Leasehold Rights not eligible for Depreciation

The Assessing Officer found that the assessee company acquires land from government for exploration of coal out of the designated allotment of land. The assessee claimed before the Assessing Officer that the amount paid for the lease land are the commercial assets of the company. The price paid is actually for purchase of a mining right which is a capital expenditure. The Assessing Officer also noted that in the preceding year, such a claim has been disallowed by the CIT(A)and the Tribunal. Therefore, the Assessing officer did not accept the claim of the assessee and disallowed Rs. 1769.58 lakhs.

On appeal, the CIT(A) following the decision dated 12.9.2011 of the Tribunal in assessee’s own case in ITA No. 226,227/CTK/2009, 456,457 & 458/CTK/2010 and No. 50,51,52 & 53/CTK/2011, has confirmed the addition. Consequently, the depreciation claimed by the assessee was also disallowed by the CIT(A).

Held by ITAT

Both the parties agreed before us that the above issues are covered by the decision of this Tribunal in assessee’s own case for the assessment year 2008-09 in ITA No. 73/CTK/2012 order dated 3.1.2018. The findings portions are as under:

“45. Ld D.R. objected to the admission of additional grounds on the ground that the grounds have to be dismissed as the lease hold rights are not eligible for depreciation u/s.32(1)(ii) of the Act considering it as intangible asset. He referred to the decision of Hon’ble High Court of Bombay in the case of CIT vs. Techno Shares Stocks Ltd., 225 CTR 337 (Bom), wherein, it has been held that the depreciation under section 32 is restricted to the tangible/intangible assets which are specifically enumerated therein and depreciation is not allowable on all tangible/intangible assets. He also referred to the decision of ITAT Mumbai Benches in the case of Dabur India ltd. vs ACIT, 159 TTJ 563 (Mumbai), wherein also, it was held that the tenancy rights cannot be construed as intangible assets falling within meaning Explanation to section 32(1) and, therefore, there is no question of allowing depreciation on said rights.

46. We find that the assessee has raised these additional grounds as per the direction of Hon’ble High Court of Orissa, Cuttack in W.P (C) No. 24 of 2013 and Misc. Case No. 5716 of 2013 order dated  20.3.2013. In view of above, we admit these additional grounds for our consideration.

47. On merits also, we find force in the submission of ld D.R. that the depreciation is not allowable u/s.32(1)(iii) of the Act in respect of intangible assets, which is supported by judicial pronouncements cited above. In view of above, we dismiss these grounds filed by the assessee.”

Accordingly, we hold that the lease hold rights are not eligible for depreciation u/s.32(1)(ii) of the Act considering it as intangible asset and, hence, dismiss this ground of appeal of the assessee.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

These are cross appeals filed by the assessee and the revenue against the order of the CIT(A)-Berhampur dated 11.3.2013 for the assessment year 2009-2010.

2. First, we take up the appeal of the assessee in ITA No.325/CTK/2013:

3. The assessee is a Government of India Enterprises and engaged in exploration, prospecting, development and administration of collieries & production of coal and filed its return of income on 23.9.2009 with total income of Rs.275926.69 lakhs and also revised return was filed on 29.7.2010 and return of income was processed u/s.143(1) of the Act and case was selected for scrutiny under CASS method and notices u/s.142(1) and 143(2) were issued and served on the assessee. The assessee filed various documents and case was discussed and thereafter the Assessing Officer completed the assessment u/s.143(3) of the Act dated 30.12.2011.

4. Ground Nos. 1 & 2 of appeal are general in nature and hence, requires no separate adjudication by us.

5. Ground No. 3(1) relates to confirmation of addition on account of “donation and subscription”.

6. The Assessing Officer found that the assessee has claimed Rs. 15.67 lakhs as donation & subscription. The Assessing Officer following the order of the Tribunal in the case of the assessee for the assessment year 2005-06 to 2007-08 allowed the expenditure of Rs. 3.86 lakhs incurred under the instructions of Government authorities and also which are covered under the provisions of section 80G of the Act and disallowed the claim of Rs. 3.79 lakhs and added to the income of the assessee.

7. On appeal, the CIT(A) confirmed the action of the Assessing Officer.

8. Before us, ld A.R. of the assessee submitted that the expenditure is incurred wholly and exclusively for the purposes of business. He submitted that since the assessee is a public sector undertaking, has undertaken number of development work in and around its peripheral area to fulfil its social obligation and in the process made donations and further details of expenditure were duly furnished before the Assessing Officer. Ld A.R. relied on the decision of the Tribunal in assessee’s own case for the assessment year 2008-09 order dated 3.1.2018 in ITA No.73/CTK/2012.

