. The assessee has repaired the existing plant and machinery, therefore, the AO was incorrect in disallowing expenditure as capital in nature. In support of his arguments relied upon plethora of judgements including the decision of Hon'ble Bombay High Court in the case of New Sharrock Spinning & Mfg Co Ltd vs CIT 30 ITR 338 (Bom). The assessee also relied upon the decision of Hon'ble Supreme Court in the case of Ballimal Naval Kishore & Anr vs CIT 224 ITR 414.
37. On the other hand, the Ld.DR submitted that the Ld.CIT(A) was right in upholding addition made by the AO towards disallowance of repairs and maintenance to plant & machinery as the assessee has carried out renovation of blast furnace which gives enduring benefit which is evident from the fact that cost incurred for repairs and maintenance works out to 40% of the cost of the existing machinery. The Ld.DR further submitted that as admitted by the assessee, the production capacity of the machine had decreased due to bad / inferior quality of the furnace which the assessee has replaced with better quality which resulted into enhanced production capacity which gave enduring benefit till life of the asset. Therefore, the AO was right in disallowing repairs 36 Sourashtra Ferrous P Ltd to plant & machinery being capital in nature and his order should be upheld. The Ld.DR further submitted that in respect of partial relief allowed by the CIT(A) for Rs.15,86,633, the CIT(A) without appreciating the fact that expenditure is in the nature of capital expenditure, deleted addition made by the AO without assigning any reasons. The AO has brought out clear facts to the effect that total expenditure incurred by the assessee under the head repairs and maintenance is only capital expenditure and hence, it cannot be allowed as deduction u/s 30(1) or u/s 37(1) of the Act.
38. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The AO disallowed repairs and maintenance to plant & machinery on the ground that expenditure incurred is in the nature of capital expenditure which gives enduring benefit till the life of the asset. The AO has given various reasons for disallowing repairs and maintenance expenditure. According to him total expenditure incurred for repairs and maintenance works out to more than 40% of the existing cost of the asset and the assessee derived enduring benefit for the rest of the life of the machinery by undertaking the repair. The AO further observed that functioning of the blast furnace is directly related to yield of production and failure of its lining which compelled the assessee to realign the same with durable efficacy and energy saving lining of fire bricks which is nothing but capital expenditure. It is the contention of the assessee that expenditure is in the nature of current repairs which does not give rise to creation of any new asset. The assessee 37 Sourashtra Ferrous P Ltd further contended that it has repaired blast furnace which was not given expected result due to inferior quality of blast furnace which was installed for the first time in 2005 and hence, it has repaired inferior quality blast furnace to achieve better yield and energy efficient which cannot be construed as creation of new asset which gave enduring benefit to the assessee. The assessee further contended that the AO was completely went wrong with his reasoning to disallow expenditure by holding that total expenditure incurred for repairs and maintenance works out to more than 40% of the existing cost of the asset without appreciating the fact that cost incurred for repairs and maintenance is not relevant factor to decide whether a particular expenditure is capital or revenue in nature. What is required to be seen is whether the assessee has repaired existing plant and machinery or created new plant & machinery which gives enduring benefit to the assessee.
39. The AO has disallowed repairs to plant & machinery only on the ground that expenditure incurred for repairs and maintenance works out to more than 40% of total cost of the asset. Other than this, the AO has not given any reason to come to the conclusion that expenditure incurred is in the nature of capital expenditure. On the other hand, the assessee has filed various details to prove that it is merely a repair of blast furnace to retain its existing production capacity and energy efficiency. The assessee has filed pictures of the plant and machinery. According to the assessee, the blast furnace is an integrated production process, in which lining is one of the components. Due to high 38 Sourashtra Ferrous P Ltd pressure, the lining has been damaged because of which it was not yielding expected production. Therefore, the assesse has leveraged existing blast furnace with new fire bricks. We find that the assessee has furnished a paper book explaining the materials used for repairs and maintenance of blast furnace. The assessee has purchased fire bricks from Sashwat International Ltd and the cost of each fire bricks worked out less than Rs.200. The assessee also furnished various materials used for repairing. On perusal of the details filed by the assessee, the materials used for repairs and maintenance of blast furnace are in the nature of minute components which cannot be considered as creation of new blast furnace which gives enduring benefit to the assessee. We further notice that the AO completely went wrong to conclude that expenditure is in the nature of capital expenditure only on the basis of cost incurred for repairs and maintenance which is not at all relevant to decide whether the particular expenditure is capital or revenue in nature. The quantum of repair expenditure incurred for the blast furnace cannot be a guiding or decisive factor to determine whether the expenditure is capital or revenue in nature. We further notice that by repairing a part of refractory lining of the blast furnace, no additional advantage is procured by the assessee company because the repairing of the refractory lining has not enhanced capacity of the blast furnace. By repairing the blast furnace, the assessee company has regained its production capacity which has reduced substantially due to defects in the refractory lining. Thus, the assessee company has not derived any enduring benefit from the repair of 39 Sourashtra Ferrous P Ltd the refractory lining, more so, when the life of the refractory lining cannot be determined as it has to withstand the heat above 2300 degree centigrade. Therefore, we are of the view that repair and maintenance to plant & machinery is revenue in nature.
