Karnataka H.C : CIT(A) was empowered to give a finding that the expenditure was capital in nature, when such issue was not before it ?

High Court Of Karnataka

Dr. Aswath N. Rao vs. Assistant Commissioner Of Income Tax

Section 37(1)

Asst. Year 2001-02

K.L. Manjunath & Mrs. B.V. Nagarathna, JJ.

IT Appeal No. 2900 of 2005

23rd February, 2010

Counsel appeared :

R.B. Krishnamurthy, for the Appellant : K.V. Aravind, for the Respondent

JUDGMENT

K.L. Manjunath, J. :

The assessee has come up in this appeal challenging the concurrent findings of all the authorities below.

2. The facts leading to this case are as hereunder : Assessee is a cardiologist by profession. He is assessed to tax by the respondent. Method of accounting of the assessee is cash system. For the asst. yr. 2001-02 he filed return of income. He claimed the expenditure incurred on purchase of second-hand medical equipment from USA dt. 31st March, 2001. According to the assessee he is having medical equipment which is used for his profession as a cardiologist and he has installed equipments both in Bangalore and Mysore for the purpose of investigation concerning cardiac problems. As these machineries are old, they often go out of order and the spare parts are not readily available in India and that as and when he visits USA on professional work he is in the habit of buying second-hand machines and after bringing them into India he uses spare parts after dismantling machineries purchased by him from USA. Accordingly, when he had been to USA in March, 2001, he purchased second-hand machines in order to dismantle the same and used spare parts of it for his old equipments. Actually secondhand machineries purchased by him at USA in the month of March, 2001 arrived at Bangalore Airport in August, 2001. The claim made by the assessee has been negatived by the Department on the ground that during the relevant assessment year old machineries purchased by the assessee had not reached Bangalore, therefore the said claim has to be disallowed and that if at all the assessee is entitled to the same it can be considered for the next assessment year. Accordingly, order of assessment came to be completed. Being aggrieved by the order of assessment, assessee filed an appeal before the CIT(A) which appeal came to be dismissed. Against which second appeal came to be filed before the Tribunal, Bangalore in ITA 2236/Bang/2004 which appeal also came to be rejected by its order dt. 3rd May, 2005. Being aggrieved by the concurrent findings, present appeal is filed.

3. The appeal was admitted without considering the substantial questions of law arising in this appeal though the same has been formulated by the appellant in the appeal memo. Therefore, we have to examine the questions of law arising in this appeal. Accordingly, we are required to answer the following substantial questions of law in this appeal :

“1. Whether the Tribunal was right in coming to the conclusion that CIT(A) was empowered to give a finding that the expenditure was capital in nature, when such issue was not before it ?

2. Whether the amount spent by the assessee towards the purchase of a second-hand machinery for the purpose of dismantling the same and use the parts of it as spare parts to the existing machinery is allowable expenditure as a renewable expenditure or not ?

” We have heard the counsel for the parties. Mr. R.B. Krishnamurthy, counsel for the assessee contends that the expenditure incurred by the assessee for the purchase of old second-hand machinery at USA is to use the same as spare parts to the existing old machineries installed in Bangalore and Mysore by the assessee. Since spare parts are not available, the only course open to the assessee was to purchase second-hand machinery and use it as and when the equipments of the assessee had worn out on account of its usual wear and tear. His submission is that the assessee being a cardiologist cannot be expected to send his equipment for repairs only when his machineries are worn out. Considering the nature of his profession, machineries are required to be repaired forthwith and such repairs cannot be done immediately on account of non-availability of the spare parts in India. If the reasonings of the AO is accepted, the assessee being a cardiologist would be unable to treat the patients immediately if his equipment installed in Bangalore and Mysore are worn out because of its usual wear and tear. In the circumstances, is it possible for a cardiologist to buy second-hand machineries from USA after the machine is worn out and replace the spare parts. Therefore, Mr. Krishnamurthy contends that purchase of such machinery to use it as spare parts and keep the spare parts in advance is for the advantage of the patients as the assessee is maintaining cash system method of accounting as and when demands are made to purchase spare parts are to be treated expenditure incurred on the date of purchase.