9. Contra, ld D.R. supported the order of the CIT(A).

10. We have heard the rival submissions and perused the order of the Tribunal in assessee’s own case for assessment year 2008-09 (supra). We find the Tribunal has deleted the addition. The relevant portion of the findings of the Tribunal are as under:

“24. We have heard the rival submissions, perused the orders of lower authorities and materials available on record. We find that the Assessing Officer has disallowed the expenditure claimed under the head “donation and subscription” on the ground that the assessee failed to furnished any evidence before the Assessing Officer as called for. On appeal, the CIT(A) following the order of the Tribunal for the assessment years 1999-2000, 2000-2001, 2001-02 and 2002-03 has directed the Assessing Officer to allow such expenditure where the assessee has been able to establish relation over the expenditure of the assessee company. As regards to donation which are eligible for deduction u/s. 80G, the Assessing Officer shall allow the same on submission of the evidence of exemption u/s.80G.

25. We find that the assessee has paid an amount of 2.81 lakhs towards donations and Rs. 2.43.958 towards subscription to different concerns as mentioned in para 21 of this order. The major amounts are paid to Government institutions headed by Government officials like District Magistrate and other Government officials where the assessee company has major business operations. As regards the subscriptions, the details furnished by the assessee are in the nature of annual membership, etc. The Tribunal in the assessment years 1999-2000, 2000-2001, 2001-02 and 2002-03 has directed the Assessing Officer to allow such expenditure where the assessee has been able to establish relation over the expenditure of the assessee company. As regards to donation which are eligible for deduction u/s. 80G, the Assessing Officer shall allow the same on submission of the evidence of exemption u/s.80G. But in the present year under consideration, the ld A.R. submitted that there is no such donation which is eligible for deduction u/s.80G. We considering the facts and submissions, set aside the orders of lower authorities and direct the Assessing Officer to allow deduction of Rs.5.25 lakhs made under the head “donation and subscription” and allow this ground of appeal of the assessee.

11. In the present case in hand, the assessee has filed details of donation covered u/s.80G of the Act, which are relied by the Assessing Officer in assessment order and the Assessing has granted relief available under 80G being 50%, which is not disputed and made dis allowance of balance claim and other claims and we consider the facts and restrict the dis allowance to the extent of Rs. 3.69 lakhs and partly allowed the ground of appeal of the assessee.

12. Ground No.3(2) relates to confirmation of dis allowance of 288.10 lakhs incurred for CMPDIL expenses.

13. The Assessing Officer noticed that the assessee has incurred expenditure of Rs. 480.40 lakhs under the head “”CMPDIL expenses” appearing in the annual report under schedule 12(B). The Assessing Officer disallowed Rs.288.10 lakhs considering the same as capital expenditure as this amount was spent on contractual survey paid to M/s. RITES for the purpose of railway lines is not eligible for deduction u/s.37(1) of the Act.

14. On appeal, the CIT(A) confirmed the action of the Assessing Officer with a rider that the said expenditure is to be allowed as per provisions of section 35E of the Act.

15. Ld A.R. of the assessee submitted that the expenditure actually relates to CMPDIL (the proper head of Account being “004959”) and was incurred for the cost of preparation of pre- feasibility report, Environment Management Plan (EMP), Environment Impact Assessment (EIA) Report etc for the preparation of expansion Project Report which is in the nature of normal revenue expenditure to be allowed u/s. 37 (1). Ld A.R. submitted the details of such expenditure as below:

All expenses relates to CMPDIL

Ld A.R. submitted that the vouchers extract from the report of CMPDIL in support of such expenditure are available in paper book and Ld A.R. relied on the decision of Hon’ble Calcutta High Court in the case of Kesoram Industries & Cotton Mills Ltd s CI, 196 ITR 845 (Cal) and Hindustan Almn. Corporation Ltd vs CIT, 159 ITR 673 (Cal)

16. Ld D.R. supported the order of the CIT(A).

17. We heard the rival submissions and perused the orders of lower authorities. The assessee submitted that the said amount of Rs. 288.10 lakhs was actually paid to CMPDIL, a sister concern controlled by the holding company, Coal India Ltd, in Basundhara Area for the preparation of pre- feasibility report, environment management plan and preparation of explanation project report. It was further submitted that these expenditures are incurred regularly in the ordinary course of mining activity. The CIT(A) found that the nature of work/services rendered by CMPDIL are of contractual in nature and usage of asset is of enduring nature. Therefore, the CIT(A) called for a remand report from the Assessing Officer. The Assessing Officer submitted his report, wherein, it was stated that the work undertaken by CMPDIL are purely contractual nature and obtaining of an asset is of enduring nature. The remand report was furnished to the assessee for its comments and the assessee filed its submissions.

