The Principal Commissioner Of Income Tax, Vadodara 1 v. Gujarat Industries Power Company Ltd

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 351 of 2022 ========================================================== THE PRINCIPAL COMMISSIONER OF INCOME TAX, VADODARA 1 Versus GUJARAT INDUSTRIES POWER COMPANY LTD. ========================================================== Appearance: MR.VARUN K.PATEL(3802) for the Appellant(s) No. 1 for the Opponent(s) No. 1 ========================================================== CORAM:HONOURABLE MR. JUSTICE N.V.ANJARIAandHONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 01/08/2022 ORAL ORDER (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1. This appeal is filed under section 260A of the Income Tax Act,1961 [for short ‘the Act,1961’] by the Revenue feelingaggrieved by the common order dated 28.02.2022 passed bythe Tribunal in ITA No. 3003/AHD/2010 for the assessment year 2003-04. 2. The Revenue has proposed the following substantial questions of law: “(a)Whether on the facts and in the circumstances ofthe case and in law, the Hon’ble ITAT is justified inupholding the decision of the Ld. CIT(Appeals) in deleting the addition of Rs. 2,97,69,400/- made onaccount of disallowance of expenditure incurred oncapital stores and spares claimed as revenue expenditureinstead of capital expenditure? (b)Whether on the facts and in the circumstances ofthe case and in law, the Hon’ble ITAT is justified inupholding the decision of the Ld. CIT(Appeals) indeleting the addition of Rs. 2,97,69,400/- holding that thereplacement of spares in the machineries would beallowable as revenue expenditure only, withoutappreciating the fact that the assessee itself classified thestores and spares as capital spares in its books ofaccounts and the replacement cycle of such stores andspares has resulted in enduring benefit to the assessee andaccordingly the expenditure incurred on such stores andspares are in the nature of capital expenditure? 3. The assessee is engaged in generation of power in form ofelectricity. For the assessment year 2003-04, the AssessingOfficer disallowed the revenue expenditure claimed by theassessee for replacement of parts of machinery by treating thesame as capital expenditure and claim of deduction undersection 80IA of the Income Tax Act, 1961 [For short ‘theAct,1961’]. The Assessing Officer disallowed the replacementcost of parts of machinery on the ground that the same is ofcapital nature. 4. The Assessing Officer also disallowed additional claim undersection 80IA of the Act,1961 on the ground that the assesseeneither obtained or filed audit report nor claimed deductionunder section 80IA of the Act, 1961 at the time of filing theoriginal return of income and the assessee is required to set offof previous year brought forward losses for the said unit undersection 80IA(5) of the Act,1961 but the same was not done bythe assessee and therefore, the claim made by the assessee wasrejected by the Assessing Officer.section 80IA of the Act,1961 on the ground that the assesseeneither obtained or filed audit report nor claimed deductionunder section 80IA of the Act, 1961 at the time of filing theoriginal return of income and the assessee is required to set offof previous year brought forward losses for the said unit undersection 80IA(5) of the Act,1961 but the same was not done bythe assessee and therefore, the claim made by the assessee wasrejected by the Assessing Officer. 5. Being aggrieved, the assessee preferred appeal before theCIT(Appeals). The CIT(Appeals), considering the decisions ofthe Hon’ble Supreme Court and High Court, held that thereplacement of parts of a larger machine would not amount tocreation of a new asset or incurring of capital expenditure andit would be a revenue expenditure as the manufacturingactivity is carried on by the machine comprising of variousparts and where one or more of the parts is replaced, it wouldnot amount to replacement of the whole. CIT(Appeals). The CIT(Appeals), considering the decisions ofthe Hon’ble Supreme Court and High Court, held that thereplacement of parts of a larger machine would not amount tocreation of a new asset or incurring of capital expenditure andit would be a revenue expenditure as the manufacturingactivity is carried on by the machine comprising of variousparts and where one or more of the parts is replaced, it wouldnot amount to replacement of the whole. 6. The CIT (Appeals) relied on the decision of the Hon’bleSupreme Court in case of CIT vs. Sarvana Spinning Mills Pvt.Ltd reported in 293 ITR 201.Supreme Court in case of CIT vs. Sarvana Spinning Mills Pvt.Ltd reported in 293 ITR 201. 7. With regard to disallowance of claim under section 80IA ofthe Act, 1961, CIT(A) held that filing of audit report isprocedural in nature and if the same is submitted beforefinalization of assessment, the legal requirement would besatisfied as held by this Court in case of CIT vs. Gujarat Oiland allied Industries reported in 201 ITR 325. Regardingcomputation of profit in conformity with the provision ofsection 80IA of the Act, 1961, the CIT (Appeals) followed thedecision of the Chennai Bench of the Tribunal in case ofMohan Breweries and Distiller Ltd vs. ACITreported in 114TTJ 532 wherein it is held that initial assessment year is theyear in which the assessee first opts to be governed by thededuction provisions and not the year of manufacture.Accordingly, the CIT (Appeals) allowed the appeal filed bythe assessee on both the grounds. 