ITAT Kolkata
Sarat Chatterjee & Co. (VSP) (P.) Ltd.
v.
Assistant Commissioner of Income-tax
IT Appeal NOs. 1531 & 1544 (KOL.) of 2010
Assessment year 2006-07
Date of Decision – May 31, 2012
ORDER
C.D. Rao, Accountant Member
The above two appeals one filed by the assessee and the other filed by the Revenue are against order dated 20.05.2010 of the CIT(A)-VIII, Kolkata pertaining to A.Yr. 2006-07.
2. In this appeal the assessee has raised the following grounds :-
“1. For that the Ld. Commissioner of Income Tax (Appeals) VIII, Kolkata erred in upholding the addition of Rs. 34,80,019/- by way of disallowance resorted to by the Ld. Assistant Commissioner of Income Tax, Circle 9, Kolkata on the alleged premise that this amount represented expenditure of capital nature and the alleged findings on that behalf is wholly arbitrary, unreasonable, and perverse.
2. For that the action of the Ld. Commissioner of Income Tax (Appeals) VIII, Kolkata in upholding the impugned finding of the Ld. Assistant Commissioner of Income Tax, Circle 9, Kolkata was contrary to law and facts as none of the conditions precedent for holding such expenditure as being capital in nature existed and/or fulfilled in the instant case and the purported finding on that behalf is altogether flawed, erroneous and perverse.
3. For that the Ld. Commissioner of Income Tax (Appeals) Viii, Kolkata acted unlawfully in upholding the alleged finding of the Ld. Assistant Commissioner of Income Tax, Circle 9, Kolkata that the expenditure of Rs. 34,80,019/- constituted deferred revenue expenditure as per the provisions of the Income Tax Act, 1961 and the impugned finding in this respect was capricious, unjustified, wrong and perverse.”
3. The brief facts relating to grounds raised by assessee as appearing in the impugned order are as under :-
“The appellant company, carrying on the business of Stevedoring & Clearing Agents, Ship Handlers. Transport & Commission Agents had filed its return of income for the assessment year 2006-07 on 03.11.2006 disclosing total income of Rs. 3,1766,597/-. The return was filed along with properly audited accounts and the tax audit report u/s. 44AB of the I.T. Act, 1961. The return was assessed u/s. 143(3) on 28.12.2008 and the total income ‘has determined at Rs. 3,76,21,360/-.
In arriving at the assessed income, the Assessing Officer, inter alia, disallowed. Rs. 34,80,0I9/- out of bank charges on the finding that the said amount is in the nature of capital expenditure. Under the ‘Bank Charges’ head the assessee incurred the following expenses inter alia,
Rs. 14,24,000/- being ‘front fee for term loan &
Rs. 20,56,019/- being Prepayment penalty charges’
Both these expenses were incurred in relation to obtaining bank loans to finance procurement of heavy machinery and were purely in the nature of revenue expenditure. Capital expenditure in this connection was duly incurred being the capital cost of the machineries financed by the ‘Term loans” that were received from the Banks/Financial institutions.
The Assessing Officer’s finding as to the amount of Rs. 14,24,000/- being ‘Upfront fee for term loan and Rs. 20,56.019/- being ‘prepayment penalty charges are in the nature of capital expenditure is not correct. Both these are revenue expenses incurred to finance the acquisition of capital goods on which depreciation has been claimed by us year to year. These were expenses incurred to obtain either loans or to reduce the cost of such loans which were duly utilized to acquire capital goods. Actually the expenditure that was incurred to ‘bring into existence an asset’ was the amount of loan and the amount of loan has not been claimed as revenue expenditure. The expenses incurred for obtaining the loan cannot be equated with the amount of loan.
In course of the assessment proceeding it was explained and the Assessing Officer also accepted in principle, that these expenses resulted in the business being benefited. The Assessing Officer’s finding that the said expenses resulted in enduring benefit is not correct. Only the loan amounts which were utilized to acquire the capital assets were expenses incurred ‘with a view to bringing into existence an asset’ and there is no dispute regarding the capital nature of such expenditure.
Enduring benefit for the business is derived from the capital goods purchased and not by getting some reduction in the interest outgo. By applying the Assessing Officer’s logic we have already derived the benefit when we acquired the capital assets by obtaining loans and not at that point when by changing and negotiating with a new lender we were able to extract some ret benefit so far as our interest outgo is concerned. By paying a lesser amount by way of interest we not only obtained a benefit for our business, we were able to return increased amount of Total Income which resulted in a benefit for the exchequer also as an increased amount of income tax was paid compared to the amount which would have been payable had there been no decrease in the payment of interest on the loans.
In the assessment order the Assessing Officer has elaborately quoted from the Judgement in the case of Gujarat Mineral Development Corpn. Ltd. v. CIT [1983] 143 ITR 822 (Guj.) to highlight the tests to be applied in determining ‘capital expenditure’. There is no dispute regarding the tests to be applied in determining ‘capital expenditure’. However the assessment order is silent on how the tests were applied in our case. In the show cause issued in course of the assessment proceeding and also in the assessment order, the Assessing Officer has indicated that the expenditure in question should have been treated as ‘deferred revenue expenditure’. It has also been explained in the assessment order through a hypothetical scenario.’ All these reasoning by the Assessing Officer proves that the Assessing Officer himself is convinced that the expenses in question were not in the nature of capital expenditure or otherwise where is the scope for treating the amounts under ‘deferred revenue expenditure’?
