SHAH PULP & PAPER MILLS LTD., MUMBAI V. DY.C.I.T. RANGE 8(3), MUMBAI

ITA 6575/MUM/2008

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 56257 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 1 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 29-11-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 12-11-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: O A MAO
• Assessee Lawyers: HIRO RAI
• Keywords: Revenue expenditure; Capital expenditure
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I MUMBAI BEFORE SHRI B.R. MITTAL (JUDICIAL MEMBER) AND SHRI PRAMOD KUMAR (ACCOUNTANT MEMBER) ITA NO.6575/MUM/2008 ASSESSMENT YEAR-2005-06 M/S. SHAH PULP & PAPER MILLS LTD., B/202, 2 ND FLOOR, ANGELINE APARTMENT, JUNCTION OF OLD POLICE STATION ROAD & SAROJINI ROAD, VILE PARLE (W), MUMBAI-400 056 PAN-AAACS 6820K VS. THE DY. CIT RANGE 8(3), MUMBAI (APPELLANT) (RESPONDENT) ITA NO.7187/MUM/2008 ASSESSMENT YEAR-2005-06 THE DY. CIT RANGE 8(3), MUMBAI VS. M/S. SHAH PULP & PAPER MILLS LTD., B/202, 2 ND FLOOR, ANGELINE APARTMENT, JUNCTION OF OLD POLICE STATION ROAD & SAROJINI ROAD,VILE PARLE (W), MUMBAI-400 056 (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI HIRO RAI DEPARTMENT BY: SHRI O.A. MAO DATE OF HEARING :29.11.2011 DATE OF PRONOUNCEMENT: 16.12.2011 O R D E R PER B.R. MITTAL, JM : THESE CROSS APPEALS ARE FILED BY ASSESSEE AND DEPAR TMENT FOR ASSESSMENT YEAR 2005-06 AGAINST ORDER OF LD. CIT(A) DT.8.10.2008. ITA NO. 6575 &7187/M/08 2 2. FIRSTLY, WE TAKE UP APPEAL FILED BY ASSESSEE BEI NG ITA NO. 6575/M/08 AND THE ONLY ISSUE INVOLVED IN THIS APPEAL AS TO WH ETHER LD. CIT(A) IS JUSTIFIED TO CONFIRM DISALLOWANCE OF CLAIM OF RS. 26,02,183/- BEING PAYMENT OF COMMISSION TO M/S. OM PAPER CORPORATION. 3. THE RELEVANT FACTS GIVING RISE TO THIS GROUND OF APPEAL ARE THAT ASSESSING OFFICER OBSERVED THAT ASSESSEE DEBITED TO ITS PROFIT & LOSS ACCOUNT AN EXPENDITURE OF RS. 1,34,04,947/- ON ACCOUNT OF C OMMISSION ON SALES. HE OBSERVED THAT ASSESSEE PAID COMMISSION OF RS. 26,02 ,183/- TO M/S. OM PAPER CORPORATION. THE AO STATED THAT ENQUIRIES WERE CON DUCTED ABOUT M/S. OM PAPER CORPORATION DURING THE COURSE OF ASSESSMENT P ROCEEDINGS FOR A.Y. 2003-04 AND A.Y. 2004-05, A STATEMENT OF SHRI N. RA VINDRAN, PROPRIETOR OF M/S. SHIVA MARKETING SYSTEMS IN THE INDIVIDUAL CAPA CITY AND PROPRIETOR OF M/S. OM PAPER CORPORATION IN THE CAPACITY OF KARTA WERE RECORDED. IN HIS STATEMENT, SHRI RAVINDRAN AGREED THAT SERVICE PROVI DER