DCIT, Tiruppur V. Prabhu Spinning Mills P Ltd., Tiruppur

ITA 603/CHNY/2013

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 4654 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-08-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 27-08-2013
• Assessment Year: 2009-2010
• Appeal Filed On: 08-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S DASGUPTA
• Assessee Lawyers: T BHANUSEKAR
• Keywords: Depreciation; Revenue expenditure; Capital expenditure
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI BEFORE SHRI ABRAHAM P.GEORGE , ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ASSESSEE BY : MR. T.BHANUSEKAR, FCA REVENUE BY : MR. S.DAS GUPTA, JCIT DATE OF HEARING : 27 TH AUGUST, 2013 DATE OF PRONOUNCEMENT : 2 9 TH AUGUST, 2013 O R D E R PER CHALLA NAGENDRA PRASAD, JM : THESE TWO APPEALS ARE FILED BY THE ASSESSEE AND TH E REVENUE FOR THE ASSESSMENT YEARS 2008-09 AND 2009-1 0 RESPECTIVELY AGAINST THE ORDERS OF THE COMMISSIONER OF INCOME TAX (APPEALS)-II, COIMBATORE DATED 30.01.201 3. ITA NO. 618/MDS/2013:- 2. THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-II, COIMBA TORE ITA NO. APPELLANT RESPONDENT ASSESS- MENT YEAR 618/MDS/2013 M/S. PRABHU SPINNING MILLS P. LTD., 207/86, MANGALAM ROAD, TIRUPUR-641 601. PAN:AABCP0750E THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE, TIRUPUR. 2008-09 603/MDS/2013 THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE, TIRUPUR. M/S. PRABHU SPINNING MILLS P.LTD., 207/86, MANGALAM ROAD, TIRUPUR-641 601. PAN:AABCP0750E 2009-10 ITA NOS. 618 & 613/MDS//2013 2 DATED 30.01.2013 FOR THE ASSESSMENT YEAR 2008-09 A ND THE SOLE ISSUE IN THIS APPEAL IS THAT THE COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THAT THE EXPENDI TURE INCURRED TOWARDS MODERNIZATION AND REPLACEMENT OF MACHINERY IS REVENUE EXPENDITURE AND NOT CAPITAL EXPENDITURE. 3. THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT DISALLOWED COST OF CERTAIN MACHINERIES I .E. CARDING AND CHUTE FEED MACHINES AND COST OF COMPA CT SPINNING SYSTEM TREATING THE SAID EXPENDITURE AS CA PITAL EXPENDITURE AS AGAINST THE CLAIM OF THE ASSESSEE TH AT IT IS ONLY A REVENUE EXPENDITURE. THE COMMISSIONER OF INCOME T AX (APPEALS) IN SO FAR AS THE EXPENDITURE ON CARDING A ND CHUTE FEED MACHINES ARE CONCERNED, HE SUSTAINED THE DISAL LOWANCE FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. MANGAYARKARASI MILLS P. LTD. (315 I TR 114). IN RESPECT OF THE EXPENDITURE ON COMPACT SPINNING SYST EM IS CONCERNED, THE COMMISSIONER OF INCOME TAX (APPEALS) FOLLOWING THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE ITA NOS. 618 & 613/MDS//2013 3 ASSESSEES OWN CASE IN ITA NO.1847/MDS/2011 DATED 20.01.2012 ALLOWED THE CLAIM OF THE ASSESSEE. NOW, THE ASSESSEE IS IN APPEAL BEFORE US AGAINST THE DISALLO WANCE SUSTAINED BY THE COMMISSIONER OF INCOME TAX (APPEAL S) ON THE EXPENDITURE ON CARDING AND CHUTE FEED MACHINES AS CAPITAL EXPENDITURE. 4. THE COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON CARDING AND CHUTE FEED MACHINES IS ONLY REVENUE EXPENDITURE AND NOT C APITAL EXPENDITURE. 5. THE DEPARTMENTAL REPRESENTATIVE RELIED ON THE OR DER OF THE COMMISSIONER OF INCOME TAX (APPEALS). 6. HEARD BOTH SIDES. PERUSED THE ORDERS OF THE LOWE R AUTHORITIES AND THE CASE LAW RELIED ON BY BOTH SIDE S. THE COMMISSIONER OF INCOME TAX (APPEALS) CONSIDERED TH IS ISSUE IN HIS ORDER AND FOLLOWING THE DECISION OF THE HON BLE SUPREME ITA NOS. 618 & 613/MDS//2013 4 COURT IN THE CASE OF MANGAYARKARASI MILLS P. LTD. ( SUPRA) SUSTAINED THE DISALLOWANCE OBSERVING AS UNDER:- 6. EXPENDITURE ON CARDING AND CHUTE FEED MACHINES TO THE TUNE RS.1 ,26,13,600/-: THE ASSESSEE HAS INCURRED EXPENDITURE OF ` 1,26,13,6001- ON PURCHASE OF CARDING AND CHUTE FEED MACHINES . FOR THESE MACHINERIES, THE ASSESSEE SUBMITTED THAT THERE IS NO INCREASE IN NUMBER OF SPINDLAGE BEFORE AND AFTER REPLACEMENT AND HENCE IT IS TO BE HELD AS REVENUE EXPENDITURE AS HELD IN THE CASE OF SRI KARTHIKEYA SPINNING MILLS ( 2004 265 ITR 285 (MDS) 6.1 ACCORDING TO ME, THE EXPENDITURE OF THE ASSESSEE IN THE PURCHASE OF ABOVE MACHINERIES HAS RESULTED IN ENDURING BENEFIT TO THE COMPANY AND THEREFORE IS CLEARLY A CAPITAL EXPENDITURE SQUARELY COVERED BY THE DECISION OF THE HON'BLE APEX COURT IN THE CASE OF CIT VS. MANGAYARKARASI MILLS PVT LTD. REPORTED IN 315 ITR 114. 6 . 2 HENCE RESPECTFULLY FOLLOWING THE JUDGEMENT OF THE HON'BLE APEX COURT IN THE CASE OF MANGAYARKARASI MILLS PVT LTD. CITED SUPRA, WHICH IS FULLY RELEVANT TO THE FACTS OF THE CASE IN HAND , THE ACTION OF A . 0 IN TREATING THE EXPENDITURE MADE BY THE ASSESSEE ON REPLACEMENT OF MACHINERIES AS CAPITAL EXPENDITURE IS UPHELD. HOWEVER THE ASSESSEE WILL BE ENTITLED TO ITA NOS. 618 & 613/MDS//2013 5 PROPORTIONATE DEPRECIATION ON THE QUANTUM OF EXPENDITURE CAPITALIZED. THIS GROUND APPEAL IS ACCORDINGLY DISMISSED. 7. ON GOING THROUGH THE ORDER OF THE COMMISSIONER O F INCOME TAX (APPEALS), WE DO NOT FIND ANY INFIRMITY IN THE DECISION TAKEN BY THE COMMISSIONER OF INCOME TAX (A PPEALS) ESPECIALLY AS THE COMMISSIONER OF INCOME TAX (APPEA LS) FOLLOWED THE APEX COURTS DECISION IN COMING TO HIS CONCLUSION THAT THE EXPENDITURE INCURRED BY THE ASS ESSEE ON CARDING AND CHUTE FEED MACHINES IS CAPITAL EXPENDIT URE. THEREFORE, THE GROUNDS OF APPEAL RAISED BY THE ASSE SSEE ARE REJECTED. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DIS MISSED. ITA NO.603/MDS/2013:- 9. THIS APPEAL IS FILED BY THE REVENUE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-II, COIMBA TORE DATED 30.01.2013 FOR THE ASSESSMENT YEAR 2009-10. T HE ONLY ITA NOS. 618 & 613/MDS//2013 6 GRIEVANCE IN THE APPEAL OF THE REVENUE IS THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN ALLOW ING THE DEDUCTION CLAIMED FOR THE EXPENDITURE TOWARDS MODER NIZATION EXPENSES ON COMPACT DRAFTING SYSTEM AS REVENUE EXPENDITURE UNDER SECTION 37 OF THE ACT. 10. AT THE TIME OF HEARING, THE COUNSEL FOR THE ASS ESSEE SUBMITS THAT THE ISSUE IN THE APPEAL IS SQUARELY CO VERED IN FAVOUR OF BY THE ASSESSEE BY THE DECISION OF THE CO -ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE F OR THE ASSESSMENT YEAR 2008-09 IN ITA NO.593/MDS/2013 DATE D 9.7.2013. A COPY OF THE ORDER IS PLACED ON RECORD. 11. THE DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDER OF THE ASSESSING OFFICER. 12. HEARD BOTH SIDES. PERUSED THE ORDERS OF LOWER AUTHORITIES AND THE DECISION OF THE CO-ORDINATE BEN CH OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE EARLIER ASSESSMENT YEAR I.E. 2008-09. THE COMMISSIONER OF INCOME ITA NOS. 618 & 613/MDS//2013 7 TAX (APPEALS) FOLLOWING THE DECISION OF TRIBUNAL I N THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2007-08 IN ITA NO.1847/MDS/2011 DATED 20.01.2012 ALLOWED THE CLAIM OF THE ASSESSEE HOLDING THAT EXPENDITURE ON COMPACT SPINNI NG SYSTEM IS ALLOWABLE AS REVENUE EXPENDITURE. WE HAV E GONE THROUGH THE ORDER OF THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 200 8-09 IN ITA NO.593/MDS/2013 DATED 9.7.2013, WHEREIN SIMILAR ISSUE HAS BEEN CONSIDERED AND HELD IN FAVOUR OF THE ASSES SEE OBSERVING AS UNDER:- 6. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESENTATIVE OF BOTH THE SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE CASE LAWS RELIED ON BY THE REPRESENTATIVES OF BOTH THE SIDES. WE FIND THAT THE ISSUE IN HAND HAS ALREA DY BEEN ADJUDICATED BY THE CO-ORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AY. 2007-08 IN ITA NO. 1847/MDS/2011 (SUPRA) WHEREIN THE TRIBUNAL HAS DISCUSSED IN DETAIL THE PROCESS OF COMPACT SPINNING SYSTEM TO DETERMINE THE NATURE OF EXPENDITURE. THE RELEVANT EXTRACT OF THE ORDER O F THE TRIBUNAL IS RE-PRODUCED HERE IN BELOW: 11. AFTER COGITATING THE RIVAL STANDS IN THE LIGHT OF THE OBTAINING EVIDENCE/FACTS/CIRCUMSTANCES OF THE CASE, WE HAVE FOUND THAT DURING THE YEAR THE ASSESSEE-COMPAN Y HAD INSTALLED A NEW TECHNOLOGY CALLED COMPACT SPINNING SYSTEM. TO UNDERSTAND THE EXACT NATURE OF THIS EXPENDITURE WE HAVE TO EXAMINE THE PROCESS INVOLVED IN THIS CASE. THE YARN FROM THE STAGE OF SIMPLEX IS SENT TO DRAFTING BEFORE SPINNING. THE DR AFTING ITA NOS. 618 & 613/MDS//2013 8 SYSTEM IS SITUATED IN THE RING FRAMES. THE CONVENTI ONAL DRAFTING SYSTEM HAS BEEN REPLACED WITH THE LATEST, STATE-OF-THE-ART GADGET CALLED COMPACT SPINNING. AFTER EXAMINING THE RELEVANT DETAILS, WE HAVE FOUND THAT THIS IS A SINGLE PIECE GADGET WHICH IS FIXED TO EACH SPI NDLE. IT IS NOT A MACHINERY BY ITSELF BUT ONLY AN ATTA CHMENT TO THE MACHINE (LIKE MANUAL ANALOG WALL CLOCK IS F IXED WITH BATTERY OPERATED SYSTEM). IT HAS BEEN CLAIMED AS REVENUE EXPENDITURE. THE OLD DRAFTING SYSTEMS HAVE BECOME SCRAP ON REPLACEMENT. THE LD. A.R HAS TAKEN US THROUGH A SET OF COLOUR PHOTOGRAPHS TO ILLUSTRAT E THE NATURE AND WORKING OF THIS 'COMPACT SPINNING SYSTEM '. IT IS SEEN FROM THE RECORDS [PAPER BOOK PAGE 5] THA T THE ASSESSEE HAD PURCHASED 33 NUMBER OF RING FRAMES AND 18 RING FRAMES FITTED WITH GADGETS. THE COMPANY HAS PURCHASED 18 NUMBER OF SETS, AS ONE SET IS REQUIRED FOR ONE RING FRAME. THUS, TOTAL NUMBER OF GADGETS FOR 1 8 RING FRAMES COMES TO 20,736 AND THE RATE PER GADGET SO PURCHASED COMES TO RS. 4,079/-. WE HAVE SEEN THE COMMERCIAL INVOICES ENCLOSED IN THE PAPER BOOK AND FOUND THE SUBMISSION OF THE LD. A.R TO BE CORRECT. WE HAVE FOUND THAT DURING THE YEAR THE ASSESSEE-COMPAN Y HAS INSTALLED NEW TECHNOLOGY GADGETS CALLED 'COMPAC T SPINNING SYSTEM'. THE YARN FROM THE STAGE OF SIMPLE X IS SENT THROUGH THE DRAFTING FOR SPINNING BY RING F RAMES. THE DRAFTING SYSTEM IS SITUATED IN THE RING FRAMES. THE CONVENTIONAL DRAFTING SYSTEM IS REPLACED WITH THE L ATEST, STATE OF THE ART GADGET CALLED COMPACT SPINNING. THIS IS A SINGLE PIECE GADGET AND THIS IS FIXED TO EACH SPINDLES. EACH GADGETS COST RS. 4,100/- EACH BECAUS E THE ASSESSEE HAS PURCHASED 37,296 SUCH GADGETS IN 37 SETS[BATCHES] FOR RS. 15.39 CRORES. THUS, IT IS NOT A MACHINERY BY ITSELF BUT ONLY AN ATTACHMENT TO THE EXISTING MACHINE. WE HAVE UNDERSTOOD THAT THIS GADG ET CANNOT FUNCTION INDEPENDENTLY. IT FUNCTIONS ONLY AN D ONLY IF IT IS FIXED IN THE SPINDLES. EACH RING FRAM E COMES WITH CONVENTIONAL DRAFTING GADGET AS WE HAVE UNDERSTOOD FROM THE PICTOGRAPH AND PHOTOGRAPHS PRODUCED BY THE LD. A.R. THEREFORE, IN ORDER TO PRO DUCE HIGH QUALITY OF YARN, THE CONVENTIONAL TYPE IS REPL ACED WITH THE LATEST, HI-TECH GADGET. IT WAS BROUGHT TO OUR NOTICE AND IT WAS FOUND FOR A FACT THAT ALL THE RIN G FRAMES HAVE NOT BEEN REPLACED WITH THE LATEST GADGET. ONLY CERTAIN NUMBER OF RING FRAMES ARE FITTED WITH THIS NEW GADGET AND THE REMAINING CONTINUED TO MANUFACTURE EARLIER QUALITY OF YARN CATERING TO THE REQUIREMENT OF LOWER STRATA OF THE SOCIETY. OUT OF 50 RING FRAMES, ONLY 37 RING FRAMES ARE FITTED WITH THIS GADGET AND THE ITA NOS. 618 & 613/MDS//2013 9 REMAINING ARE RUNNING WITH CONVENTIONAL GADGET. THI S FACT WAS ALSO FOUND TO BE UNDENIABLE AND TO BE CORR ECT. IT WAS ALSO FOUND TO BE A FACT THAT THE OLD DRAFTIN G SYSTEMS SIMPLY BECOME SCRAP ON REPLACEMENT AND CANNOT BE USED AGAIN AS SUCH. WE ARE CONVINCED THAT THE YARN NORMALLY CONTAINS HAIRY SUBSTANCE LIKE B RISTLES ON THE SIDE OF THE THREAD AND WHEN THIS YEARN IS SE NT THROUGH THE 'COMPACT SPINNING SYSTEM', THESE HAIRY SUBSTANCES ARE REMOVED AND YARN GETS A SHINING. MANUFACTURING PREMIUM QUALITY OF YARN WHICH FETCHES HIGHER PRICE IN THE MARKET AND ATTRACTS HIGH INCOME GROUP CUSTOMERS. WE HAVE ALSO UNDERSTOOD THE NEED FOR INSTALLING THESE COMPACT SPINNING SYSTEMS BECAU SE THESE ARE USED IN MANUFACTURE OF T SHIRTS AND THE MANUFACTURERS OF T SHIRTS NEED SUCH PREMIUM BRAND PRODUCTS. THIS CHANGE WAS NECESSITATED TO COMPETE I N THE MARKET AND THIS STEP OF THE ASSESSEE CANNOT BE TAKEN AS A SURPRISE BUT HAS TO BE TREATED AS TAKEN IN BUSINESS EXIGENCY. WHEN A QUESTION REGARDING LIFE O F THESE GADGETS WAS PUT TO THE LD. A.R, HE STATED THA T EACH GADGET ITSELF CONSIST OF MANY SMALL PARTS AND EACH PART IS ASSEMBLED TOGETHER TO HAVE ONE SINGLE GADGE T SO, THEY ARE SUBJECT TO HEAVY WEAR AND TEAR DUE TO CONTINUOUS RUNNING. IT WAS BROUGHT TO OUR NOTICE WI TH CERTITUDE THAT THESE GADGETS REQUIRE CONSTANT REPLACEMENT ALMOST AFTER FOUR YEARS AT THE MAXIMUM . WE FIND THAT THE TRIBUNAL WHILE ADJUDICATING THE MATTER HAS ALSO TAKEN INTO CONSIDERATION VARIOUS CASE LAWS DECIDED BY THE HONBLE SUPREME COURT OF INDIA INCLUDING ASSAM BENGAL CEMENT CO. LTD., VS. CIT REPORTED AS 27 ITR 34 (SC); EMPIRE JUTE CO. LTD., VS. CIT REPORTED AS 124 ITR 1 (SC); ALEMBIC CHEMICAL WORKS CO. LTD., VS. CIT REPORTED AS 177 ITR 377 (SC); AND THE ORDER OF THE TRIBUNAL IN THE CASE OF M/S. VIJAYESWARI TEXTILES LTD., IN ITA NO. 963/MDS/2011 FOR AY. 2006-07 DATED 23-08-2011. THE CO-ORDINATE BENCH OF THE TRIBUNAL AFTER DISCUSSING THE FACTS OF THE CASE AND THE AFORESAID DECISIONS OF THE HONBLE APEX COURT CAME TO THE CONCLUSION THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON INTRODUCING THE COMPACT SPINNING SYSTEM IS REVENUE IN NATURE AND IS THUS AN ALLOWABLE EXPENDITURE. ITA NOS. 618 & 613/MDS//2013 10 7. SINCE THE ISSUE IN HAND IS SIMILAR TO THE ONE DECIDED BY THE CO-ORDINATE BENCH OF THE TRIBUNAL, WE RESPECTFULLY FOLLOW THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE AY. 2007-08, AND DISMISS THIS APPEAL OF THE REVENUE HOLDING THE EXPENDITURE INCURRED BY THE ASSESSEE ON INTRODUCING COMPACT SPINNING SYSTEM AS REVENUE EXPENDITURE. ACCORDINGLY, THE APPEAL OF THE REVENUE IS DISMISSED. 13. RESPECTFULLY FOLLOWING THE DECISION OF THE CO-O RDINATE BENCH OF THIS TRIBUNAL, WE REJECT THE GROUNDS OF AP PEAL OF THE REVENUE. 14. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. 15. TO SUM UP, BOTH THE APPEALS OF THE ASSESSEE AND THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THURSDAY, THE 29 TH DAY OF AUGUST, 2013 AT CHENNAI. SD/- SD/- (ABRAHAM P.GEORGE ) (CHALLA NA GENDRA PRASAD) ACCOUNTANT MEMBER J UDICIAL MEMBER CHENNAI, DATED THE 29 TH AUGUST, 2013. SOMU COPY TO: (1) ASSESSEE (4) CIT(A) (2) ASSESSING OFFICER (5) D.R. (3) CIT (6 ) G.F.