8. The Tribunal, after considering the submissions made by both the sides and the technical write up submitted by the assesseetogether with details of spares consumed at regular interval forvarious assessment years and the case laws relied by theassessee, arrived at a finding that the replacement of parts in amachinery is treated as not capital but revenue in nature for thefollowing reasons. “a.For a power generating company, these bucketspares are in the nature of consumables’ spares onlynotwithstanding its high cost. b. The buckets are designed with special profile ofairfoil cross section for efficient energy conversion. c. Due to high working temperature of around 800' Cand high speed of the turbine (5100 RPM), thiscomponent is the most critical in the turbine and failureof this component may lead to catastrophic damage tothe machine. d. It is also seen from the Original EquipmentManufacturer namely BHEL/General Electric, USA havevery categorically prescribed the operating life of theabove bucket which helps to ensure trouble freeoperation and to avoid any catastrophic damage to themachine. e. Further it is also stated that by replacement of thebuckets on completion of 48000 hours of continuousoperation the power generation capacity is neitherincreased nor is the power plant efficiency or life of theplant gets increased. f. The cost of the Gas Turbine parts such as Bucketsand Nozzles are high primary due to very specialmetallurgy and manufacturing process provided by themanufacturer out side India and the assessee companyprocures the same by import and thus attracts customduty, air freight, insurance etc. d. It is also seen from the Original EquipmentManufacturer namely BHEL/General Electric, USA havevery categorically prescribed the operating life of theabove bucket which helps to ensure trouble freeoperation and to avoid any catastrophic damage to themachine. e. Further it is also stated that by replacement of thebuckets on completion of 48000 hours of continuousoperation the power generation capacity is neitherincreased nor is the power plant efficiency or life of theplant gets increased. f. The cost of the Gas Turbine parts such as Bucketsand Nozzles are high primary due to very specialmetallurgy and manufacturing process provided by themanufacturer out side India and the assessee companyprocures the same by import and thus attracts customduty, air freight, insurance etc. g. Further the replacement of parts is Capital orRevenue is No more Res integra based on theobservation made by the Hon’ble Supreme Court in thecase of CIT V/s. Saravana Spinning Mills andCommissioner of Income Tax V/s. Sri Mangayar karasiMills (P) Ltd. 315 ITR 114 wherein held that whencertain parts of an air-conditioner or a T.V. is replaced,it does not amount to replacement of entire unit. h. Thus this issue is already dealt by the co-ordinateBenches of ITAT, Hyderabad in the case of DCIT -VsAP Gas Power Corporation Ltd wherein after detaileddiscussion held that expenditure incurred by the assesseecannot betreated as capital expenditure but Revenueexpenditure only. i. Thus, applying the same logic to the facts of theassessee’s case, it can be said that there is noreplacement of the gas turbine as a whole but certainrepair and replacement to some of the parts of the gasturbine, which does not result in bringing into existence a new asset of enduring nature, rather, the repair andmaintenance are of recurring nature and essentiallyrequired for smoothrunning of business of the assesseei.e., generation of power. j. Therefore we have no hesitation in holding that thereplacement of spares in the machineries would beallowable as Revenue expenditure only and additionmade by the AO is directed to be deleted. Thus theDepartment ground isrejected.” 9. With regard to disallowance under section 80IA of the Act, 1961, the Tribunal followed the decision of this Court in case of CIT vs. Gujarat Oil and allied Industries (supra)considering the fact that the audit report was filed by theassessee before completion of the assessment. The Tribunal,relying upon the aforesaid decision of this Court, held that it issettled law that filing of tax audit report during pendency ofassessment proceedings is sufficient compliance for claimingdeduction under section 80IA of the Act, 1961. 10.With regard to the issue of set off of losses as per section 80IA(5) for computation of income of eligible unit, the issue of initial assessment year is considered by the Tribunal on the basis of material placed before it and Circular No. 1/2016issued by the CBDT that an assessee who is eligible to claimdeduction under section 80IA of the Act has the option tochose initial/first year from which it may desire to claim forten consecutive years, out of slab of fifteen (or twenty )yearsas prescribed under that sub-section. The said circular alsoclarified that once such initial assessment year has beenadopted by the assessee, the assessee would be entitled toclaim deduction under section 80IA for ten consecutive yearsbeginning from the year in respect of which the assessee hasexercised such option subject to fulfillment of conditionsprescribed in the section. Therefore, the term “initialassessment year” would mean, the first year opted for by theassessee for claiming deduction under section 80IA with arider that total number of ten years for claiming deductionshould not transgress the prescribed slab of fifteen or twentyyears as the case may be and the period of claim should beavailed in continuity. 11. 11. Following the aforesaid circular, SLP filed by thedepartment was also dismissed against the decision of Madras-High Court in case of Assistant Commissioner of Incometax,Tirupur vs Velayuthasamy Spinning Mills (P) Ltd reported in[2016] 76 taxmann.com 176 holding that loss in earlier year toinitial year already absorbed against the profit of otherbusiness cannot be notionally brought forward and set offagainst the profit of eligible business as no such mandate isprovided under section 80IA(5) of the Act, 1961. TheTribunal, following the decision of the Apex Court and theCircular No. 1/2016 issued by the CBDT, rejected the appealfiled by the Revenue allowing the claim of deduction undersection 80IA of the Act in favour of the assessee. 12.Considering the above findings of fact arrived at by theTribunal with regard to the claim of the assessee for the cost ofspare parts as revenue expenditure as well as the deductionunder section 80IA of the Act, 1961 in view of the CBDTCircular No. 1/2016 dated 15.02.2016 as well as the decision of the Apex Court in case of CIT vs. Sarvana Spinning Mills Pvt. Ltd (supra) and Velayuthasamy Spinning Mills (P) Ltd(supra), we are of the opinion that no question of law muchless any substantial question of law proposed or otherwisearises from the impugned order of the Tribunal. The Appealaccordingly stands dismissed. (N.V.ANJARIA, J) JYOTI V. JANI (BHARGAV D. KARIA, J)