T.R.Meena, Member (A) -
(1.) THE ITA No. 762/JP/2011 filed by the assessee as well as cross appeal No. 878/JP/2011 by the Revenue are against the order dated 11/07/2011 of the learned C.I.T.(A) -III, Jaipur for the A.Y. 2008 -09. The grounds of assessee's appeal as well as the Revenue are as under: -
Grounds of ITA No. 762/JP/2011
1. That the learned CIT(A) has grossly erred in holding the expenditure of Rs. 3,86,81,256/ - incurred on normal repairs and maintenance as not qualifying for deduction U/s. 31(1) of the Income Tax Act, 1961, without appreciating the nature of the expenditure vis a vis its business necessary, thus the expenses incurred on current repairs at Rs. 3,86,81,256/ - deserves to be allowed as claimed, more particularly when he has not doubted the genuineness of the expenditure incurred, thus the observations of the learned CIT(A) that the expenditure under question does not qualify to be allowed as deduction from the profit and loss deserves to be hold as bad in law and arbitrary.
1.1. That the learned CIT(A) has further grossly erred in holding the expenditure of Rs. 3,86,81,256/ - incurred on repairs and maintenance as also not qualifying for deduction U/s. 37(1) of the Income Tax Act, 1961 arbitrarily, without appreciating the fact that such expenditure was incurred under business expediency, thus the expenses of Rs. 3,86,81,256/ - deserves to be allowed as claimed by the assessee.
(2.) THAT the learned CIT(A) has further erred in holding that the expenditure as incurred and claimed is not in the nature of ordinary business expenditure and the assessee is deriving long term benefit from the incurrence of such expenditure, without in any manner appreciating the nature of assessee's business and the judicial precedents available in this respect, thus has seriously erred in holding the expenditure to be of capital nature, which is contrary to the facts and circumstances of the case and the intentions of the law, thus such observations deserves to be ignored and excluded.
2.1. Without prejudice to other grounds of appeal and in the alternative, in case the expenditure incurred be hold as capital expenditure, assessee be entitled for depreciation @ 100% as no new assets was created and the expenditure is of temporary in nature.
Without prejudice to the above grounds of appeal and in the alternative it is contended that the learned CIT(A) has grossly erred in making enhancement to the assessed income without following the procedure as laid down in section 251(2) of the Income Tax Act, 1961 and the action of learned CIT(A) tantamount to reassessment thus it is a serious misutilization of the available powers which deserves to be hold unlawful and the consequent enhancement of income as done deserves to be hold void ab initio.
Grounds of ITA No. 878/JP/2011
On the facts and in the circumstances of the case, the learned CIT(A) has erred in:
(i) Deleting the disallowance of Rs. 36,09,51,960/ - made by the A.O. on account of depreciation claimed on road/on road construction, while treating it as a building in nature.
(ii) Allowing the claim of depreciation @ 60% on EDP equipment as claimed by the assessee as against the rate of 15% allowed by the A.O.
2. The assessee company is engaged in construction, operation and maintenance of highways. Vide agreement dated 08/05/2002 between the National Highways Authority of India (NHAI) and the company, the assessee entered into a concession agreement with NHAI for widening of two lane road to six lane road of 90.358 Kms stretch on NH -8 between Jaipur and Kishangarh on Build Operate Transfer (BOT) basis. The work of the widening of the highway was completed by the assessee company and the road was opened to the public on 09/4/2005. Since then the assessee has been maintaining the said road on toll basis. Relevant previous year was the third year of operation of the toll road.