AND THE RECIPIENT OF COMMISSION WAS DIFFERENT. THE AO HAS STATED THAT I T WAS ALSO STATED BY HIM THAT THE RECIPIENT OF COMMISSION I.E. THE HUF ENTIT Y DID NOT HAVE ANY FINANCIAL TRANSACTIONS WITH ASSESSEE. THE RECIPIENT OF COMMI SSION DID NOT PROVIDE ANY DOCUMENTARY EVIDENCE THAT SERVICES WERE PROVIDED BY THEM. THE AO FURTHER NOTED THAT ASSESSEE HAD SOLD GOODS TO GOVERNMENT AN D THERE WAS NO SCOPE FOR ANY COMMISSION IN GOVERNMENT TRANSACTION. THAT THESE WERE ILLEGAL PAYMENTS AND COVERED BY EXPLANATION TO SEC. 37(1) O F THE ACT. THE AO FURTHER STATED THAT COMMISSION PAYMENT WAS NOT FOR GENUINE SERVICES AND ACCORDINGLY DISALLOWED SAID COMMISSION OF RS. 26,02 ,183/- TO M/S. OM PAPER CORPORATION. BEING AGGRIEVED, ASSESSEE FILED APPEA L BEFORE LD. CIT(A). 4. LD. CIT(A) VIDE PARA 3.4 AFTER CONSIDERING SUBMI SSIONS OF ASSESSEE HAS STATED THAT SIMILAR ISSUE HAD COME UP IN ASSESSEES OWN CASE BEFORE HIS PREDECESSORS FOR ASSESSMENT YEARS 2003-04 AND 2004- 05 AND FOLLOWING HIS PREDECESSORS ORDERS DT. 7.8.2007 AND 5.2.2008 FOR ASSESSMENT YEARS 2003- 04 AND 2004-05 RESPECTIVELY, CONFIRMED DISALLOWANCE MADE BY AO. THE LD. ITA NO. 6575 &7187/M/08 3 CIT(A) HAS ALSO STATED THAT FACTS ARE IDENTICAL IN ASSESSMENT YEAR UNDER CONSIDERATION ALSO. HENCE, ASSESSEE IS IN FURTHER APPEAL BEFORE TRIBUNAL. 5. AT THE TIME OF HEARING, LD. AR SUBMITTED THAT AS SESSEE FILED APPEALS BEFORE TRIBUNAL FOR ASSESSMENT YEARS 2003-04 AND 20 04-05 DISPUTING DISALLOWANCE OF COMMISSION PAID TO M/S. OM PAPER CO RPORATION BEING ITA NOS. 6437/M/07 AND 2905/M/08 RESPECTIVELY AND TRIBU NAL AFTER CONSIDERING ORDERS OF AUTHORITIES BELOW AS WELL AS SUBMISSIONS OF REPRESENTATIVES OF PARTIES ALLOWED APPEALS OF ASSESSEE VIDE ITS COMMON ORDER DT. 16 TH SEPTEMBER, 2011, ITAT, E BENCH, MUMBAI. THE LD. A R FURNISHED A COPY OF SAID ORDER OF TRIBUNAL AND SUBMITTED THAT FACTS IN THE ASSESSMENT YEAR UNDER CONSIDERATION ARE IDENTICAL. THEREFORE ISSUE IS COV ERED IN FAVOUR OF ASSESSEE. THE LD. DEPARTMENTAL REPRESENTATIVE HAS NOT DISPUTE D ABOVE SUBMISSION OF ASSESSEE SAVE AND ACCEPT RELYING ON ORDERS OF AUTHO RITIES BELOW. 