40. The assessee has relied upon various case laws. The Hon'ble Bombay High Court in the case of New Shorrock Spinning & Manufacturing Co. Ltd. v. CIT (30 ITR 338) wherein their Lordships observed as under:
"In our opinion, therefore, the expression "current repairs"
used in section 10(2)(v) means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration, which is only for the purpose of preserving or maintaining an already existing asset, which does not bring a new asset into existence or does not give to the assessee a new or different advantage, and they must be repairs which are attended to as and when the need for them arises."
"We should also like to make it clear that the question as to when a building, machinery, plant or furniture requires repairs and when the need arises must be decided by not any academic or theoretical test but must be decided by the test of commercial expediency. It is after all f o r a b u s i n e s s m a n p r i m a r i l y t o d e c i d e w h e n h i s b u i l d i n g , machinery, plant or furniture requires repairs. It is by that test alone that the question must be decided as to whether the repairs are current repairs or repairs which have fallen into arrears or have been accumulated over a period of time and then expenditure has been incurred in carrying out those repairs."
The aforesaid decision of the Bombay High Court has been approved and applied by the Hon'ble Supreme Court in the case of Ballimal Naval Kishore & Anr. v. CIT (224 ITR 414) wherein their Lordships observed as under:
"In our opinion the test involved by Chagla C. J., in New 40 Sourashtra Ferrous P Ltd Shorrock Spinning and Manufacturing Co. Ltd.'s case [1956] 30 ITR 338 (Born) is the most appropriate one having regard to the context in which the said expression occurs. It has also been followed by a majority of the High Courts in India. We respectfully accept and adopt the test."
Dismissing the appeal of the Revenue, the Bombay High Court held as under:
"On a plain reading of the above section it is clear that in order to entitle an assessee to claim deduction under section 3 I of the Act, t h e a m o u n t m u s t b e p a i d o n a c c o u n t o f " c u r r e n t r e p a i r s " . T h e expression "current repairs" has not been defined in the Act. It has, t h e r e f o r e , t o b e t a k e n i n i t s p o p u l a r o r c o m m e r c i a l s e n s e . I n commercial parlance, it means repairs which are undertaken in the normal course of user for the purpose of preservation, maintenance or proper utilisation. It does not mean "petty repairs" or repairs necessitated by wear and tear during the particular year. Payments o n a c c o u n t o f " c u r r e n t r e p a i r s " m u s t b e u n d e r s t o o d i n contradistinction to payments for "additions" or "improvement". As observed by Chagla C. J. in New Shorrock Spg. and Mfg. Co. Ltd. v . C I T [ 1 9 5 6] 3 0 h R 3 3 8 ( B o r n ) , t h e s i m p l e t e s t t h a t m u s t b e constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure should not be to bring a new asset into existence nor to obtain a new or different advantage. The quantum of expenditure."
41. In the case of CIT v. Jagatjit Industries Ltd. (241 ITR 556). the Delhi High Court held as under:
"Whether on given set of facts, replacement of certain items, forming an integral or important part of the machinery would be revenue expenditure or capital expenditure is primarily a question of fact, to be decided in the context of the business carried on by an assessee. Merely, because the benefit accruing by the expenditure is of enduring nature, is by itself not a conclusive test to hold it as a capital expenditure (see Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC)). Normally initial investment on machines and their parts will be in the nature of capital 41 Sourashtra Ferrous P Ltd expenditure but replacement of parts of an existing machinery in the course of their working will he a revenue expenditure."
42. In the case of CIT v. Malerkotla Steels And Alloys P. Ltd. (336 ITR 49 the Punjab & Haryana High Court held that the assessee had effected repairs to the damaged furnace in the course of the regular business and no new assets were acquired. The effect of the repairs carried out by the assessee" has been only to restore the machiner y to its original condition. Therefore, it was current repairs.
43. In the case of Metro Ispat Pvt Ltd vs CIT in ITA No.4069/Mum/2008 dated 17th December, 2009, the ITAT, Mumbai Bench held that the expenditure incurred on replacement of chilled rolls / fire bricks / forged rolls cannot be treated as capital expenditure though it may not fall within the description of 'Current repairs' but it is allowable as deduction u/s 37 of the Act.
44. In this view of the matter and considering the ratios of the case laws discussed above, we are of the considered view that the assessee has not derived any enduring benefit by repairing damaged refractory lines of blast furnace. The assessee only regained its lost production capacity by repairing refractory lines. Therefore, the lower authorities were completely erred in treating the repairs and maintenance to plant and machinery being capital in nature. Hence, we direct the AO to delete addition made towards repairs and maintenance to plant & machinery.
45. In the result, appeal filed by the assessee in ITA No.8806/Mum/2011 is 42 Sourashtra Ferrous P Ltd allowed and the appeal filed by the revenue in ITA No.549/Mum/2012 is dismissed.
Order pronounced in the open court on 08th December, 2017.
Sd/- sd/-
(Joginder Singh) (G Manjunatha)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dt : 08th December, 2017
Pk/-
Copy to :
1. Appellant
2. Respondent
3. CIT(A)
4. CIT
5. DR
/True copy/ By order
Asstt. Registrar, ITAT, Mumbai