18. The CIT(A)observed that the expenditure is not incurred on existing revenue yielding mine but such expenditure is in connection with a new capital asset. Therefore, this expenditure is in the nature of preliminary and prospecting expenditure covered u/s.35E of the Act and directed the Assessing Officer accordingly.

19. We find that the CIT(A) gave his findings that the claims of the assessee has to be allowed u/s.35E and not under section 37 of the Act, as the expenses being preliminary and prospecting expenditure. We also find that the Tribunal for the assessment year 2008-09 in ITA No. 37/ctK/2012 order dated 3.1.2018 on similar issue has held that the assessee shall approach the respective assessing authorities to consider the claim of the assessee. Following the same, we direct the Assessing Officer to allow the claim of the assessee u/s.35E of the Act. This ground of appeal of the assessee is allowed for statistical purposes.

20. Ground No. 3(3) relates to confirmation of addition of Rs. 537.87 lakhs made under the head “deterioration of stock ‘

21. The relevant facts are that the Assessing Officer found that the assessee has made provision pf Rs. 913.07 lakhs towards deterioration of stock due to fire and longer period of stocking of coal, where the stock is valued at net realizable value. The Assessing Officer observed that the  assessee could not bring any evidence in support of its claim that provision of 10% of value of closing stock is made to care of deterioration, hence disallowed Rs. 913.07 lakhs.

22. On appeal, the CIT(A) observed that the assessee has not made any scientific basis for calculating the deterioration in stock and directed the Assessing Officer to reconsider the issue on the basis of the direction of the Tribunal in ITA No. 50,51,52, & 53 for the assessment year 2004-05 to 2007-08.

23. Before us, ld A.R. of the assessee submitted that the method of valuation adopted by the company is ‘Lower of Cost or Net realizable value’ which is accepted worldwide by all the Accounting institutes, Revenue department and otherwise. Accordingly, the total stock of coal has been valued at lower of cost or net realizable value. The production out of underground mines is very low and there cannot be 100% dispatch of stock. In these cases, the stock which is stacked at the bottom is lying as it is for many years resulting into deterioration in the quality and quantity due to fire and passage of time. At the time of closure of such mines these stocks cannot be liquidated. Such coal is lying in the open field. Due to inherent nature of the coal it catches fire very often. Further, when stocked for a longer period, the quality of coal gets deteriorated and sometimes it gets mixed with the earth thereby leaving no realizable value at all. As the net realizable price is less than notified price and  deterioration occurs due to degradation of coal for losing its Useful Heat Value, such provision is to be made to give a true and fair valuation of the stock of coal. Hence, to take care of all such contingency it was found that a provision of 10% is sufficient and accordingly the stock is valued. Ld A.R. submitted that the dis allowance made by the Assessing officer is reduced by Rs. 361.20 Lakhs in the order u/s. 154 dated 28/03/2012 pertaining to amount of provision on account of deterioration in opening stock.. Hence the net dis allowance on this account remains at Rs. 537.87 Lakhs’. It was submitted that as per accounting policy consistently followed by the assessee company (clause 10.2 of Schedule – ‘O’ , Provision @ 10% on the value of closing stock of coal is made to take care of deterioration of stock due to fire and longer period of stocking etc. where the stock is valued at Net Realizable Value. No such provision is made where the stock is valued at cost.’

