ADDL CIT RG 8(2), MUMBAI V. HYDAC INIDA P.LTD, NAVI MUMBAI

ITA 2067/MUM/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8208 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-08-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 17-07-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 14-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V V SHASTRI
• Assessee Lawyers: DEEPAK KANABAR
• Keywords: Depreciation; Revenue expenditure; Capital expenditure
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES H MUMBAI BEFORE SHRI B.R. MITTAL, JUDICIAL MEMBER AND SHRI RAJENDRA, ACCOUNTANT MEMBER ITA NO. 2067/MUM/2011 ASSESSMENT YEAR 2006-07 D.C.I.T., 8(2), MUMBAI R.NO. 216-A, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 400 020 VS. M/S. HYDAC INDIA PVT. LTD., A-58, HYDAC HOUSE, TTC INDUSTRIAL AREA, MAHAPE, NAVI MUMBAI 400 705. PAN: AAACH 2910 B (APPELLANT ) (RESPONDENT) REVENUE BY : SHRI V.V. SHASTRI ASSESSEE BY : SHRI DEEPAK KANABAR DATE OF HEARING : 17-07-2012 DATE OF PRONOUNCEMENT : 01-08-2012 ORDER PER RAJENDRA, A.M. THIS APPEAL IS INSTITUTED AGAINST ORDER DATED 19-11 -2010 OF THE CIT (A)-17, MUMBAI, RAISING FOLLOWING GROUNDS OF APPEAL : 1)ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN HOLDING REMAINING CAPITAL EXPENDITURE OF R S.54,67,323/- AS REVENUE IN NATURE, OUT OF TOTAL CAPITAL EXPENDITURE OF RS. 73, 07,197/-, WITHOUT APPRECIATING THE FACTS OF THE CASE. 2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E ARID IN LAW, THE LD. CIT(A) ERRED IN NOT APPRECIATING THE ACTION OF THE A.O. IN HOLDI NG THE EXPENDITURE OF RS.73,07,198/- AS CAPITAL IN NATURE, BASED ON THE DECISION IN THE CASE OF CIT VS. MANGAYARKARSI MILLS 315 ITR 114 (SC). 3) THE APPELLANT PRAYS THAT THE ORDER OF THE CIT (A ) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF THE ITO/AC/DCJT BE RESTORED. ITA NO. 2067/MUM/2011 M/S. HYDAC INDIA PVT. LTD., 2 4) THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUNDS OR ADD A NEW GROUND WHICH MAY BE NECESSARY. 2. ASSESSEE-COMPANY, ENGAGED IN THE BUSINESS OF ASSEMBLY OF HYDRAULIC ACCESSORIES, COMPONENTS AND MANUFACTURE OF PRESSURE TRANSCUCERS, FILED RETURN OF INCOME DECLARING A TOTAL INCOME OF RS.3.97 CRORES. ASSESSMENT WAS FINALISED AT RS. 4.75 CRORES. 3. FIRST GROUND OF APPEAL RELATES TO DISALLOWANCE OF E XPENSES OF REPAIRS OF RS. 65,76,475/-. DURING THE ASSESSMENT PROCEEDINGS ASSESSING OFFICER (AO) NOTICED THAT THE APPELLANT-COMPANY HAD CLAIMED REPAIRS AND RENOVATION WORK OF RS.75,32,010/-. AFTER GOING THROUGH THE DETAILS FI LED IN THIS REGARD, HE HELD THAT EXPENDITURE INCURRED BY THE ASSESSEE COULD NOT BE H ELD AS CURRENT REPAIRS. RELYING ON THE DECISION OF MANGAYARKARASI MILLS (315ITR114),HE HELD THAT THE EXPENDITURE AMOUNTING TO RS. 73.07 LAKHS WAS CAPITAL NATURE. AF TER ALLOWING DEPRECIATION AT THE RATE OF 10% HE MADE AN ADDITION OF RS. 65,76,475/- TO THE TOTAL INCOME OF THE ASSESSEE. 