M/s. Prime Urban Development India Ltd., Tiruppur V. ACIT, Tiruppur

ITA 1692/CHNY/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 0762 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-02-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 07-02-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 04-09-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: K RAVI
• Keywords: Capital asset; Depreciation; Principle of natural justice; Question of law; Revenue expenditure; Capital expenditure
• Section: 143(3); 37(1); 37

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL A BENCH, CHENNAI. BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER & SHRI S.S. GODARA, JUDICIAL MEMBER I.T.A. NO.1692/MDS/2012 ASSESSMENT YEAR : 2006-07 M/S. PRIME URBAN DEVELOPMENT INDIA LTD., 110, AVINASHI ROAD, GANDHI NAGAR POST, TIRUPUR 641 603. [PAN:AABCP9571D] VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE, TIRUPUR. (APPELLANT) (RESPONDENT) A PPELLANT BY : SHRI K. RAVI, ADVOCATE RESPONDENT BY : SHRI SHAJI P. JACOB, ADDL.CIT DATE OF HEARING : 07.02.2013 DATE OF PRONOUNCEMENT : 14.02.2013 ORDER PER S.S. GODARA, JUDICIAL MEMBER THIS ASSESSEES APPEAL IS DIRECTED AGAINST THE ORD ER OF THE COMMISSIONER OF INCOME TAX (APPEALS) II, COIMBATORE DATED 30.05.2012 IN ITAPPEAL NO. 268/09-10 FOR THE ASSESSMENT YEAR 2006 -07 IN PROCEEDINGS UNDER SECTION 143(3) OF THE INCOME TAX ACT 1961 [IN SHORT THE ACT]. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: GENERAL 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS), IS VIOLATIVE OF THE PRINCIPLES OF EQUITY AND NATURAL JUSTICE, THE MANDATORY PROVISIONS OF THE INCOME TAX ACT 1961. I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1692 1692 1692 1692/M/ /M/ /M/ /M/12 1212 12 2 REPLACEMENT OF MACHINERY 2. THE LEARNED COMMISSIONER OF INCOME TAX HAS ERRE D IN NOT ALLOWING THE CLAIM OF THE ASSESSEE REGARDING THE RE PLACEMENT OF MACHINERY AS REVENUE EXPENDITURE A) ON THE GROUND THAT REPLACEMENT OF MACHINERY RESU LTS IN ENDURING BENEFIT. B) THAT THE EXPENSES FOR BRINGING ABOUT DAY-TO-DAY IMPROVEMENT IN FUNCTIONING OF THE ORGANIZATION WOUL D BE REVENUE IN NATURE. C) THAT EXPENSES INCURRED FOR SURVIVAL OF BUSINESS WOULD BE REVENUE IN NATURE. 3. THE LEARNED COMMISSIONER OF INCOME TAX HAS ERRE D IN DISALLOWING THE EXPENDITURE ON ACCOUNT OF REPLACEME NT OF MACHINERY CLAIMED BY THE ASSESSEE AS DEDUCTION U/S 37(1), STATING THAT THE EXPENDITURE BRING INTO EXISTENCE A NEW ASSET AND ALSO AN ENDURING BENEFIT FOR THE ASSESSEE. 