ACIT, Tuticorin V. M/s. Loyal Textiles Mills Ltd., Kovilpatti

ITA 1366/CHNY/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 0918 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 08-01-2013
• Assessment Year: 2004-2005
• Appeal Filed On: 18-06-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR S MOHARANA
• Assessee Lawyers: R MEENAKSHISUNDARAM
• Keywords: Capital asset; Depreciation; Question of law; Revenue expenditure; Capital expenditure
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER ------- ITA NOS. 1366 & 1456/MDS/2012 ASSESSMENT YEAR : 2004-05 THE ASST.COMMISSIONER OF INCOME TAX, CIRCLE-I, TUTICORIN. V. M/S. LOYAL TEXTILE MILLS LTD., 21/4, MILL STREET, KOVILPATTI. (PAN : AAACL2632C) (APPELLANT) (RESPONDENT) APPELLANT BY : DR. S. MOHARANA, CIT RESPONDENT BY : SHRI R. MEENAKSHI SUNDARAM, ADVOCATE DATE OF HEARING : 08.0 1.2013 DATE OF PRONOUNCEMENT : 08.01.201 3 O R D E R PER V. DURGA RAO, JUDICIAL MEMBER : ITA NO. 1456/MDS/2012 IS A REPEATED APPEAL FILED BY THE REVENUE. BOTH THE PARTIES SUBMITTED THAT THIS APPEA L HAS BEEN FILED MISTAKENLY AND NO ADJUDICATION IS REQUIR ED. ACCORDINGLY, THIS APPEAL DISMISSED. ITA NOS.1366 & 1456/MDS /2012 : 2 : 2. ITA NO. 1366/MDS/2012 : THERE IS A DELAY IN FILING THE APPEAL BY 8 DAYS. IN THE AFFIDAVIT FILED BY THE RE VENUE IT IS SUBMITTED THAT THIS FILE WAS MIXED UP WITH ANOTHER FILE AND THEREFORE THERE IS A DELAY IN FILING THE APPEAL BEF ORE THE TRIBUNAL. WE FIND THAT THERE IS A GENUINE REASON F OR NOT FILING THE APPEAL IN TIME. THEREFORE THE DELAY IS CONDONE D AND THE APPEAL FILED BY THE REVENUE IS ADMITTED. 3. THE FIRST GROUND OF APPEAL RAISED BY THE REVENUE IN THIS APPEAL RELATES TO DISALLOWANCE OF INTEREST OF ` 7,11,872/-. THE FACTS IN BRIEF ARE THAT THE M/S. LOYAL TEXTILE MILL S LTD. IS A COMPANY ENGAGED IN THE MANUFACTURING AND TRADING OF YARN, CLOTH, GARMENTS AND ALSO IN SECURITIES. FOR THE AS SESSMENT YEAR 2004-05 THE ASSESSEE FILED ITS RETURN OF INCOM E ON 28-10- 2004 ADMITTING TOTAL INCOME OF ` 7,70,76,960/-. THE ASSESSMENT WAS COMPLETED AFTER MAKING CERTAIN ADDIT IONS AND DISALLOWANCES. INSOFAR AS THE DISALLOWANCE IN RESP ECT OF INTEREST ON BORROWED FUNDS OF ` 7,11,872/- IS CONCERNED, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEES REPR ESENTATIVE HAS CLAIMED THAT MONIES WERE ADVANCED TO ASSOCIATED CONCERNS TOWARDS PURCHASE OF MATERIALS AND SERVICE CHARGES. AS PER THE DETAILS FURNISHED, THE ASSESSEE COMPANY HAS PAID ITA NOS.1366 & 1456/MDS /2012 : 3 : INTEREST @ 8% UPTO 31-1-2003 AND @ 7% W.E.F. 1.2.20 04 ON THE CREDIT FACILITIES AVAILABLE. ACCORDINGLY, THE INTEREST PAID ON THE BORROWED FUNDS DIVERTED FOR NON-BUSINESS PURPOS E WAS WORKED OUT AT ` 7,11,872/- AND THE SAME WAS TREATED AS INCOME OF THE ASSESSEE AND DISALLOWED U/S 36(1)(III ) OF THE INCOME TAX ACT, 1961 ('THE ACT' FOR SHORT). 4. THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT(APPEALS). THE CIT(APPEALS) OBSERVED THAT THE A SSESSEE SUBMITTED COPIES OF THE LEDGER EXTRACT OF PROCESSIN G CHARGES AND DETAILS OF INTEREST-FREE FUNDS AVAILABLE WITH I T FOR THE RELEVANT PERIOD AND THE ASSESSEE COMPANY HAD JOB WO RK TRANSACTIONS WITH ASSOCIATE CONCERNS TO THE TUNE OF ` 6.37 CRORES. THE CIT(APPEALS) OBSERVED THAT IT COULD BE THUS INFERRED THAT THE ASSESSEE HAD REGULAR BUSINESS TRA NSACTIONS WITH THESE ASSOCIATE CONCERNS AND THE FUNDS HAD BEE N ADVANCED FOR BUSINESS PURPOSES. IT WAS FURTHER SUB MITTED THAT CASH CREDIT LOANS WERE OBTAINED AGAINST STOCK OF GO ODS AND DEBTORS AND FROM THE FOLLOWING DETAILS IT WAS EVIDE NT THAT THE LOAN WAS REPRESENTED BY THE STOCKS AND THERE WAS NO DIVERSION OF CASH CREDIT LOANS: ITA NOS.1366 & 1456/MDS /2012 : 4 : LOANS FROM BANKS ` 59,60,96,000/- INVENTORIES ` 73,48,45,000/- SUNDRY DEBTORS ` 31,99,65,000/- ASST. YEAR NET PROFIT DEPRECIATION TOTAL RS RS RS 2001-02 10,23,93,000 10,29,50,000 20,53,43,0 00 2002-03 5,50,64,000 11,01,67,000 16,52 ,31,000 2003-04 12,04,86,000 13,64,79,000 2,56 ,95,000 ------------------ 62,75,65,000 ========= __________________________________________ ____ THE CIT(APPEALS) FURTHER OBSERVED AS UNDER : ASSESSEE SUBMITTED THE STATEMENT OF FUND POSITION. ON PERUSAL OF ALL THE RELEVANT DETAILS, I AM OF THE VIEW THAT THE DECISION OF HONBLE TRIBUNAL O N THIS ISSUE FOR EARLIER ASST. YEARS IN ASSESSEES CA SE IS SQUARELY APPLICABLE FOR THIS YEAR ALSO, FACTS REMAINING THE SAME. HENCE I DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF ` .7,11,872/- MADE BY THE ASSESSING OFFICER AS THE DISALLOWANCE OF INTEREST IS, IN MY VIEW, NOT JUSTIFIED. 5. AGGRIEVED, THE REVENUE HAS CARRIED THE MATTER BE FORE THE TRIBUNAL. THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE ISSUE INVOLVED IN THIS APPEAL IS CLEARLY ITA NOS.1366 & 1456/MDS /2012 : 5 : COVERED BY THE DECISION OF THE TRIBUNAL IN THE ASSE SSEES OWN CASE IN ITA NOS. 917 AND 342/MDS/2000 FOR THE ASSES SMENT YEARS 1996-97 AND 1997-98 VIDE ORDER DATED 31-03-20 06. 6. ON THE OTHER HAND, THE LEARNED DR FAIRLY CONCEDE D THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL, REFERRED TO ABOVE. 7. WE HAVE HEARD BOTH THE SIDES, PERUSED THE RECORD S AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE CIT(APPEALS) HAS GIVEN A CATEGORICAL FINDING THAT T HE FACTS IN THE YEAR UNDER CONSIDERATION ARE IDENTICAL TO THE F ACTS IN THE ASSESSMENT YEARS 1996-97 AND 1997-98 AND THAT FUNDS WERE ADVANCED BY THE ASSESSEE TO THE ASSOCIATE CONCERNS FOR THE PURPOSE OF BUSINESS. THE CIT(APPEALS) BY FOLLOWING THE DECISION OF THE TRIBUNAL (SUPRA), ALLOWED THE GROUN D RAISED BY THE ASSESSEE. WE FIND NO INFIRMITY IN THE ORDER PA SSED BY THE CIT(APPEALS). IN THE CIRCUMSTANCES, THIS GROUND OF APPEAL RAISED BY THE REVENUE IS DISMISSED. 