4. ASSESSEE REFERRED AN APPEAL BEFORE THE FIRST APPELL ATE AUTHORITY(FAA). FAA FOUND THAT THE ASSESSEE HAD FILED DETAILS FOR RS.7 3.07 LAKHS UNDER THE HEAD REPAIRS AS AGAINST THE CLAIM OF RS.75.32 LAKHS. HENCE, A SUM OF RS.2,24,814/- WAS DISALLOWED. BEFORE THE FAA THE AUTHORISED REPRESENTATIVE (AR) O F THE ASSESSEE ADMITTED THAT EXPENDITURE AMOUNTING TO RS.17,49,700/- HAD RESULTE D IN ADDITIONS THAT WERE CAPITAL IN NATURE. AFTER SCRUTINISING THE DETAILS SUBMITTED B Y THE ASSESSEE FAA FOUND THAT RS.8,99,774/- WERE SPENT ON REPLACING THE FLOOR WIT H POLISHED TILES. APPLYING THE RATIO OF MODI SPINNING AND WEAVING MILLS LTD. (200 ITR 54 4), FAA HELD THAT THE SAID EXPENDITURE WAS CAPITAL IN NATURE. REMAINING EXPEND ITURE OF RS.54.67 LAKHS WAS HELD TO BE REVENUE BY THE FAA. 5. BEFORE US, DEPARTMENTAL REPRESENTATIVE (DR) SUBMITT ED THAT THE EXPENDITURE INCURRED BY THE ASSESSEE-COMPANY WAS CAPITAL IN NAT URE, THAT AO HAD RIGHTLY DISALLOWED THE CLAIM MADE BY THE ASSESSEE. AR SUBM ITTED THAT DURING APPELLATE PROCEEDINGS ASSESSING COMPANY ITSELF HAD ADMITTED T HAT EXPENDITURE AMOUNTING TO RS.17.49 LAKHS WAS CAPITAL IN NATURE, THAT THE REMA INING EXPENDITURE WAS INCURRED FOR REPAIRING/RENOVATING THE OFFICE BUILDING. HE REFERR ED TO PAGE NUMBER 16 OF THE PAPER BOOK AND SUBMITTED THAT THE BALANCE EXPENDITURE WAS RIGHTLY TREATED AS REVENUE EXPENDITURE BY THE FAA . 6. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE ARE OF T HE OPINION THAT THE ORDER OF THE FAA DOES NOT REQUIRE ANY INTERFERENCE. AFTER C ONSIDERING THE CHART AND THE DETAILS SUBMITTED BY THE ASSESSEE-COMPANY, WITH REGARD TO E XPENDITURE INCURRED UNDER THE HEAD RENOVATION OF THE OFFICE, FAA HAD ARRIVED AT A FACTUAL FINDING THAT OUT OF RS.75.32 LAKHS EXPENDITURE AMOUNTING TO RS.54.67 LA KHS WAS REVENUE IN NATURE. WE FIND THAT FAA HAD DISALLOWED EXPENDITURE INCURRED O N REPLACING THE FLOOR WITH POLISHED TILES. WE HAVE PERUSED THE DETAILS SUBMITT ED BY THE APPELLANT COMPANY IN PAPER BOOK. AFTER GOING THROUGH THE DETAILS WE ARE OF THE OPINION THAT THE REST OF THE EXPENDITURE I.E. RS. 54.67 LAKHS CANNOT BE HELD REV ENUE IN NATURE. 7. WE HAVE NOTED THE FACTS OF THE CASE RELIED UPON BY THE AO. IN THE CASE OF MANGAYARKARASI MILLS (SUPRA) ISSUE BEFORE THE HON BLE SUPREME COURT WAS OF REPLACEMENT OF MACHINERY OF A SPINNING MILL. IN TH AT CASE ASSESSEE WAS ENGAGED IN THE ITA NO. 2067/MUM/2011 M/S. HYDAC INDIA PVT. LTD., 3 MANUFACTURE AND SALE OF COTTON YARN. DURING THE ASS ESSMENT YEAR 1995-96, THE ASSESSEE CLAIMED AN AMOUNT OF RS. 61,28,150, BEING EXPENDITURE INCURRED ON