24. Before us, both the parties agreed that the issue requires reconsideration in view of the decision of the Tribunal in ITA No. 50,51,52, & 53 for the assessment year 2004-05 to 2007-08 and also by the Tribunal decision dated 3.1.2018 in ITA No.73/CTK/2012 for the assessment year 2008-09, wherein, it has been observed as under:

“Having heard both the parties and perusing the material on record, we are of the considered view that in absence of any technical report In support of the claim and as there is any evidence in support of the claim, the learned CIT(A) is not justified in allowing the claim of the assessee which has been quantified on a percentage basis i.e., 10% that too without any material basis. At the same time, it is not improbable that there might be certain deterioration of stock due to fire and longer period of stocking etc., but a basis has to be based on the books of accounts itself and not in a whimsical manner. These facts, in our view, require reconsideration in the light of technical support or evidence in the books of account. We, therefore, set aside the impugned order of the CIT(A) and restore the matter to the file of the Assessing Officer for consideration afresh in the light what has been stated above.”

 25. We find that the CIT(A) has directed the Assessing Officer to reconsider the issue on the above basis of above findings of the Tribunal. Hence, we confirm the order of the CIT(A) on this ground and dismiss this ground of appeal of the assessee.

26. Ground No. 3(4) relates to confirmation of addition of Rs. 92.49 lakhs towards provision for obsolete and non-moving stores.

27. The brief facts of the case are that the Assessing Officer found that the assessee has provided an amount of Rs. 92.49 lakhs towards obsolescence of stores, which, as per the assessee, was arrived at after technical appraisal of stores articles which mainly pertains to spares store of those machineries and HEMM which has already been scrapped. The Assessing Officer disallowed on the ground that the assessee could not furnish the details as well as evidence thereof, which was confirmed in appeal by the CIT(A).

28. Before us, ld A.R. submitted that as per accounting policy consistently followed by the assessee, provisions ar made at the rate of 50% of stores and spares not moved for more than 5 years except insurance items. Ld A.R. submitted that in the process of certain machineries for which the spares lying with the assessee are being scrapped or they become outdated in terms of technological changes,  therefore, these types of machineries remained unmoved. Ld A.R. relied on the decision of Hon’ble Rajasthan High Court in the case of CIT vs. Wolkem India Ltd., 221 CTR 767 (Raj), wherein, it has been held that :

“ As per the provisions of s. 145A the income from business under the head “Profits and gains from business” has to be computed in accordance with method of accounting regularly employed by the assessee. Similarly, s. 145A provides that the inventory shall be valued in accordance with the method of accounting employed by the assessee, therefore, if the method of valuation adopted by the assessee is recognized method then the same cannot be rejected on the ground that the net realizable value/market value has been determined on the basis of certain estimate. It is to be noticed that the AO while holding that the inventories valued by the assessee @ 5 per cent is excessive, did not care to estimate the net realizable value of the store and proceeded to disallow the amount of Rs. 68,59,108 written off as obsolete stores and claimed in P&L a/c altogether. It has come on record that the assessee has valued the inventories which were rusted, non-moving and unusable on account of obsolescence/ damage/deterioration by efflux of time at cost and net realization value, whichever is lower. It has also come on record that these items were 5-6 years old. It is also not disputed that the assessee had made the requisite efforts to dispose of the same. That apart, some of these items were actually sold in subsequent years at a price 8.43 per cent of the cost. Thus, considering the totality of the facts and circumstances, the value of the stores inventory written down taken at 10 per cent of the cost by the CIT(A), cannot be faulted with.—Asst. CIT vs.  Wolkem India Ltd. (2007) 107 TTJ (Jd) 439 affirmed.

29. Ld D.R. agreed that the issue is covered by the decision of this Tribunal in the case of the assessee for the assessment years 2003-04 and 2004-05 in ITA No.226 & 27/CTK/2009 order dated 12.9.2011, which has been followed in assessee’s case for the assessment year 2008-09 wherein, has been held as under:

“”We have heard both the parties and perused the material available on record. We find that the authorities below have disallowed the claim of the assessee mainly on the ground that no details thereof could be furnished by the assessee. The ld A.R. of the assessee vehemently contended that the details thereof were produced before the ld CIT(A) including the area-wise details of amount charged against non-moving stores and spares. He also submitted a copy of such details, which is found placed at page 165 of the paper book. If that is so, in our considered view, without examining such details furnished before him the ld CIT(A) is not justified in upholding the dis allowance as made by the Assessing Officer. Therefore, for the ends of justice, we set aside the impugned order of the CIT(A) and restore this issue to the file of the AO for consideration afresh in the light of details furnished by the assessee when claim as mandatory percentage to actual identification has to be considered to be established by the assessee and pass necessary consequential order in accordance with law giving due and proper opportunity of being heard to the assessee.”

26. Facts being identical for the assessment year under consideration, following the decision of the Tribunal as above, we set aside the order of the CIT(A) and restore the file to the Assessing Officer for consideration afresh in the light of details furnished by the assessee after affording reasonable opportunity of hearing to the assessee. Hence, this ground is allowed for statistical purposes.

30. Since there is no change in the facts in the assessment year 2009-10, we restore the issue to the file of the Assessing Officer for fresh consideration in the light of details furnished by the assessee as per law. and this ground of appeal is allowed for statistical purposes.

31. Ground No. 3(5) relates to confirmation of addition of Rs. 1769.58 towards charge on lease hold land. Ground No. 3(6) relates to depreciation on premium paid for lease hold land as intangible assets. These grounds are interconnected; therefore, they are disposed as under:

32. The Assessing Officer found that the assessee company acquires land from government for exploration of coal out of the designated allotment of land. The assessee claimed before the Assessing Officer that the amount paid for the lease land are the commercial assets of the company. The price paid is actually for purchase of a mining right which is a capital expenditure. The Assessing Officer also noted that in the preceding year, such a claim has been disallowed by the CIT(A)and the Tribunal. Therefore, the Assessing officer did not accept the claim of the assessee and disallowed Rs. 1769.58 lakhs.

33. On appeal, the CIT(A) following the decision dated 12.9.2011 of the Tribunal in assessee’s own case in ITA No. 226,227/CTK/2009, 456,457 & 458/CTK/2010 and No. 50,51,52 & 53/CTK/2011, has confirmed the addition. Consequently, the depreciation claimed by the assessee was also disallowed by the CIT(A).

34. Both the parties agreed before us that the above issues are covered by the decision of this Tribunal in assessee’s own case for the assessment year 2008-09 in ITA No. 73/CTK/2012 order dated 3.1.2018. The findings portions are as under:

“45. Ld D.R. objected to the admission of additional grounds on the ground that the grounds have to be dismissed as the lease hold rights are not eligible for depreciation u/s.32(1)(ii) of the Act considering it as intangible asset. He referred to the decision of Hon’ble High Court of Bombay in the case of CIT vs. Techno Shares Stocks Ltd., 225 CTR 337 (Bom), wherein, it has been held that the depreciation under section 32 is restricted to the tangible/intangible assets which are specifically enumerated therein and depreciation is not allowable on all tangible/intangible assets. He also referred to the decision of ITAT Mumbai Benches in the case of Dabur India ltd. vs ACIT, 159 TTJ 563 (Mumbai), wherein also, it was held that the tenancy rights cannot be construed as intangible assets falling within meaning Explanation to section 32(1) and, therefore, there is no question of allowing depreciation on said rights.

46. We find that the assessee has raised these additional grounds as per the direction of Hon’ble High Court of Orissa, Cuttack in W.P (C) No. 24 of 2013 and Misc. Case No. 5716 of 2013 order dated  20.3.2013. In view of above, we admit these additional grounds for our consideration.

47. On merits also, we find force in the submission of ld D.R. that the depreciation is not allowable u/s.32(1)(iii) of the Act in respect of intangible assets, which is supported by judicial pronouncements cited above. In view of above, we dismiss these grounds filed by the assessee.”

35. Accordingly, we hold that the lease hold rights are not eligible for depreciation u/s.32(1)(ii) of the Act considering it as intangible asset and, hence, dismiss this ground of appeal of the assessee.

36. Ground No.4 of appeal relates to short credit of TDS of Rs. 368.76 lakhs.

37. The Assessee has claimed TDS of Rs. 12805.12 lakhs. However, the Assessing Officer has allowed credit of Rs. 12444.42 lakhs in the assessment u/s.143(3)of the Act and balance of Rs. 368.76 lakhs was considered. Further, the TDS credit has been reduced further to Rs. 12436.36 lakhs in the order passed u/s.154 of the Act dated 28.3.2012, which was confirmed in first appeal.

38. Both the parties agreed that the issue is covered by the decision of this Bench in assessee’s own case for the assessment year 2008-09 in ITA No. 73CTK/2012 order dated 3.1.2018, wherein, the Tribunal has observed that the credit of TDS should have been allowed to the assessee on the basis of original TDS certificates submitted by the assessee. Since the facts being identical for the present assessment year under consideration, we confirm the order of the CIT(A) and dismiss the ground of appeal of the assessee.

