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M/s Akshaya Steel Works Pvt. Ltd. Versus DCIT, Circle-3, Kolkata

2018 (1) TMI 451 - ITAT KOLKATA

Nature of expenditure - replacement of steel rolls - revenue or capital - Held that:- We find from the explanation of the aforesaid manufacturing process, steel rolls are not independent machinery but instead they are only part of a rolling mill. It does not contribute for the increase in production capacity of the products manufactured by the assessee company. Hence there is no enduring benefit or advantage derived by the assessee company in this regard. The replacement of steel rolls are merel .....

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a capital expenditure at all vis a vis the facts of the instant case and the manufacturing process involved therein, the explanation to section 30 and 31 of the Act brought into the statute with effect from 1.4.2003 would not be applicable to the facts of the instant case. - Expenses in the instant case would have to be treated only as revenue expenditure and we direct accordingly. Hence the Ground No.2 raised by the assessee is allowed. - I.T.A No. 823/Kol/2015 - Dated:- 5-1-2018 - Shri M. .....

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) of the Income Tax Act, 1961 (in short the Act ) dated 28.02.2013 for the Assessment Year 2010-11. 2. The only issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the treatment of replacement of steel rolls as capital expenditure as against revenue expenditure claimed by the assessee, in the facts and circumstances of the case. The ld AR during the course of hearing stated that he would press only Ground No. 2 which is the effective ground for adjudication .....

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. The ld AO on perusal of the profit and loss account of the assessee, observed that it had debited an amount of ₹ 95,69,107*/- under sub head Rolls in Schedule N of Profit and loss account under head Operating and Other Expenditure . On perusal of the details for the same filed by the assessee, the ld AO show caused the assessee as to why the same should not be treated as capital expenditure as it provides enduring benefit to the assessee. The assessee replied that these rolls were used i .....

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edule and rate of depreciation provided thereon was 80%, the expenditure incurred thereon would only have to be treated as capital expenditure. The ld AO accordingly treated the same as capital expenditure and granted depreciation in the following manner:- The ld AO after allowing depreciation of ₹ 54,29,808/- , made net disallowance of ₹ 41,39,298/- (9569106-5429808) as capital expenditure in the assessment. This action of the ld AO was upheld by the ld CITA. Aggrieved, the assessee .....

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Expenditure by any process of reasoning. 4. We have heard the rival submissions. We find that the assessee had installed one Rolling Mill for manufacture of rolled products i.e Angles, Channels, Round Bar, Flat Bar, Square Bar, Octagonal Bar, Hexagonal Bar etc . In the rolling mill, the assessee uses Steel Rolls which is an integral part of the machinery. In the process of manufacture of rolled products, the raw materials (mild steel billets / mild steel ingots) are fed into the heating furnace .....

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oducts are subjected to process of cooling and thereafter sent for sizing, bundling , etc. From the aforesaid manufacturing process, it was explained by the ld AR that the steel rolls get worn out warranting frequent replacement in 2 to 6 months. We find from the explanation of the aforesaid manufacturing process, steel rolls are not independent machinery but instead they are only part of a rolling mill. It does not contribute for the increase in production capacity of the products manufactured .....

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e item in the Appendix I of Depreciation Rates Schedule, it does not take the character of capital expenditure automatically. We hold that since it is not a capital expenditure at all vis a vis the facts of the instant case and the manufacturing process involved therein, the explanation to section 30 and 31 of the Act brought into the statute with effect from 1.4.2003 would not be applicable to the facts of the instant case. 4.1. We find that the reliance placed by the ld AR on the co-ordinate b .....

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to be addressed by us is, whether the expenditure incurred on replacement of rolling mill rolls constitutes a capital expenditure or revenue expenditure The facts detailed above clearly show that the assessee has all throughout been claiming expenditure on replacement of rolls as revenue expenditure. Up to the assessment year 1991-92, the Department has allowed the same as deduction. In none of the earlier assessment years, the expenditure was treated as capital expenditure Now, the only issue .....

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depreciation on the rolls for the simple reason that expenditure incurred on rolls prior to the commencement of the business would be capital in nature. Therefore, it is necessary to provide the rate of depreciation on rolls so that depreciation at that rate could be allowed to the assessee. But it does not mean that expenditure incurred on replacement of rolls subsequent to the commencement of the business would also be a capital expenditure. The judgment of the Karnataka High Court in the cas .....

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Machinery and plant". This only shows that the rate of depreciation mentioned in the Appendix provides depreciation when the expenditure is considered as capital and not in the case where the expenditure itself is revenue in nature. Now, it is obvious that the nature of the assessee's business is such that it requires frequent replacement of rolls. The expenditure incurred thereon would certainly fall in the nature of current repairs as the same does not result in creating a capital ass .....

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tjit Industries Ltd. [2000] 241 ITR 556, the Delhi High Court has held that the expenditure on replacement of damaged moulds was revenue expenditure. In the case of Co-operative Sugars Ltd. [1999] 235 ITR 343, the Kerala High Court has held that expenditure on "machinery maintenance" of sugar plant by replacing substantial part of the plant was revenue expenditure as no new asset was brought into existence. Even the jurisdictional High Court of Punjab and Haryana, in the case of Khalsa .....

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er of Income-tax (Appeals) and direct the Assessing Officer to allow deduction on the replacement cost of rolls as current repairs. Accordingly, this ground of appeal is allowed for both the assessment years. In the result, both the appeals of the assessee are partly allowed. 4.2. We also find that the aforesaid decision of Chandigarh Tribunal had been approved by the Hon ble Punjab & Haryana High Court in the case of CIT vs Malhotra Industrial Corporation reported in (2002) 254 ITR 635 (P&a .....

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larly when such rolls have been termed as capital assets of the concern on which depreciation is allowable under the Income-tax Act itself at the prescribed rates ?" 2. We have heard Mr. R.P. Sawhney, the learned counsel for the revenue. He submits that the Tribunal has erred in treating the deduction claimed by the assessee as the revenue expenditure. 3. The assessee is running a steel rolling mill. In para 4 of the petition of appeal, it has been admitted that in the absence of rolls, it .....

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