Commissioner Of Income Tax, Ludhiana-Ii v. M/S Malerkotla Steels & Alloys Pvt. Ltd., Malerkotla

Income-tax Appeal No. 228 of 2007 -1- **** IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH 1.Income-tax Appeal No. 228of 2007 Date of decision: 8.12.2010 Commissioner of Income Tax, Ludhiana-II ...Appellant Versus M/s Malerkotla Steels & Alloys Pvt. Ltd., Malerkotla ...Respondent2.Income-tax Appeal No. 227of 2007 Commissioner of Income Tax, Ludhiana-II ...Appellant Versus M/s Malerkotla Steels & Alloys Pvt. Ltd., Malerkotla ...Respondent3.Income-tax Appeal No. 154of 2008 Commissioner of Income Tax, Ludhiana-II ...Appellant Versus M/s Malerkotla Steels & Alloys Pvt. Ltd., Malerkotla ...Respondent4.Income-tax Appeal No. 173of 2008 Commissioner of Income Tax, Ludhiana-II ...Appellant Income-tax Appeal No. 228of 2007 **** Versus M/s Malerkotla Steels & Alloys Pvt. Ltd., Malerkotla ...Respondent CORAM: HON'BLE MR.JUSTICE ADARSH KUMAR GOEL HON'BLE MR.JUSTICE AJAY KUMAR MITTAL Present: Mr. Denesh Goel, Advocate for the appellant. Ms. Radhika Suri, Advocate for the respondent. **** ADARSH KUMAR GOEL, J (Oral). This order will dispose of ITA Nos.227, 228 of 2007, 154and 173 of 2008 as common questions of law are involved therein. Income Tax Appeal No.228 of 2007 was admitted toconsider the following substantial questions of law:- “1. Whether on the facts and circumstances of thecase, the Income Tax Appellate Tribunal was right intreating the expenditure incurred on account of repair andmaintenance expenses on furnace as revenueexpenditure instead of capital expenditure? 2.Whether on the facts and circumstances of thecase, the Income Tax Appellate Tribunal was right intreating the cost of moulds as revenue expenditureinstead of capital expenditure?” In other three appeals only question no.2 is involved. The assessee is engaged in steel industry. It claimed deduction under the head repair of plant and machinery. A fire hadbroken out in the factory resulting in damage to the furnace. Theassessee effected repair to the damaged furnace apart from incurringexpenditure on the repair and maintenance of the machinery. Onaccount of fire, the assessee got claim for insurance partly. Theassessing officer held that expenditure on repair was not revenueexpenditure relying upon the judgment of the Hon'ble Supreme Courtin Ballimal Naval Kishore Vs. Commissioner of Income-tax[1997] 224 ITR 414. The CIT(A) upheld the plea of the assesseethat the expenditure was incurred in the course of regular businessand no new asset was acquired. Entire furnace was not damagedand only repairs were carried out. This view has been upheld by theTribunal with the following observations:- “6.We have considered the rival submissions. Wehave perused the orders of the lower authorities and alsothe written submissions made by the assessee before thefirst appellate authority. We find that the assessee ownstwo furnaces namely M/s Magathermic make 3 MTcapacity furnace and GEC 3.5 MT capacity furnace. TheGEC furnace was extensively damaged in a fire whichbroke out in the factory of the assessee on 11.6.99. Theassessee carried out repairs by way of replacement of atransformer and the panel static inverter generatorpertaining to the furnace which was damaged. The costof the transformer and the panel static inverter generator “6.We have considered the rival submissions. Wehave perused the orders of the lower authorities and alsothe written submissions made by the assessee before thefirst appellate authority. We find that the assessee ownstwo furnaces namely M/s Magathermic make 3 MTcapacity furnace and GEC 3.5 MT capacity furnace. TheGEC furnace was extensively damaged in a fire whichbroke out in the factory of the assessee on 11.6.99. Theassessee carried out repairs by way of replacement of atransformer and the panel static inverter generatorpertaining to the furnace which was damaged. The costof the transformer and the panel static inverter generator was claimed as revenue expenditure. In this backgroundthe CIT(A) has concluded that the expenditure has notresulted either in enhancement of the capacity of thefurnace nor any new asset has come into existence. Theeffect of the repairs carried out by the assessee has beenonly to restore the machinery to its original condition.These factual findings have not been controverted by thedepartment before us on the basis of any cogent materialor evidence. In the absence of any material to infer to thecontrary we do not find ourselves in a position to interferewith the conclusion drawn by the CIT(A). The expenditurehas been rightly held to be revenue expenditure. 7.In so far as the reliance placed by the revenue onthe decision of the Apex Court in the case Ballimal NavalKishore & sons (supra) is concerned, we find that thesame does not help the case of the revenue. Thejudgment of the Apex Court was rendered in the contextof expenditures incurred on repairs of the cinema theaterwhich entailed acquisition of new machinery, newfurniture, new sanitary fittings and new electrical wiringsbesides extensive repairs to the structure of the existingbuilding. It was under such circumstances thatexpenditure incurred was held by the Apex Court to becapital in nature. In the instant case, the facts andmaterial on record, do not establish that the assessee has set up a new furnace unit or that a new asset with anenhanced capacity has been created on account of theimpugned expenditure. Therefore, the reasoningenunciated in the case of Ballimal Naval Kishore & sons(supra) by the Apex Court is not attracted to the facts ofthe instance case. As a result we hereby affirm theconclusion drawn by the