39. Ground No. 4 reads as under”

“That the AO has further erred in not allowing interest u/s.244A of the I.T.Act, 1961.”

40. At the time of hearing, ld A.R. did not press this ground, hence same is dismissed as not pressed.

41. In the result, appeal filed by the assessee is partly allowed.

42. Now we take up the appeal filed by the revenue in ITA No. 377/CTK/2013.

43. In Ground No.1 of appeal, the grievance of the revenue is that the CIT(A) was not justified in giving relief on HEMM expenses of Rs. 633.19 lakhs.

44. The facts in brief are that the Assessing Officer noticed that the assessee has claimed an amount of Rs. 755.68 lacs under the head HEMM rehabilitation expenses. Before the Assessing Officer, it was explained that the expenditure is incurred to make the Heavy Earth Moving Machineries (HEMM) to last their rated life and for their efficient performance. The Assessing Officer observed that this expenditure was incurred when 50 to 80% of the completed life of the equipment in terms of the working rated hours is spent and the maximum limit of expenditure as per the policy of the assessee is 40% of the current basic price of the equipment. Considering the amounts spent and the facts that the expenditure incurred to extend the working life of the equipment up to the level of its rated life and thereby increasing the performance and efficiency of the equipment, the Assessing Officer was of the view that the  expenditure is of capital in nature, and, therefore, disallowed Rs.663.19 lakhs and allowed the depreciation thereon.

45. Before the CIT(A), the assessee submitted as under:

“ The expenditure in question are major repairs / overhauling expenditure incurred for revamping of the HEMM for improving the performance and availability during the remaining life of such equipment. These involve a huge amount of expenditure and charged to P&L a/c in the year of expenditure itself. HEMM are the main equipment’s required for any mining industry and with the increase in their age depreciation reduces and expenditure on their maintenance increases. Thus such expenditure is related with the assessee’s business and an allowable expenditure u/s 37(1).

As a matter of fact this expenditure has considerably reduced in comparison to previous years’ amount of Rs. 984.95 Lakhs. (Schedule – 10 appearing at Page 101 of printed accounts)

The Ld. AO has lost sight while dealing with this issue. In this regard the finding of AO (Page -24 of assessment order) is reproduced below based on which he has considered the expenditure as Capital;

It is observed from the above that rehabilitation expenditure is incurred when 50% to 80% of the completed life of the equipment in terms of working rated hours is spent and the maximum limit of expenditure is bound at 40% of the ‘current’ basic price of the equipment, excluding service charge if any. Thus it is apparent that in this case expenditure are being incurred up to the level of 40% of the current basic price. It is an admitted fact that repairs & overhaul are major in nature. Now the extend of such repairs and overhauls is found to be pegged at a maximum of 40% of the current basic price. Thus ‘the expenditure incurred partakes the character of a capital expenditure‘

From the aforesaid finding it becomes clear that the Ld. AO has considered the expenditure as Capital in nature just on the ground that there is a guideline of CIL which prescribes that such repair expenditure should not exceed 40% of the current basic price of equipment. By no stretch of imagination this guideline can be used to justify the expenditure as Capital in nature for income tax purposes.

We also invite your honour’s kind attention at Para 6 of the Director’s Report (appearing in Page 7 of the Printed Annual Accounts) where the data relating to population and performance of HEMM is given. From such data (para 7.1) your honour may appreciate that the assessee is having 533 Heavy earth moving machineries (HEMM). Your honour may very well appreciate that to maintain such a huge heavy machinery a large amount of repair expenditure has to be incurred. Hence adverse view taken by the Ld. AO in this respect is totally unwarranted and uncalled for.

It may also be noted here that similar addition was made during assessment year 2003-04 which was deleted by your predecessor in office. Copy of appeal order is enclosed at Page 48-49 of P/B.

Moreover, this matter has also been dealt with by the Ld. AO in the initial years of the company i.e. during AY 1993-94 to 1997-98 wherein the Ld. AO has allowed the total claim of the assessee. A copy of assessment order for AY 1993-94 is enclosed marked as Annexure – 1.

In view of the aforesaid your honour may appreciate that the addition made by the Ld. AO is excessive, unwarranted, uncalled for and bad in law. Therefore it is prayed before your honour to kindly delete the said addition.”

