High Court of Madras

Commissioner of Income-tax

v.

Southern Petrochemical Industries Corporation Ltd.

P.D. DINAKARAN AND MRS. CHITRA VENKATARAMAN, JJ.

T.C. (A) NOS. 74 AND 75 OF 2003

January 29, 2007

Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/Rate of - Assessment years 1986-87 and 1987-88 - Whether deprecation should be allowed on spare parts which are stand-by items even though they were not taken for use during accounting year - Held, yes

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1987-88 - Whether where Tribunal had recorded a finding that expenses relating to obtaining fixed deposits from public were closely linked with business requirement of assessee, such expenses should be held to be revenue in nature - Held, yes

FACTS

For the assessment years 1986-87 and 1987-88, the assessee filed its returns, inter alia claiming depreciation on stand by items such as, spare parts in respect of critical parts of plant and machinery. For the assessment year 1987-88, the assessee also claimed deduction of expenses relating to the issue of fixed deposits as revenue expenditure. The Assessing Officer, however, rejected both the said claims of the assessee. On appeal, the Commissioner (Appeals), as regards depreciation on stand-by items, held that they must be treated as machinery being put to use in the business of the assessee and depreciation should be allowed on them. In respect of deduction on expense relating to obtaining fixed deposits, the Commissioner (Appeals) held that the expenses were relatable to issue of fixed deposits from public in order to augment working capital of the assessee and the expenses incurred for raising working capital was revenue expenditure and, accordingly, deleted the addition made by the Assessing Officer. The appeal filed by the revenue against said order of the Commissioner (Appeals) was dismissed by the Tribunal.

On appeal:

HELD

Undisputedly, as found in the order of the Tribunal, the stand-by items were assets acquired by the assessee and kept in readiness for use whenever the machinery that was regularly used went out of action or required repairs. [Para 3.2]

Applying the decision of the same High Court in CIT v. Vayithri Plantations Ltd. [1981] 128 ITR 675, it was to be held in the instant case that the assessee was entitled to depreciation on spare parts which we stand-by items even though they were not taken for use during the accounting year. Therefore, the order of the Tribunal was justified. [Para 3.7]

As regards the issue of deduction of expenses relating to obtaining fixed deposits, when the Tribunal had recorded a finding that the expenses relating to obtaining fixed deposits were closely linked with the business requirement of the assessee, such expenses were allowable expenses. Therefore the Tribunal was right in holding that the expenses for obtaining fixed deposits from the public was revenue in nature. [Para 4.5]