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2022 (6) TMI 364 - AT - Income TaxDisallowance u/s 14A in computation of book profit u/s 115JB - HELD THAT:- AO is not correct in disallowing while computing book profit u/s 115JB by invoking the provisions of section 14A read with Rule 8D. Nature of expenditure - Replacement of parts in machinery treated as capital in nature - HELD THAT:- Classification of items in the books is not relevant for deciding the treatment of such items while computing taxable income as held by the Hon’ble Supreme Court in the case of Kedarnath Jute Manufacturing Co Ltd [1971 (8) TMI 10 - SUPREME COURT] Thus the book entries are not conclusive for determining the nature of expenditure. The provisions of law prevail over the book entries. Accordingly, consumption of spares being only replacement of spare parts would qualify under the head "current repairs" and treated as Revenue Expenditure For a power generating company, these bucket spares are in the nature of consumables spares only notwithstanding its high cost. The buckets are designed with special profile of airfoil cross section for efficient energy conversion.Due to high working temperature of around 800' C and high speed of the turbine (5100 RPM), this component is the most critical in the turbine and failure of this component may lead to catastrophic damage to the machine. It is also seen from the Original Equipment Manufacturer namely BHEL/General Electric, USA have very categorically prescribed the operating life of the above bucket which helps to ensure trouble free operation and to avoid any catastrophic damage to the machine. Further it is also stated that by replacement of the buckets on completion of 48000 hours of continuous operation the power generation capacity is neither increased nor is the power plant efficiency or life of the plant gets increased. The cost of the Gas Turbine parts such as Buckets and Nozzles are high primary due to very special metallurgy and manufacturing process provided by the manufacturer out side India and the assessee company procures the same by import and thus attracts custom duty, air freight, insurance etc. Further the replacement of parts is Capital or Revenue is No more Res integra based on the observation made by the Hon’ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills [2007 (8) TMI 16 - SUPREME COURT] and CIT V/s. Sri Mangayarkarasi Mills (P) Ltd. [2009 (7) TMI 17 - SUPREME COURT] wherein held that when certain parts of an air-conditioner or a T.V. is replaced, it does not amount to replacement of entire unit. Thus it can be said that there is no replacement of the gas turbine as a whole but certain repair and replacement to some of the parts of the gas turbine, which does not result in bringing into existence a new asset of enduring nature, rather, the repair and maintenance are of recurring nature and essentially required for smooth running of business of the assessee i.e, generation of power - replacement of spares in the machineries would be allowable as Revenue expenditure only and addition made by the AO is directed to be deleted. Additional claim under section 80IA - Initial assessment year - HELD THAT:- As the issue is now settled by the Circular No.1/2016 issued by the CBDT that an assessee who is eligible to claim deduction u/s 80IA has the option to choose the initial/first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen (or twenty) years, as prescribed under that sub-section. The Circular further clarified that once such initial assessment year has been opted for by the assessee, he shall be entitled to claim deduction u/s 801A for ten consecutive years beginning from the year in respect of which he has exercised such option subject to the fulfillment of conditions prescribed in the section. Hence, the term 'initial assessment year' would mean the first year opted for by the assessee for claiming deduction u/s 80IA. However, the total number of years for claiming deduction should not transgress the prescribed slab of fifteen or twenty years, as the case may be and the period of claim should be availed in continuity. Thus the Assessing Officers are directed to allow deduction u/s 80IA in accordance with this clarification and Standing Counsels/D.R.s are suitably instructed pending litigation on allowability of deduction u/s 80 IA shall also not be pursued to the extent it relates to interpreting 'initial assessment year' as mentioned in subsection (5) of section 80IA of the Act. Disallowance under Section 14A - HELD THAT:- Directions of CIT-A to apply Rule 8D is not proper and there being the surplus funds were invested by the assessee and there were no administrative expenses, the disallowance made u/s.14A is unwarranted and liable to be deleted. Depreciation on building used for Managing Director’s residence - HELD THAT:- As the building is used for official-cumresidential purpose by the Managing Director, with all office facilities we find that 10% depreciation can be granted on this Building and direct the AO to allow the same. Accordingly the CO filed on this ground is allowed. Disallowance of contribution made to various organizations - HELD THAT:- The assessee claimed payment to SVADES, to DEEP and to various NGOs the same were disallowed by the AO. But the Ld CIT[A] granted relief in cases were the assessee has submitted Certificate of Registration of 80G in respect of payments made to SVADES and DEEP and balance amount was confirmed - In our considered view the CIT[A] has granted appropriate relief to the assessee, which does not require any further inference. Disallowance u/s 43B - CIT(A) by his detailed order has held that the AO was correct in not allowing the deduction of interest however, the AO is directed to allow this as a deduction in AY 2008-09 - Similarly, the interest payment disallowed in the earlier year, which was actually paid in the PY corresponding to AY 2007-08 should be allowed as deducting in this year - HELD THAT:- In our considered view the CIT[A] has granted appropriate relief to the assessee, which does not require any further inference.
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