46. The CIT(A) deleted the addition by observing as under:

“So far as HEMM expenditure is considered, on careful consideration of the facts of the case, I am inclined to agree with the Id. A/R that this is in the nature of a revenue expenditure being repairs to the machinery. As has been mentioned by the Id. A/R and also recognized by the AO in his assessment order, this expenses only help in extending the life of the HEMM to their rated life. The AO has placed unnecessary reliance on the fact that as per the company’s policy such HEMM rehabilitation expenses -are allowed up to 40% of the current cost of the HEMM. While quantity of expenditure may be a relevant criterion, it is definitely not a determining factor to decide as to whether an expenditure is of the nature of repairs or not. One relevant consideration, as held by the Hon’ble Supreme Court in CIT vs. Saravana Spg. Mills Pvt. Ltd.(2007) 293 ITR 201(SC), if an expenditure results in replacement of an asset the same cannot be allowed under the head repairs. Admittedly in the instant case there is no replacement of the asset. The expenses only help in making the asset perform as per their rated capacity, efficiency and life. This expenditure was allowed by the AO for Asst.Yr.1993-94 in his order U/s.143(3) dated 29-03-1996. Further, this expenditure was allowed by my predecessor for Asst. Yr. 2003-04 in appeal No. 0202/08-09 dated 03-07-2009. Incidentally this decision of the  CIT(A) for Asst.Yr.2003-04 apparently has been accepted by the Department and no appeal has been preferred before ITAT as is clear from the order of ITAT for that year. Considering the overall facts of the case as discussed above, more particularly the fact that the expenditure has not resulted in replacement of the asset, I see no reason to differ from the view taken by the AO earlier and my predecessor in office. Therefore, the dis allowance of Rs. 633.19 lacs is deleted. Ground No. 3(4) is thus decided in favor of the appellant.”

47. Ld D.R. submitted that the CIT(A) has erred in granting relief of HEMM expenses of Rs. 663.19 lakhs without going into the merits of the case. Ld D.R. submitted that the Assessing Officer has made a categorical observation in respect of HEMM rehabilitation expenses and dealt on the accounting standards. The Assessing Officer found that the assessee has claimed replacement of machineries as current repairs and further observed that over haul expenses claimed to the extent of 40% of the current basic price and such expenses increases the performance and efficiency of the machineries, which is capital in nature and not allowable as revenue expenditure and supported the action of the Assessing Officer treating as capital expenditure. The Assessing Officer has rightly allowed depreciation.

48. Ld A.R. supported the order of the CIT(A) and further submitted that the CIT(A) has dealt on the disputed issue and considered that the expenses incurred are revenue in nature being repairs of machineries. The CIT(A) observed that the Assessing Officer has observed that expenses only help in extending the life of the HEMM to their rated life without considering the maintenance and replacement of the machineries.

49. We have heard the rival submissions, perused the orders of lower authorities and materials available on record. The sole matrix of the dispute is with regard to claim of HEMM expenses. Ld D.R.’s contention being the CIT(A) has erred in granting relief irrespective of the fact that the expense is of capital nature and which has enduring benefit to the assessee. Whereas ld A.R. vehemently submitted and relied on the order of the CIT(A) and the judicial decision of Hon’ble Apex Court in the case of Saravana Spg. Mills Pvt. Ltd (supra) . Further, the revenue has not challenged the order of the CIT(A) in assessment year 2003-04 but it was stated in the ground of appeal that the CIT(A) has not considered the issue on merit. But the CIT(A) has observed that the revenue having accepted the claim of the assessee in the earlier assessment year, has not filed second appeal. The findings of the CIT(A) are supported by the decision of Hon’ble Supreme Court in the case of Saravana Spg. Mills Pvt. Ltd (supra). Even before us, the revenue could not point out any specific error in the order of the CIT(A) except relying on the order of the Assessing Officer and no new facts have been brought on record to substantiate that the expenditure claimed by the assessee is of capital in nature. Hence, we uphold the findings of the CIT(A) and dismiss this ground of appeal of the revenue.

50. Ground No. 2 of appeal is against the direction of the CIT(A) to treat the preliminary and prospecting expenditure as per the provision of section 35E of the I.T. Act instead of disallowing the same u/s.37 of the Act.

51. In view of our decision in assessee’s appeal in Ground No. 3.2, this ground of appeal of the revenue is dismissed.

52.  In the result, appeal filed by the assessee is partly allowed and the appeal of the revenue is dismissed.

Order pronounced on 19/03/2018.