6. WE HAVE CONSIDERED ORDERS OF AUTHORITIES BELOW A ND SUBMISSIONS OF LD. REPRESENTATIVES OF PARTIES AS ALSO EARLIER ORDERS O F TRIBUNAL IN ASSESSEES OWN CASE DT. 16 TH SEPTEMBER, 2011 (SUPRA). WE OBSERVE THAT IN THE P RECEDING ASSESSMENT YEAR, TRIBUNAL HELD THAT ASSESSEE IS ENT ITLED TO CLAIM COMMISSION PAID TO M/S. OM PAPER CORPORATION AS DEDUCTION AS T HE SAME WAS PAID FOR SERVICES RENDERED AND WAS WHOLLY AND EXCLUSIVELY FO R THE PURPOSES OF BUSINESS OF ASSESSEE AND IS FURTHER NOT HIT BY EXPL ANATION TO SEC. 37(1) OF THE ACT. WE OBSERVE THAT LD. CIT(A) HAS CONFIRMED DISA LLOWANCE IN THE ASSESSMENT YEAR UNDER CONSIDERATION AFTER OBSERVING IN PARA 3.4 THAT FACTS IN ASSESSMENT YEAR UNDER CONSIDERATION ARE IDENTICAL T O PRECEDING ASSESSMENT YEARS 2003-04 AND 2004-05. SINCE TRIBUNAL HAS ALLO WED PAYMENT OF COMMISSION BY REVERSING ORDERS OF AUTHORITIES BELOW IN A.YRS 2003-04 & 2004- 05, WE RESPECTFULLY FOLLOWING EARLIER ORDER OF TRIB UNAL IN ASSESSEES OWN CASE, DELETE DISALLOWANCE OF RS. 26,02,183/- BEING PAYMEN T OF COMMISSION PAID TO M/S. OM PAPER CORPORATION BY ALLOWING GROUND OF APP EAL TAKEN BY ASSESSEE. ITA NO. 6575 &7187/M/08 4 7. NOW WE TAKE UP APPEAL FILED BY DEPARTMENT BEING ITA NO. 7187/MUM/2008 DISPUTING ORDER OF LD. CIT(A) IN DELE TING DISALLOWANCE OF RS. 11,97,000/- BEING REPAIRS AND MAINTENANCE EXPENSES . 8. THE RELEVANT FACTS GIVING RISE TO THIS APPEAL AR E THAT AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVED THAT ASSE SSEE DEBITED RS. 11,97,000/- ON ACCOUNT OF PURCHASE OF NEW ENGINE FO R D.G. FROM VINAYAK DIESEL SALES & SERVICE. THE AO STATED THAT D.G. SE T CANNOT BE OPERATED WITHOUT ENGINE THEREFORE PURCHASE OF NEW ENGINE FOR D.G. AMOUNTS TO CAPITAL EXPENDITURE, AND DISALLOWED THE CLAIM OF ASSESSEE. BEING AGGRIEVED, ASSESSEE FILED APPEAL BEFORE FIRST APPELLATE AUTHORITY. 9. ON BEHALF OF ASSESSEE, IT WAS CONTENDED THAT DET AILS OF EXPENSES OF REPAIRING AND MAINTENANCE CHARGES HAVE BEEN SUBMITT ED TO AO. IT WAS CONTENDED THAT ENGINE WAS A PART AND PARCEL OF GENE RATING UNIT WHICH WAS PURCHASED AND INSTALLED IN THE PLANT IN THE YEAR 20 01. SINCE ENGINE FAILED, IT WAS NECESSARY TO REPLACE ENGINE TO RECOMMENCE D.G. IT WAS CONTENDED THAT REPLACEMENT OF ENGINE HAS NOT RESULTED IN ANY ADDIT IONAL CAPACITY OF PRODUCTION. THE ASSESSEE ALSO LODGED INSURANCE CLA IM FOR SUCH LOSS AND REALIZED AN AMOUNT OF RS. 5,19,988/- AS CLAIM IN FU LL AND FINAL SETTLEMENT FROM INSURANCE COMPANY. IT WAS CONTENDED THAT EXPENDITURE INCURRED FOR REPLACEMENT OF ENGINE, IS ONLY A PART OF PLANT AND NOT NEW PLANT OR MACHINERY. THE EXPENDITURE IS ALLOWABLE AS REPAIRS AND IS IN THE NATURE OF REVENUE EXPENDITURE. THE LD. CIT(A) AFTER CONSIDER ING ABOVE SUBMISSION OF ASSESSEE HAS HELD THAT IT IS A REVENUE EXPENDITURE VIDE PARA 4.3 OF IMPUGNED ORDER WHICH IS AS UNDER: I HAVE CONSIDERED THE