3. Grounds No. 1, 2 and 3 of the assessee's appeal are against holding the expenditure of Rs. 3,86,81,251/ - incurred on normal repair and maintenance as not qualifying for deduction U/s. 31(1) of the Income Tax Act, 1961 (hereinafter referred as the Act) and also not allowable U/s. 37(1) of the Act and also expenditure incurred as capital in nature. Alternatively, grounds of appeal is on allowability of depreciation @ 100% being new assets created and expenditure without prejudice to the above, the appellant challenged the enhancement made by the learned CIT(A). The learned CIT(A) observed that the appellant has claimed the repairing and maintenance expenses to the extent of Rs. 6,65,21,097. He referred Section 31 of the Act and analyzed these expenses as per Section whether are allowable or not. He made detailed discussion on pages 10 to 16 and concluded the findings as under: -
6.5 The above explanation of the learned AR's was carefully considered and the same was not found acceptable for the following reasons:
i) Repairs expenses towards earthen shoulders (Rs. 35390040) -
This is an admitted fact that "earthen shoulders of the either side of the road" were part of the capital assets, i.e. the Road, of the appellant. Thus, the original cost thereof must have been capitalized and made part of the cost incurred towards the road widening project and depreciation is now being claimed @ 15%, thereon, as discussed in earlier part of this order. With this background, to ascertain the exact and correct nature of such repairs job termed as 'refurbishment of earthen shoulder' and carried out by M/s. R. Balarami Reddy & Co., the relevant work orders dated 09/5/2007 and 05/4/2008, issued in this regard, were examined. From the language of such work orders, it is noted that the nature of repairs job has been defined as "Refurbishment of Earthen Shoulders" and meant to repair the "damaged stretches" of highway in the two parts, covering the entire road -length of the project. It was further noted that the first work order dated 09/5/2007 covers the repairing of entire stretch of 90 KM (approx) of the project, involving estimated contract price of Rs. 3.75 crores and contract period was of 10 months to complete such job. Similarly, the other work order dated 05/4/2008, covers an additional stretch of highway of 9 K.M., involving the contract price of Rs. 28,70,100/ - and contract period of 6 months to accomplish such job. However, the 2nd work order is not found relevant to the period under consideration.
From the above, discussion, it can be inferred that the repair work of 'earthen shoulders of road' of the entire road -assets of the project was not a petty repairs or normal wear -tear, as is meant to restore the damage caused to the entire project itself, involving the highway of more than 90 km., as such. It is also evident that such extensive repairs or restoration works could not be resulted; due to prolong uses of such assets, therefore, the same cannot be termed as 'normal wear and tear' related to a particular year, as such. This peculiar aspect is further strengthened from the fact that the dictionary meaning of the core -term used in the work -order "i.e. Refurbishment" means -"to brighten up or to restore and redecorate assets". Thus, in other words, the repair -job was to restore/replace the earthen shoulders of both sides of the road only. Moreover, the quantum of the contract work (more than Rs. 3.50 crores) and the time period (10 months) involved therein, also indicate the volume and the extent of repairs aspect involved in such process. In order words the refurbishment of damaged earthen shoulder of the entire highway seems to be result of an accumulated repair related to the prolonged use of the assets involved in routine usage thereof. While explaining the nature of the impugned repairs, the learned AR has also admitted, in his reply dated 07/7/2011, that the refurbishment job/work had involved the aspects of repairing and redoing of the clay based side lane of the national highway, which is part of the road constructed and with the passage of time and plying of the traffic gets damaged, therefore, in order to maintain both the sides of the road level, the repairing work was carried out. From the submission of the learned AR, it is evident that the extensive damage to the earthen shoulders of highway was result of prolonged use of such roads for the considerable time period, which is certainly beyond the relevant previous year under consideration.
As already discussed that in the various Court decisions, it have been held that the replacement of restoration of the parts of an assets or an accumulated repairs thereof, cannot be considered as "current repairs", which only is allowable U/s. 31(1) of the Act. Accordingly, it is concluded that the expenses of Rs. 35390040/ - paid towards the 'refurbishment of the earthen shoulder' being restoration process of such assets, does not amount to "current repair" and thus also not qualified as an admissible expenses U/s. 31(1) of the Act. The relevant details, as gathered, rather suggest that these expenses were related to extensive carried out, which would enable the appellant to have enduring benefit through replacement/restoration of an old assets, therefore, the same also amounts to an expenditure of capital in nature, therefore, also not covered U/s. 31(1) and even S. 37(1) of the Act.
ii) Repair expenses towards replacement of barbed wire/fencing poles (Rs. 3291486/ -) -
From the relevant copy of account i.e. "RM -Pavement and RD furniture account", submitted by the appellant, it is also observed that Rs. 3291486/ - were spent towards 'Fencing Repairs' head. In this regard, it was contended that these expenses were incurred towards replacing the old fencing poles and the old/damaged barbed wires. The above fact is also confirmed by the learned AR in his submission dated 07/07/2011, as reproduced hereinabove. As already held in the earlier paras that such replacement of assets/parts of assets amounts to restoration of old assets, leading to an enduring advantages, therefore, does not falls in the category of 'current repairs', as such. Since, the fencing cost has been treated as part of total cost of road capitalization, therefore, any expenses incurred towards major repairs/replacements of such assets would be amounting to a capital expenditure and otherwise also not allowable u/s. 31(1) of the Act, which deals with the current repairs only. Accordingly, it is held that total expenditures of Rs. 3291486/ - spent towards replacement of fencing poles and barbed wires are an expenditure, which cannot be considered as expenditure towards current repairs, therefore, requires to be treated as capital expenditure and not covered u/s. 31(10) of the Act, as such.
iii) The learned AR also made an alternative claim that these expenses, if not covered u/s. 31(1), are otherwise also allowable u/s. 37(1) of the Act, as incurred wholly and solely for the business purpose. However, it is found that, in the similar circumstances, the Courts have held that the any expenditure which is covered by Sec. 30 to 36 of the Act and does not qualify as an admissible expenditure under such provisions, (like repairs in this case, being covered u/s. 31(1) of the Act), are otherwise also not allowable u/s. 37(1) of the Act, as the residuary section prohibits any expenditure to be claimed therefrom, which is otherwise covered by S. 30 to 36 of the Act. Reliance, in this regard, is placed on the following case laws -
i. Malwa Vanaspati & Chemicals : 154 ITR 655 (MP)
ii. Travancore Titanium Products Ltd. : 203 ITR 714 (Ker.)
Moreover, in the earlier part of this order, it is already concluded that such types of repairs are in fact of capital in nature, thus also not qualify to be considered u/s. 37(1) of the Act. Reliance, in this regard, is placed on the decision of following case laws: -
i. Sri Mangayarkarasi Mills Ltd. : 315 ITR 114 (S.C.)
ii. Hindustan Plikington Glass Works 73 Taxman 631 (Cal)
In view of the above, even the alternative claim of the learned AR, as discussed above, is also found not tenable, under the given circumstances.
In the light of the above facts and circumstances, such as the nature of expenditures incurred towards the road assets and the replacement of fencing poles/wires, the parameters laid down by the Hon'ble Courts, viz. the issue under consideration etc., it is concluded that such expenditures are not of current repairs per se. The nature, quantum, quality and time span involved in such process, clearly indicate that they are major repairs, having flavor of capital expenditure as resulting into replacement or restoration of the entire old assets, thus, not qualified as deductible expenditure u/s. 31(1) of the Act. Similarly, in view of the ratio upheld by the various court, mentioned hereinabove, even such expenditures are not allowable u/s. 37(1) of the I.T. Act. Accordingly, the A.O. is directed to disallow the total expenditure of Rs. 38681256 (Rs. 35390040 + Rs. 3291486/ -) incurred as repairs expenses towards the purposes, as discussed above, being capital in nature but claimed u/s. 31(1) of the Act. Needless to say that these expenses may be allowed to be capitalized and the depreciation thereon, al eligible rate may be allowed at prescribed rate, give in the Act.
(3.) LEARNED A.R. for the assessee submitted that the assessee company is engaged in construction, operation and maintenance of Highways. More than 90 KMs stretch between Jaipur and Kishagarh on NH -8 was agreed to Build, Operate and Transfer basis with NHAI, which was opened to public on 09/4/2005. As per agreement made between the NHAI and the appellant, the highway is to be transferred after a period of 18 years in the same condition as on the initially opening of highway. The appellant company was to deliver the buildings, superstructures, rest room etc. alongwith road, bridges, culverts, fencing, walls etc. in original condition to the NHAI. No consideration would be receivable by the appellant company at the time of handing over road to NHAI. Ownership over the road and the superstructures etc. built by the appellant company as owned and built by it, would remain in its exclusive possession for the contract period. During the construction and operational period, continual spot inspections are being carried out by the independent consultants appointed by the NHAI. Since the date of construction, the appellant company is maintaining the road on toll collection basis. The assessee company incurred and claimed an expenditure of Rs. 6,65,21,097/ - towards the repair and maintenance of assets, which includes repair and maintenance of highway at Rs. 4,02,551,720/ -, which further includes Rs. 3,53,90,040/ - paid towards the repair of worn out earthen shoulders and Rs. 32,91,486/ - for the repairing and restoration of fencing which has been held as capital expenditure by the Learned CIT(A) as against the current repairs claimed by the assessee and allowed by the Assessing Officer in scrutiny assessment. The learned A.R. further argued that the expenditure was incurred in the normal course of business since it was incurred on the repairs and maintenance of road constructed and operated by the assessee company in terms of concession agreement. It is further submitted that the learned CIT(A) had enhanced the income on the