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2017 (12) TMI 535

Addition made on account of share application money u/s 68 - Held that:- Assessee has all necessary evidence right from Foreign Inward Remittance certificate to application filed with Forex department of RBI to justify allotment of equity shares and receipt of share application money from M/s Great Value Company Ltd of Mauritius. Once the initial burden cast upon the assessee to prove the identity, genuineness of transactions and creditworthiness of the parties is established, then it is for the .....

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e AO - Decided against revenue - Disallowance of depreciation - assets put to use for less than 180 days as evident as per the note ‘credits for excise duty availed on capital goods purchased - Held that:- On perusal of details filed by the assessee, we find that the assessee has rightly classified assets purchased and put to use for more than 180 days and assets purchased and put to use for less than 180 days. This is further supported by bills. The AO, without appreciating facts, only on t .....

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lding that it is in the nature of capital expenditure. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO. - Disallowance of interest paid on cash credit u/s 43B(e) - Held that:- The provisions of section 43B(e) provides for disallowance of interest on loans or advances if such interest is not paid on or before the due date of furnishing return of income. Further Explantion 3D explains the position of law provided in section 43B(e) so as to clarify the .....

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g excise duty. We further notice that amount shown in PLA account is nothing but advance payment of excise duty which has been kept in the loans and advances in the asset side of the balance-sheet. The AO without appreciating the facts made addition to PLA balance on suspicion and surmise without bringing any material on record to show that this represents unutilised Modvat credit which has not been considered for valuation of closing stock. The CIT(A), after considering submissions of the asses .....

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excise duty. - TDS u/s 194C - Non deduction of tds on transportation charges paid - addition u/section 40(a)(ia) - Held that:- We find that the CIT(A) has recorded a categorical finding to the effect that the impugned payment is covered by the certificate furnished by the assessee u/s 197 of the Act, for non deduction of tax at source u/s 194C. The AO, without appreciating the facts, simply disallowed transportation charges u/s 40(a)(ia) even though the assessee has furnished valid certifi .....

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xplaining the shortfall. Therefore, we are of the view that the AO was incorrect in making addition towards estimated production loss. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO. - Disallowance of repairs and maintenance to plant and machinery being capital in nature - expenditure giving enduring benefit to the assessee - Held that:- We are of the considered view that the assessee has not derived any enduring benefit by repairing damaged refract .....

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ts return of income for the assessment year 2008-09 on 26-09-2008 declaring total loss of ₹ 3,15,83,056. The case was selected for scrutiny and notices u/s 143(2) and 142(1) were served on the assessee alongwith a questionnaire. In response to the notices, the authorized representative of the assessee appeared from time to time and furnished details, as called for. The assessment was completed u/s 143(3) on 27-12-2010 determining total income at ₹ 49,36,78,420, interalia making addit .....

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uct tax at source u/s 194C and addition made on account of shortfall in production by rejecting books of account u/s 145A of the Act. However, the CIT(A) has allowed partial relief in respect of addition made by the AO towards disallowance of repairs and maintenance expenditure being capital in nature and allowed relief of ₹ 15,86,633 and confirmed balance amount of ₹ 2,08,21,467. Thus, the CIT(A) has partly allowed appeal filed by the assessee. Aggrieved by the order of CIT(A), the .....

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ning of Explanation 3D to the section 4313(e) of the Act: 5. On the facts and in the circumstances of the case and law, the Ld. CIT(A) erred in deleting the addition made on account of disallowance of repairs & Maintenance being Capital expenditure of ₹ 15,86,633/- without providing an opportunity in accordance to the Income tax rule 46A. 6. On the facts and in the circumstances of the case and law, the CIT(A) erred in deleting the addition made on account of excise duty towards cost o .....

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llant prays that the order of the CIT(A) on the grounds be set aside and that of the Assessing Officer be restored. 5. The first issue that came up for our consideration from revenue s appeal is addition made on account of share application money amounting to ₹ 8,51,26,250 within the meaning of section 68 of the Act. The facts with regard to the impugned addition are that during the year under consideration, the assessee company has allotted share capital with share premium to M/s Great Va .....