He further contends that the Revenue is not disputing the payment made by the assessee in order to purchase the second-hand machinery at USA in the month of March, 2001. It is also contended that even though the machinery has arrived at Bangalore Airport in the next assessment year, same cannot be a ground for the Revenue to reject the contention of the assessee. He further contends that the CIT(A) has committed an error in treating the expenditure as capital in nature as the purpose of purchasing the machinery is to use the same as spare parts to the existing old equipment and purchase of spare parts to the existing machinery cannot be considered as a capital expenditure and it has to be treated as revenue expenditure for the maintenance of the machineries. Therefore he contends that question No. l has to be answered in favour of the assessee. He further contends that when the full sale consideration is paid, the goods purchased by him is passed on to the assessee since title to the goods is passed on to the assessee, the moment the goods are sold by the vendor of the assessee that too after complete payment of the entire sale consideration. He contends that this aspect of the matter has not been considered by the AO so also by the CIT(A) and the Tribunal therefore he requests to set aside of the orders and answer the questions of law in favour of the assessee. Per contra, learned counsel for the Revenue contends that the amount paid by the assessee to purchase second-hand equipment at USA in the month of March, 2001 cannot be considered as an expenditure incurred by the assessee towards the maintenance of the machinery. According to him, when spare parts purchased, same has to be used as and when machineries are worn out, therefore he contends that the assessee’s transaction cannot be treated as an allowable transaction for the relevant assessment year. He further contends that since machinery is said to have arrived at Bangalore Airport in the month of August, 2001, the case of the assessee has to be considered only for the next assessment year. He further contends that since machinery was in transit, it cannot be considered as a transaction taken place at relevant point of time.

In the circumstances, he requests the Court to dismiss the appeal. Having heard the counsel for the parties, we are of the opinion that both the questions are to be answered in favour of the assessee for the following reasons : It is not in dispute that the assessee is a cardiologist and that he has installed two machineries for the purpose of his profession one at Bangalore and another at Mysore. It is also not the case of the Revenue that the equipments installed by the assessee both in Bangalore and Mysore are not old. If old machineries are being used by the assessee, considering the nature of profession of the assessee, one cannot say that the assessee has to wait till the machineries are worn out and send it for repairs. If anyone directs the assessee to send machineries after the machineries are worn out, then it leads to apathy as the assessee being a cardiologist is required to use these machineries as and when the patients arrive and considering the nature of cardiac problems in India, no cardiologist says that the patient has to approach him only after the machinery is restored to its original position. When the spare parts are not available in India as a prudent doctor and wise man has rightly purchased second- hand machineries in USA in anticipation that such machineries are required to be used as spare parts in order to serve the patients. Therefore, purchase of second-hand machineries by the assessee by paying cash in USA has to be taken as a transaction that took place during the relevant assessment year and it cannot be considered as a transaction for the future assessment year. When the entire sale consideration is paid and when the machinery purchased by him has been despatched by the vendor from USA, sale transaction is completed and as per the provisions of the Sale of Goods Act, title to the goods has been passed on to the assessee and he has become the owner of the secondhand machineries purchased by him to use them as spare parts even though the goods have reached airport at Bangalore in the month of August, 2001 and it is to be noted that when actually goods were delivered to the assessee is not the criteria to consider the sale transaction. We could have appreciated the contention of the Revenue provided these second-hand machineries had been purchased by the assessee only to use them as machineries and not as spare parts. Therefore, we are of the opinion that second-hand machinery purchased by the assessee ought to be considered as spare parts for the existing old machineries and has to be considered as an allowable expenditure on revenue side. So far as the first question is concerned, we are of the view that when an assessee purchased the spare parts for the existing machineries, same cannot be treated as capital expenditure and it has to be treated as revenue expenditure since these spare parts are purchased for the maintenance of the existing equipments. On this question, Revenue cannot dispute the legal position. Therefore, we are of the view that CIT(A) has committed an error in treating it as a capital expenditure and not revenue expenditure.

In the result, both the questions are answered against the Revenue and in favour of the assessee. Accordingly this appeal is allowed. AO is directed to reconsider the matter and compute the assessment in accordance with law treating the purchase of the second-hand machinery as spare parts to the existing old equipments or machineries of the assessee and considering it as revenue expenditure.

[Citation : 326 ITR 188]

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