Rajanarayan Textiles Ltd., CHENNAI V. ACIT, Coimbatore

ITA 1406/CHNY/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64657 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-12-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 26-11-2012
• Assessment Year: 1995-1996
• Appeal Filed On: 27-06-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: TN SITARAMAN
• 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 DR. O.K. NARAYANAN, VICE PRESIDENT AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ITA NO.1406/MDS/2012 ASST. YEAR : 1995-96 M/S.RAJNARAYAN TEXTILES LTD., POST BOX NO.3901, NO.70, RACE COURSE ROAD, COIMBATORE 641 018. PAN :AABCR0320G. (APPELLANT) V. THE ASST. COMMISSIONER OF INCOME TAX, COMPANY CIRCLE I(1), COIMBATORE. (RESPONDENT) APPELLANT BY : MR. TN SITARAMAN, ADVO CATE RESPONDENT BY : MR. GURU BASHYAM, JCIT DATE OF HEARING : 26 NOV 2012 DATE OF PRONOUNCEMENT : 12 DEC 201 2 O R D E R PER CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-I, COIM BATORE DATED 04.4.2012 IN IT APPEAL NO.346/10-11 FOR THE ASST. Y EAR 1995-96. THE ONLY ISSUE IN THE GROUNDS OF APPEAL IS THAT THE COMMISSIONER OF ITA 1406/MDS/12 2 INCOME TAX (APPEALS) ERRED IN DIRECTING THE ASSESSI NG OFFICER TO TREAT THE AGGREGATE EXPENDITURE OF C.62,92,686/- INCURRED DURING THE YEAR ON REPLACEMENT OF VARIOUS ITEMS OF TEXTILE MACHINER Y AS CAPITAL EXPENDITURE. 2. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURE OF YARN. DU RING THE ASST. YEAR 1995-96, THE ASSESSEE REPLACED ONE DRAW FRAME, TWO SPEED FRAMES, TWO RING FRAMES, TWO TRANSFORMERS, AND ONE USTER EVENNESS TESTER, TOTALING TO C.62,96,685/-. THE SAID EXPEND ITURE WAS CLAIMED AS REVENUE EXPENDITURE ALLOWABLE UNDER SEC.37 OF TH E ACT.. THE ASSESSING OFFICER TREATED THE SAID EXPENDITURE AS C APITAL EXPENDITURE AND ALLOWED DEPRECIATION. THE ASSESSEE SUCCEEDED B EFORE THE TRIBUNAL AND BEFORE THE HIGH COURT AND THE MATTER R EACHED THE HON'BLE SUPREME COURT IN CIVIL APPEAL NO.922/2006 A ND OTHER BATCH OF APPEALS. 3. BEFORE THE HON'BLE SUPREME COURT BOTH THE PARTI ES SUBMITTED THAT THE MATTER IS SQUARELY COVERED BY TH E JUDGMENT OF DIVISION BENCH OF HON'BLE SUPREME COURT IN THE CASE OF CIT V. RAMARAJU SURGICAL COTTON MILLS & OTHERS REPORTED IN 294 ITR 328. ITA 1406/MDS/12 3 THE HON'BLE SUPREME COURT BY ITS ORDER DATED 13.1.2 009 IN CIVIL APPEAL NO.922 OF 2006 ACCEPTED THE CONTENTIONS OF T HE PARTIES AND THE SUBMISSIONS MADE BEFORE IT , REMITTED THE APPEA L TO THE FILE OF THE COMMISSIONER OF INCOME TAX (APPEALS) WITH A DIRECTI ON TO DISPOSE OF THE MATTER IN ACCORDANCE