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pies of statutory forms filed with Registrar of companies. The AO, after considering relevant submissions and also considering various facts observed that the assessee company has totally failed to justify issue of shares and also charging share premium from time to time. The AO further observed that the assessee has not been able to prove beyond reasonable doubt the creditworthiness of the party and genuineness of transaction. Although the assessee has submitted address of shareholder, copy of .....

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w method for valuation of shares which is based on the project financials of the company for the next five financial year years, therefore, there is no reason given by the assessee to justify charging premium of ₹ 190 per share. All these sequence of events show that the purported share application money received from M/s Great Value Company Ltd of Mauritius and allotment of equity shares with huge premium of ₹ 190 is not a genuine transaction and accordingly opined that the assessee .....

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arging identity by filing confirmation from subscriber and furnishing bank details for having transferred fund through banking channel will not be a sufficient compliance of section 68 of the Act. To escape from the clutches of provisions of section 68 of the Act, the assessee has to prove identity, genuineness of transaction and creditworthiness of the parties. In this case, no doubt, the assessee has discharged identity of the party, but failed to prove the genuineness of transactions and cred .....

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actions. The Ld.AR further submitted that various details have been filed before the AO to justify charging premium. Assuming for a moment that the assessee has not justified charging premium, it is irrelevant for the purpose of making addition u/s 68, as the section speaks about identity, genuineness of transaction and creditworthiness of the parties. The assessee has discharged all three ingredients of section 68 and hence, the CIT(A) has rightly deleted addition made by the AO and his order s .....

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M/s Great Value Company Ltd of Mauritius on 08-04-2006, 27-12-2006 and 31-03-2007. The assessee also filed various details including share application form, confirmation from subscriber, CA s certificate for valuation of shares, application filed with RBI for approval of allotment of equity shares to NRI, Board resolution for charging premium and statutory form filed with registrar of companies for increase in share capital and allotment of equity shares. The AO has not disputed all these eviden .....

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income of the assessee of that previous year, if the assessee fails to prove identity, genuineness of transactions and creditworthiness of the parties. If credits are not pertaining to the relevant period or if the credits are carried forward from previous financial year, then no addition can be made u/s 68 of the Act, in respect of credits appearing in the books of account. This legal proposition is supported by the decision of Hon ble Delhi High Court in the case of CIT vs Usha Stud Agricultur .....

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The assessee has received share application money from M/s Great Value Company Ltd of Mauritius through proper banking channel and the evidence of which has been furnished before the AO. The assessee also filed details of application filed before the RBI for approval of allotment of equity shares to non resident. The assessee also filed Foreign Inward Remittance certificate issued by HDFC Bank Ltd, Lower Parel Branch, which contains the name and address of the subscriber. The assessee also filed .....

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ee. The assessee has pointed out that subscription to share capital was received in the financial year 2006-07 relevant to AY 2007-08 in response to a query from the AO. The assessment for AY 2007-08 was completed u/s 143(3) where the assessee was specically addressed all queries raised calling for various details by the then AO. The assessee has filed various details to explain receipt of share application money and allotment of equity shares and also filed break up of money received from M/s G .....

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on only on the basis of higher share premium charged by the assessee to conclude that transaction is not genuine. Therefore, we are of the considered view that there is no reason of whatsoever to make addition towards share application money received from M/s Great Value Company Ltd of Mauritius in the financial year 2006-07 relevant to AY 2007-08, in the impugned assessment year, that too, when the assessee has proved all the three ingredients of section 68 of the Act. The Ld.AO, except for fin .....

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use for less than 180 days which is evident as per the note credits for excise duty availed on capital goods purchased from M/s Anjaneya Ispat, Millennium Metal,Sashwat International Ltd, etc. The treatment of excise duty in the books of account in respect of assets capitalised clearly shows that installation was done in the month of March, 2008 and the assets in question have been used for less than 180 days. It is the contention of the assessee that the assets purchased and put to use for more .....

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ating facts, only on the basis of input credits for excise duty claimed in the month of March has come to the conclusion that all assets are purchased and put to use for less than 180 days.. The assessee has filed depreciation chart as per which it has capitalised plant & machinery and other asses of ₹ 13,12,87,037 before 30th September, 2007. There is no evidence to the contrary in the AOs possession that plant & machinery was put to use after 30th September, 2007 except input cre .....

