2009 (6) TMI 644 - AT - Income Tax

Addition - Balancing charge - Accrual or receipt basis - appellant s alternate claim that insurance claims received against the damaged windmills should be assessed under s. 145(1A) instead of under s. 41 (2) is not acceptable for the reason that there is a specific provision under s. 41 (2) for charging of deemed income on account of balancing charge created as a result of receipt of excess scrap value for the damaged assets over and above its WDV - in asst. yr. 1993-94 same being installed after commissioning in September 50 per cent depreciation was granted and balance 50 per cent was granted in asst. yr. 1994-95 under s. 32 only and not under s. 32(1)(i) - Therefore in this case windmill owned by the assessee and used for the purpose of business two conditions i.e. (a) and (c) are fulfilled but the second condition namely (b) in respect of which depreciable is claimed under cl. (i) of sub-s. (1) of s. 32 is not fulfilled as the assessee has not claimed and was not granted depreciation under s. 32(1)(i) of the Act by virtue of this the provisions of s. 41(2) just are not attracted - Decided in favor of the assessee Disallowance of repairs as capital in nature - To support the claim that the building used for office premises necessitating repairs and maintenance are of revenue in nature while concluding it was strongly argued by the learned Authorised Representative that no new assets come into existence. no benefits of enduring nature and the nature and description of the expenses themselves go to prove that they are of revenue in nature - Decided in favor of the assessee

Summary

Issues Involved:
1. Reopening of assessment under sections 147 and 148 of the IT Act.
2. Taxation of insurance claim and salvage value under section 41(2) of the IT Act.
3. Disallowance of repairs as capital expenditure.
4. Disallowance of donation to Shri Aurbindo Service Trust.
5. Disallowance of vehicle registration expenses as capital expenditure.
6. Charging of interest under sections 234B, 234C, and 234D of the IT Act.

Detailed Analysis:

1. Reopening of Assessment under Sections 147 and 148:
The first issue concerns the reopening of the assessment by issuing a notice under sections 147 and 148 of the IT Act. The learned counsel for the assessee did not press this issue, and accordingly, it was dismissed as not pressed.

2. Taxation of Insurance Claim and Salvage Value under Section 41(2):
The primary issue revolves around the taxation of the insurance claim and salvage value received by the assessee after the damage of windmills due to a cyclone. The AO taxed the difference between the actual cost and the written-down value (WDV) under section 41(2), treating it as income for the year under consideration. The CIT(A) confirmed the AO's action, noting that the salvage value was correctly determined at Rs. 14,42,000 based on a joint final survey report. However, the assessee argued that section 41(2) was not applicable as the depreciation was claimed under section 32 and not under section 32(1)(i). The Tribunal found that the depreciation was indeed claimed under section 32 r/w rule 5 and not under section 32(1)(i), making section 41(2) inapplicable. The Tribunal relied on the Mumbai Tribunal's decision in Rajhans Metals (P) Ltd. vs. ITO, which held that section 41(2) could not be applied to cases where depreciation was claimed prior to the amendment effective from 1st April 1998. Consequently, the addition made by the AO and confirmed by the CIT(A) was deleted.

3. Disallowance of Repairs as Capital Expenditure:
The AO disallowed the repairs expenditure of Rs. 9,66,947 and consultancy charges of Rs. 2,61,518, treating them as capital in nature. The CIT(A) confirmed this disallowance, stating that the expenses created a durable asset and provided enduring benefits. However, the Tribunal found that the expenses on granite, tiles, hardware, pipe replacement, and other items were of a revenue nature, as they did not result in the creation of a new asset or provide enduring benefits. The Tribunal allowed these expenses as revenue expenditure.

4. Disallowance of Donation to Shri Aurbindo Service Trust:
The learned counsel for the assessee did not press this issue, and accordingly, it was dismissed as not pressed.

5. Disallowance of Vehicle Registration Expenses as Capital Expenditure:
The learned counsel for the assessee did not press this issue, and accordingly, it was dismissed as not pressed.

6. Charging of Interest under Sections 234B, 234C, and 234D:
This issue was deemed consequential and required no adjudication. Accordingly, it was dismissed.

Conclusion:
The appeal was partly allowed, with significant relief granted on the major issues of taxation under section 41(2) and the disallowance of repairs as capital expenditure.