TMI Blog2014 (2) TMI 1409X X X X Extracts X X X X X X X X Extracts X X X X ..... re incurred by the assessee cannot be treated as capital expenditure. Thus we direct the Assessing Officer to delete the addition made on account of disallowance of expenditure. Addition on account of social welfare expenditure - Revenue or capital expenditure - HELD THAT:- A perusal of the assessment order makes it clear that the Assessing Officer admits the fact that the community hall is in the control of Village Panchayat as its ultimate asset. In such view of the fact it cannot be held that it is a capital expenditure as there is no capital asset created by the assessee for it. That besides, as has been rightly held by the CIT(A) social welfare expenditures incurred by a company helps in improving the working with the native people of the nearby area and it also improves the condition of the area inhabited by its employees and others. Therefore, such social welfare expenditures are to be allowed as business expenditure. As in Karnataka Financial Corporation [ 2009 (12) TMI 410 - KARNATAKA HIGH COURT] held that the amount spent by the Corporation towards development of model villages has to be considered as expenditure incurred towards his business promotion and theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ekhar Reddy For Assessee : Mr. V. Sivakumar ORDER PER SAKTIJIT DEY, J.M. These three appeals are filed by both by the department and assessee against separate orders of the CIT(A) while the appeal relating to the A.Y. 2003-2004 is filed by the department , there are cross-appeals for the assessment year 2005-2006 by assessee. Since issues are common and the assessee is the same, these are clubbed and heard together and are being disposed of by this consolidated order. ITA.No.310/Hyd/2009 A.Y. 2005-06 ( Revenue Appeal) 2. Since the CIT(A) has passed substantive order for the assessment year 2005-2006, for the sake of convenience, we will deal with the facts as involved in assessment year 2005-2006. The department altogether has raised 9 grounds. Grounds No.1 and 9 are general in nature and therefore, it need not be adjudicated and hence, they are dismissed. 3. In Ground Nos.3 to 5 the department has challenged the action of the CIT(A) in deleting the addition made due to disallowance of expenditure of ₹ 20,21,46,278/-. 4. Briefly the facts are, the assessee is a company engaged in generation of power. For the assessment year under dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an enduring benefit, the expenditure incurred cannot be considered as towards current repairs but is a capital expenditure. He further was of the view that if assessee s contention is accepted, then assessee will have unhindered and continuous generation of power with efficiency and effectiveness without installing new turbine at all by only replacing major parts of the turbine at one go in regular intervals and claiming such expenditure as current repairs. This according to the Assessing Officer, will make the [1] provisions of section 31(i) redundant. With the above said observation, the Assessing Officer disallowed an amount of ₹ 20,21,46,278/- by treating it as capital expenditure. 5. The assessee being aggrieved of such disallowance, challenged the same in an appeal filed before the CIT(A). In course of hearing of appeal before the CIT(A), it was contended by the assessee that the expenditure incurred was towards cost of nozzles, buckets, shrouds, bearings, transition pieces and combustion liners which are parts of gas turbines. It was submitted that the expenditure was incurred only for replacement of unserviceable parts of gas turbine without which the power generat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 and were allowed by the department. The assessee also furnished the details of expenditure claimed in those financial years and allowed by the department. It was thus contended that, these figures would show that the expenditure incurred is a recurring expenditure which is necessary and required for effective running of the gas turbines. It was submitted by the assessee that since in the assessee s case, the production process is an integrated one and only some of the parts of the machinery is repaired or replaced that did not result in coming into existence of any new asset. The expenditure was incurred [1] simply to preserve and maintain the existing asset. In this context, the assessee relied upon the decision of the Hon ble Karnataka High Court in the case of Sagar Talkies 173 Taxman 12. 