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ngly, interest of ₹ 1,80,13,928 has been disallowed. The CIT(A), after considering the explanation of the assessee and also relying upon the provisions of section 36(1)(iii) deleted addition made by the AO towards disallowance of interest by holding that the issue is whether interest payment is in respect of capital asset or not is irrelevant insofar as section 36(1)(iii) is concerned. The assessee is not claiming deduction on its borrowed funds, but on the corresponding interest paid on w .....

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apital expenditure but not a revenue expenditure used for the purpose of business. We do not find any merit in the findings of the AO for the reason that as per the provisions of section 36(1)(iii) interest paid on loans borrowed for the purpose of business of the assessee is deductible irrespective of the fact that whether it is borrowed for the purpose of working capital or for acquisition of capital assets. Whether the assessee has taken term loan for acquisition of capital asset or working c .....

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ncreased the debit balance in the account, as a result, the interest component on the loan has been converted into further loan or enhanced utilisation of cash credit limit. By debiting interest amount, the loan liability towards bank only increases by way of debit balance in the bank account which is clear and evident from the bank statement. This amounts to conversion of interest liability into a further loan. The assessee has not complied with the provisions of section 43B(e) and Explanation .....

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tions towards interest on CC account without appreciating the facts in right perspective whether such interest falls within the ambit of setion 43B(e) Explanation 3D of the Act. The provisions of section 43B(e) provides for disallowance of interest on loans or advances if such interest is not paid on or before the due date of furnishing return of income. Further Explantion 3D explains the position of law provided in section 43B(e) so as to clarify the position of interest actually paid or intere .....

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include excise duty for valuation of closing stock. The AO further observed that the assessee has paid excise duty on the raw materials and that part of raw-material which has not utilised is appearing on the closing stock. Such closing stock of raw material has to be adjusted with the unutilised Modvat credit. However, the assessee has failed to make any adjustment towards unutilised Modvat credit while valuing closing stock, therefore, made addition of ₹ 42,30,010. The CIT(A) deleted ad .....

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8377; 42,30,010 in the asset side of the balance-sheet under the head Personal Ledger Account . The AO made addition towards PLA balance on the ground that the assessee has not made suitable adjustments towards unutilised Modvat credit for valuation of closing stock. We do not find any merit in the findings of the AO for the reason that there is nothing on record to indicate that the assessee has not considered unutilised input tax credit for valuation of closing stock. The assessee has furnishe .....

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The AO disallowed excise duty collected on the ground that as per the amended provisions of section 145A, all taxes and duties collected are required to be included in sales and shall be routed through P&L Account. The assessee has not shown excise duty collected of ₹ 12,91,55,890 though such treatment is necessarily to be given as per the provisions of section 145(1) of the Act. The AO, further observed that the assessee, by way of disclosure in the notes to accounts, have already rec .....

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biting the excise duty paid to P&L Account and crediting excise duty collected to P&L Account has routed through balancesheet Account; however, for the purpose of disclosure in the financial statements shown excise duty collected as a separate item by reducing from the gross sales. This presentation is in accordance with the provisions of section 145(1) of the I.T. Act, 1961 and the AO was incorrect in adding excise duty collected as income of the assessee. 24. The Ld.DR submitted that t .....

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the sales figures were to be increased by the amount of excise duty, on the same parity of reasoning, the amount of excise duty paid by the assessee is required to be debited to the P&L Account. Secondly, the said excise duty is paid before the year and, therefore, the same cannot be disallowed. The CIT(A), after considering relevant facts has righty deleted the addition and his order should be upheld. 26. We have heard both the parties, perused the materials available on record and gone th .....

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y merit in the findings of the AO for the reason that the assessee has collected excise duty on sales and paid the same to the excise department which is evident from the fact that the assessee has routed its excise duty collected on sales and payment of excise duty through balance-sheet. The assessee, for the purpose of disclosure of accounts in accordance with provisions of section 145(1) shown sales net of excise duty in the P&L Account. The AO misconstrued the facts to make addition towa .....