WITH LAW AND IN TERMS OF D IRECTIONS GIVEN IN THE JUDGMENT IN THE CASE OF CIT V. RAMARAJU SURGICA L COTTON MILLS & OTHERS(SUPRA). THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. RAMARAJU SURGICAL COTTON MILLS & OTHERS HELD AS UND ER :- 4. THERE ARE NUMBER OF TESTS WHICH ARE REQUIRED TO BE CONSIDERED WHILE DECIDING WHETHER THE EXPENDITURE WAS REVENUE OR CAPITAL IN NATURE. NUMBER OF JUDGEMENTS HAVE BEEN CITED BEFO RE US IN THAT REGARD. HOWEVER, IN THE ABSENCE OF THE REQUISITE D ETAILS REGARDING THE PRODUCTION CAPACITY REMAINING CONSTANT EVEN AFT ER REPLACEMENT, THE MATTER NEEDS TO BE REMITTED TO THE CIT(A). THE RE IS ONE MORE REASON WHY WE ARE INCLINED TO REMIT THE MATTER. AS STATED ABOVE, THE IMPUGNED JUDGMENT OF THE MADRAS HIGH COURT IN T HE CASE OF JANAKIRAM MILLS LTD. (SUPRA) HAS BEEN SET ASIDE BY THIS COURT AS THERE WAS CONFUSION BETWEEN THE TESTS TO BE APPLIED IN RESPECT OF S.31 VIS--VIS THE TEST TO BE APPLIED IN CASE OF S. 37 OF THE IT ACT. WITHOUT EXPRESSING ANY OPINION ON THE MERITS OF THE CASE WE REMIT THE MATTER TO CIT(A) WHO WILL DECIDE THE QUESTION I N ACCORDANCE WITH LAW. ITA 1406/MDS/12 4 MEANWHILE, THE HON'BLE SUPREME COURT IN THE CASE OF SRI MANGAYARKARASI SPINNING MILLS (P) LTD. (315 ITR 114 ) HELD THAT EXPENDITURE OF AN ASSESSEE FOR REPLACEMENT OF PARTS OF TEXTILE MILLS FOR SPINNING YARN IS NOT REVENUE EXPENDITURE UNDER SEC.37 OF THE I.T. ACT. 4. THE APPEAL OF THE ASSESSEE WAS TAKEN UP BY THE COMMISSIONER OF INCOME TAX (APPEALS) AS DIRECTED BY THE HON'BLE SUPREME COURT TO DECIDE THE ISSUE IN ACCORDANCE WIT H LAW AND IN TERMS OF DIRECTIONS IN THE CASE OF CIT V. RAMARAJU SURGICAL COTTON MILLS & OTHERS (SUPRA). 5. THE COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE T HE COMMISSIONER OF INCOME TAX (APPEALS) THAT IN VIEW O F THE DECISION IN THE CASE OF CIT V. RAMARAJU SURGICAL COTTON MILLS& OTHERS (SUPRA) AND SINCE THERE IS NO INCREASE IN PRODUCTION CAPACI TY IN ASSESSEES CASE, THE EXPENDITURE INCURRED BY THE ASSESSEE IS R EVENUE AND NOT CAPITAL EXPENDITURE. 6. THE DEPARTMENTAL REPRESENTATIVE SUPPORTED THE O RDERS OF THE LOWER AUTHORITIES. ITA 1406/MDS/12 5 7. THE COMMISSIONER OF INCOME TAX (APPEALS), AFTER CONSIDERING THE DECISIONS OF HON'BLE SUPREME COURT IN THE CASE OF CIT V. RAMARAJU SURGICAL COTTON MILLS& OTHERS (SUPR A), SRI MANGAYARKARASI MILLS (P) MILLS LTD. (315 ITR 114) ( S.C) (SUPRA), CIT V. SARAVANA SPINNING MILLS (P) LTD (211 CTR 281)(S.C) ETC., HELD THAT THE EXPENDITURE INCURRED ON REPLACEMENT OF MACHINER Y IS CAPITAL EXPENDITURE. THE COMMISSIONER OF INCOME TAX (APPEA LS) ALSO OBSERVED THAT THE COUNSEL FOR THE ASSESSEE HIMSELF ADMITTED THAT RING FRAMES ATTRIBUTES TO THE INCREASE IN PRODUCTIO N CAPACITY ON ACCOUNT OF INCREASE IN SPINDLEAGE. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED TH E MATERIAL PLACED ON RECORD AND THE JUDGMENTS RELIED UPON. WE FIND THAT ON IDENTICAL FACTS, THE CO-ORDINATE BENCH OF T HIS TRIBUNAL IN THE CASE OF THE KUMARAN MILLS LTD. V. ACIT IN ITA NO.75 4/MDS/2012 FOR THE ASST. YEAR 1994-95, DATED 12 SEPT 2012, HELD TH AT REPLACEMENT OF DRAW FRAMES ARE CAPITAL EXPENDITURE NOT ALLOWABL E AS DEDUCTION UNDER SEC.37 OF THE ACT. THE CO-ORDINATE BENCH HEL D AS UNDER :- ITA 1406/MDS/12 6 5. WE HAVE HEARD BOTH THE SIDES, PERUSED THE RECOR DS AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. T HE ONLY ISSUE FOR ADJUDICATION BEFORE US IS WHETHER THE EXP ENDITURE INCURRED FOR THE PURPOSE OF REPLACEMENT OF DRAW FRA ME IS REVENUE EXPENDITURE OR CAPITAL EXPENDITURE. THE LEA RNED CIT(APPEALS) BY CONSIDERING THE ENTIRE FACTS OF THE CASE AND ALSO THE DECISIONS OF VARIOUS HIGH COURTS AND THE H ON'BLE SUPREME COURT INCLUDING THE DECISION IN THE CASE OF CIT V. RAMARAJU SURGICAL COTTON MILLS LTD. (SUPRA) AND BY FOLLOWING THE DECISION IN THE CASE OF CIT V. MANGARKARASI MIL LS LTD. (SUPRA) HAS HELD THAT REPLACEMENT OF DRAW FRAME IS A CAPITAL EXPENDITURE. FOR THAT PROPOSITION THE HON'B LE SUPREME COURT HAS RELIED ON THE DECISIONS IN THE C ASE OF TRAVANCORE COCHIN CHEMICALS LTD. V. CIT (106 ITR 90 0) (SC) AND LAKSHMIJI SUGAR MILLS P. CO. V. CIT AIR 19 72 SC 159 AND OBSERVED THAT IT HAS BEEN HELD BY THIS COURT THAT BRINGING INTO EXISTENCE A NEW ASSET OR AN ENDURING BENEFIT FOR THE ASSESSEE AMOUNTS TO CAPITAL EXPENDI TURE. WE HAVE ALREADY EXPLAINED WHY REPLACEMENT, IN THIS CASE, AMOUNTS TO BRINGING INTO EXISTENCE A NEW ASSE T AND ALSO AN ENDURING BENEFIT FOR THE ASSESSEE IT IS CLEAR THEN THAT THE EXPENDITURE OF THE ASSESSEE HERE IS N OT OF A REVENUE NATURE AND THUS, CANNOT BE CLAIMED AS A DEDUCTION UNDER SECTION 37 OF THE ACT.. 6. THE HONBLE JURISDICTIONAL HIGH COURT IN THE CAS E OF CIT, MADURAI V. MADURA COATS (2012) 205 TAXMAN 357 (MADR AS) HAS OBSERVED AS UNDER :- 11. WHEN THE TAX CASE APPEALS CAME UP FOR CONSIDER ATION IT IS SUBMITTED BY THE LEARNED COUNSEL FOR THE APPELLANT/REVENUE THAT WITH REGARD TO THE SUBSTANTI AL 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 S UBSTANTIAL QUESTION OF LAW 1 AND 2 RAISED IN THIS TAX CASE APP EAL ARE ANSWERED AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. ITA 1406/MDS/12 7 13. WITH REGARD TO THE THIRD SUBSTANTIAL