8. THE NEXT GROUND OF APPEAL RAISED BY THE REVENUE RELATES TO REPLACEMENT OF ELITE COMPACT CONVERSION KITS (E CC KITS FOR SHORT). THE FACTS IN BRIEF ARE THAT DURING THE COU RSE OF THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER OBSERV ED THAT ITA NOS.1366 & 1456/MDS /2012 : 6 : THE ASSESSEE COMPANY HAD IMPORTED FROM SUESSEN, 3 N UMBERS OF ECC KITS AT A COST OF ` 1,61,27,199/- AND CLAIMED 100% DEPRECIATION IN THE DEPRECIATION CHART PREPARED FOR INCOME-TAX PURPOSE. IT WAS SUBMITTED BEFORE THE ASSESSING OFF ICER THAT ECC KITS WAS ONLY AN ATTACHMENT TO THE RING FRAME E XISTED ALREADY AND IT WAS USED TO STRENGTHEN THE YARN PROD UCED AT THE SUBSEQUENT STAGE OF PROCESSING. THE ASSESSEE C LAIMED THAT THE SAME DID NOT INCREASE THE PRODUCTION CAPAC ITY AND CLAIMED 100% DEPRECIATION. THE ASSESSING OFFICER A FTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVE D THAT THE ATTACHMENT OF ECC KITS TO ALREADY EXISTING RING FRA MES IS NOT A REPLACEMENT OF SPARES ALREADY USED AND THAT IT IS A NEW COMPONENT PURCHASED AND USED UNDOUBTEDLY BRINGS INT O AN ADVANTAGE OR OF ENDURING BENEFIT TO THE ASSESSEE. THE ASSESSING OFFICER HELD THAT THE COST OF NEW COMPONE NT OF ` 1,61,27,199/- IS IN THE NATURE OF CAPITAL EXPENDITU RE AND ALLOWED DEPRECIATION @ 25% BY TREATING THE ECC KIT S AS A PLANT AND MACHINERY. 9. THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT(APPEALS). IT WAS SUBMITTED BEFORE THE CIT(APPE ALS) THAT THE SAID COMPONENT DID NOT GIVE ANY INCREASE TO THE CAPACITY. ITA NOS.1366 & 1456/MDS /2012 : 7 : IT REQUIRES TO BE CHANGED WITHIN A SPAN OF ONE YEAR . IT ONLY SERVES FOR THE PURPOSE OF DELIVERING BETTER QUALITY OF YARN WITH HIGHER STRENGTH AND THERE IS NO INCREASE IN OUT PUT OF YARN PRODUCED. THE CIT(APPEALS) AFTER CONSIDERING THE S UBMISSIONS OF THE ASSESSEE OBSERVED THAT THE ATTACHMENT IS NOT AN INDEPENDENT MACHINERY CAPABLE OF PRODUCING AN IDENT IFIABLE PRODUCT OR OUTPUT OF ITSELF. THE ATTACHMENT HAS N OT RESULTED IN ANY CAPACITY INCREASE (I.E.) THERE HAS BEEN NO I NCREASE IN PRODUCTION CAPACITY AFTER THE REPLACEMENT. ADDITIO NAL CAPACITY IS ONE OF THE VITAL TESTS FOR DISTINGUISHING REVENU E EXPENDITURE FROM CAPITAL EXPENDITURE. WHERE CAPACITY IS NOT IN CREASED, IT IS NOT CAPITAL EXPENDITURE SO THAT SECTION 37 OF THE A CT WILL BE APPLICABLE. THE CIT(APPEALS) ACCORDINGLY DIRECTED THE ASSESSING OFFICER TO TREAT THE EXPENDITURE AS REVEN UE EXPENDITURE AND CONSEQUENTLY TO WITHDRAW DEPRECIATI ON ALLOWED OF ` 40,31,800/-. 