4. THE LEARNED COMMISSIONER OF INCOME TAX HAS ERRE D IN FOLLOWING THE DECISION OF THE HONOURABLE SUPREME CO URT IN THE CASE OF SARAVANA SPINNING MILLS P LTD, WITHOUT PROP ERLY APPRECIATING THE FACTS OF THE INSTANT CASE WHICH DI FFERS FROM THE SAID DECISION OF THE HONOURABLE SUPREME COURT AND A RE APPLICABLE TO SPECIFIC SET OF FACTS AND ONLY WHEN T HE CLAIM IS MADE U/S 31(1) OF THE INCOME TAX ACT, 1961. 5. THE LEARNED COMMISSIONER OF INCOME TAX HAD ERRE D IN TREATING THE EXPENDITURE INCURRED ON REPLACEMENT OF MACHINER Y AS CAPITAL IN NATURE WITHOUT APPRECIATING THE DIFFEREN CE BETWEEN THE ENDURING BENEFIT IN CAPITAL FIELD AND ENDURING BENEFIT IN REVENUE FIELD, AND IT IS ONLY IN THOSE CASES WHERE THERE IS AN ENDURING BENEFIT IN CAPITAL FIELD, CAN AN EXPENDITU RE BE TREATED AS CAPITAL IN NATURE. 6. THE LEARNED COMMISSIONER OF INCOME TAX HAD ERRE D IN TREATING THE EXPENDITURE INCURRED ON REPLACEMENT OF MACHINER Y AS CAPITAL IN NATURE, WHEN IT WAS ALSO CATEGORICALLY PROVEN TH AT THE REPLACEMENT OF MACHINERIES ON ACCOUNT OF WHICH THE ASSESSEE HAD CLAIMED AS REVENUE EXPENDITURE, DO NOT BRING AB OUT ANY INCREASE IN THE OVERALL CAPACITY OF THE UNIT AT ALL . I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1692 1692 1692 1692/M/ /M/ /M/ /M/12 1212 12 3 OTHER GROUNDS 7. FOR THESE AND SUCH OTHER GROUNDS AS MAY BE RAIS ED BEFORE YOUR HONORS DURING THE COURSE OF HEARING. 3. REITERATING THE GROUNDS, THE ASSESSEE CONTENDS BEFORE US THAT THE AUTHORITY BELOW HAVE WRONGLY REJECTED HIS CLAIM BY APPLYING SECTION 31(1) INSTEAD OF APPLYING SECTION 37(1) OF THE ACT QUA ITS CLAIM OF EXPENDITURE PERTAINING TO REPLACEMENT OF OLD MACHINERY IN ITS T EXTILE UNITS. PER AR, THE FUNDAMENTAL PRINCIPLES OF THE ABOVE SAID PROVISIONS ARE ENTIRELY DIFFERENT AND THE ASSESSEES CLAIM RAISED UNDER SECTION 37(1) OF THE ACT COULD NOT HAVE BEEN CONSIDERED BY APPLYING THE RIGOR OF SECTION 31 (1) OF THE ACT. THEREFORE, HE PRAYS THAT THE INSTANT APPEAL BE ACCE PTED AND THE DISALLOWANCE/ADDITION MADE BY THE ASSESSING OFFICER BE SET ASIDE. 4. PER CONTRA, THE REVENUE SUBMITS THAT THE ISSUE WHETHER REPLACEMENT OF OLD TEXTILE MACHINERY IS CAPITAL EXPENDITURE OR NOT IS NO MORE RES INTEGRA IN VIEW OF VARIOUS DECISIONS. TO BUTTRESS HIS SUBMISSI ONS, THE DR PLACED ON RECORD COPY OF COORDINATE BENCH OF ITAT, CHENNAI OR DER DATED 12.09.2012 IN I.T.A. NO. 754/MDS/2012 TITLED THE KUMARAN MILLS LTD. V. ACIT AS WELL AS [2012] 28 TAXMANN.COM 106 (SC) CIT V. SREE AYYANAR SPINNING & WEAVING MILLS LTD. AND PRAYS FOR REJECTION OF THE APPEAL. HEARD RIVAL CONTENTIONS AND ALSO PERUSED THE FINDI NGS OF THE ASSESSING OFFICER, CIT(A) AS WELL AS CASE LAW CITED. I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1692 1692 1692 1692/M/ /M/ /M/ /M/12 1212 12 4 5. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S A PUBLIC LIMITED COMPANY ENGAGED IN TEXTILES BUSINESS. IN THE SCRUT INY ASSESSMENT PROCEEDINGS OF THE IMPUGNED ASSESSMENT YEAR, THE AS SESSING OFFICER HAD NOTICED THAT THE ASSESSEE HAD SHOWN TO HAVE MADE IN VESTMENT OF ` .3,30,30,375/- WHICH WAS CLAIMED AS REVENUE EXPENDI TURE. IN SUPPORT, IT HAD PLEADED THAT THE MACHINERY IN QUESTION HAD BEEN PURCHASED TO REPLACE THE EARLIER ONE, WHICH WAS ALLOWABLE AS REVENUE EXP ENDITURE UNDER SECTION 37 OF THE ACT. IN THE ASSESSMENT ORDER DATED 11.1 2.2008, THE ASSESSING OFFICER; AFTER REFERRING TO A CATENA OF CASE LAWS A S WELL AS RELEVANT PROVISION OF SECTION 31(1) AND 37(1) OF THE ACT CAME TO THE CONCLUSION THAT THE EXPENDITURE CLAIMED WAS CAPITAL IN NATURE. WHILST H OLDING SO, THE ASSESSING OFFICER ALSO CONSIDERED SPEED AND PRODUCTION CAPACI TY OF THE OLD MACHINERY AS WELL AS REPLACED MACHINERY IN QUESTION. WE FIND THAT THE CIT(A) HAS ALSO AFFIRMED THE FINDINGS OF THE ASSESSING OFFICER BY F OLLOWING CONCLUSION: 12. ON GOING THROUGH THE FACTS OF THE CASE, IT IS SEEN THAT THE ASSESSEE HAS PURCHASED MACHINERY TO THE TUNE OF ` .3,30,30,375 AND IT CAPITALIZED THE SAME IN ITS ACCOUNTS. HOWEVER, IN T HE RETURN FILED BEFORE THE ASSESSING OFFICER, THE SAID EXPENDITURE WAS CLA IMED AS A REVENUE ITEM. AS PER THE DECISION OF THE SUPREME _ COURT IN THE SARAVANA SPINNING MILLS, EACH MACHINERY OF A SPINNING MILL I S TO BE CONSIDERED AS A SEPARATE AND INDEPENDENT UNIT. IT IS SEEN FROM THE ASSESSMENT ORDER THE ASSESSING OFFICER HAS MADE A COMPARISON O F THE OLD AND NEW MACHINERY WITH REFERENCE TO THE SPEED AND PRODUCTIO N CAPACITY. IT IS SEEN THAT INVARIABLY THERE IS AN INCREASE IN PRODUC TION CAPACITY VARYING FROM 14.28% TO 90.40%. THERE IS AN ENDURING BENEFIT ACCRUING TO THE ASSESSEE ON ACCOUNT OF REPLACEMENT OF MACHINERIES. THESE FACTS HAVE NOT BEEN REFUTED BY THE ASSESSEE. THE CASE OF VIJAY ASHREE TEXTILES AND PRABHU SPINNING MILLS P. LTD. (963 MDS 2011 DATED 2 3-8-2011 AND I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1692 1692 1692 1692/M/ /M/ /M/ /M/12 1212 12 5 1847 MDS 2011 DATED 20.1.2012 RESPECTIVELY) HAVE NO APPLICABILITY TO THE FACTS OF THE CASE. AS THERE IS A REPLACEMENT OF MACHINERY IN THE CRUCIAL STAGES OF PRODUCTION AS A WHOLE, WHICH SUBS TANTIALLY ENHANCES THE PRODUCTION AND VEST THE ASSESSEE WITH AN ENDURI NG BENEFIT. 13. THE ASSESSEE HAS RELIED ON THE FOLLOWING CASE LAWS: (I) GITANJALI MILLS LTD. - 265 ITR 281 (II) KARTHIKEYA SPINNING & WEAVING MILLS - 265 IT R 285 (III) SRI VARADHARAJA MILLS LTD. (9 ITD 469 MAD I TAT) (IV) CROMPTON ENGINEERING - 242 ITR 317 (V) KIRLOSKAR OIL ENGINES LTD. - 206 ITR 13 (VI) EMPIRE JUTE CO - 124 ITR 1 (SC) (VII) SAKTHI TEXTILES - 262 ITR 375 THESE JUDGMENTS DO NOT HAVE ANY RELEVANCE IN VIEW O F THE SUPREME COURT'S DECISION IN THE CASE OF SARAVANA SPINNING M ILLS P. LTD. REPORTED IN 293 ITR 201. 14. RESPECTFULLY FOLLOWING THE DECISION OF THE HON 'BLE APEX COURT IN THE CASE OF SARAVANA SPINNING MILLS CITED SUPRA AND AGREEING WITH THE ASSESSMENT OFFICER IN THE REASONS GIVEN IN THE ASSE SSMENT ORDER, THE EXPENDITURE IN MACHINERIES PURCHASED BY THE ASSESSE E IS TREATED AS CAPITAL EXPENDITURE. THE ASSESSEE'S APPEAL ON THIS GROUND IS DISMISSED. IN THIS MANNER, THE ASSESSEE IS AGGRIEVED. 6. AFTER GIVING OUR THOUGHTFUL CONSIDERATION TO TH E ISSUE INVOLVED, WE ARE ALSO OF THE VIEW THAT ASSESSEES CLAIM IN QUESTION OF EXPENSES INCURRED HAS BEEN RIGHTLY TREATED AS CAPITAL IN NATURE. WE NOTIC E THAT THE COORDINATE BENCH DECISION (SUPRA) HAD ALREADY HELD WITH REGARD TO REPLACEMENT OF MACHINERY EXPENDITURE IN A TEXTILE UNIT TO BE CAPIT AL EXPENDITURE. IN REACHING TO THE ABOVE CONCLUSION, THE COORDINATE BENCH HAS A LSO CONSIDERED DECISIONS OF 106 ITR 900 (SC), AIR 1972 SC 159, 315 ITR 114 (SC), [2012] 205 TAXMAN 357 (MADRAS) AND OBSERVED AS UNDER: I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1692 1692 1692 1692/M/ /M/ /M/ /M/12 1212 12 6 5. WE HAVE HEARD BOTH THE SIDES, PERUSED THE RECO RDS AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE ON LY ISSUE FOR ADJUDICATION BEFORE US IS WHETHER THE EXPENDITURE I NCURRED FOR THE PURPOSE OF REPLACEMENT OF DRAW FRAME IS REVENUE EXP ENDITURE OR CAPITAL EXPENDITURE. THE LEARNED CIT(APPEALS) BY CO NSIDERING THE ENTIRE FACTS OF THE CASE AND ALSO THE DECISIONS OF VARIOUS HIGH COURTS AND THE HON'BLE SUPREME COURT INCLUDING THE DECISIO N 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 EX PENDITURE. FOR THAT PROPOSITION THE HON'BLE SUPREME COURT HAS RELIED ON THE DECISIONS IN THE CASE OF TRAVANCORE COCHIN CHEMICALS LTD. V. CIT (106 ITR 900) (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 TH E ASSESSEE AMOUNTS TO CAPITAL EXPENDITURE. WE HAVE ALREADY EXPLAINED W HY REPLACEMENT, IN THIS CASE, AMOUNTS TO BRINGING INTO EXISTENCE A NEW ASSET AND ALSO AN ENDURING BENEFIT FOR THE ASSESSEE IT IS CLEAR THEN THAT THE EXPENDITURE OF THE ASSESSEE HERE IS NOT OF A REVENUE NATURE AND TH US, CANNOT BE CLAIMED AS A DEDUCTION UNDER SECTION 37 OF THE ACT. . 6. THE HONBLE JURISDICTIONAL HIGH COURT IN THE CA SE 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 SUBSTANTIAL QUESTION OF LAW 1 AN D 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. 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 FRAM ES, DRAW FRAMES AND SPEED FRAME IS PURCHASED FOR THE FIRST T IME, THEN IT IS A CAPITAL ASSET, ON WHICH DEPRECIATION SHOULD BE GRANTED. WHEREAS, IT IS SUBMITTED THAT THE SALE OF A WORN OU T MACHINERY AND REPLACEMENT THEREOF BY NEW MACHINERY CAN ONLY B E TREATED AS REDUCTION AND ADDITION TO THE BLOCK OF ASSETS, W HICH IS A PART I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1692 1692 1692 1692/M/ /M/ /M/ /M/12 1212 12 7 OF REPLACEMENT. IT IS ALSO SUBMITTED THAT WHILE UND ER THE LAW, AS IT STOOD PRIOR TO 1988-89, THE FACT OF TREATING THE ENTIRE MILL 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 O NCE THE CONCEPT OF BLOCK OF ASSETS HAS BEEN BROUGHT IN BY T HE 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, IT S VALUE IS REDUCED AND IF ANY NEW ITEM COMES IN ITS PLACE, ITS VALUE IS ADDED TO THE BLOCK. IN VIEW OF THE ABOVE, IT IS SUB MITTED THAT THE THIRD SUBSTANTIAL QUESTION OF LAW IS ALSO COVERED A S 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 L AW IS ALSO ANSWERED IN FAVOUR OF THE REVENUE AND AGAINST THE A SSESSEE. 7. IN VIEW OF THE DECISIONS OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. RAMARAJU SURGICAL COTTON MILLS LTD. (SUPRA), CIT V. SRI MANGAYARKARASI MILLS P. LTD. (SUPRA) AND THE DECISI ON OF THE HONOURABLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT, MADURAI V. MADURA COATS (SUPRA), WE FIND NO INFIRMITY IN THE O RDER PASSED BY THE LEARNED CIT(APPEALS). HIS ORDER IS ACCORDINGLY CONF IRMED AND THE APPEAL OF THE ASSESSEE IS DISMISSED. TAKING CUE FROM THE SAME, WE ALSO HOLD THAT THE EXP ENDITURE IN QUESTION IS NOT REVENUE, BUT CAPITAL IN NATURE. SO FAR AS THE A RGUMENTS OF THE ASSESSEE THAT THE CLAIM HAS BEEN WRONGLY CONSIDERED UNDER SE CTION 31(1) INSTEAD OF SECTION 37(1) OF THE ACT, WE ARE ALSO NOT CONVINC ED WITH THE SAME AS ONCE AN EXPENDITURE IS HELD TO BE CAPITAL IN NATURE, IT IS EITHER ALLOWABLE UNDER SECTION 31(1) OR UNDER SECTION 37(1) OF THE ACT. HENCE, WE DO NOT SUBSCRIBE TO THE ARGUMENTS OF THE ASSESSEE AND HOLD THAT THE CIT(A) HAS RIGHTLY AFFIRMED THE FINDINGS OF THE ASSESSING OFFICER BY O BSERVING THAT THE I.T.A. I.T.A. I.T.A. I.T.A. NO. NO. NO. NO.1692 1692 1692 1692/M/ /M/ /M/ /M/12 1212 12 8 REPLACEMENT EXPENDITURE INCURRED BY THE ASSESSEE IS NOT REVENUE EXPENDITURE. 7. CONSEQUENTLY, ASSESSEES APPEAL STANDS DISMISSE D. ORDER PRONOUNCED ON THURSDAY, THE 14 TH OF FEBRUARY, 2013 AT CHENNAI. SD/- SD/- (N.S. SAINI) ACCOUNTANT MEMBER (S.S. GODARA) JUDICIAL MEMBER CHENNAI, DATED, THE 14.02.2013 VM/- TO: THE ASSESSEE//A.O./CIT(A)/CIT/D.R.