The Madras High Court division bench comprising Justice V.Ramasubramanian and Justice T.Mathivanan recently held that the expenditure incurred by an assessee after the expiry of the life span of machinery, for the purpose of expanding its life span, could be treated as revenue expenditure. The court was considering the appeal filed Commissioner of Income Tax, Chennai against the Neyveli Lignite Co.
During the previous years relevant to the assessment years 1993- 94 to 1999-2000, the assessee, a public limited company engaged in the business of generation of electricity and mining of lignite, incurred expenditure to the tune of about Rs.252 Crores towards what was termed by them as ”Life Extension Program of Thermal Power Station-I. From assessment years 1995-96 to 1999-2000, the assessee also incurred huge expenditure on the rejuvenation of Bucket Wheel Excavator (BWE) and claimed these expenditures to be Revenue expenditure allowable under Section 37 or as current repairs under Section 31(i) of the Income Tax Act.
The Assessing Officer held these expenses to be capital in nature, on the ground that these expenses were incurred after the life span of the machinery, giving the assessee an enduring advantage and hence, the assessee’s claim was rejected.
However, CIT (A) and the Tribunal, on appeal accepted the claim of the assessee. Therefore, the Revenue preferred an appeal before the High Court by raising a question that whether the expenditure incurred by an assessee after the expiry of the life span of a machinery, for the purpose of expanding its life span, could be treated as a revenue expenditure or capital expenditure ?
The assessee’s contention was that the expression “current repairs” denotes the repairs for the purpose of preserving or maintaining an already existing asset. It does not bring about a new asset into existence, nor does it give a new or different advantage. Therefore, he contends that the test of improvement or advantage is not relevant to determine whether the repair was current repair or not. It is his further contention that the magnitude of the expenditure cannot also determine whether something is current repair or not.
The Court on deciding whether the assessee is entitled to get such exemption pointed out that there was a clear finding in the order of assessment that the assessee had two options. The first option was to install a new plant which would have costed about Rs.4.5 Crores per MW with a longer gestation period. The second option was to go in for the life extension program at a cost of Rs.0.44 Crores per MW with a shorter gestation period. These findings of fact recorded by the Assessing Officer are accepted by the Revenue. Therefore, what follows out of these findings of fact, is the question to be addressed.
In the instant case, there were two options were open to the assessee and that the assessee had gone in for a cheaper option. The Court opined that the AO erred in treating both options to be of the same nature. This reasoning was rejected by both the appellate authorities. The Court accepted the decision of the appellate authorities and hence, allowed the claim of the assessee.
Read the full text of the Judgment here.
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