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2-2008 to 31-03-2008. The copy of the said certificate was received by the assessee through an email on 17-12-2010. The above date clearly shows that the assessee had obtained the certificate from the party only when the question was raised regarding TDS and allowability of expenses u/s 40(a)(ia) of the Act. As per section 194C, the assessee is required to make TDS on transportation charges, but failed to deduct TDS, therefore, the AO opined that expenses are inadmissible u/s 40(a)(ia) of the Ac .....

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llowed transportation charges u/s 40(a)(ia) even though the assessee has furnished valid certificate issued u/s 197 of the Act. We do not find any error in the findings of the CIT(A); hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by the revenue. 29. The next issue that came up for our consideration is addition made by the AO on account of reduction in production of pig iron amounting to ₹ 21,65,77,838 by rejecting books of account u/s 145 of the Act. .....

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observed that the alleged moisture and generation of fines has been accounted for only in the current year and neither in the past or future records of the assessee shows such items, hence the same is without any basis and documentary evidence. Moreover, the assessee being a manufacturing industry is required to disclose the consumption ratios with regard to the yield, wastage, by-products, etc in the tax audit report as well as in the return. The tax audit report, however, does not show the yi .....

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t of quantity of 5742.27 m.t. for an amount of ₹ 6.48 crores, the said debit note is not supported by any documentary evidence. Therefore, the AO opined that the assessee was not able to explain difference in production of pig iron when compared to previous financial year and hence rejected books of account u/s 145(3) and estimated production loss at 11,738 M.T. and worked out total value at ₹ 21,65,77,838 and treated it as unaccounted sales for the year. 30. It is the contention of .....

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aw material work out to 42.39% which is on par with previous year s percentage of 42.23% and hence, there is no change in production percentage of finished goods in terms of quantity. The AO, without appreciating the facts in right perspective and also without bringing any cogent material on record in his possession that the assessee has sold goods outside the books of account or there is excess stock found in the possession of the assessee, made addition only on the basis of suspicion and surmi .....

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plaining iron ore fines generated at the time of handling iron ores in segments. It is a kind of by-product of iron ore and not a separate raw material which has been sold. The CIT(A) further observed that if by-product of iron ore fines sold by assessee and the reduction in quantity of coke due to moisture and ash content is considered for the purpose of calculation of consumption of raw materials, the percentage of production of finished goods achieved by the assessee is in comparison with pre .....

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account of inclusion of iron fines is acceptable. The revised yield is worked out as below:- Particulars 2007-08 2006-07 Raw materials Quantity (MT) Quantity (MT) IRON ORE 92389.437 56678.440 COKE 44126.989 28027.588 DOLOMITE 4630.073 3529.000 QUARTZITE 1157.467 1093.464 LIMESTONE 6113.781 3637.159 MANGANESE ORE 452.791 361.509 HYDRATED LIME POWDER 325.791 - PET COKE 5859.210 - 155055.393 93327.160 Less : Sale of Fines 22675.970 - Less : Moisture & Ash deduction - Net Consumption 126637.176 .....

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ching of coke employed by the appellant to cool it down and treated it in the range of around 5000 degree Celsius. In the above background, the moisture content taken at 3.70% by the appellant and mentioned by the Assessing Officer as a credit in calculation of yield by the appellant is very reasonable. 32. The AO has made addition towards estimated production loss on the basis of comparison of production of finished goods percentage of financial years 2006-07 to 2007-08 and found 7.75% reductio .....

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y-product called iron ore fines and sale by furnishing various evidences. The assessee has exported 84% of by-product to China which has been handled by M/s Canara Overseas Ltd, a public limited company which is evident from the fact that the said company has filed letter deated 07-01-2008 which appointed its own transporters by the name, M/s Ashapura Cargo Carriers. The fact that an amount of ₹ 8.73 crores has been credited in the P&L Account on account of export of by-product is not .....

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produced by the assessee which were subjected to audit. The AO has also overlooked the basic fact that the finished products of the assessee are excisable and no finished goods are removed without payment of excise duty. There is nothing on record to suggest that excise authorities have contemplated any action on so-called suppressed production and there is not an iota of evidence to suggest that the assessee has sold produce of finished goods, outside books of account. In the absence of any inc .....

