TMI Blog2016 (5) TMI 1416X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) has discussed each and every item of disallowances made by the A.O. and given his findings how a particular item is plant and machinery which constitute capital in nature or a particular item is replacement of parts of existing machinery which constitute revenue in nature. We do not see any error or infirmity in the order passed by the CIT(A). Hence, we inclined to uphold the order of the CIT(A) and reject the ground raised by the assessee as well as revenue. - I.T.A. Nos. 244, 245, 246, 247/Vizag/2012, 598/Vizag/2014 and 619/Vizag/2014 - - - Dated:- 20-5-2016 - V. Durga Rao, Member and G. Manjunatha, JJ. For The Appellant : C.V.K. Prasad, A.R. For The Respondents : M.K. Sethi and P. Hari Prasad, D.Rs. ORDER 1. These cross appeals filed by the assessee as well as revenue are directed against the separate, but identical orders of CIT(A), Visakhapatnam dated 28.3.2012 for the assessment year 2007-08, 2008-09 2010-11. Since, the facts are identical and issues are common, they are clubbed, heard together and disposed off, by way of this common order for the sake of convenience. 2. Brief facts of the case extracted from ITA. No. 244/V/2012, are that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imed exempt u/s. 10(34) of the Act. Against this exempt income, the assessee has not disallowed any expenditure relatable to said exempt income, while computing the income from business. Therefore, issued a show cause notice and asked to explanation why the interest and other indirect expenditure shall not be disallowed u/s. 14A of the Act. In response to show-cause notice, the assessee company has filed a written submission dated 7.12.2009 and contended that the company has earned dividend income from various companies and the investment on these shares was made in the earlier financial years. The dividend income received during the assessment year relates to most of the investments made long ago and attributing a part of the expenditure during this assessment year as relatable to one such dividend income is not correct. The provisions of disallowance under the provisions of section 14A of the Act is applicable to investment companies or investment trustees, whose business is to sell and purchase shares by bringing borrowed capital. The assessee company is manufacturing company which is merely invested a part of its surplus funds in the shares of subsidiary company and the intenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said dividend either in the year of investment or in the current assessment year. The dividend is received by way of warrants and it is credited to the bank account and hence no expenditure is attributable to the said income either directly or indirectly, therefore, the allocation of expenditure on pro-rata basis is not correct. The CIT(A) after considering the submissions of the assessee held that the earning of dividend income must necessarily share the burden of certain administrative expenditure relatable to salaries of employees, repairs to assets, etc. and hence, the action of the A.O. in allocation of administrative expenditure on pro-rata basis is held to be in order. However, the CIT(A) held that in respect of pro-rata disallowance of interest is concerned, the assessee claimed that it has used its own surplus funds for investment in earning the dividend income. The investments are not made during the current financial year. Therefore, the A.O. was not correct in disallowing the interest relatable to the earning of exempt income. The CIT(A) further held that the ITAT, in assessee's own case for the earlier assessment year held that administrative and other expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re in respect of interest and other indirect expenditure should be disallowed. It is the contention of the assessee that the A.O. was not correct in disallowing interest and indirect expenditure on pro-rata basis. The assessee further contended that the investments in shares of companies have been made 15 to 20 years back and assessee has not utilized borrowed funds for the purpose of investments to earn exempt income. It is further contended that earning of dividend income need not to incur any expenditure. The assessee a manufacturing company invested its surplus funds in its subsidiary companies, therefore, its case cannot be considered on par with an investment company, which is involved in the main business of dealing in shares and securities. The provisions of section 14A of the Act is meant for disallowing the expenditure relatable to earning of exempt income, in the case of companies where the major business is trading in shares and securities with borrowed funds. Therefore, the A.O. was not correct in disallowing the interest and other indirect expenditure by invoking the provisions of section 14A of the Act. 10. The question before us is whether the A.O. is right is di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares and borrowed funds, no disallowance can be made towards interest. However, the assessee cannot get away with the plea that there is no indirect expenditure such as salary to employees and other indirect expenses to maintain the day to day affairs of the investment portfolio. Therefore, indirect expenditure relatable to the earning of exempt income should be disallowed on pro-rata basis. The relevant portion of the order is reproduced hereunder: Having given a thoughtful consideration to the rival submissions and from perusal of the orders of the authorities below, we are of the view that CIT(A) has rightly adjudicated the issue after having held that in this type of situation it is very difficult to find out whether the investment in shares were made out of the surplus funds or the borrowed funds for which he has given the benefit of doubt to the assessees. But the assessee has received a substantial amount of ₹ 1,85,79,015/- as a dividend income and to maintain the investment portfolios and other things assessee requires to incur some administrative expenses. The CIT(A) has restricted the disallowance to ₹ 5.91 lakhs to which we do not find any unreasonablen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme Court of India, in the case of CIT v. Saravana Spinning Mills Ltd., CIT v. Ramaraju Surgical Cotton Mills Ltd. and CIT v. Shri Mangayarkarsi Mills Pvt. Ltd. and held that the Hon'ble Supreme Court had laid down certain guidelines to classify particular expenditure is a revenue or capital. According to the A.O., all the expenditure are capital in nature and replacement of existing plant and machinery gives enduring benefit to the assessee, therefore, cannot be allowed as deduction. It is the contention of the assessee that the expenditure incurred under the hard repairs and maintenance are current repairs to the existing plant and machinery, therefore, cannot be considered as capital expenditure. It is further submitted that the assessee has replaced the certain parts of existing plant and machinery which are parts and accessories of existing plant machinery. Though these items are independent machines, they are fixed into the continuous process plant of the assessee and which cannot be used as an independent machine in the assessee's business. The assessee further submitted that the A.O. was not correct in relying upon the judgement of Hon'ble Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or a period of years. On the other hand, revenue expenses are short term expenses required to meet the ongoing operational cost of running a business and these are essentially the same as operating expenses. Unlike capital expenditure, revenue expenses can be fully tax deducted in the same year of expenses incurred. In relation to the major assets purchased that qualify as capital expenditure, revenue expenditure include the ordinary repair and maintenance cost that are necessary to keep the asset in working order without substantially improving or expanding the useful life of the asset. Revenue expenses related to existing assets include repairs and regular maintenance as well as repainting and other maintenance as well as renewal expenses. Revenue expenditure can be considered to be recurring expenses in nature in contrast to one of nature of most capital expenditure. In short, if expenditure is incurred for acquiring or bringing into existence an asset or advantage of enduring nature, the expenditure is of a capital nature. But, if for running the business or to produce profits a recurring expenditure is incurred which is not of enduring nature, the expenditure is of revenue nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied upon the decision of ITAT, Visakhapatnam Bench, in the case of Chodavaram Co-operative Sugars Limited v. DCIT, (2003) 78 TTJ 236. We have gone through the case law relied upon, in the light of the facts of the present case. The Co-ordinate Bench, while considering the issue of repairs and maintenance expenditure of plant and machinery is capital or revenue expenditure held that replacement of plant and machinery or any parts of plant and machinery already in existence cannot be held to be capital expenditure. With due respect, we do not prefer to follow the case law cited by the assessee, as it goes against the guidelines or tests laid down by the Hon'ble Supreme Court in the case of CIT v. Saravana Spinning Mills reported in (2007) 211 CTR 281 (SC) and CIT v. Mangayarkarasi Mills Pvt. Ltd. (2009) 315 ITR 114 (SC), wherein the Hon'ble Supreme Court held that each item of machinery in a plant has to be considered independent machinery. 19. Considering the facts and circumstances of the case, we are of the view that the A.O. was right in disallowing certain expenditure under the head repairs and maintenance as capital expenditure by depending upon the functions and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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