10. ON BEING AGGRIEVED, THE REVENUE HAS CARRIED THE MATTER BEFORE THE TRIBUNAL. THE LEARNED DR SUBMITTED THAT THE ASSESSEE IN THE FIRST INSTANCE SHOWED THE EXPENDITU RE IN THE BOOKS OF ACCOUNT AS CAPITAL EXPENDITURE AND IN THE RETURN CLAIMED 100% DEPRECIATION. WHEN THE ASSESSING OFFI CER ITA NOS.1366 & 1456/MDS /2012 : 8 : ALLOWED DEPRECIATION ONLY AT 25%, THE ASSESSEE FILE D AN APPEAL BEFORE THE CIT(APPEALS) AND SUBMITTED THAT IT IS NO T A CAPITAL EXPENDITURE INCURRED BY THE ASSESSEE BUT ONLY A REV ENUE EXPENDITURE. THE LEARNED DR FURTHER SUBMITTED THAT THE ISSUE INVOLVED IN THIS APPEAL IS SQUARELY COVERED AGAINST THE ASSESSEE BY THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT, MADURAI V. MADURA COATS (2012) 205 TAX MAN 357 (MADRAS). 11. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ECC KIT WHICH IS ATTACHED TO THE RING FRAME WAS ONLY FOR THE BETTER QUALITY OF YARN AND NOT FOR INCREASE IN THE CAPACITY. THEREFORE, IT IS A REVENUE EXPENDITU RE. HE FURTHER SUBMITTED THAT THE ECC KIT WHICH IS ATTACHE D TO THE RING FRAME IS A REVENUE EXPENDITURE AND HE RELIED O N TWO DECISIONS OF THE TRIBUNAL, I.E. I.T.A. NO. 1138/MDS /2011 IN THE CASE OF ACIT V. M/S. VIJAYESWARI TXTILES LTD. DATED 27-11-2012 AND I.T.A. NO.963/MDS/2011 IN THE CASE OF VIJAYESWA RI TEXTILES LTD. DATED 23-08-2011. 12. WE HAVE HEARD BOTH THE SIDES, PERUSED THE RECOR DS AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE ONLY ISSUE INVOLVED IN THIS GROUND IS WHETHER ECC KIT AT TACHED TO ITA NOS.1366 & 1456/MDS /2012 : 9 : THE RING FRAME IS CAPITAL EXPENDITURE OR REVENUE EX PENDITURE. THE ASSESSEE IN ITS ORIGINAL RETURN OF INCOME CLAIM ED 100% DEPRECIATION ON THE ABOVE ECC KITS BY TREATING THE EXPENDITURE ON THE PURCHASE OF THE SAME AS A CAPITAL EXPENDITUR E. THE ASSESSING OFFICER BY TREATING THE ABOVE KITS AS A P LANT AND MACHINERY ALLOWED DEPRECIATION AT 25%. ON APPEAL T HE ASSESSEE CLAIMED THE EXPENDITURE INCURRED ON THE EC C KITS AS REVENUE EXPENDITURE. WE ARE UNABLE TO UNDERSTAND T HAT SIMPLY BECAUSE THE ASSESSING OFFICER HAS NOT ALLOWE D THE CLAIM OF DEPRECIATION AT 100%, HOW THE CAPITAL EXPENDITUR E BECOMES REVENUE EXPENDITURE. ON THIS GROUND ALONE THE ASSESSEE HAS NO CASE FOR THE REASON THAT THE ASSESS EE ITSELF ADMITTED THAT THE ECC KIT IS A CAPITAL EXPENDITURE AND CLAIMED DEPRECIATION THEREON. HOWEVER, THE CIT(APPEALS) ON A DIFFERENT FOOTING FOUND THAT THERE HAS BEEN NO INCR EASE IN THE PRODUCTION CAPACITY AFTER REPLACEMENT AND THEREFORE THE EXPENDITURE IS REVENUE EXPENDITURE. THE CIT(APPEAL S) HAS FAILED TO CONSIDER THE ORIGINAL CLAIM MADE BY THE A SSESSEE BEFORE THE ASSESSING OFFICER. APART FROM THAT THE ECC KIT WHICH IS ATTACHED TO A RING FRAME IS A NEW COMPONEN T PURCHASED AND IT WILL BRING ADVANTAGE OR ENDURING B ENEFIT TO ITA NOS.1366 & 1456/MDS /2012 : 10 : THE ASSESSEE. THE HONBLE JURISDICTIONAL HIGH COUR T IN THE CASE OF CIT, MADURAI V. MADURA COATS (SUPRA), HAS CONSID ERED SIMILAR ISSUE WITH REGARD TO THE RING FRAMES, DRAW FRAMES AND SPEED FRAMES AND HELD AS UNDER : 11. WHEN THE TAX CASE APPEALS CAME UP FOR CONSIDERATION IT IS SUBMITTED BY THE LEARNED COUNSEL FOR THE APPELLANT/REVENUE THAT WITH REGARD TO THE SUBSTANTIAL QUESTION OF LAW 1 AND 2 THEY ARE COVERED AS PER THE JUDGMENT OF THIS COURT DATED 25-04-2011 IN TAX CASE (APPEALS) NOS. 71 AND 72 OF 2008. 