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TMI Blog2012 (6) TMI 377X X X X Extracts X X X X X X X X Extracts X X X X ..... t cannot be treated as allowable expenditure under the Income-tax Act, though as per accounting norms, these could be treated as revenue expenditure or current expenditure in the light of Supreme Court decision in the case of Ballimal Naval Kishore Vs. CIT 224 ITR 414 and CIT Vs. Saravana Spinning Mills Pvt.Ltd. 293 ITR 201(SC). 3. Facts in brief in respect of this issue as appeared from the corresponding assessment order passed u/s.143(3) of the I.T.Act dated 27/11/2006 were that the assessee-company is in the business of manufacturing of Phosphatic fertilizers. It was observed by the AO that a sum of Rs.35,86,601/- was debited in respect of repairs and maintenance. In respect of building repairs the AO has reproduced a list of items of expenditure totalling to Rs.28,33,767=72. The observation of the AO was that on physical verification of the bills it was found that the material purchased was in respect of fabrication, construction, flooring, hence, in the nature of capital expenditure. In compliance of the show-cause notice it was submitted that the expenditure on building was in the nature of revenue expenses. Explanation submitted is reproduced below : "Building ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure which was of capital expenditure has been so accounted. Capital expenditure of Rs.2833767/- on building and Rs.5932008/- on machinery, incurred by the appellant is already capitalized separately and the expenditure listed by the Assessing Officer is revenue expenditure and not capital expenditure. It is also observed that the expenditure on repairs and replacements is reasonable considering the size of the factory (5296 square meters) and nature of business (appellant uses sulphuric acid which is corrosive and harms civil structure and Plant & Machinery). Repairs & Maintenance expenditure depends upon nature of industries as well as uses of the product. Regarding expenditure on crane bucket, it is sent hat no new crane is purchased and the expenditure represents replacement of parts of crane. 5.3.1. Regarding the expenditure listed in the Assessment Order, the list gives no indication that the expenditure is of capital nature. For example, when expenditure on M.S. angle is incurred, the same may be for creating new structure or for replacing such angle forming part of existing structure. The expenditure in former case would be capital expenditure and in the latter case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. We have perused the orders of the authorities below in the light of compilation filed before us and the case laws cited. 6. At the outset, it was not in dispute that in respect of an another building at Udaipur, this assessee itself has capitalised the expenditure. However, the impugned repairs were in respect of an another factory building situated at F-227, Mewar Industrial Area Udaipur, wherein the company has carried out manufacturing of Fertilizer; namely, Single Super Phosphate. One of the ingredients of the said fertilizer is stated to be sulphuric acid. Due to acidic fumes the corrosion was high. The acidic fumes have harmed the civil structure. Repairs were preventive in nature to check the corrosion or decay of the building. Repairs were also needed for safety reasons. Facts of the case thus have revealed that the assessee being owner of the property has considered necessary to maintain the property in good condition, therefore, incurred repairs which were nothing but in the nature of current repairs. Repairs were incurred to preserve and maintain an existing asset. The object of the expenditure was not bringing into existence an another new asset. By the incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, considering the nature of expenditure in the light of the manufacturing activity carried out by the assessee, the same is to be allowed as revenue expenditure. However, in respect of the said two items viz. expenditure of crane buckets and submersible pumps, no such distinction was noticed by the AO. Rather the AO had made the disallowance in respect of the entire amount of the expenditure. Now before us, the ld. Representative of the Department wants to segregate two items for the purpose of disallowance. In this regard, on due consideration of the assessment order, it is not clear whether the said two amounts were in respect of either "replacement of the machinery" or under the head "Repairs". Ld. DR has referred that in the cases of machinery in a textile mill it had been held by some Hon'ble Courts that each spindle had worked independently and not as a mere part of the entire composite machinery, therefore, it could constitute bringing into existence a new asset. A decision in this context was cited in the grounds of appeal viz. CIT vs.Saravana Spinning Mills P.Ltd. 293 ITR 201(S.C.). The verdict was that the basic test is to find out whether expenditure is incurred to pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .s. 2(24)(x). Thus, the disallowance u/s.36(1)(va) r.w.s. 2(24)(x) in respect of employee's contribution to provident fund and ESI beyond the due date is mandatory. 9.1. As per AO, it was found that a sum of Rs.12,73,555/- was paid by the employer, i.e. assessee, towards Employees' Provident Fund Contribution. As per AO, the amount was not realised within the due date. The provisions of section 36(1)(va) read with section 2(24)(x) was relied upon and the entire amount of Rs.12,73,555/- was disallowed. The matter was carried before the first appellate authority. Ld.CIT(A) has examined the facts and thereupon granted the relief as per the following paragraphs: "6. As regards Ground No.(3), the AO, during the course of assessment proceedings had observed that the appellant had violated the provisions of the provident fund Act and therefore, denied the deduction of expenditure claimed by the appellant in respect of delayed payments of contribution to the provident fund and added an amount of rs.12,73,555/- to the total income of the appellant. 6.1. It is discussed by the AO on page no.5 to 7 of the assessment order. 6.2. The AR while explaining as to how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1998-99 and subsequent years only when they are paid on or before the due date of filing of return. However, as per the definition of the term 'due date' in Explanation below clause-(va) of sub section(1) of section 36; means the date by which the assessee is required as an employer to credit an employee's contribution to the employee's account in the relevant fund under any Act , rule , order or notification. For this legal proposition, whether the provisions of sec.36 and the provisions of 43B are independent of each other, now a decision of Honble S.C of CIT vs Alom Extrusiion Ltd. 319 ITR 306 is available. But this decision is dated 25 Nov.2009 , however, the order of the A.O. is dated 27.11.2006, hence it was not available at the assessment stage. The A.O. is therefore required to find out the similarity and if on facts identical then has to follow the law laid down therein. Therefore being the objection raised from the side of the revenue, we deem it proper to give an opportunity to the revenue to re-decide as per law. This ground of the Revenue may be treated as allowed for statistical purpose. 11. Ground Nos.3(a) & 3(b) are as under: 3(a) The Ld. CIT(A) erred in de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estments being exempt under the specific provisions of section 10 of the Act. Accordingly a sum of Rs.25,42,321/- is included in the total income of the assessee." 12.1. There is one more disallowance of interest on the ground that an amount of Rs.62,58,343/- was given by the assessee for non-business purposes. In his opinion, the said amount was advanced to various parties and no interest was recovered. According to him, the said advance was out of the borrowed funds. Hence, the payment of interest was suffered by the assessee. He has computed the disallowance of interest by invoking the provisions of section 36(1)(iii) of Rs.13,86,222/-. In the said manner, a total addition of Rs.39,28,543/- was made on account of disallowance of interest. The matter was carried before the first appellate authority. 13. The Learned CIT(Appeals) has passed a cryptic order as per the following observations:- "7.1. As far as first part A is concerned the major investment is allotment of equity shares met out of internal accruals and as such diversion of funds does not arise. The new investments during the year are in shares of Uma co-op Bank and Nandesari Environment Control ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Assessing Officer required a detailed order and not a cryptic order from the First Appellate Authority. We have also noticed that the provisions of section 14A of the I.T.Act have not been discussed at all by the Learned CIT(Appeals). On one hand, the Assessing Officer has stated that the assessee was unable to demonstrate that the non-interest bearing funds were utilized towards investment for earning dividend income. On the other hand, the argument of the assessee was that there were sufficient reserves and share capital out of which the said investment was made. However, the findings of the Assessing Officer have not been dealt with by Learned CIT(Appeals) in their right perspective and one of the reasons of the disallowance of the invocation of section 14A of the I.T.Act has also not been dealt with, therefore, we deem it proper to restore this ground back to the stage of Learned CIT(Appeals) to decide De novo, needless to say after providing opportunity of hearing to both the sides. Since the matter has been restored back, therefore, this ground of the Revenue may be treated as allowed for statistical purposes. (B) ITA No.503/Ahd/2009 for Assessment Year 2005-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal has also held that the main ingredient of a contingent liability is that it depends upon the happening of a certain event. In the case of the assessee, the "event", i.e., the change in the value of foreign currency in relation to the Indian currency had already taken place in the current year. Therefore, the loss incurred by the assessee was held to be a fait accompli and not a notional loss. Following the judicial decisions as above, it is held that the action of the AO in disallowing the expenditure of Rs.6,79,458/- was not warranted and is accordingly directed to be deleted." 18. During the course of hearing, an enquiry has been raised that about the nature of transaction from the foreign party resulting into "Exchange Fluctuation Loss". The Learned Authorised Representative has stated that the Assessing Officer has not made the disallowance on account of the fact that the borrowings were towards acquisition of any capital asset. Rather as per ld.AR the transaction was in respect of the running of the business, hence, the "Foreign Exchange Fluctuation Loss" is admissible as Revenue expenditure. 19. On hearing the submissions of both the sides and on c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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