QUESTION O F LAW, IT IS SUBMITTED BY THE LEARNED COUNSEL FOR THE APPELLANT THAT WHEN EACH OF THE MACHINERY IN QUESTION SUCH AS RING FRAM ES, DRAW FRAMES AND SPEED FRAME IS PURCHASED FOR THE FI RST TIME, THEN IT IS A CAPITAL ASSET, ON WHICH DEPRECIA TION SHOULD BE GRANTED. WHEREAS, IT IS SUBMITTED THAT THE SALE OF A WORN OUT MACHINERY AND REPLACEMENT THEREOF BY NEW MACHIN ERY CAN ONLY BE TREATED AS REDUCTION AND ADDITION TO T HE BLOCK OF ASSETS, WHICH IS A PART OF REPLACEMENT. IT IS ALSO SUBMITTED THAT WHILE UNDER THE LAW, AS IT STOOD PRIOR TO 1988 -89, THE FACT OF TREATING THE ENTIRE MILL AS AN INTEGRATED UNIT M AY HAVE HAD THE EFFECT OF TREATING THE REPLACEMENT OF MACHINERY AS REPLACEMENT OF PARTS OF A LARGER WHOLE AND THUS TRE ATED AS REVENUE EXPENDITURE AND ONCE THE CONCEPT OF BLOCK O F ASSETS HAS BEEN BROUGHT IN BY THE PARLIAMENT FROM THE ASSE SSMENT YEAR 1988-89 , WHETHER THE MILL IS AN INTEGRATED WH OLE OR NOT, WHETHER THE REPLACEMENT OF MACHINES RESULTED IN INC REASED CAPACITY OR NOT, WILL HAVE NO BEARING AND WHEN ANY ITEM BELONGING TO THE BLOCK IS REMOVED, ITS VALUE IS RED UCED AND IF ANY NEW ITEM COMES IN ITS PLACE, ITS VALUE IS ADDED TO THE BLOCK. IN VIEW OF THE ABOVE, IT IS SUBMITTED THAT T HE 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 APPE LLANT, WE HOLD THAT THE THIRD QUESTION OF LAW IS ALSO ANSW ERED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. 7. IN VIEW OF THE DECISIONS OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. RAMARAJU SURGICAL COTTON MILLS L TD. (SUPRA), CIT V. SRI MANGAYARKARASI MILLS P. LTD. (S UPRA) AND THE DECISION OF THE HONOURABLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT, MADURAI V. MADURA COATS (SUPRA), W E FIND NO INFIRMITY IN THE ORDER PASSED BY THE LEARNED CIT(APPEALS). HIS ORDER IS ACCORDINGLY CONFIRMED AN D THE APPEAL OF THE ASSESSEE IS DISMISSED. THEREFORE, FOLLOWING THE DECISION OF THE HON'BLE SU PREME COURT IN THE CASE OF CIT V. SRI MANGAYARKARASI SPINNING MILLS ( P) LTD. (SUPRA) AND THE DECISION OF THE CO-ORDINATE BENCH, WE HOLD THAT REPLACEMENT OF ITA 1406/MDS/12 8 MACHINERY IN TEXTILE MILLS IS CAPITAL EXPENDITURE A ND NOT ALLOWABLE AS DEDUCTION UNDER SEC.37 OF THE I.T. ACT. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. 10. ORDER PRONOUNCED ON WEDNESDAY, THE 12 TH DAY OF DECEMBER 2012, AT CHENNAI. SD/- SD/- ( DR. O.K. NARAYANAN) (CHALLA NAGENDR A PRASAD) VICE PRESIDENT JUDICIAL MEMBE R CHENNAI, DATED : 12 TH DECEMBER 2012. JLS. COPY TO:- (1) APPELLANT (2) RESPONDENT (3) CIT-(A), CHENNAI (4) C.I.T., CHENNAI (5) D.R. (6) GUARD FILE