K.P.R.Spinning Mills (P) Ltd., CHENNAI V. ITO, Coimbatore

ITA 1873/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7957 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-02-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 19-01-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 22-06-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHIVA SRINIVAS
• Assessee Lawyers: S SRIDHAR
• Keywords: Capital asset; Depreciation; Revenue expenditure
• Section: 37

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI [CAMP @ COIMBATORE ] . . . , . , BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ./ ITA NO. 1873/MDS/2016 / ASSESSMENT YEAR : 2005 - 06 M/S. K.P.R. SPINNING MILLS (P) LTD., (NOW KNOWN AS M/S. K.P.R. MILL LIMITED), 9, A.K.S. NAGAR, THADAGAM ROAD, COIMBATORE. PAN : AABCK5208N V. THE INCOME TAX OFFICER, COMPANY WARD 1, COIMBATORE. ( ! /APPELLANT) ( '# ! /RESPONDENT) ! $ /APPELLANT BY : SHRI S. SRIDHAR, ADVOCATE '# ! $ /RESPONDENT BY : SHRI SHIVA SRINIVAS, JCIT $ /DATE OF HEARING : 19.01.2017 $ /DATE OF PRONOUNCEMENT : 14.02.2017 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER : THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-1, COIMBATORE D ATED 10.03.2016 AND PERTAINS TO THE ASSESSMENT YEAR 2005 06. 2. SHRI S. SRIDHAR, THE LD. COUNSEL FOR THE ASSESSE E SUBMITTED THAT THE ONLY ISSUE ARISES FOR CONSIDERATION IS DISALLOW ANCE OF 2 I.T.A. NO. 1873/MDS/2016 2,30,93,720/- ON ACCOUNT OF REPLACEMENT OF MACHINER IES AND PARTS OF THE MACHINERIES. ACCORDING TO THE LD. COUNSEL, THE ASSESSEE HAS A SPINNING MILL. IN THE COURSE OF ITS BUSINESS ACTIV ITY, THE ASSESSEE HAS REPLACED BLOW ROOM MACHINERY, DRAW FRAME, SPEED FRA ME AND COMPRESSOR. ACCORDING TO THE LD. COUNSEL, THESE AR E ALL PARTS OF THE MACHINERY INSTALLED IN THE SPINNING MILL AND IT CAN NOT DO ANY INDEPENDENT FUNCTION IN THE SPINNING MILL. THE PROD UCTION CAPACITY OF THE SPINNING MILL AFTER REPLACEMENT REMAINS THE SAM E. THE SPINDULAR CAPACITY DOES NOT INCREASE. REFERRING TO THE ORDER OF THE ASSESSMENT, THE LD. COUNSEL SUBMITTED THAT THE ASSESSING OFFICE R FOUND THAT THE MACHINES REPLACED ARE LATEST MODEL MACHINES AVAILAB LE IN THE MARKET AND THERE WOULD BE A FUNCTIONAL PRODUCTION CAPACITY ATLEAST 25 TO 30% MORE THAN THE OLD MACHINERY. ACCORDING TO THE LD. COUNSEL, DUE TO REPLACEMENT OF THE NEW MACHINERIES, THE SPINNING MI LL FUNCTIONS EFFICIENTLY. THE EFFICIENCY OF THE MACHINERY IN FUN CTIONING DOES NOT RESULT IN INCREASE IN PRODUCTION CAPACITY. ACCORDI NG TO THE LD. COUNSEL, UNLESS THE NUMBER OF SPINDLES ARE INCREASED, THE PR ODUCTION CAPACITY DOES NOT IN ANY WAY BE INCREASED. THEREFORE THE CI T (APPEALS) IS NOT JUSTIFIED IN CONFIRMING THE ORDER OF THE ASSESSING OFFICER. ACCORDING TO THE LD. COUNSEL, THE ASSESSEE HAS TO NECESSARILY MA INTAIN THE ENTIRE PART OF THE SPINNING MILL FOR THE PURPOSE OF MAINTA INING THE PRODUCTION. INSTALLED CAPACITY OF THE SPINNING MILL WOULD ALWAY S BE MEASURED IN 3 I.T.A. NO. 1873/MDS/2016 TERMS OF SPINDLEAGE. WHEN THERE WAS NO INCREASE IN THE INSTALLED CAPACITY DUE TO REPLACEMENT OF THE MACHINERY, THE M ADRAS HIGH COURT IN THE CASE OF KARTHIKEYA SPINNING & WEAVING MILLS LTD., 265 ITR 285, FOUND THAT THE EXPENDITURE