ground that quantum of expenditure on repair and period involved in it but it is a fact that more than 90 KMs stretch of road used by heavy traffic and required normal tear and wear to run the traffic smoothly on it. The total cost of project is more than 590 crores and the expenditure incurred on repair of earthen shoulders alongwith side road. This work was completed by the contractor namely M/s. R. Balarami Reddy & Co. The learned CIT(A) has not doubted the genuineness of the expenses. During the year under consideration, the assessee collected total revenue from the toll was over Rs. 136 crores and compared to total cost and revenue generated from the toll, the expenditure on repair is nominal. Laying the earthen shoulder on both sides of the road for the first time was forming part of total cost of road eligible for depreciation which fact remained uncontroverted by the learned CIT(A). As the learned CIT(A) held that the repairing work is a replacement of earthen shoulders at both sides of road for prolonged use of the assets but the learned CIT(A) was failed to appreciate the fact that no new asset was created by repairing of the earthen shoulders of both sides of road. Replacement of internal part of machinery does not amount to capital expenditure, rather clarified deduction as current repairs since without such keep up the machine could not function. Likewise, this repair on both sides of earthen shoulder is required for smooth running the traffic on both sides of earthen shoulders road. The assessee had incurred 32.91 lacs on repairing of fencing of both sides of road as we know the fencing on highways is required to prevent the animal, who might come over the national highway which disturbed the smooth running of the N.H. At the time of construction of highway, fencing was done, which was capitalized in the total cost of road, which had been capitalized by the appellant but to repair the fencing and expenditure incurred on it, as revenue expenditure. The appellant had not replaced entire assets in this way but repaired the damaged fencing and no new assets have been created by this process. The learned CIT(A) was no right allowing the repair expenditure on earthen shoulder, road on both sides of the highway U/s. 31(1) of the Act. He further relied upon the decision of the Hon'ble Supreme Court in the case of Ballimal Nawal Kishore and Anr. Vs. CIT reported in : 224 ITR 414 has held that the expression "Current Repairs" means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration but which is only for the purpose of preserving or maintaining an already existing asset and does not bring a new asset into existence or does not give to the assessee a new or different advantages." The learned Assessing Officer has considered Section 31(1) of the Act when allowing these expenses in scrutiny assessment. He further relied upon the decision of the Hon'ble Madras High Court in the case of CIT Vs. Southern Roadways reported in : (2007) 288 ITR 15 wherein the expenditure on placement of machinery has been considered by the Hon'ble Court and held that expenditure on replacement of machinery is revenue expenditure. He further relied on the following case laws: -
(i) IBM India Vs. CIT : 105 ITD 1 (Bang.)(Trib).
(ii) CIT Vs. Madras Auto Services (P) Ltd. : 233 ITR 468 (SC)
(iii) Empire Jute Co. Ltd. Vs. CIT : 124 ITR 1 (SC)
(iv) CIT Vs. Shri Rani Lakshmi Ginning Spinning & Weaving Mills Ltd. : 256 ITR 592 (Mad.)
(v) CIT Vs. Revathi C.P. Equipments Ltd. : 245 ITR 686, 692 (Mad.).
(vi) Indian Ginning & Pressing Co. Ltd. Vs. CIT : 252 ITR 577, 581 -82, 582 -83 (Guj.).
(vii) CIT Vs. Bharat Suryodaya Mills Co. Ltd. : 202 ITR 942, 944 -45 (Guj.)
(viii) CIT Vs. Kusum Products Ltd. : 175 ITR 557 (Cal.).
(ix) CIT Vs. Polyolefins Industries Ltd. : 169 ITR 538 (Bom.)
(x) CIT Vs. Metal & Metallurgical Corpn. : 141 ITR 40 (Mad.)
(xi) CIT Vs. Indian Woolen Textile Mills P. Ltd. : 112 ITR 441 (Punj.).
(xii) Hindustan Times Ltd. Vs. CIT, : 122 ITR 977 (Del.)
(xiii) Regal Theatre Vs. CIT : 59 ITR 449 (Punj.)
(xiv) CIT Vs. Volga Restaurant : 253 ITR 405 (Delhi).
He further submitted that the learned CIT(A) had not provided reasonable opportunity of being heard before enhancement, which is required U/s. 251(2) of the Act. He simply asked to file details only. The learned Assessing Officer in subsequent year had not disallowed any repair and accepted the assessee's computation of income as it. Thus, enhancement made by the learned CIT(A) without following the procedure laid down in the Act as well as the judicial pronouncements, is required to be quashed.;