TMI Blog2013 (5) TMI 750X X X X Extracts X X X X X X X X Extracts X X X X ..... & Industries Ltd., [1999 (8) TMI 41 - DELHI High Court] wherein held that in the case of slow moving items which did not have a ready market, it was permissible for the assessee to adopt a lower value - issue decided against revenue. Expenditure on repairs of plant and machinery - revenue v/s capital - AO observed that assessee had debited these expenses as an Extra ordinary items in its profit and loss account - Held that:- It is an undisputed fact that the machinery was damaged due to earthquake and expenses were incurred for its repairs. It is also a fact that no new asset have come into existence. In the present case what was replaced was only a part of the machinery and not the entire machinery. Nothing has been brought on record by the Revenue to prove that the entire machinery was replaced and the replacement was not a part of the existing machinery. Thus cosedring totality of fact & CIT vs. Tanjavore Textile Mills [2001 (1) TMI 14 - MADRAS High Court] wherein held that expenditure on replacement of worn out parts of machinery is expenditure of revenue character as it is meant to keep the business without break down of machinery and not expenditure incurred for starting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee could not substantiate its claim and had not included the landed cost in case of talc and marble lumps. 2. The Ld. CIT (A), erred in allowing expenditure of Rs.33,44,209/- on repairs of plant and machinery, considering it as revenue nature even though in note at para 11 to the audit report it was mentioned that the expenditure on repairs of plant and machinery caused enduring benefit to the assessee. First ground is with respect to the deletion of diminution in value of inventory of Rs. 72,57,271/-. 6. During the course of assessment proceedings on perusing the balance sheet and the Profit and loss account A.O. noticed that the assessee follows the policy of valuing the slow and non moving inventory of raw materials at net realisable value as estimated by the management. Management ascertained permanent diminution in its value amounting to Rs.2,90,29,086/- and the same was written off during the year. The assessee was asked to explain the basis for such reduction in the value of inventory along with justification. In response to the query of the A.O. Assessee submitted and explained manufacturing process. It was further submitted that the assessee had in its stock m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks and other financial institutions. This matter was brought to the notice of the bankers and the assessee company requested the banks for restructuring of its debts. Banks with the other financial institutions agreed to undertake the verification of inventory by third party auditors and based on their report the stock was revalued. CIT (A) after considering the submissions of the assessee and placing reliance on the various decisions of High Court deleted the addition made by A.O. by holding as under:- 3.2. I have considered the submissions of the Ld. A. R. and the facts of the case. The issue relating to revaluation of inventory has been considered by the courts. There is unanimity in judicial opinion regarding the allowability of a change in the valuation of stock provided it is done for bonafide reasons. An issue similar to the present one came up for consideration of the Delhi High Court in the case of CIT vs. Bharat Commerce Industries Ltd., 240 ITR 256, wherein the court held that in the case of slow moving items which did not have a ready market, it was permissible for the assessee to adopt a lower value. In another case the Madras High Court observed, while permitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee company due to fungal growth. Fourthly, the other important stake-holders in the company, viz. SBI, Exim Bank of India, IDBI and SIDBI had a joint meeting under the chairmanship of the lead manager of the consortium (IDBI). As per minutes of the meeting dated 26-3-2004 of the Corporate Debt Restructuring Cell, IDBI, it has been recorded that all the banks/financial institutions have agreed to reduce the rate of interest to 10.25% from 17.74 (IDBI), from 15% (Exim Bank) and from 17% (GSFC). Further, repayment of principal amount was also rescheduled and allowed to be repaid in 24 equal quarterly installments ending in April, 2013. Further, the cash credit limit was converted into term loan and some interest was also waived. Altogether IDBI, Exim Bank and GSFC waived interest amounting to Rs.511 lacs,Rs. 82 lacs and Rs.32 lacs respectively. 3.3.2. From the above, it is clear that the contamination of the stock of raw materials represented a serious threat to the business. This was recognized not only by the assessee company but also its bankers. Looking to the potential loss in profitability resulting from the revaluation of its useless stock, the bank and other financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... written off the amounts in two years i.e. A. Y. 2004-05 and 2005-06. He further submitted that the valuation report of the Chartered Accountant was received after the close of the year. Further the C.A. is not a Registered Valuer and therefore the Valuation Report submitted by him cannot be relied upon. He thus supported the order of A.O. 10. The Ld. A.R. on the other hand submitted that the assessee had considered the current market rate for the purposes of valuation. Assessee had submitted various purchase bills and also the current purchase prices in the form of bills as evidence to support the price. The Ld. A.R. further submitted that the valuation of stock has been done in line with Accounting Standard-2 on Valuation of Inventory prescribed by the Institute of Chartered Accountants of India (ICAI). He further pointed out that the A.O. has not fully accepted the justification offered by the assessee meaning thereby that the justification could not be fully ignored. The Ld. A.R. further pointed out that the revaluation/reduction in value of various materials had been listed at pages 501 502 of the paper book. From the aforesaid table he pointed out to the fact that in many ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round of Revenue is dismissed. Second ground is with respect to expenditure of Rs.33,44,209/- on repairs of plant and machinery. 12. Assessing Officer observed that assessee had debited expenses of Rs.33,44,209/- as an Extra ordinary items in its profit and loss account. The assessee submitted that the aforesaid expenses were incurred for repairs of plant and machinery at its Bhuj plant as it was damaged during the earthquake at Bhuj. Assessee submitted that the plant and machinery at its Bhuj was damaged at the time of earthquake on 26-1-2001. After carrying out inspection of the damaged plant a team of engineers opined that it was not possible to repair the machines in India and can be repaired at its plant in UK. The assessee further submitted that the assessee had claimed an insurance from the insurance company and the claim of Rs.16,04,401/- which was received by the assessee was accounted as other income in F.Y. 2004-05 and offered to tax. The assessee had also received subsidy of Rs.31,80,000/- through Government of Gujarat which was credited to the expenses account. Thus the net amount of Rs.33,44,209/- was accounted as an extra ordinary item and claimed as an expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue character as it is meant to keep the business without break-down of machinery and not expenditure incurred for starting a new business. Here, what was replaced was only a part of the whole plant. That part was not capable of producing the end product which was sold but only facilitated in its manufacture. Hence, in my opinion the A.O. was not correct in treating the expenditure of Rs.33,44,209/- as capital expenditiure. 4.2.1 Coming to the aspect regarding the machinery taken out from the gross block to capital work-in-progress in the earlier year, and reinstatement of the same in the gross block by taking out from the capital work-in-progress, it would be relevant to reproduce the Accounting Standard-10 for case of reference. 14. Retirements and Disposals 14.1. An item of fixed asset is eliminated from the financial statements on disposal. 14.2. Item of fixed assets that have been retired from active use and are held for disposal are stated at the lower of their net book value and net realizable value and are shown separately in the financial statements. Any expected loss is recognized immediately in the profit and loss statement. 14.3. In historical c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit and loss account. He further submitted that the insurance claim that was received in subsequent year has been offered as income. In the alternate he submitted that if the expenditure are treated as capital expenditure, the assessee should be granted depreciation. 17. We have heard the rival submissions and perused the material on record. It is an undisputed fact that the machinery was damaged due to earthquake and expenses were incurred for its repairs. It is also a fact that no new asset have come into existence. In the present case what was replaced was only a part of the machinery and not the entire machinery. Nothing has been brought on record by the Revenue to prove that the entire machinery was replaced and the replacement was not a part of the existing machinery. In the case of CIT vs. Tanjavore Textile Mills 253 ITR 138 (Mad.) it has been held as under:- Expenditure on replacement of worn out parts of machinery is expenditure of revenue character as it is meant to keep the business without break down of machinery and not expenditure incurred for starting a new business. Held accordingly that,Tribunal was right in allowing the assessee s claim to deduction of exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justification and substantiate its claim. Assessee interalia submitted that the material lying at the customers site was rejected by the customers as the material was found to be unacceptable. Further it was not commercially viable proposition to bring back the material to Bhuj as the freight charges were very high and further the cost of reimbursement was also high. Under these circumstances, the amount was written off from the books of accounts. The A.O. did not accept the contention of the assessee. He was of the view that the goods were not even rejected in the earlier years and the assessee had given the credit for the same during the year under assessment. Since the assessee was following the mercantile system, the same could be accounted in respect of assessee. He thus disallowed the claim of the assessee. Aggrieved by the order of A.O. assessee carried the matter before the CIT (A). 24. CIT (A) after considering the submissions of the assessee deleted the addition by holding as under:- 6.2.3. It is not in dispute that the debt had become bad. What the A.O. has disputed is only the year in which the debt turned bad Section 37(1)(iii) is very clear on this point. 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