CANNOT BE TERMED AS CAPI TAL IN NATURE. REFERRING TO THE JUDGMENT OF THE APEX COURT IN SARA VANA SPINNING MILLS P. LTD (2007), 293 ITR 201, THE LD. COUNSEL SUBMITTE D THAT THE JUDGMENT OF THE APEX COURT IN SARAVANA SPINNING MIL LS IS SQUARELY APPLICABLE TO THE FACTS OF THIS CASE. ACCORDING TO THE LD. COUNSEL, THE ASSESSEE CLAIMS THE EXPENDITURE AS CURRENT REPAIR F OR THE PURPOSE OF MAINTAINING THE SPINNING MILL AS SUCH IN A WORKING CONDITION. IF IT COULD NOT BE ALLOWED AS CURRENT REPAIR, DEFINITELY IT SHO ULD BE ALLOWED AS REVENUE EXPENDITURE UNDER SECTION 37 OF THE ACT, SI NCE THE EXPENDITURE WAS ADMITTEDLY INCURRED IN THE PROCESS OF EARNING OF THE PROFIT. THEREFORE THE CIT (APPEALS) IS NOT JUSTIFIED IN CONFIRMING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 3. ON THE CONTRARY, SHRI SHIVA SRINIVAS, THE LD. DE PARTMENTAL REPRESENTATIVE SUBMITTED THAT THE REPLACEMENT OF MA CHINERY CREATES A NEW ASSET OF ENDURING IN NATURE. THEREFORE, THE EX PENDITURE INCURRED BY THE ASSESSEE HAS TO BE CAPITALIZED AND AT THE BE ST THE ASSESSEE MAY CLAIM DEPRECIATION AS PER THE PROVISIONS OF LAW . REFERRING TO THE JUDGMENT OF THE APEX COURT IN CIT V. SARAVANA SPINN ING MILLS (2007) 4 I.T.A. NO. 1873/MDS/2016 293 ITR 201, THE LD. D.R., SUBMITTED THAT THE MACHI NERY / MACHINE IN THE SEGMENT HAS TO BE CONSIDERED AS INDEPENDENT MAC HINERY SINCE THE SAME PLAYS INDEPENDENT ROLE. THEREFORE, REPLACE MENT OF MACHINERY IN THE TEXTILE MILL CANNOT BE CONSTRUED A S MERE REPLACEMENT OF PART OF THE MACHINERY. ACCORDING TO THE LD. D. R., WHAT WAS REPLACED BY THE ASSESSEE IS INDEPENDENT MACHINERY I N THE TEXTILE MILL. THEREFORE, THE ASSESSEE HAS BROUGHT INTO EXISTENCE O F NEW CAPITAL ASSET WITH ENDURING BENEFIT. THEREFORE, THERE IS A COMMERCIAL ADVANTAGE FOR THE ASSESSEE WHICH IS DEFINITELY IN T HE CAPITAL FIELD. THEREFORE, THE ASSESSING OFFICER HAS RIGHTLY DISALLO WED THE CLAIM OF THE ASSESSEE. REFERRING TO THE JUDGMENT OF THE APEX CO URT IN CIT V RAMARAJU SURGICAL COTTON MILLS (2007) 294 ITR 328, THE LD. D.R., SUBMITTED THAT THERE ARE TWO ISSUES AROSE FOR CONSI DERATION BEFORE THE APEX COURT. FIRST ONE IS WHETHER THERE WAS ANY INCR EASE IN THE PRODUCTION CAPACITY AFTER REPLACEMENT OF THE MACHIN ERY OR THE PRODUCTION CAPACITY REMAINS CONSTANT EVEN AFTER REP LACEMENT. THE SECOND ONE WHETHER THE TEST APPLIED TO DETERMINE TH E ALLOWABILITY OF CLAIM UNDER SECTION 31 OF THE ACT AS CURRENT REPAIR CAN BE APPLIED. SUBSEQUENTLY, THE APEX COURT IN THE CASE OF SRI MAN GAYARKARASI MILLS P. LTD., (2009) 315 ITR 114 FOUND THAT THE MACHINE I N A SEGMENT OF TEXTILE MILL HAS AN INDEPENDENT ROLE TO PLAY AND OU TPUT OF EACH DIVISION IS DIFFERENT FROM ONE ANOTHER. DEALING WITH RING F RAME IN THE TEXTILE MILL, 5 I.T.A. NO. 1873/MDS/2016 THE APEX COURT FOUND THAT THE RING FRAME IN A TEXTI LE MILL IS INDEPENDENT MACHINERY. THEREFORE, THE CIT (APPEALS) FOUND THAT T HE ASSESSING OFFICER HAS RIGHTLY DISALLOWED THE CLAIM OF THE ASS ESSEE. 