FACTS OF THE CASE, SUBMISSIO NS MADE BY THE APPELLANT AND ALSO PERUSED THE ASSESSMENT ORDER PASSED BY AO. THE APPELLANT HAS DEBITED RS. 11,97,000/- ON ACCOUN T OF PURCHASE OF NEW ENGINE FOR D.G. FROM VINAYAK DIESEL SALES & SER VICE. THE A.O. MADE DISALLOWANCE ON THE BASIS THAT D.G. SET CANNOT BE OPERATED WITHOUT ENGINE AND HENCE PURCHASE OF NEW ENGINE AMO UNTS TO CAPITAL EXPENDITURE. ON THE OTHER HAND, THE APPELLANT HAS STATED THAT THE ITA NO. 6575 &7187/M/08 5 AMOUNT OF RS. 5,19,988/- WAS RECEIVED FROM INSURANC E COMPANY FOR FAILURE OF ENGINE OF D.G. SET WHICH HAS BEEN DULY A CCOUNTED FOR IN THE BOOKS OF ACCOUNTS. FURTHER AFTER REPLACEMENT OF TH E ENGINE, THE D.G. SET HAS BEEN PUT BACK TO THE WORK WITHOUT RESULTING INTO ANY ADDITIONAL CAPACITY FOR PRODUCTION. SINCE THE EXPENDITURE INCU RRED FOR REPLACEMENT OF ENGINE IS A PART OF THE PLANT AND NO NEW PLANT O R MACHINERY HAS BEEN PURCHASED, IT IS ALLOWABLE AS REPAIRS AND IS I N THE NATURE OF REVENUE EXPENDITURE. I HAVE CONSIDERED THE ISSUE AND FIND THAT THE REPLACEMENT OF THE EXISTING ENGINE INTO GENERATOR W ITHOUT ADDING TO ADDITIONAL CAPACITY FOR PRODUCTION WHERE NO NEW ASS ET HAS COME UP WILL NOT AMOUNT TO CAPITAL EXPENDITURE. THIS IS SUPPORT ED BY THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CI T VS JAFARBHAI AKBARALI & BROS. (1995) 211 ITR 496 AND HONBLE AND HRA PRADESH HIGH COURT IN CIT VS NIJAM SUGAR FACTORY (1979) 16 ITR 7 06 (AP). IN VIEW OF THESE FACT, THE EXPENDITURE ON ACCOUNT OF REPLAC EMENT OF ENGINE TO D.G. SET IS HELD TO BE REVENUE EXPENDITURE. THIS G ROUND IS OF APPEAL IS THEREFORE, ALLOWED. HENCE, DEPARTMENT IS IN APPEAL BEFORE TRIBUNAL. 10. THE LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED T HAT D.G. SET IS AN INDEPENDENT MACHINERY AND ENGINE IS AN ESSENTIAL PA RT OF D.G. SET. HE SUBMITTED THAT REPLACEMENT OF ENGINE AMOUNTS TO BRI NGING INTO EXISTENCE OF NEW D.G. SET. HE SUBMITTED THAT REPLACEMENT OF ENGI NE GIVES ENDURING BENEFIT TO ASSESSEE. LD. DR RELYING ON DECISION OF HONBLE APEX COURT IN THE CASE OF CIT VS SRI MANGAYARKARASI MILLS (P) LTD. 315 ITR 11 4 SUBMITTED THAT EXPENDITURE IS NOT OF A REVENUE NATURE AND ACTION O F AO SHOULD BE CONFIRMED BY REVERSING THE ORDER OF LD. CIT(A). 11. ON THE OTHER HAND, LD. AR REITERATED HIS SUBMIS SIONS ON THE LINES AS MADE BEFORE FIRST APPELLATE AUTHORITY. HE SUBMITTE D THAT REPLACEMENT OF ENGINE OF D.G SET DOES NOT AMOUNT TO REPLACEMENT OF D.G SET AS A WHOLE. IT IS A REPLACEMENT OF PART OF D.G. SET. LD. AR RELYIN G ON DECISION OF BOMBAY HIGH COURT IN THE CASE OF CIT VS JAFARBHAI AKBARAL I & BROS. (1995) 211 ITR 496 SUBMITTED THAT REPLACEMENT OF ENGINE OF A VAN U SED FOR BUSINESS PURPOSES WAS HELD TO BE REVENUE EXPENDITURE. LD. A R FURTHER SUBMITTED THAT REPLACEMENT OF ENGINE OR PART OF OLD MACHINERY I.E. ENGINE OF D.G. SET IN THE CASE OF ASSESSEE IS REVENUE EXPENDITURE AND REFERRE D THE DECISION OF FULL ITA NO. 6575 &7187/M/08 6 BENCH OF HONBLE APEX COURT IN THE CASE OF CIT VS MAHALAKSHMI TEXTILE MILLS LTD., 66 ITR 710 (SC). HE FURTHER SUBMITTED THAT D ECISION OF HONBLE APEX COURT IN THE CASE OF CIT VS SRI MANGAYARKARASI MILL S (P) LTD. (SUPRA) RELIED ON BY LD. DR IS DISTINGUISHABLE TO THE FACTS OF THE CA SE OF ASSESSEE AS IN THAT CASE ENTIRE MACHINERY WAS REPLACED AND IT WAS HELD THAT EACH MACHINE IN A TEXTILE MILL SHOULD BE TREATED INDEPENDENTLY, AND T HEREFORE REPLACEMENT OF SUCH AN OLD MACHINE WITH A NEW ONE WOULD CONSTITUTE BRINGING INTO EXISTENCE OF A NEW ASSET. THEREFORE, IT WAS HELD THAT REPLAC EMENT OF MACHINERY COULD NOT AMOUNT TO CURRENT REPAIR AND AS SUCH DEDUCTIO N COULD NOT BE CLAIMED U/S. 37(1) OF THE ACT. LD. AR SUBMITTED THAT IN TH E CASE OF ASSESSEE ONLY ENGINE WAS REPLACED OF A D.G. SET AND NOT ENTIRE D. G SET WAS REPLACED WHICH IS A PART OF THE PLANT OF ASSESSEE. HE FURTHER SUB MITTED THAT ONLY A SUM OF RS.6,77,912/- WAS CLAIMED AS AN EXPENDITURE BECAUSE OUT OF TOTAL REPLACEMENT COST OF RS. 11,97,000/-, A SUM OF RS. 5 ,19,988/- WAS RECEIVED BY ASSESSEE FROM INSURANCE CLAIM IN RESPECT OF THAT EN GINE. HE SUBMITTED THAT ORDER OF LD. CIT(A) SHOULD BE CONFIRMED. 12. WE HAVE CAREFULLY CONSIDERED ORDERS OF AUTHORIT IES BELOW AND SUBMISSIONS OF LD. REPRESENTATIVES OF PARTIES. WE HAVE ALSO GONE THROUGH THE CASES CITED BY LD. REPRESENTATIVES OF PARTIES I N SUPPORT OF THEIR SUBMISSION (SUPRA). WE OBSERVE THAT ASSESSEE REPLA CED IN THE ASSESSMENT YEAR UNDER CONSIDERATION ENGINE OF D.G. SET WHICH W AS INSTALLED IN THE PLANT IN THE YEAR 2001. THE DEPARTMENT HAS NOT DISPUTED THE FACT THAT ON REPLACEMENT OF ENGINE, D.G SET WAS PUT TO OPERATION . IT IS A FACT THAT ASSESSEE HAS NOT REPLACED D.G. SET AS A WHOLE BUT O NLY A PART OF D.G. SET HAS BEEN REPLACED BECAUSE ENGINE WAS NOT WORKING. IT IS OBSERVED THAT ASSESSEE ALSO RECEIVED INSURANCE CLAIM FOR THE SAID OLD ENGI NE. WE AGREE WITH LD. AR THAT ASSESSEE HAS ONLY REPLACED A PART OF D.G. SET AND NOT THE ENTIRE D.G. SET. THEREFORE RELIANCE PLACED