The Kumaran Mills Ltd., Coimbatore V. The ACIT, Coimbatore

ITA 754/CHNY/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64256 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-09-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 10-09-2012
• Assessment Year: 1994-1995
• Appeal Filed On: 11-04-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: K RAGHU
• Keywords: Capital asset; Depreciation; Question of law; Revenue expenditure; Capital expenditure
• Section: 143(3); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER ITA NO. 754/MDS/2012 ASSESSMENT YEAR : 1994-95 THE KUMARAN MILLS LTD., 1024, AVANASHI ROAD, OPP: VOC PARK SITE, COIMBATORE-641 018. (PAN :AABCT0945K) V. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-II, COIMBATORE. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI K. RAGHU, CA RESPONDENT BY : SHRI SHAJI P. JACOB, ADDL. CIT DATE OF HEARING : 10.09. 2012 DATE OF PRONOUNCEMENT : 12.09.2012 O R D E R PER V. DURGA RAO, JUDICIAL MEMBER : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS)- I, COIMBATORE DATED 29-02-2012 FOR THE ASSESSMENT YEAR 1994- 95. ITA NO.754/MD S/2012 2 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE IS A CO MPANY ENGAGED IN THE BUSINESS OF TEXTILE SPINNING MILL. THE ASSESSEE FILED A RETURN OF INCOME FOR THE YEAR UNDER CONSIDE RATION DECLARING TOTAL INCOME OF ` 99,07,020/-. INITIALLY IT WAS PROCESSED UNDER SECTION 143(1) OF THE INCOME TAX AC T, 1961 ('THE ACT' FOR SHORT). SUBSEQUENTLY THE ASSESSMENT WAS COMPLETED U/S 143(3) OF THE ACT. DURING THE COUR SE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAD CLAIMED A SUM OF ` 34,01,457/- AS AN EXPENDITURE ON REPLACEMENT OF DRAW FRAMES AND THE S AME WAS CLAIMED AS REVENUE EXPENDITURE. IT WAS SUBMIT TED BEFORE THE ASSESSING OFFICER THAT THIS EXPENDITURE INCURRE D BY THE ASSESSEE FOR THE PURPOSE OF THE BUSINESS AND IS A R EVENUE EXPENDITURE. HOWEVER, THE ASSESSING OFFICER DID NO T ACCEPT THE SUBMISSIONS OF THE ASSESSEE AND HELD THAT THE C OST OF REPLACEMENT OF DRAW FRAMES IS A CAPITAL EXPENDITURE AND THE SAME WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. THIS ISSUE ULTIMATELY REACHED THE HON'BLE SUPREME COURT. THE HON'BLE SUPREME COURT DIRECTED THE CIT(A) TO DECIDE THE ISSUE IN ACCORDANCE WITH THE DECISION IN THE CASE OF CIT V. RAMARAJU SURGICAL COTTON MILLS LTD (294 ITR 328). AS PER TH E DIRECTIONS ITA NO.754/MD S/2012 3 OF THE HON'BLE SUPREME COURT THE LEARNED CIT(APPEAL S) DECIDED THE ISSUE AND OBSERVED AS UNDER : 8. THE QUESTION RAISED BY THE HON'BLE SUPREME COURT IN THE CASE OF RAMARAJU SURGICAL COTTON MILL S & ORS REGARDING THE TESTS FOR DETERMINING THE NATURE OF EXPENDITURE AND THE ALLOWABILITY U/S 37 ARE ALSO ANSWERED BY THE JUDGEMENT IN THE CASE OF SRI MANGYARKARASI MILLS (P) LTD. IN THE CASE OF COMMISSIONER OF INCOMETAX V. SARVARAYA TEXTILES LTD. (2011) 332 ITR 553 (AP), THE HONBLE ANDHRA PRADESH HIGH COURT, ELABORATELY DISCUSSED THE VARIOUS JUDGEMENTS OF THE HON'BLE SUPREME COURT AND IT WAS HELD THE ENTIRE TEXTILE MACHINERY CANNO T BE REGARDED AS A SINGLE ASSET, REPLACEMENT OF PARTS WHICH CAN BE CONSIDERED TO BE FOR THE MERE PURPOSE OF PRESERVING OR MAINTAINING THIS ASSET. ALL MACHINES PUT TOGETHER CONSTITUTE THE PRODUCTION PROCESS AND EACH SEPARATE MACHINE IS AN INDEPENDENT ENTITY. REPLACEMENT OF AN OLD MACHINE WITH A NEW ONE WOULD CONSTITUTE THE BRINGING INTO EXISTENCE OF A NEW ASSET IN THE PLACE OF THE OLD ON E, AND NOT REPAIR OF THE OLD AND EXISTING MACHINE. A NEW ASSET IN A TEXTILE MILL GIVES THE PURCHASER AN ENDURING BENEFIT OF BETTER AND MORE EFFICIENT PRODUCTION OVER A PERIOD OF TIME. THE EXPENDITURE INCURRED WAS TO BRING A NEW ASSET INTO EXISTENCE WITH A VIEW TO OBTAIN A NEW ADVANTAGE AND NOT ITA NO.754/MD S/2012 4 EXPENDITURE INCURRED TO PRESERVE AND MAINTAIN AN ALREADY EXISTING ASSET. THE EXPENDITURE WAS CAPITA L IN NATURE. THE FACTS OF THE APPELLANTS CASE ARE SIMILAR TO THE FACTS IN THE JUDGEMENTS DISCUSSED ABOVE. ACCORDINGLY, THE CLAIM OF THE APPELLANT IS REJECTED AND THE ASSESSING OFFICER IS DIRECTED TO TREAT THE EXPENDITURE OF ` 34.01 LAKHS INCURRED ON REPLACEMENT OF MACHINERY AS CAPITAL EXPENDITURE AND ALLOW DEPRECIATION THEREON AS PER THE PROVISION S OF THE ACT FOR THIS YEAR AND SUBSEQUENT YEARS. 3. ON BEING AGGRIEVED, THE ASSESSEE HAS CARRIED THE MATTER BEFORE THE TRIBUNAL. THE LEARNED COUNSEL FOR THE A SSESSEE SUBMITTED THAT THESE EXPENSES ARE INCURRED FOR THE PURPOSE OF THE BUSINESS AND THE REPLACEMENT WAS MADE TO MAINTA IN GOOD QUALITY OF PRODUCT. THEREFORE THE SAME HAS TO BE C ONSIDERED AS REVENUE EXPENDITURE. 4. ON THE OTHER HAND, THE LEARNED DR SUBMITTED THAT THE ORDER PASSED BY THE LEARNED CIT(APPEALS) AND RELIED ON THE DECISION OF THE HON'BE SUPREME COURT IN THE CASE OF CIT V. SRI MANGAYARKARASI MILLS P. LTD. (315 ITR 114) (SC). H E ALSO RELIED ON THE DECISION OF THE HONBLE JURISDICTIONA L HIGH COURT ITA NO.754/MD S/2012 5 IN THE CASE OF CIT, MADURAI V. MADURA COATS (2012) 205 TAXMAN 357 (MAD). 5. WE HAVE HEARD BOTH THE SIDES, PERUSED THE RECORD S AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE ONLY ISSUE FOR ADJUDICATION BEFORE US IS WHETHER THE EXP ENDITURE INCURRED FOR THE PURPOSE OF REPLACEMENT OF DRAW FRA ME IS REVENUE EXPENDITURE OR CAPITAL EXPENDITURE. THE LE ARNED CIT(APPEALS) BY CONSIDERING THE ENTIRE FACTS OF THE CASE AND ALSO THE DECISIONS OF VARIOUS HIGH COURTS AND THE H ON'BLE SUPREME COURT INCLUDING THE DECISION IN THE CASE O F 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 EXPENDITURE. FOR THAT PROPOSITION THE HON'BLE SUPR EME COURT HAS RELIED ON THE DECISIONS IN THE CASE OF TRAVANCO RE COCHIN CHEMICALS LTD. V. CIT (106 ITR 900) (SC) AND LAKSH MIJI SUGAR MILLS P. CO. V. CIT AIR 1972 SC 159 AND OBSERVED TH AT IT HAS BEEN HELD BY THIS COURT THAT BRINGING INTO EXISTENC E A NEW ASSET OR AN ENDURING BENEFIT FOR THE ASSESSEE AMOUN TS TO CAPITAL EXPENDITURE. WE HAVE ALREADY EXPLAINED WHY REPLACEMENT, IN THIS CASE, AMOUNTS TO BRINGING INTO EXISTENCE A ITA NO.754/MD S/2012 6 NEW ASSET AND ALSO AN ENDURING BENEFIT FOR THE ASSE SSEE IT IS CLEAR THEN THAT THE EXPENDITURE OF THE ASSESSEE HER E IS NOT OF A REVENUE NATURE AND THUS, CANNOT BE CLAIMED AS A DE DUCTION UNDER SECTION 37 OF THE ACT.. 6. THE HONBLE JURISDICTIONAL HIGH COURT IN THE CAS E 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 CONSIDERATION IT IS SUBMITTED BY THE LEARNED COUNSEL FOR THE APPELLANT/REVENUE THAT WITH REGARD TO THE SUBSTANTIAL QUESTION OF LAW 1 AND 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 SUBSTANTIAL QUESTION OF LAW 1 AND 2 RAISED IN THIS TAX CASE APPEAL 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 FRAMES, DRAW FRAMES AND SPEED FRAME IS PURCHASED FOR THE FIRST TIME, THEN IT IS A CAPITAL ASSET, ON WHICH DEPRECIATION SHOULD BE GRANTED. WHEREAS, IT IS SUBMITTED THAT THE SALE ITA NO.754/MD S/2012 7 OF A WORN OUT MACHINERY AND REPLACEMENT THEREOF BY NEW MACHINERY CAN ONLY BE TREATED AS REDUCTION AND ADDITION TO THE BLOCK OF ASSETS, WHICH IS A PART OF REPLACEMENT. IT IS ALSO SUBMITTED THAT WHILE UNDER THE LAW, AS IT STOOD PRIOR TO 1988-89, THE FACT OF TREATING THE ENTIRE M ILL 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 ONCE THE CONCEPT OF BLOCK OF ASSETS HAS BEEN BROUGHT IN BY THE 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, ITS VALUE IS REDUCED AND IF ANY NEW ITEM COMES IN ITS PLACE, ITS VALUE IS ADDED TO THE BLOCK. IN VIE W OF THE ABOVE, IT IS SUBMITTED THAT THE THIRD SUBSTANTIAL QUESTION OF LAW IS ALSO COVERED AS 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 LAW IS ALSO ANSWERED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. ITA NO.754/MD S/2012 8 7. IN VIEW OF THE DECISIONS OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. RAMARAJU SURGICAL COTTON MILLS L TD. (SUPRA), CIT V. SRI MANGAYARKARASI MILLS P. LTD. (SUPRA) AND THE DECISION OF THE HONOURABLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT, MADURAI V. MADURA COATS (SUPRA), WE FIND NO INFIRMI TY IN THE ORDER PASSED BY THE LEARNED CIT(APPEALS). HIS ORDE R IS ACCORDINGLY CONFIRMED AND THE APPEAL OF THE ASSESSE E IS DISMISSED. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DIS MISSED. ORDER PRONOUNCED ON WEDNESDAY, THE 12 TH OF SEPTEMBER, 2012, AT CHENNAI. SD/- SD/- (ABRAHAM P. GEORGE) ( V.DURGA RAO ) ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI, DATED THE 12 TH SEPTEMBER, 2012. H. COPY TO: ASSESSEE/AO/CIT (A)/CIT/D.R./GUARD FILE