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ASSE SSEE ADMITTEDLY INCURRED AN EXPENDITURE OF 2,30,93,720/- IN REPLACEMENT OF BLOW ROOM MACHINERY, CARDING MACHINERY, DRAW FRAME, SPEED FRA ME AND COMPRESSOR. THE APEX COURT WHILE CONSIDERING THE C ASE OF THE SPINNING MILL IN SARAVANA SPINNING MILLS ( SUPRA) FOUND THAT THE MACHINERIES IN A SEGMENT OF TEXTILE MILL HAS AN IND EPENDENT ROLE TO PLAY. THEREFORE, IT HAS TO BE CONSTRUED AS INDEPEND ENT MACHINERY. THE QUESTION ARISES FOR CONSIDERATION IS WHEN THERE WAS A REPLACEMENT OF CERTAIN MACHINERY IN THE TEXTILE MILL, CAN WE SA Y THAT THERE WAS A ENDURING BENEFIT TO THE ASSESSEE ESPECIALLY WHEN TH E PRODUCTION ACTIVITY REMAINS AS SUCH. AS RIGHTLY SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE, THE PRODUCTION CAPACITY OF THE SPINNI NG MILL WOULD ALWAYS DEPENDING UPON THE NUMBER OF SPINDLES INSTAL LED IN THE SPINNING MILL. IN THE CASE BEFORE US, NO SPINDLES WERE REPLACED. WHAT WAS REPLACED IS ONLY BLOW ROOM MACHINERY, CARDING M ACHINE, DRAW FRAME, SPEED FRAME AND COMPRESSOR. THEREFORE, WE CA N SAFELY 6 I.T.A. NO. 1873/MDS/2016 CONCLUDE THAT THERE WAS INCREASE IN PRODUCTION CAPA CITY OF THE SPINNING MILL AFTER THE REPLACEMENT OF THE ABOVE MA CHINERY. 5. NEXT CONTENTION OF THE LD. D.R., IS THAT AFTER R EPLACEMENT THE ASSESSEE BROUGHT INTO EXISTENCE THE NEW ASSET WHICH HAS AN ENDURING BENEFIT OF BETTER AND MORE EFFICIENT PRODUCTION OVE R A PERIOD OF TIME. NO DOUBT, REPLACEMENT OF ANY MACHINERY WOULD HAVE M ORE EFFICIENCY IN ITS ACTIVITY. THE QUESTION ARISES FOR CONSIDERAT ION IS WHETHER THE EFFICIENCY DUE TO REPLACEMENT OF CERTAIN MACHINERY WOULD RESULT IN INCREASING OF PRODUCTION CAPACITY. THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT MERELY BECAUSE CERTAIN MACHINERIES WER E REPLACED, IT COULD NOT AUTOMATICALLY RESULT IN INCREASE IN PRODU CTION CAPACITY. IT HAS TO BE DEMONSTRATED THAT DUE TO CHANGE OF MACHINERY OR REPLACEMENT OF MACHINERY, THE PRODUCTION CAPACITY IN FACT ACTUALLY INCREASED. MERELY BECAUSE THERE WAS EFFICIENCY IN RUNNING THE MACHINE RY, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT ALONE CANNOT BE A RE ASON TO DISALLOW THE CLAIM OF THE ASSESSEE. UNLESS AND UNTIL, THE ASSE SSEE REPLACES THE MACHINERY, IT MAY NOT BE ABLE TO RUN THE SPINNING M ILL AT ALL. MAINTENANCE OF MACHINERY IN THE COURSE OF MANUFACTU RING ACTIVITY IS ONE OF THE REQUIREMENTS, IF THE ASSESSEE INTENDS TO CONTINUE IN THE BUSINESS. THEREFORE, THIS TRIBUNAL IS OF THE CONSID ERED OPINION THAT UNLESS AND UNTIL THE PRODUCTION CAPACITY WAS INCREA SED, THE 7 I.T.A. NO. 1873/MDS/2016 EXPENDITURE INCURRED BY THE ASSESSEE HAS TO BE ALLO WED AS CURRENT REPAIR. A SIMILAR VIEW WAS TAKEN BY THE MADRAS HIGH COURT IN M/S. PRECOT MERIDIAN LTD., (TAX CASE) APPEAL NOS. 14 0 TO 143 OF 2013 DATED 24.07.2013. IN VIEW OF THE ABOVE, WE ARE UNA BLE TO UPHOLD THE ORDERS OF THE LOWER AUTHORITIES. THEREFORE, THE ORD ERS OF THE LOWER AUTHORITIES ARE SET ASIDE AND THE ADDITION MADE BY THE ASSESSING OFFICER TO THE EXTENT OF 2,30,93,720/- IS DELETED. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE STANDS ALLOWED . ORDER PRONOUNCED ON 14 TH FEBRUARY, 2017 AT CHENNAI. SD/- SD/- ( . ) ( . . . ) (ABRAHAM P. GEORGE) (N.R.S. GAN ESAN) / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, /DATED, THE 14 TH FEBRUARY, 2017. JR. $ ' % & % /COPY TO: 1. ! /APPELLANT 2. '# ! /RESPONDENT 3. '() ( )/CIT(A)-1, COIMBATORE 4. '() /CIT 5. ' % /DR 6. *+ /GF.