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ture of capital expenditure which gives enduring benefit to the assessee. The AO further observed that the assessee has repaired blast furnace which was installed in the previous financial year with a capital cost of ₹ 5,38,32,142. The function of the same is directly related to yield of production and its failure which compelled the assessee to re-align the same with durable yield efficient and energy efficient with fire bricks. The repair cost with reference to the original cost of the m .....

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0 degree centigrade. The blast furnace consists of steel shell which is lined with refractory bricks internally. The shell is continuously cooled by water spray evaporation cooling system from outside. A refractory was installed in the year 2005. Since the size of the furnace of Chinese design is put up for the first time in the country and the same was not functioning properly resulting in yield going down, the assessee has carried out necessary repairs to keep the blast furnace intact to achie .....

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nce only on the ground that total cost incurred for repair and maintenance worked out to 40% of existing machine. The AR further submitted that cost incurred for repairs and maintenance is not a relevant factor for deciding whether it is capital or revenue in nature but what is relevant is whether the assessee has restored already existing plant and machinery or created new plant & machinery which gives enduring benefit. The assessee has repaired the existing plant and machinery, therefore, .....

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h better quality which resulted into enhanced production capacity which gave enduring benefit till life of the asset. Therefore, the AO was right in disallowing repairs to plant & machinery being capital in nature and his order should be upheld. The Ld.DR further submitted that in respect of partial relief allowed by the CIT(A) for ₹ 15,86,633, the CIT(A) without appreciating the fact that expenditure is in the nature of capital expenditure, deleted addition made by the AO without assi .....

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lated to yield of production and failure of its lining which compelled the assessee to realign the same with durable efficacy and energy saving lining of fire bricks which is nothing but capital expenditure. It is the contention of the assessee that expenditure is in the nature of current repairs which does not give rise to creation of any new asset. The assessee further contended that it has repaired blast furnace which was not given expected result due to inferior quality of blast furnace whic .....

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total cost of the asset. Other than this, the AO has not given any reason to come to the conclusion that expenditure incurred is in the nature of capital expenditure. On the other hand, the assessee has filed various details to prove that it is merely a repair of blast furnace to retain its existing production capacity and energy efficiency. The assessee has filed pictures of the plant and machinery. According to the assessee, the blast furnace is an integrated production process, in which lini .....

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s not at all relevant to decide whether the particular expenditure is capital or revenue in nature. The quantum of repair expenditure incurred for the blast furnace cannot be a guiding or decisive factor to determine whether the expenditure is capital or revenue in nature. We further notice that by repairing a part of refractory lining of the blast furnace, no additional advantage is procured by the assessee company because the repairing of the refractory lining has not enhanced capacity of the .....

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y existing asset, which does not bring a new asset into existence or does not give to the assessee a new or different advantage, and they must be repairs which are attended to as and when the need for them arises. We should also like to make it clear that the question as to when a building, machinery, plant or furniture requires repairs and when the need arises must be decided by not any academic or theoretical test but must be decided by the test of commercial expediency. It is after all for a .....

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s under: On a plain reading of the above section it is clear that in order to entitle an assessee to claim deduction under section 3 I of the Act, the amount must be paid on account of current repairs . The expression current repairs has not been defined in the Act. It has, therefore, to be taken in its popular or commercial sense. In commercial parlance, it means repairs which are undertaken in the normal course of user for the purpose of preservation, maintenance or proper utilisation. It does .....

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decided in the context of the business carried on by an assessee. Merely, because the benefit accruing by the expenditure is of enduring nature, is by itself not a conclusive test to hold it as a capital expenditure (see Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC)). Normally initial investment on machines and their parts will be in the nature of capital expenditure but replacement of parts of an existing machinery in the course of their working will he a revenue expenditure. 42. In the cas .....

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assessee only regained its lost production capacity by repairing refractory lines. Therefore, the lower authorities were completely erred in treating the repairs and maintenance to plant and machinery being capital in nature. Hence, we direct the AO to delete addition made towards repairs and maintenance to plant & machinery. 45. In the result, appeal filed by the assessee in ITA No.8806/Mum/2011 is allowed and the appeal filed by the revenue in ITA No.549/Mum/2012 is dismissed. Order prono .....

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