REPLACEMENT OF MACHINERY, AS REVENUE EXPENDITURE. T HE ASSESSEE CLAIMED THAT SUCH EXPENDITURE WAS MERELY EXPENDITURE ON REPLACEMENT O F SPARE PARTS IN THE SPINNING MILL SYSTEM AND, THEREFORE, AMOUNTED TO REVENUE EXPENDIT URE. THE AO DID NOT, HOWEVER, ACCEPT THIS VIEW OF THE ASSESSEE BECAUSE, ACCORDING TO HIM, EACH MACHINE IN A SPINNING MILL DOES A DIFFERENT FUNCTION AND THE PRO DUCT FROM ONE MACHINE IS TAKEN AND MANUALLY FED INTO ANOTHER MACHINE AND THE OUTPUT IS TAKEN, ALL THE MACHINES ARE, THUS, NOT INTEGRALLY CONNECTED. BASED ON THIS REASONING, HE DISALLOWED THE ABOVE CLAIM OF THE ASSESSEE AND HELD THE SAID EXPENDITURE TO BE OF A CAPITAL NATURE. HE FURTHER HELD THAT THE ASSESSEE HAD TREATED THE SAID EXPENDITURE AS CAPITAL EXPENDITURE BY CAPITALIZING THE ASSETS IN THE BOOKS OF ACCOUNT AND HAD, THUS, SHOWN PROFIT IN ITS PROFIT AND LOSS ACCOUNT TO THIRD PARTIES, LIKE BANKERS, FI NANCIAL INSTITUTIONS, CREDITORS, SHAREHOLDERS, ETC. HOWEVER, FROM THE TAX POINT OF V IEW, THE RESPONDENT WANTED TO REDUCE THE NET PROFIT AND THE TOTAL TAXABLE INCOME BY CLAIMING SUCH HUGE EXPENDITURE IN THE STATEMENT OF TOTAL INCOME COMPUTATION FOR AC QUISITION OF FIXED ASSETS, AS REVENUE EXPENDITURE. THEREFORE, HE DISALLOWED SUCH EXPENDITURE OF THE ASSESSEE TO BE COVERED UNDER SECTION 31 OF THE ACT OR AS REVENUE E XPENDITURE UNDER SECTION 37 OF THE ACT. APPEAL PREFERRED BY THE ASSESSEE-COMPANY BEFORE THE FAA WAS DECIDED IN ITS FAVOUR. ITAT AND THE HONBLE MADRAS HC DISMISSED T HE APPEAL FILED BY THE REVENUE. DECIDING THE APPEAL HONBLE SC FRAMED THE MAIN QUES TION AS UNDER: 'WHETHER EXPENDITURE INCURRED ON REPLACEMENT OF MAC HINERY, IN THE FACTS AND CIRCUMSTANCES OF THIS CASE, AMOUNTS TO `REVENUE EXP ENDITURE' DEDUCTIBLE UNDER SECTION 37 OF THE ACT OR ` CURRENT REPAIRS' DEDUCTIBLE UND ER SECTION 31 OF THE ACT.' 7.1. AFTER TAKING NOTE OF VARIOUS DECISIONS IN RESPECT O F CURRENT REPAIRS / REVENUE EXPENDITURE HONBLE SC HELD AS UNDER : IT IS PERTINENT TO MENTION HERE THAT THE RESPONDEN T ONLY STATED THAT ITS CLAIM WAS LIMITED TO THE EXPENDITURE BEING OF A REVENUE NATUR E AND THUS ALLOWABLE UNDER SECTION 37 OF THE ACT. NOWHERE HAD THE RESPONDENT CLAIMED T HAT THE SAID EXPENDITURE AMOUNTED TO 'CURRENT REPAIRS' UNDER SECTION 31 OF THE ACT. FURTHER, THE APPELLANT ITSELF HAD RESTRICTED THE ISSUE TO THAT OF REVENUE EXPENDITURE IN ITS APPEAL TO THE HIGH COURT OF MADRAS, AGAINST WHICH IT HAS NOW FILED THI S APPEAL. ACCORDING TO THE RESPONDENT, THERE IS NO ISSUE REGARDING THE EXPENDI TURE AMOUNTING TO 'CURRENT REPAIRS' UNDER SECTION 31 OF THE ACT. WE ARE NOT IN CLINED TO UPHOLD THIS SUBMISSION OF THE RESPONDENT. THE FACT THAT THE APPELLANT HAS CON TENDED BEFORE THE COURTS BELOW THAT EACH OF THE ITEMS OF MACHINERY IN A SPINNING MILL I S INDEPENDENT, THAT THE RESPONDENT HAS ARGUED AGAINST IT, AND HAS GIVEN EVIDENCE TO TR Y TO SUPPORT ITS CONTENTION, AND ALSO THAT THE ASSESSEE BELIEVES THAT REPLACEMENT IS ONLY OF SPARE PARTS IN THE ENTIRE SYSTEM OF THE SPINNING MILLS, MAKES IT CLEAR THAT A QUESTION HAS ARISEN HERE AS TO WHETHER REPLACEMENT OF ONE OR MORE ITEMS OF MACHINE RY AMOUNTS TO REPAIR OF THE ENTIRE INTEGRATED MACHINERY OF THE SPINNING MILL OR ACQUISITION OF A NEW INDEPENDENT MACHINERY. THE FIRST ISSUE THAT NEEDS TO BE RESOLVED IS WHETHE R EACH MACHINE IN A TEXTILE MILL IS AN INDEPENDENT ITEM OR MERELY A PART OF A COMPLETE SPI NNING MILL, WHICH ONLY TOGETHER ARE CAPABLE OF MANUFACTURE, AND THERE IS NO INTER-M EDIATE MARKETABLE PRODUCT PRODUCED. . EACH MACHINE IN A TEXTILE MILL SHOULD BE TREATED INDEPENDENTLY AS SUCH ITA NO. 2067/MUM/2011 M/S. HYDAC INDIA PVT. LTD., 4 AND NOT AS A MERE PART OF AN ENTIRE COMPOSITE MACHI NERY OF THE SPINNING MILL. AS STATED ABOVE, IT CAN AT BEST BE CONSIDERED PART OF AN INTEGRATED MANUFACTURE PROCESS EMPLOYED IN A TEXTILE MILL. IT IS CLEAR ON RECORD THAT THE ASSESSEE HAS SOUGHT TO TREAT THE SAID EXPENDITURE DIFFERENTLY FOR THE PURPOSES OF COMPUTING ITS PROFI T AND FOR THE PURPOSE OF PAYMENT OF INCOME-TAX. THE SAID EXPENDITURE HAS BEEN TREATED A S AN ADDITION TO THE EXISTING ASSETS IN THE FORMER AND AS REVENUE EXPENDITURE IN THE LATTER. THOUGH ACCOUNTING PRACTICES MAY NOT BE THE BEST GUIDE IN DETERMINING THE NATURE OF EXPENDITURE, IN THIS CASE THEY ARE INDICATIVE OF WHAT THE ASSESSEE ITSEL F THOUGHT OF THE EXPENDITURE IT MADE ON REPLACEMENT OF MACHINERY AND THAT THE CLAIM FOR DEDUCTION UNDER THE ACT WAS MADE MERELY TO DIMINISH THE TAX BURDEN, AND NOT UND ER THE BELIEF THAT IT WAS ACTUALLY REVENUE EXPENDITURE. 8. IN THE CASE UNDER CONSIDERATION THE FACTS ARE TOTAL LY DIFFERENT. ISSUE TO BE DECIDED HERE IS ABOUT RENOVATION/REPAIRING OF OFFIC E PREMISES. SUCH REPAIRING CANNOT BE EQUATED WITH REPLACEMENT OF MACHINERY OF A SPINN ING MILL. AO HAS NOT ALLEGED THAT THE TREATMENT GIVEN BY THE ASSESSEE WITH REGARD TO REPAIRING OF THE OFFICE WAS FOR REDUCING THE TAX LIABILITY. 8.1. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE , BEFORE US, WE DECIDE BOTH THE GROUNDS (GOA 1 & 2) AGAINST THE AO. APPEAL FILED BY THE AO STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST AUGUST, 2012 SD/- SD/- (B.R. MITTAL) (RAJENDRA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATE 1 ST AUGUST, 2012 TNMM ITA NO. 2067/MUM/2011 M/S. HYDAC INDIA PVT. LTD., 5 COPY TO: 1. APPELLANT 2. RESPONDENT 3. THE CONCERNED CIT (A) 4. THE CONCERNED CIT 5. DR H BENCH, ITAT, MUMBAI 6. GUARD FILE (TRUE COPY) BY ORDER ASST. REGISTRAR, INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI