The Delhi Bench of Income Tax Appellate Tribunal (ITAT) held that the expenses incurred for repair and maintenance of damaged assets on fire are capital expenditure. Hence, the bench upholds the disallowance made by the assessing officer.
The assessee, Nitrex Chemicals India, company was engaged in the business of manufacturing of Industrial Nitrocellulose, having a plant at Gujrat.
During the course of scrutiny assessment proceedings, the AO observed from the P&L account that the assessee had made huge expenses under the head repair and maintenance & replacement amounting to Rs. 3,08,45,539/- as compared to last year’s expenses at Rs. 53,64,765/-.
When the AO asked for the justification regarding the expenses assessee contended that during the year under consideration, there is an increase in the said expenses on account of fire at the factory at Valsad (Gujarat). Due to the fire assessee lodged claim before the Insurance Company.
Accordingly AO noticed that the assessee has lodged a claim on account of building and machinery, which were destroyed or damaged amounting to Rs. 86,42,865/- after reducing the value of salvage of Rs. 2,15,00/.
Further it was observed that as per the provisions of section 32(l)(iii) of the Income Tax Act, 1961 the value of the money payable by the Insurance company is to be reduced from the written down value.
Thus, as the assessee had not reduced the written down value of the asset in respect of claim lodged before the insurance company.
After verifying the submissions, the AO held that the assessee has claimed excess depreciation on account of building and machinery destroyed by fire amounting and the same was added back to the assessee’s total income.
Further it was also held that the expenses incurred for repair and maintenance of damaged assets on fire are capital expenditure.
Aggrieved by the order, the assessee filed an appeal before the Commissioner of Income Tax (Appeal) {CIT(A)}, who upheld the order. Thus, assessee filed a second appeal before the tribunal.
During the proceedings Ved Jain, the counsel for the assessee submitted that the assets replaced were existing assets and no new asset has come into the existence. Therefore, the expenditure cannot be considered to be of capital nature.
Thus, the counsel argued that where no new asset has come into existence and expenses have been incurred with the objective of preserving and maintaining the asset for the purpose of being demolished due to fire, the same should be treated as revenue expenditure.
Sumit Kumar Verma, Counsel for Revenue, submitted that the expenses incurred for repair and maintenance of damaged assets on fire are capital expenditure.
Further, due to fire there damage occurred to the machinery. Hence, if the replacement is of a baby part only, then the same could not be considered to be a capital expenditure. It is only when a baby part alone could not be repaired and the whole machine is required to be replaced, the expenditure of replacement will be of capital nature.
The tribunal after reviewing the facts and submissions of the both parties the two member bench of G.S.Pannu (President) and Anubhav Sharma, (Judicial Member) upheld the disallowance of expenses incurred for repair and maintenance of damaged assets on fire and held as it was capital in nature.
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