7. The CIT(A) after considering the submissions of the assessee vis- -vis the materials available on record, noted that the Assessing Officer has made the disallowance primarily relying on the decision of the Hon ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills (supra). The CIT(A) on going through the decision of the Honble Supreme Court in the case of Saravana Spinning Mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antage or features which have improved its income earning capacity, in otherwords, a new asset has been brought into existence. He further observed that as per the observations of the Hon ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills (supra) the allowability of expenditure on repairs and maintenance may vary from industry to industry and business to business. An expenditure which may not be current repair for a textile industry can be a current repair in case of steel industry. Therefore, what is to be seen is, whether the plant and machinery on which the expenditure is claimed is part of one [1] continuous and integrated process of production or it pertains to any specific division or department of the industry with a separate identifiable marketable product as its output. Examining the facts of the assessee s case in the aforesaid perspective, the CIT(A) noted that the production process of the assessee is, generation of electric energy using combined cycle plant envisaging a gas turbine plus unfired steam generator. At one end of the turbine assembly, natural gas/naphtha is fed into the combustor which burns with atmospheric air sucked in by the rotating comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 84,177/-. The assessee contended before the CIT(A) that the said buckets needed replacement as the existing set had already exhausted its utility life and cannot be refurbished. Similarly, certain nozzles and bearings etc., were refurbished during the regular inspection. As regards Gas turbine-2, nozzles kits, shrouds, second stage buckets were either refurbished or replaced and the total cost was ₹ 79,52,326/-. As regards 172 MW stage-3, nozzle kits were apparently replaced costing 17.04 crores. 10. After going through the detailed submission along with graphical presentation of the Turbine Assembly filed by the assessee, the CIT(A) noted that buckets, nozzle kits etc., are part of one complete integrated turbine assembly. The bucket or nozzle kits or shrouds cannot function independently giving rise to an independent product/byproduct which can be sold in the market. He observed that even the Assessing Officer has not pointed out in the assessment order as to whether the item refurbished or replaced and claimed under the repair and maintenance cost are capable of generating any independent product as was analyzed by the Hon ble Supreme Court in the case of Saravana Spinn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s turbines by incurring an expenditure of ₹ 26.95 crores in comparison to repairs and maintenance carried out in the previous assessment year to the tune of ₹ 7.88 crores. It was therefore, contended that the quantum jump in the incurring of expenditure would show that the assessee has incurred huge expenditure in replacement of parts which has given a new lease of life to the plant and machinery. Therefore, it is in the nature of capital expenditure. The learned D.R. [1] referring to the accounting standard, at page 23 of the paper book submitted by the department, contended that while deciding whether subsequent expenditure resulted in an increase in the future benefit from the asset or not, both the increase in the benefits per annum as well as increase in benefits through extension of the life of the asset have to be recognized. Even if there was no increase in the annual capacity, but if the life of the asset was substantially increased, then, it would be taken as increase in the future benefits from the concerned asset beyond its previously assessed standard of performance. Hence, it should be treated as a capital expenditure. 13. The learned D.R. relying upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneration of power as discussed by the CIT(A) in his order, there is no intermediate product in the generation of power. It is also a fact on record that the replaced/repaired parts were relating to three gas turbines. A book let submitted by the assessee regarding operation and maintenance of heavy duty gas turbine clearly shows that a well planned maintenance programme is required for getting the maximum equipment availability and optimization of maintenance costs. The said book let further specifically notifies the parts which require careful attention and maintenance are those associated with the combustion process together with those exposed to the hot gases discharged from the combustion system. This include combustion liners, end caps, fuel nozzles assemblies, cross fire tubes, transition pieces, turbine nozzles, turbine stationery shrouds and turbine buckets. The said book let mentions about periodic inspection and repair/refurbish/ replacement of the aforesaid parts of the gas turbine. It also mentions that when the parts are not repairable, they are to be replaced. From this, it is very much clear that the entire gas turbines are not replaced but some of its parts are eit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain parts of a airconditioner or a T.V. is replaced, it does not amount to replacement of entire unit. Therefore, applying the same logic to the facts of the assessee s case, it can be said that there is no replacement of the gas turbine as a whole but certain repair and replacement to some of the parts of the gas turbine, which does not result in bringing into existence a new asset of enduring nature, rather, the repair and maintenance are of recurring nature and essentially required for smooth running of business of the assessee i.e, generation of power. The other decision of the Hon ble Supreme Court relied upon by the learned D.R. in the case of CIT V/s. Sri Mangayarkarasi Mills (P) Ltd. 315 ITR 114 also following the decision in the case of CIT V/s. Saravana Spinning Mills (supra), has laid down the same proposition of law. On the other hand, the decisions relied upon by the assessee as noted in the order of the CIT(A) clearly supports the view that the expenditure incurred by the assessee cannot be treated as capital expenditure. In the aforesaid view of the matter, we do not find any reason to interfere with the findings of the CIT(A) in this regard. We therefore, confir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee challenged the disallowance before the CIT(A). 