However, the Assessing Officer’s proposal to treat the amounts as ‘deferred revenue expenditure’ is not supported by the provisions of the Income Tax Act, 1961 as in the said statute there are specific provisions for allowance of expenses spread over certain number of assessment years like in Sections 35A, 35D, 35DD, 35DDA, etc. The expenditure under consideration does not fall under any of such ca1eorics for which deferred allowance spreads over successive assessment years are prescribed in the Income Tax Act, 1961.”
3.1 Aggrieved by this assessee went in appeal before ld. CIT(A). The ld. CIT(A) after taking into consideration of the various submissions which was recorded at pages nos. 8 to 12 concluded that :
“In this ground, the appellant is disputing the action of the Assessing Officer (AO) in disallowing part of Bank Charges claimed by it by holding it as capital expenditure. The appellant’s case is that this expenditure was incurred in connection with procurement of Term Loans from Banks/Financial institutions and hence should be adjudged as revenue expenditure.
The appellant’s submissions on this issue are a matter of record and have been perused. The Bank Charges consist of ‘Upfront fee for Term loan’ & ‘Prepayment penalty charges’. By the appellant’s own admission, these have been used to obtain bank loans to finance procurement of machinery. In my opinion, it is not a case of equating expenses incurred for obtaining loan with loan itself. The expenditure has ultimately resulted in enduring benefit to the appellant in the shape of new machineries which it had purchased. Logically, therefore, it should be capitalized. Under the circumstances, I uphold the AO’s action on this issue and dismiss this ground of appeal.”
3.2. Aggrieved by this now assessee is in appeal before us.
4. The revenue has raised the following grounds :
“1. Whether the ld. CIT (Appeals)-VIII, Kolkata is correct in law and on the facts and circumstances of the case in treating the expenditure of Rs. 20,18,744/- as revenue expenditure when it is seen that the expenditure was incurred for new concrete floor was constructed.”
4.1 The brief facts in respect of ground raised by the revenue are that while doing the scrutiny assessment the AO has observed that assessee has debited an amount of Rs. 20,18,744/- in P&L account which was relating to repair and maintenance charges. Based on the explanations of section 30 of the IT Act the ld. AO has treated the same as capital in nature and added to the income of assessee.
4.2 On appeal the ld. CIT(A) after taking into consideration of the various submissions and the expenditure incurred for godown maintenance for the past five years deleted the same by observing as under :-
“In the instant case, floors have been repaired, which in a godown, is necessary for normal wear and tear. Fabrication does not necessarily mean that a new asset has been brought to existence. In this case, keeping in view, the WDV of the assets, the amount spent on fabrication is comparatively small and, in my opinion, that is indicative of the fact that the purpose here has been for normal maintenance. Also, if the overall size of the assets, as evident from their WDV is kept in mind then the amount claimed by the appellant for current repairs does not appear to he substantial. No inference can be drawn from here that any new asset has been created. Neither has the A.O. pointed out any such creation of a new asset(s). The appellant in its submission has referred to the 2004 tsunami. In my opinion, natural disasters also necessitate higher spending on assets to make them usable but, it should be kept in mind that, as no asset is being created, the expenditure concerned would be in the nature of current repairs only. Under the circumstances, I feel that the appellant’s claim of this expenditure as current repairs is justified. The A.O is directed to delete this addition. This ground of appeal is allowed.”
4.3 Aggrieved by this now the revenue is in appeal by taking the above grounds.
5. We want to dispose of the revenue’s appeal first.
6. At the time of hearing before us the ld. DR appearing on behalf of the revenue relied on the orders of AO. However, he could not bring any contrary material against the findings of ld. CIT(A) which was incorporated in the preceding paragraphs.
7. On the other hand, the ld. Counsel appearing on behalf of assessee reiterated the submissions made before the revenue authorities which are as under :-
“The maintenance of the godown in proper condition is a must to prevent any accident and is a must as per the guidelines of the Port Authorities. Detailed clarifications in respect of the items cited by you is furnished (Annexure-6). The importance of the jobs can be gauged from the fact that we have to employ a leading organization like Larsen & Toubro Ltd. for some of the jobs to ensure proper repairs and longevity and also to reduce the time of repairs as Larsen & Toubro Ltd. has got fully mechanised system to handle such work.
The Assessing Officer, without going into the merits of our submission summarily rejected the arguments with the terse observation – “Assessee submitted various decisions, which not cover amended provisions of Section 30. A sample example is 6l Mtr. Fabrication @ Rs. 9000/- per Mt., is not repair but expenditure in nature of capital’. He has also observed that in the records of last three sears no sizeable expenditure of this nature is reflected. The Assessing Officer’s observation is not correct and not supported by the actual facts as may kindly be seen from the following figures:
