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2016 (4) TMI 675 - MADRAS HIGH COURT

2016 (4) TMI 675 - MADRAS HIGH COURT - [2016] 388 ITR 172 - Expenses incurred on Life Extension Program (LEP) of Thermal Power Station - revenue v/s capital expenditure - Held that:- The question whether a particular expenditure would fall within the definition of the expression "current repairs" under Section 31(i) or not, does not depend upon what the assessee did or did not. After all if the expenditure is capitalised, the assessee takes the benefit of depreciation. If the expenditure is trea .....

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#8377; 4.5 Crores per MW with a longer gestation period. The second option was to go in for the life extension program at a cost of ₹ 0.44 Crores per MW with a shorter gestation period. These findings of fact recorded by the Assessing Officer is accepted by the Revenue. Therefore, what follows out of these findings of fact, is the question to be addressed. - After having found that there were two options open to the assessee and that the assessee had gone in for a cheaper option (almos .....

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, could not be taken to be of such a huge nature as to project it as capital expenditure. - Decided in favour of the assessee. - Tax Case (Appeal) Nos. 279 to 285 of 2015 - Dated:- 12-4-2016 - V. Ramasubramanian And T. Mathivanan, JJ. For the Appellant : Mr. T. Ravikumar For the Respondent : Mr. R. Vijayaraghavan, For M/s. Subbaraya Aiyar JUDGMENT V. Ramasubramanian,J These appeals are by the Revenue, filed under Section 260A of Income Tax Act, 1961, raising the following questions of law: " .....

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expenditure on rejuvenation of Bucket Wheel Excavators (BWE) as Revenue Expenditure? (3) Whether on the facts and in the circumstances of the case, the Appellate Tribunal is correct in concluding that each machine in Thermal Power Station is not capable of generating power independently and hence to be viewed as a composite asset, in contrary to the decision of Supreme Court in the case of Mangayarkarasi Mills (P) Ltd. [315 ITR 114], wherein, it is held that each machine should be treated indepe .....

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to 1999-2000, the assessee incurred expenditure to the tune of about ₹ 252 Crores towards what was termed by them as ''Life Extension Program of Thermal Power Station-I''. (c) From assessment years 1995-96 to 1999-2000, the assessee also incurred huge expenditure on rejuvenation of Bucket Wheel Excavator (BWE). (d) The assessee claimed the expenditure to be Revenue expenditure allowable under Section 37 or as current repairs under Section 31(i) of the Income Tax Act. (e) T .....

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of Income Tax (Appeals) confirmed the disallowance made by the Assessing Officer. On the second appeal filed by the assessee, the Tribunal remanded the matter back to the Assessing Officer to consider the issue de novo. Primarily the Tribunal was of the view that the admissibility of the claim has to be examined on the principles laid down by the jurisdictional court in Janakiram Mills v. Commissioner of Income Tax [275 ITR 403]. (g) The Assessing Officer went into the issue afresh and once agai .....

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not be treated as capital expenditure. 4. The Revenue filed appeals before the Tribunal. But, the Tribunal dismissed the appeals, holding that the expenditure on replacement and overhauling parts of the boilers/BWEs was incurred for preserving and maintaining the already existing assets and that the object of such expenditure was not to bring a new asset into existence. The Tribunal relied upon the decision of the Allahabad High Court in Commissioner of Income Tax v. Renu Sugar Power Co. Ltd. [ .....

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her the expenditure incurred by an assessee after the expiry of the life span of a machinery, for the purpose of expanding its life span, could be treated as a revenue expenditure or capital expenditure ? 6. Though Section 2 of the Income Tax Act defines expressions such as ''Capital Asset'', "Income'', etc., it does not define the expression "expenditure". But, almost all types of expenditure that one could conceive of, are dealt with in the chapter relati .....

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oviding for deduction on various types of expenditure, the Act also contains a residuary provision in Section 37(1) which reads as follows:- "Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ''Profits and .....

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whether the introduction of a conversion system in the spinning plant, by replacing certain roller stands and fluted rollers fitted with rubber aprons, constituted revenue expenditure or not. Since the Tribunal inspected the spinning factory and recorded a finding of fact that the assessee had merely replaced certain old parts, without actually putting in place a new machinery, the expenditure was revenue in nature. This finding was affirmed by the High Court and the Supreme Court. But in this c .....

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of the High Court of Bombay, was concerned with an interesting situation, where an assessee, who was engaged in the business of marine transport, incurred an expenditure towards the repair of a ship, which, together with the written down value of the ship, exceeded the original cost, but the assessee claimed the expenditure to be revenue in nature. After discussing the scope of the expression ''current repairs'' in the popular or commercial sense, the Bombay High Court came to t .....

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rs'' do not mean only petty repairs or repairs necessitated by wear and tear during the particular year. (iv) Such repairs should not bring into existence nor obtain a new or different advantage. (v) The quantum of expenditure nor the fact that in the process of repairs, there was substantial replacement of the parts of machine or ship, is decisive of the true nature of the expenditure. (vi) The original cost of the asset is not at all relevant for ascertainment of the true nature of the .....

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39; appears to have been used by the legislature with a view to restricting the allowance to expenditure incurred for preservation and maintenance thereof in its current state in contradiction to that incurred on any improvement or an addition thereto''. 12. In Commissioner of Income Tax v. Renu Sagar Power Co. Ltd. [298 ITR 94], the Allahabad High Court was concerned with the question as to whether the cost incurred on replacement of a Turbine Rotor, constituted a revenue expenditure or .....

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s, the Supreme Court was concerned with the scope and extent of Section 31(i) of the Act as it stood during the accounting years ending 31.03.1993 and 31.03.1994. After pointing out the test formulated in New Shorrock Spinning & Manufacturing Co. Ltd., v. Commissioner of Income Tax [(1956) 30 ITR 338 (Bom)], which was also approved in Ballimal Naval Kishore v. Commissioner of Income Tax [(1997) 138 CTR (SC) 284], to the effect that if the object of the expenditure is not to bring a new asset .....

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ITR 114], the Supreme Court was concerned with the question whether expenditure incurred on replacement of machinery amounted to revenue expenditure deductible under Section 37 or current repairs deductible under Section 31. Placing reliance upon the decision in Saravana Spinning Mills, the Court held even in this case that the entire textile mill machinery cannot be regarded as a single asset, replacement of parts of which can be considered to be for mere purpose of preserving or maintaining th .....

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xtile Mills Ltd. [AIR 1968 SC 101], or (ii) where old parts have worked for 50-60 years". 15. After holding that Section 31 has no application to the case of replacement, the Court took up for consideration the question whether the expenditure incurred would be deductible at least under Section 37. Even to find an answer to this question, the Court applied a four way test indicated in Saravana Spinning Mills, wherein it was held that expenditure is deductible under Section 37 only if it (a) .....

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o the user of the asset. In para 14 of the unreported decision, this Court held as follows:- ''As far as the first issue raised by the Revenue that the expenditure was incurred after the boat was purchased is concerned, the issue would have taken a different turn if the assessee had replaced the entire boat with such a mechanism that the repair had brought in a totally new machinery in the place of the old one. Admittedly, such repair had not resulted in either in increase in capacity or .....

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re made to it. But if one applies the decision of this Court reported in (1981) 128 ITR 675 (Commissioner of Income Tax, Tamil Nadu-I v. Vayithri Plantations Ltd.), to the phrase 'used for the purpose of business' used under Section 31 of the Income Tax Act, we do not think that there should be any hesitancy on our part to accept the plea of the assessee that the expenditure merits to be considered under Section 31 of the Income Tax Act''. 17. A careful look at the above decision .....

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g are indicated as the steps taken in so far as the boiler is concerned:- (a) Electricity is generated in Thermal Power Station-I, Neyveli from the units consisting of boilers, turbines, generator and transformer. Steam generated in the boiler drives steam turbine that is coupled to the generator which generates electric power. (b) The high-pressure parts of boiler namely, super heaters and Main Steam line are subjected to creep damage and have a service life or around 1,80,000 hours. Pressure p .....

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tube wall thickness, etc., and were partially replaced to the extent required. The following components were replaced completely in the Boilers: (1) Ceiling super heaters, connective super heater, screen super heater along with their headers and inter connecting pipe. (2) Boiler condenser and injection at temperator. (3) Rear side water wall. (4) Economiser and their transfer pipes. (5) Main steam line with valves and fittings. (6) High pressure valves. (7) Air and gas ducts compensators. The fo .....

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e replacement of worn out parts. These expenditure are classifiable as current repairs, as they do not bring new asset into existence. 19. In so far as BWE is concerned, the assessee claims to have done the following:- Rejuvenation of Bucket Wheel Excavator (BWE) of Mine-1: The following critical items are replaced. (i) Crawler Pads (ii) All the six crawler frames with drivers assemblies (for 3 tracks) including the mechanical components. (iii) Traverse box of self aligning track (iv) Tower fram .....

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ii) Cabin and houses. The following components have been subjected to only strengthening/repair: (i) Steering tiller (FST and RST) (ii) Under carriage (iii) Turn table (iv) Counter weight boom and Box (v) Intermediate structure. 20. On the basis of the nature of the repairs and replacement carried out by the assessee to the boiler as well as to BWE, it is contended by Mr.Vijayaraghavan, learned counsel for the assessee that the expression "current repairs" denotes the repairs for the p .....

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is necessary to have a look at the provisions of Sections 31 and 37. 22. Under Section 31, the amount paid on account of current repairs to plant or furniture used for the purpose of business or profession shall be allowed as deduction. But, the Explanation to Section 31 qualifies the general rule by stating that the amount paid on account of current repairs shall not include any expenditure in the nature of capital expenditure. 23. Though the Act defines the expression "income", it do .....

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three items of expenditure. They are (i) expenditure of the nature described in Sections 30 to 36, (ii) expenditure in the nature of capital expenditure, and (iii) expenditure in the nature of personal expenses of the assessee. 25. Therefore, if an item of expenditure falls within any of the categories indicated in Sections 30 to 36, the same is entitled to deduction as per the provisions of those Sections. But, any expenditure which does not fall within the scope of Sections 30 to 36, but which .....

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ind, if we have a look at the order of the Tribunal, it could be seen that admittedly the assessee's power generation plant was installed in the year 1962-1970 comprising of 9 units. The power generation plant cumulatively accounted for 600 MW of capacity. The assessee's case was that they had erected one boiler for each 50 MW of power generation and the boilers worked for 12 years. Each boiler contained several parts, some of which were replaced. 28. During the assessment years 1993-94 .....

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what were replaced were only part of the boiler, the expenditure incurred towards the same was only to preserve and maintain the existing assets without any enduring advantage. In such a view, the Tribunal held in favour of the assessee. The Tribunal also went on the footing that if a new plant has to be commissioned, it would cost ₹ 4.5 Crores per MW and that the total project cost for 600 MW would run to ₹ 2700 Crores. Hence, the Tribunal found that the amount of expenditure actua .....

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ery had worked for 35 years only after which the main parts were replaced. The expenditure was incurred as an one time expenditure and the same resulted in an increase in the power generation. Therefore, the learned Standing Counsel contended that the Tribunal was wrong in its conclusion. 31. On the contention of Mr.T.Ravikumar, learned Standing Counsel that the assessee originally capitalised the expenditure, but reversed the same later, we have to point out that there cannot be any estoppel in .....

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