12. IN VIEW OF THE ABOVE, FOLLOWING THE SAME, THE SUBSTANTIAL QUESTION OF LAW 1 AND 2 RAISED IN THIS TAX CASE APPEAL ARE ANSWERED AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. 13. WITH REGARD TO THE THIRD SUBSTANTIAL QUESTION OF LAW, IT IS SUBMITTED BY THE LEARNED COUNSEL FOR THE APPELLANT THAT WHEN EACH OF THE MACHINERY IN QUESTION SUCH AS RING FRAMES, DRAW FRAMES AND SPEED FRAME IS PURCHASED FOR THE FIRST TIME, THEN IT IS A CAPITAL ASSET, ON WHICH DEPRECIATION SHOULD BE GRANTED. WHEREAS, IT IS SUBMITTED THAT THE SALE OF A WORN OUT MACHINERY AND REPLACEMENT THEREOF BY NEW MACHINERY CAN ONLY BE TREATED AS REDUCTION AND ADDITION TO THE BLOCK OF ASSETS, WHICH IS A PART OF REPLACEMENT. IT IS ALSO ITA NOS.1366 & 1456/MDS /2012 : 11 : SUBMITTED THAT WHILE UNDER THE LAW, AS IT STOOD PRIOR TO 1988-89, THE FACT OF TREATING THE ENTIRE M ILL AS AN INTEGRATED UNIT MAY HAVE HAD THE EFFECT OF TREATING THE REPLACEMENT OF MACHINERY AS REPLACEMENT OF PARTS OF A LARGER WHOLE AND THUS TREATED AS REVENUE EXPENDITURE AND ONCE THE CONCEPT OF BLOCK OF ASSETS HAS BEEN BROUGHT IN BY THE PARLIAMENT FROM THE ASSESSMENT YEAR 1988-89, WHETHER THE MILL IS AN INTEGRATED WHOLE OR NOT, WHETHER THE REPLACEMENT OF MACHINES RESULTED IN INCREASED CAPACITY OR NOT, WILL HAVE NO BEARING AND WHEN ANY ITEM BELONGING TO THE BLOCK IS REMOVED, ITS VALUE IS REDUCED AND IF ANY NEW ITEM COMES IN ITS PLACE, ITS VALUE IS ADDED TO THE BLOCK. IN VIE W OF THE ABOVE, IT IS SUBMITTED THAT THE THIRD SUBSTANTIAL QUESTION OF LAW IS ALSO COVERED AS PER THE JUDGMENT OF THIS COURT DATED 25.04.2011 IN TAX CASE (APPEALS) NOS. 71 & 72 OF 2008. IN VIEW OF THE SAID SUBMISSION MADE BY THE LEARNED COUNSEL FOR THE APPELLANT, WE HOLD THAT THE THIRD QUESTION OF LAW IS ALSO ANSWERED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. 13. IN THE PRESENT CASE THE ECC KITS ATTACHED TO A RING FRAME COME WITHIN THE PURVIEW OF BLOCK OF ASSETS AN D THEREFORE THE ABOVE DECISION OF THE JURISDICTIONAL HIGH COURT ITA NOS.1366 & 1456/MDS /2012 : 12 : SQUARELY APPLIES. THEREFORE, IN VIEW OF THE DECISI ON OF THE HONBLE JURISDICTIONAL HIGH COURT, SUPRA, WE REVERS E THE FINDING GIVEN BY THE CIT(APPEALS) AND ALLOW THIS GR OUND OF APPEAL RAISED BY THE REVENUE. 14. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT AT THE TIME OF HEARING ON THE 08 TH OF JANUARY, 2013, AT CHENNAI. SD/- SD/- (ABRAHAM P. GEORGE) (V.DURGA RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI, DATED THE 08 TH JANUARY, 2013. H. COPY TO: ASSESSEE/AO/CIT(A)/CIT/D.R./GUARD FILE