18. The CIT(A) after considering the submissions of the assessee in the light of the ratio laid down in various decisions, deleted the addition by holding as under : 4.1. I have gone through the fact of the case and the submission of the appellant. I have also gone through the decision relied upon by the appellant. In the case of Nalco, it was held that expenditure incurred on rehabilitation of employees and other persons who were displaced when the assessees' plant was constructed and other expenses incurred in peripheral development work are allowable as business expenditure. The Hon'ble ITAT Cuttack Bench relied on the following decisions: (i) CIT Vs Madras Refineries Ltd (266 ITR 117) (Mad.) (ii) HPCL Vs DCIT (92 TTJ 168) (Mumbai) (iii) CIT Vs Rupsa Rice Mills(104 ITR 249) (Orissa) (iv) Orissa Forest Dev.Corp. Vs CIT 80 ITD 300 (Cut.) A some what similar issue was decided by ITAT Mumbai D Bench in the case of DCIT Vs BSES Ltd (113 TTJ 227). In that case the assessee company had incurred expenditure on construction of toilets, borewells, schools and colleges to improve the working rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal disallowance of ₹ 60,54,821/-. As prior period expenditure for the period from 1990 to 2004. The A.O. held that as the expenditure has apparently accrued and chargeable to those years as per the clauses of term loan agreement between the parties and the expenditure is apparently interest and penal interest for nonpayment/ deferment by the assessee, the same is not an expenditure allowable for the year. 21. In course of the appeal proceedings before the CIT(A), the assessee contended that it has availed rupee form loan from UTI vide agreements dated 06.03.1990 and 18.12.1991. As per the said agreement, there was an option for the institutions to convert part of the loan to equity and to increase the interest waived by it if the shares of the company are not listed in the stock exchange. When UTI proposed to exercise its option to convert part of its loan to equity, assessee explained its difficulty in lifting its shares in stock exchange. After negotiations with UTI, it was finally agreed to waive the additional 1% interest on the condition that assessee shall pay interest upto 31.12.2000 and from 01.12.2001 at specific rate which resulted in payment of further interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act when the amount was actually paid by the assessee. In the given circumstances, the CIT(A) having found that the assessee has paid an amount of ₹ 45,92,009/- during the year out of the total expenditure of ₹ 60,54,821/- the same has rightly been allowed as a deduction. Accordingly, we confirm the order of the CIT(A) and dismiss the ground raised by the department. ITA.No.324/Hyd/2009 A.Y. 2005-06 : 23. The issue pertaining to the aforesaid appeal of the assessee is, disallowance of ₹ 37,46,363/- as a prior period [1] expenditure. Briefly, the facts are that the during the assessment proceeding, the Assessing Officer noticed that the assessee claimed a deduction of ₹ 37,46,363/- towards waiver of expenditure relating to prior period in the year under consideration. When asked the assessee s A.R. contended that the amount in question which was offered as income in earlier years, is waived now and claimed by the assessee as prior period expenditure. The Assessing Officer, however, did not accept the contention of the assessee by opining that the assessee being power generation and selling company, it is getting surcharged for delay in clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30 of paper book. On a perusal of the aforesaid letter, it is to be noted that A.P. Transco in the said letter has objected to the levy of surcharge by stating that there is no clear provision in the MOU for levying surcharge. It is further mentioned in the said letter that as per the minutes of extraordinary general meeting of the assessee company held on 08.09.2003, assessee company had taken a decision to drop the levy of surcharge on A.P. Transco. Hence, it was requested by A.P. Transco not to raise/include the surcharge claimed in the bills and to withdraw whatever claims raised towards surcharge till date. In pursuance to the aforesaid [1] letter, the Board has taken a decision vide minutes of meeting dated 19.01.2005 to waive the surcharge of ₹ 51,02,271/- charged upto December, 2004 which includes the amount of ₹ 37,46,363/- from November, 2002 to 31st March, 2004. Therefore, the reasoning of the CIT(A) that the assessee had taken unilateral decision for waiver of the surcharge is not correct. That besides, when A.P. Transco is contesting the levy of surcharge, which is very much evident from its letter under reference, and demanding for withdrawal of the levy ..... 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