CIT(A) on this issue. Therevenue accordingly fails on this count.” As regards question no.2, the assessing officerdisallowed deductions claimed by the assessee on expenditureincurred on moulds used in manufacturing process. The assessingofficer held the said expenditure to be capital expenditure entitlingthe assessee only to depreciation instead of entire deduction. TheCIT(A) reversed the view of the assessing officer and held theexpenditure in question to be revenue expenditure which has beenaffirmed by the Tribunal in the following terms:- “We have considered the rival submissions. Havingregard to the products manufactured by the assesseenamely steel and iron ingots, runners and risers, it ismaintaining electric furnaces, in whose running themoulds are utilized. It is clear that the moulds are used inthe production process carried out by the assessee. Theposition of the moulds in the industry of the assessee, inour view, is akin to that in a steel rolling mill. The mouldsare used in an electric furnace which is run at a very high “We have considered the rival submissions. Havingregard to the products manufactured by the assesseenamely steel and iron ingots, runners and risers, it ismaintaining electric furnaces, in whose running themoulds are utilized. It is clear that the moulds are used inthe production process carried out by the assessee. Theposition of the moulds in the industry of the assessee, inour view, is akin to that in a steel rolling mill. The mouldsare used in an electric furnace which is run at a very high degree of temperature. In a case relating to the steelrolling mill, where also the moulds are used formanufacturing process, the Hon'ble jurisdictional HighCourt in the case of M/s Malhotra Industrial Corpn.Reported in 254 ITR 635 (P&H) held that the costincurred for frequent replacement of rolls which a revenueexpenditure as it did not result in creation of any capitalasset or a benefit of enduring nature. Drawing similaranalogy to the instant case where the moulds are used inthe production process of the assessee, an as contendedby the assessee, the life of the moulds is short requiringfrequent replacements, such an expenditure, in our view,only seeks to facilitate the main production processcarried out by the assessee and in no way can beconstrued as creating a new asset in the hands of theassessee. The expenditure thus has been rightlyconsidered to be in nature of 'revenue expenditure' bythe CIT(A). We have heard learned counsel for the parties. Learned counsel for the revenue submits that expenditureon repairs was in a way investment in machinery being totalreplacement of the damaged furnace and in such a situation theassessing officer was fully justified in holding the same to be capitalexpenditure following the law laid down in Ballimal Naval Kishore'scase (supra). He further submits that replacement of moulds was also capital expenditure as moulds were part of machinery used inproduction process.Learned counsel for the assessee supported the viewtaken by the CIT(A) and the Tribunal. Whether the expenditure in question is capital or revenueexpenditure has to be determined in the facts and circumstances ofindividual case. Tests of expenditure being of enduring nature or foracquiring new assets are broad tests, though not conclusive for allsituations. Reference may be made toAssam Bengal Cement Co.Ltd. Vs. CIT271 ITR 34, CIT Vs. Madras Auto Service (P) Ltd.233ITR 468 apart from Ballimal Naval Kishore's case. . Interferenceby this Court is permissible only if the view taken by the Tribunalsuffers from perversity. In the present case, having regard to theconcurrent finding recorded by the CIT(A) and the Tribunal, it is clearthat expenditure was on repairs of damaged furnace and not forreplacement or restoration thereof. In Ballimal Naval Kishore'scase in the facts and circumstances of that case, the findingrecorded by the High Court was upheld. The assessee was runninga ginning factory which was converted into a cinema theatre bymaking huge investment in the process of conversion. The saidinvestment was held to be out side the purview of the current repairs.The said judgment being on a different fact situation isdistinguishable. Accordingly, question no.1 is answered against therevenue and in favour of the assessee. On question no.2, the Tribunal has merely followed the view taken by this Court in Malhotra Industrial Corporation's caseholding that replacement of rolls did not result in creation of newcapital asset or benefit of enduring nature. The said principle wasapplied to the present case in the context of expenditure onreplacement of moulds. Mere fact that the moulds were used inproduction process could not be conclusive on the issue of natureof expenditure as held by this Court in Malhotra IndustrialCorporation's case (supra). Question no.2 is answered in favour ofthe assessee and against the revenue. Accordingly, the appeals are dismissed. On question no.2, the Tribunal has merely followed the view taken by this Court in Malhotra Industrial Corporation's caseholding that replacement of rolls did not result in creation of newcapital asset or benefit of enduring nature. The said principle wasapplied to the present case in the context of expenditure onreplacement of moulds. Mere fact that the moulds were used inproduction process could not be conclusive on the issue of natureof expenditure as held by this Court in Malhotra IndustrialCorporation's case (supra). Question no.2 is answered in favour ofthe assessee and against the revenue. Accordingly, the appeals are dismissed. (Adarsh Kumar Goel) Judge December 08,2010Pka (Ajay Kumar Mittal) Judge