BY LD. DR ON THE DECISION OF APEX COURT IN THE CASE OF CIT VS SRI MANGAYARKARASI MILLS (P) LTD. (SUPRA) IS DISTINGUISHABLE TO THE FACTS OF THE CASE OF ASSESSEE. WE OBSERVE THAT IN THE SAID CASE THEIR LORDSHIPS HELD THAT EACH MACHINE IN A TEXTILE MILL IS A PART OF INTEGRATED ITA NO. 6575 &7187/M/08 7 PROCESS OF MANUFACTURE OF YARN AND EACH MACHINE IN A TEXTILE MILL SHOULD BE TREATED INDEPENDENTLY AS SUCH. THEIR LORDSHIPS HEL D THAT REPLACEMENT OF SUCH AN OLD MACHINE WITH A NEW ONE WOULD CONSTITUTE BRIN GING INTO EXISTENCE OF A NEW ASSET IN PLACE OF OLD ONE AND IT DOES NOT AMOUN T TO REPAIR OF OLD AND EXISTING MACHINE. HOWEVER IN THE CASE BEFORE US, T HERE IS NO DISPUTE THAT ASSESSEE HAS NOT REPLACED THE ENTIRE D.G. SET BUT H AS ONLY REPLACED A PART OF D.G. SET I.E. THE ENGINE. WE ARE OF THE CONSIDERED VIEW THAT DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CI T VS JAFARBHAI AKBARALI & BROS.(SUPRA) REFERRED TO BY LD. AR SQUARELY APPLY T O THE FACTS OF THE CASE BEFORE US. IN THE SAID CASE, ASSESSEE INCURRED EXP ENDITURE ON REPLACING BODY AND ENGINE OF OLD PETROL VAN WHICH WAS USED FOR THE PURPOSE OF BUSINESS. THEIR LORDSHIPS HELD THAT REPLACEMENT OF A NEW DIES EL ENGINE AND OLD BODY BY NEW BODY OF SAID VAN DOES NOT AMOUNT TO BEING EXIST ENCE OF A NEW ASSET AND HELD THAT SAID EXPENDITURE WAS DEDUCTIBLE AS REVENU E EXPENDITURE. WE ARE OF THE CONSIDERED VIEW THAT ON THE FACTS AND CIRCUMSTA NCES OF THE CASE AND IN THE LIGHT OF ABOVE DECISIONS (SUPRA), LD. CIT(A) IS JUSTIFIED TO HOLD THE EXPENDITURE ON ACCOUNT OF REPLACEMENT OF ENGINE TO D.G. SET A REVENUE EXPENDITURE. HENCE, WE CONFIRM ORDER OF LD. CIT(A ) AND REJECT GROUND OF APPEAL TAKEN BY DEPARTMENT. 13. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED; WH EREAS APPEAL OF DEPARTMENT IS DISMISSED. ORDER PRONOUNCED ON THIS 16 TH DAY OF DECEMBER, 2011 SD/- SD/- ( PRAMOD KUMAR) (B.R. MITTAL ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 16 TH DECEMBER, 2011 RJ ITA NO. 6575 &7187/M/08 8 COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR I BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI ITA NO. 6575 &7187/M/08 9 0 DATE INITIALS 1. DRAFT DICTATED ON: 31.11.2011 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 1.12.2011 SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: SR. PS/PS 6. ORDER PRONOUNCED ON: SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: SR. PS/PS 9. DATE ON WHICH FILE GOES TO AR 10. DATE OF DISPATCH OF ORDER: