IT : Expenditure towards purchase of drills, tools and mills which were consumed during operation as these did not have a life of more than few days, is revenue expenditure
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[2013] 38 taxmann.com 84 (Gujarat)
HIGH COURT OF GUJARAT
Commissioner of Income-tax-I
v.
ADI Artech Transducers (P.) Ltd.*
M.R. SHAH AND MS. SONIA GOKANI, JJ.
TAX APPEAL NOS. 505 TO 507 OF 2013†
AUGUST 5, 2013
Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Consumable Tools and equipments] - Assessment years 2007-08 to 2009-10 - Whether very nature of items and very process of consumption in ordinary course of manufacturing business, determine as to whether expenditure on it is revenue or capital in nature - Held, yes - Assessee, engaged in business of manufacturing of load cells and weigh module, claimed expenditure towards purchase of drills, tools and mills which were consumed during operation and these did not have a life of more than few days - Assessee did not consider these items as part of closing stock of inventory and had written off them in PL account - Whether expenditure claimed as revenue expenditure was to be allowed - Held, yes [Paras 9 & 10] [In favour of assessee]
FACTS
| ■ | The assessee-company was engaged in the business of manufacturing of load cells and weigh module. | |
| ■ | The assessee claimed expenses towards the purchase of tools and instrument, such as drills, tools and mills as revenue expenditure. The assessee had claimed the consumption of tools and instruments treating them as consumable items and debited the same to the Profit & Loss Account on the ground that they did not exist at the end of the year at which the depreciation needed to be claimed, as they were destroyed in the process. | |
| ■ | The Assessing Officer, however, held items not as consumable or perishable, but, treated them as part of the plant and machinery and, therefore, expenditure over these items were considered capital in nature. The Assessing Officer treated the purchase of above tools and instruments as capital expenditure and granted depreciation thereon. | |
| ■ | When this was challenged by the assessee before the Commissioner (Appeals) in the year 2007-08, the Commissioner (Appeals) deleted such additions, however, for rest of the two years it confirmed the additions on the ground that in the very case of the assessee for the assessment year 1998-99 the very issue was treated and considered as capital expenditure. | |
| ■ | On further appeal, the Tribunal allowed the claim of assessee as revenue expenditure. | |
| ■ | On revenue's appeal: |
HELD
| ■ | The Tribunal noted that the items of drill bits were used for milling, drilling operations and the end mills were used for pocketing, snorting operations and they both were consumed during the operations. They were disallowed in the assessment year 1998-99 as revenue expenses, only because the items were consumed during manufacturing operation and the Tribunal was of the opinion that the assessee should not have valued them by adopting the estimated useful life method, but should have written off the items in the Profit & Loss Account. However, in the year under consideration, the Tribunal noted that the assessee had not valued the stock of consumables and considered the same as part of closing stock of inventory and had written it off to the Profit & Loss Account. [Para 8] | |
| ■ | Again, the Tribunal also had noted that none of these items of consumables had a life of more than a very few days. The total quantity consumed also had fortified the fact that each item had a very short span. Thus, from the very nature of item and from the very process of consumption in the ordinary course of manufacturing business, they were treated as revenue expenditures. Thus, reliance of the Assessing Officer on assessment year 1998-99 was wrong since the assessee had changed the method and calculated the consumption of tools and equipments on the basis of closing stock of items and the accounting method valued by the assessee also had not been disputed by the Department by bringing any material to the contrary [Para 9]. | |
| ■ | Therefore, the Tribunal has rightly addressed the issue and with the change of method of accounting which was not disputed by the Department, the consumption of the tools and equipments has been rightly treated as revenue expenditure and thus, the Tribunal committed no error [Para 10]. |
CASES REFERRED TO
CIT v. Coal Shipments (P.) Ltd. [1971] 82 ITR 902 (SC) (para 3), CIT v. Saurashtra Bottling (P.) Ltd. [1998] 232 ITR 270 (Guj.) (para 3) andCIT v Metalman Auto (P.) Ltd. [2011] 11 taxmann.com 51/199 Taxman 149 (Punj & Har.) (Mag.) (para 9).
K.M. Parikh for the Appellant.
ORDER
Ms. Sonia Gokani, J. - All the three appeals since challenge the impugned common judgment and order dated 27.11.2012 of the Income Tax Appellate Tribunal (hereinafter referred to as "the Tribunal") and all of them raise common substantial questions of law, they are being decided by this common order.
2. Tax Appeal No.506 of 2013 concerns Assessment Year 2007-08. The Tribunal dismissed the appeal preferred by the Revenue against the order passed by CIT(Appeals) directing the deletion of Rs.34,29,000/- added by the Assessing Officer on account of disallowance of capital expenditure debited to Profit & Loss account against the head "Purchase of Tools and Instruments".
2.1 Tax Appeal No.505 of 2013 relates to Assessment Year 2008-09 whereby the appeal preferred by the assessee has been allowed quashing and setting aside the order of CIT(Appeals), which confirmed the action of the Assessing Officer in making addition of Rs.27,35,460/- by disallowing the revenue expenses claimed in Profit & Loss account for the purchase of tools and instruments.
2.2 Tax Appeal No.507 of 2013 relates to Assessment year 2009-2010 by which the Tribunal has upheld the version of the assessee respondent by quashing and setting aside the order of CIT(Appeals), which had confirmed the disallowance of expenditure on purchase of tools and instruments amounting to Rs.27,45,873/-.
3. The Assessing Officer noticed during the assessment proceedings that the assessee had claimed the consumption of tools and instruments treating them as consumable items and debited the same to the Profit & Loss Account on the ground that they do not exist at the end of the year at which the depreciation needed to be claimed, as they were destroyed in the process. The Assessing Officer, however, held items not as consumable or perishable, but, treated them as part of the plant and machinery and, therefore, expenditure over these items were considered capital in nature, relying upon the case laws rendered in CIT v. Coal Shipments (P.) Ltd. [1971] 82 ITR 902 (SC) as well as in the case of CIT v. Saurashtra Bottling (P.) Ltd. [1998] 232 ITR 270 (Guj.).
4. When this was challenged by the assessee before the CIT(Appeals) in the year 2007-08, the CIT(Appeals) deleted such additions, however, for rest of the two years it confirmed the additions on the ground that in the very case of the assessee for the Assessment year 1998-99 the very issue was treated and considered as capital expenditure.
5. When this was further challenged before the Tribunal in Assessment Year 2007-08 by preferring ITA No.2457 of 2010 the Tribunal confirmed the order of the CIT(Appeals) by considering the decision of Coordinate Bench as also by giving cogent reasons for treating such expenditure as revenue in nature.
6. This decision came to be followed in subsequent years by the Tribunal. Aggrieved by this approach of the Tribunal, the Revenue has challenged the same in these Tax Appeals proposing the following substantial questions of law for our consideration:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in not following its own decision in assessee's own case for A.Y. 1998-99 and deleting the addition made on account of expenditure incurred for the purchase of tools and instruments and also ignoring the ratio laid down in the Hon'ble Supreme Court decision in the case of CIT v. Coal Shipments Pvt. Ltd. reported in 82 ITR 902?"
7. We have heard learned counsel Mr. Ketan Parikh appearing for the Revenue and with his assistance examined in detail the material on record.
8. It appears from the order of the Tribunal that the assessee is a private limited company engaged in the business of manufacturing of load cells and weigh module filed its return of income. The Assessing Officer treated the purchase of tools and instruments as capital expenditure and granted depreciation thereon. The assessee had claimed towards the purchase of these tools and instruments, the revenue expenditure being drills, tools and mills etc. He also furnished the details of his claim of consumption of his stores and instruments. The Tribunal noted that the items of drill bits were used for milling, drilling operations and the end mills were used for pocketing, snorting operations and they both were consumed during the operations. They were disallowed in the Assessment Year 1998-99 as revenue expenses, only because the items were consumed during manufacturing operation and the Tribunal was of the opinion that the assessee should not have valued them by adopting the estimated useful life method, but should have written off the items in the Profit & Loss Account. However, in the year under consideration, the Tribunal noted that the assessee had not valued the stock of consumables and considered the same as part of closing stock of inventory and had written it off to the Profit & Loss Account.
9. Again, the Tribunal also had noted that none of these items of consumables had a life of more than a very few days. The total quantity consumed also had fortified the fact that each item had a very short span. Thus, from the very nature of item and from the very process of consumption in the ordinary course of manufacturing business, they were treated as revenue expenditures. Thus, reliance of the Assessing Officer on Assessment Year 1998-99 was wrong since the assessee had changed the method and calculated the consumption of tools and equipments on the basis of closing stock of items and the accounting method valued by the assessee also had not been disputed by the Department by bringing any material to the contrary. Moreover, reliance was also placed on judgment of Punjab and Haryana High Court rendered in the case of CIT v. Metalman Auto (P.) Ltd. [2011] 11 taxmann.com 51/199 Taxman 149 (Mag.).
10. We are of the opinion that the Tribunal has rightly addressed the issue and with the change of method of accounting which was not disputed by the Department, the consumption of the tools and equipments has been rightly treated as revenue expenditure and thus, the Tribunal committed no error. No substantial question of law since arise in any of these appeals, they merit no consideration any further. Tax Appeals are dismissed.
SBRegards
Prarthana Jalan
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