Surya Lakshmi Cotton Mills Ltd., Secunderabad V. ACIT, Hyderabad

ITA 841/HYD/2009

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 5861 (ITAT-HYDERABAD)
• Duration Of Justice: 8 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 09-02-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 08-07-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: VASUNDHARA SINHA
• Assessee Lawyers: C N PRASAD S; G SRANGAN
• Keywords: Depreciation; Revenue expenditure; Capital expenditure
• Section: 143(3); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI G.C.GUPTA, VICE PESIDENT AND SHRI AKBER BASHA, ACCOUNTANT MEMBER ITA NOS.841/HYD/09 & 1787/HYD/08 : ASSTT. YEA RS:2006-07 & 2005-06 M/S. SURYALAKSHMI COTTON MILLS LTD., SECUNDERABAD. (PAN AAECS1921R) ADDL. COMMISSIONER OF INCOME TAX, RANGE-3, HYDERABAD (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI G.SRANGAN & SHRI C.N.PRASAD, ADVOCATES RESPONDENT BY : SMT.VASUNDHARA S INHA, CIT-DR O R D E R PER SHRI AKBER BASHA, ACCOUNTANT MEMBER: BOTH THESE APPEALS, PREFERRED BY THE ASSESSEE, ARE DIRECTE D AGAINST THE SEPARATE ORDERS OF THE CIT(A) IV, HYDERAB AD FOR THE ASSESSMENT YEARS 2006-07 AND 2005-06, ON THE ORDERS OF ASSE SSMENT MADE U/S 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT). SINCE THE ISSUES INVOLVED IN THESE APPEALS ARE IDENTICAL THEY ARE H EARD TOGETHER FOR DISPOSAL BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE . 2. GROUNDS OF APPEAL TAKEN BY THE ASSESSEE IN THE APPE AL FOR THE ASSESSMENT YEAR 2006-07, WHICH ARE SIMILAR TO THE ONE S TAKEN IN THE OTHER APPEAL FOR THE ASSESSMENT YEAR 2005-06, READ AS FO LLOWS- 1. THE ORDER OF THE CIT(A) DT.28-4-2009 IS CONTRARY TO LAW AND FACTS OF THE CASE. 2. A) THE CIT(A) ERRED IN LAW IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING EXPENDITURE OF RS. 5,24,42,529 2 INCURRED ON REPLACEMENT OF TWENTY LOOMS AND FOUR RI NG FRAMES OF TEXTILE MACHINERY ON THE GROUND THAT ON SUCH REPLAC EMENT THE ASSESSEE IS DERIVING ENDURING BENEFIT AND THEREFORE THE SAID EXPENDITURE IS OF CAPITAL NATURE. B) THE CIT (A) OUGHT TO HAVE SEEN THAT THE COST OF SUCH LOOMS AND RING FRAME WAS CLAIMED AS REVENUE EXPENDITURE S INCE REPLACEMENT OF SUCH LOOMS AND RING FRAMES IS ONLY T O PRESERVE AND MAINTAIN IT MANUFACTURING CAPACITY ALREADY IN E XISTENCE BUT DID NOT INCREASE ITS PRODUCTION CAPACITY. THEREFORE THE SAID EXPENDITURE IS REVENUE EXPENDITURE ONLY BUT NOT CAP ITAL EXPENDITURE HAVING ENDURING BENEFIT. C) THE CIT (A) FAILED TO SEE THAT EXPENDITURE INCUR RED ON REPLACEMENT OF OLD AND WORN-OUT LOOMS AND RING FRAM ES IS ALLOWABLE AS DEDUCTION U/S 37 OF THE ACT AS REVENUE EXPENDITURE. D) THE CIT (A) FAILED TO SEE THAT SINCE THERE IS NE ITHER ENHANCEMENT OF PRODUCTION CAPACITY, NOR ADVANTAGE O F ENDURING BENEFIT ON ACCOUNT OF REPLACEMENT OF OLD AND WORN-O UT LOOMS AND RING FRAMES AND THE REPLACEMENT OF PARTS OF MACHINE RY WAS NECESSITATED TO CARRYON THE BUSINESS OF THE COMPANY SMOOTHLY AND EFFICIENTLY THE EXPENDITURE INCURRED ON SUCH RE PLACEMENT OF PARS OF MACHINERY IS ALLOWABLE AS REVENUE EXPENDITU RE. 3. FOR ALL OF THE ABOVE AND SUCH OTHER GROUNDS AS MAY BE URGED AT THE TIME OF HEARING IT IS MOST RESPECTFULLY PRAY ED THAT THIS HONBLE TRIBUNAL MAY BE PLEASED TO SET ASIDE THE OR DER OF THE CIT(A) AND SUITABLE DIRECTIONS BE GIVEN TO THE ASSE SSING OFFICER TO ALLOW THE CLAIM OF THE APPELLANT. 3. BRIEFLY STATED, FACTS OF THE CASE ARE THAT THE ASSESSEE HEREIN IS A PUBLIC LIMITED COMPANY ENGAGED IN THE BUSINESS OF M ANUFACTURE AND SALE OF COTTON/BLENDED YARN AND DENIM CLOTH. FOR THE ASSESSMENT YEAR 2006-07, THE ASSESSEE FILED IS RETURN ON 29-11-2006 DECLA RING INCOME OF RS.25,83,88,269 AND BOOK PROFIT AT RS.46,15,86,267 UN DER SPECIAL PROVISIONS OF SEC.115JB OF THE INCOME TAX ACT, 1961 (THE ACT). ASSESSMENT WAS COMPLETED ON 18-11-2008 U/S 143(3) DETERMIN ING THE INCOME AT RS.30,03,30,854 UNDER NORMAL PROVISIONS OF TH E ACT. THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT, DISALLOWED EXPENDITURE OF RS.5,24,42,529 INCURRED ON PURCHASE OF L OOMS AND RING FRAMES USED FOR PRODUCING DENIM FABRICS, TREATING THE SAM E AS CAPITAL EXPENDITURE. SIMILARLY, FOR THE ASSESSMENT YEAR, 2005- 06, THE ASSESSEE INCURRED AN EXPENDITURE OF RS.2,34,09,468 TOWARDS REPL ACEMENT OF TWO 3 AUTO CONERS AND ONE DRAW-FRAME FOR TEXTILE MACHINERY. THE ASSESSEE COMPANY CONTENDED BEFORE THE ASSESSING OFFICER THAT THERE IS NO ENHANCEMENT OF CAPACITY ON ACCOUNT OF REPLACEMENT OF SUCH W ORN OUT AUTO CONERS AND DRAW FRAME. BUT THE ASSESSING OFFICER REJ ECTED THE CONTENTIONS OF THE ASSESSEE AND COMPLETED THE ASSESSMENTS, DISAL LOWING THE CLAIMS OF THE ASSESSEE WITH REGARD TO THE ABOVE EXPEN DITURE ON REPLACEMENT OF AUTO CONERS, ETC. 4. ON APPEAL BEFORE THE CIT(A), ASSESSEE SUBMITTED THA T THE ABOVE EXPENDITURE WAS INCURRED ONLY FOR REPLACEMENT OF TEXTILE MACHINERY WITHOUT WHICH THE PRODUCTION CANNOT BE ACHIEVE D AT RATED CAPACITY. THE ASSESSEE FURTHER SUBMITTED THAT THERE IS NO ENDURING ADVANTAGE ON ACCOUNT OF REPLACEMENT OF THE AUTO CONERS A ND DRAW- FRAME SINCE THERE IS NO ENHANCEMENT OF CAPACITY ON SUCH REP LACEMENT. IF SUCH WORN-OUT AUTO CONERS AND DRAW FRAME ARE NOT REP LACED, RATED PRODUCTION WILL NOT BE ACHIEVED AND THE BUSINESS OF THE COMPANY WILL SUFFER. HENCE, THE ASSESSING OFFICER IS NOT JUSTIFIED IN TR EATING THE SAID EXPENDITURE ON REPLACEMENT OF AUTO CONERS AND DRAW FRA ME AS CAPITAL EXPENDITURE. THE CIT (A) THOUGH ALLOWED DEPRECIATIO N ON THE CONERS AND DRAW FRAME PURCHASED, UPHELD THE ADDITION MADE BY THE ASSESSING OFFICER IN THIS REGARD. THE ASSESSEE IS IN APPEAL BEFORE US AGAINST THE ORDERS OF THE CIT(A), REJECTION OF THE CLAIMS OF THE ASSE SSEE FOR BOTH THE YEARS. 5. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT T HE PRODUCTION ACHIEVED BY THE ASSESSEE WITH THE EXISTING MA CHINES WAS IN THE RANGE OF 50% TO 60% OF THEIR RATED CAPACITY BECAUSE OF WHICH THE ASSESSEE DECIDED TO REPLACE THE SAID MACHINES WITH NEW ONES T O GET PRODUCTION AT RATED CAPACITY. ACCORDINGLY, NEW AUTO CON ERS AND DRAW FRAME WERE PURCHASED AND REPLACED. WITHOUT THE REPLACE MENT OF THE TEXTILE MACHINERY UNDER REFERENCE, THE PRODUCTION COULD NOT HAVE BEEN 4 ACHIEVED AT THE RATED CAPACITY. HE CONTENDED THAT THERE WAS NO ENHANCEMENT IN THE CAPACITY ON ACCOUNT OF REPLACEMENT OF SUCH AUTO CONERS AND DRAW FRAME. HE ALSO CLAIMED THAT THERE IS NO ENDURING ADVANTAGE FROM THE REPLACEMENT EFFECTED IN ABSENCE OF A NY ENHANCEMENT IN THE CAPACITY AND HAD THESE MACHINERY NOT BEEN REPLACED THE BUSINESS OF THE COMPANY WOULD HAVE SUFFERED . JUST AS REPLACEMENT OF A COMPRESSOR OR A PICTURE TUBE WOULD NOT RESULT IN ANY NEW ASSET OR ENDURING BENEFIT BEING BROUGHT INTO EXIST ENCE, AND EXPENDITURE INCURRED FOR THAT PURPOSE WOULD CONSTITUTE ONLY CURRENT REPAIRS UNDER SECTION 31 [I] OF THE ACT. THESE ASSETS, I.E . COMPRESSOR OR A PICTURE TUBE DO NOT REPLACE THE AIR-CONDITIONING MACH INE OR THE TELEVISION RESPECTIVELY AND IT REPLACES ONLY THE PART OF THE MACHINES. IN A TEXTILE INDUSTRY, IT IS NOT ONE CONTINUOUS INTEGRATED PROCESS, AND THOUGH THE ENTIRE MACHINERY IS NOT A SINGLE ASSET, EACH M ACHINE IS A STANDALONE. HE CLAIMED THAT THE EXPENDITURE HAD BEEN I NCURRED ONLY FOR CARRYING ON THE BUSINESS OF THE COMPANY SMOOTHLY AND EFF ICIENTLY AND IT WAS THEREFORE ALLOWABLE UNDER S. 37 OF THE ACT. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON VARIOUS DECISIONS, INCLUDING THE DECISION OF THE KARNATAKA HIGH COURT IN THE CASE OF CIT V/S. SAGAR TALK IES (173 TAXMAN 12); OF THE SUPREME COURT IN THE CASE OF CIT V/S. TVS SEWING NEEDLES LTD. (182 TAXMAN 16); AND OF THE CHENNAI BENCH OF TH E TRIBUNAL IN THE CASE OF ACIT V/S. PRABHU SPINNING MILLS LTD. (ITA NO.29 02/MAD/05) COPIES OF WHICH ARE ALSO FILED BEFORE US. 6. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, RELIED ON THE ORDERS OF THE LOWER AUTHORITIES AND SUBMITTED THAT THE ISSUES INVOLVED IN THE PRESENT APPEAL ARE SQUARELY CO VERED IN FAVOUR OF THE REVENUE IN THE CASE OF CIT V/S. MANGAYARKARASI M ILLS P. LTD. (315 ITR 114). SHE SUBMITTED THAT THE ASSESSEE REPLACED THE MANUAL WINDING MACHINE WITH AUTO CONER WINDING MACHINE AND NE W DRAW FRAME WITH OLD DRAW FRAME, AND HENCE, THE EXPENDITURE INCUR RED WAS OF CAPITAL 5 NATURE AND THE CIT(A) RIGHTLY HELD THE SAME AS OF CAPI TAL EXPENDITURE AND ALLOWED DEPRECIATION. IN THE CIRCUMSTANCES, THERE CA NNOT BE ANY GRIEVANCE TO THE ASSESSEE AGAINST THE ORDER OF THE CIT(A ). 7. WE HAVE HEARD THE SUBMISSIONS OF THE PARTIES AND AL SO PERUSED THE MATERIAL ON RECORD. WE HAVE ALSO CONSIDERED THE CASE-LAWS RELIED UPON BY BOTH THE PARTIES. BEFORE WE GO INTO THE MAIN ISSUE, THE FIRST ISSUE WHICH NEEDS TO BE LOOKED INTO IS WHETHER EACH MACHINE IN A TEXTILE MILL IS AN INDEPENDENT ITEM OR MERELY FORMS PART OF THE COMPLETE SPINNING MILL WHICH ALONE AS AN INTEGRATED UNIT, IS CAPABLE OF MANUFACTURING BECAUSE THERE IS NO INTERMEDIARY MARKET ABLE PRODUCT PRODUCED. IN THE CASE OF CIT V/S. SARAVANA SPINNING MI LLS PVT. LTD. (293 ITR 201), THE APEX COURT HELD THAT EACH MACHINE IN TH E SEGMENT OF A TEXTILE MILL HAS AN INDEPENDENT ROLE TO PLAY IN THE MILL AND THE OUTPUT OF EACH UNIT IS DIFFERENT FROM THE OTHER. HENCE, A RING FR AME IN A TEXTILE MILL IS INDEPENDENT AND SEPARATE MACHINE AND EACH MACHINE IN A TEXTILE MILL IS PART OF THE INTEGRATED PROCESS OF MANUFACTURE OF YARN AND IS INTEGRALLY CONNECTED TO THE OTHER MACHINE IN THE MILL FOR THE PRO DUCTION OF THE FINAL PRODUCT. HOWEVER THAT INTER-CONNECTION DOES NOT TAKE AW AY THE INDEPENDENT ENTITY OR DISTINCT FUNCTION OF EACH MACHINE. THEREFORE, EACH MACHINE IN A TEXTILE MILL SHOULD BE TREATED AS AN INDE PENDENT MACHINE AND NOT AS A MERE PART OF THE ENTIRE COMPOSITE MACHINE RY OF THE SPINNING MILL. IN OUR CONSIDERED VIEW, THEREFORE, IN THE LIGHT OF THE ABOVE DECISION OF APEX COURT IN THE CASE OF SARAVANA SP INNING MILLS PVT. LTD. (SUPRA), AUTO CONERS AND RING FRAMES, LOOMS, ETC., W ITH WHICH WE ARE CONCERNED IN THE PRESENT APPEALS, ARE TO BE TREATED AS AN INDEPENDENT ITEM/MACHINE, THOUGH THE SAME ARE INTEGRA TED TO FORM PART OF THE SPINNING MILL. ANY REPLACEMENT OF THESE INDIVI DUAL ITEMS, THEREFORE, HAVE TO BE TREATED AS OF CAPITAL NATURE, SI NCE SUCH REPLACEMENT GIVES ENDURING BENEFIT TO THE ASSESSEE. 6 8. THE NEXT ISSUE TO BE DECIDED IS WHETHER THE EXPEND ITURE IN QUESTION CAN BE TREATED AS CURRENT REPAIRS OR AS CAPITAL E XPENDITURE. THIS QUESTION IS ALSO ANSWERED IN THE VERY SAME DECISION O F THE APEX COURT IN THE CASE OF SARAVANA SPINNING MILLS PVT. LTD. (SUPRA). IT WAS HELD IN THAT CASE FOR TREATING AN EXPENDITURE AS CURREN T REPAIRS, THE QUESTION WHETHER THE EXPENDITURE IN QUESTION IS OF CAPI TAL OR REVENUE NATURE IS IMMATERIAL. IT HAS LAID DOWN A BASIC TEST IN THAT CASE AND HELD WHERE THE EXPENDITURE IS INCURRED TO PRESERVE AND MAIN TAIN AN ALREADY EXISTING ASSET OR MACHINE AND NOT TO BRING INTO EXISTENCE A NEW ASSET OR TO OBTAIN A NEW ADVANTAGE, SUCH EXPENDITURE HAS TO BE TREATED AS IN THE NATURE OF CURRENT REPAIRS AND CONSEQUENTLY HAS TO BE ALL OWED. IN THE FACTS OF THE PRESENT CASE, ONCE IT IS HELD THAT THE ENTIRE TEXTILE MILL MACHINE CANNOT BE TREATED AS A SINGLE ASSET, REPLACEMENT OF AN AUTO CONER OR RING FRAME, ETC., EACH OF WHICH CONSTITUTE AN I NDEPENDENT MACHINE, NOTWITHSTANDING ITS INTERCONNECTIVITY WITH THE SPINNING MILL AS A WHOLE, REPLACEMENT OF SUCH UNIT HAS TO BE TREATED AS RE PLACEMENT OF A MACHINE AS A WHOLE, WHICH CONSEQUENTLY BRINGS INTO EXISTE NCE AN INDEPENDENT UNIT OF MACHINERY AND CONSEQUENTLY, WHAT THE ASSESSEE DERIVES BY SUCH REPLACEMENT IS ALSO AN ADVANTAGE OF ENDUR ING NATURE AND NOT A TEMPORARY BENEFIT, AND HENCE, THE EXPENDIT URE ON SUCH REPLACEMENT CANNOT BE TREATED AS CONSTITUTING CURRENT REP AIRS. 9. IN TERMS OF S.37 OF THE ACT, AN EXPENDITURE CAN BE CLAIMED AS DEDUCTION ONLY IF THE FOLLOWING CONDITIONS ARE SATISFI ED. I) THE SAID EXPENDITURE IS NOT DEDUCTIBLE UNDER S. 30 TO 36 OF THE ACT; II) EXPENDITURE IS OF REVENUE NATURE; 7 III) EXPENDITURE IS INCURRED DURING THE CURRENT YEAR AND THE EXPENDITURE INCURRED IS WHOLLY AND EXCLUSIVELY FOR TH E PURPOSE OF THE ASSESSEES BUSINESS. EVEN THOUGH THE ASSESSEE SATISFIED TWO OUT OF THE ABOVE CONDITIONS I.E. [I] AND [III] ABOVE, THE CONDITION WITH REGARD TO TH E NATURE OF EXPENDITURE BEING REVENUE IN NATURE, HAS NOT BEEN FULFILLED AS TH E NEW ASSET BOUGHT BY THE ASSESSEE COMPANY HAS SECURED ENDURING BENEFIT FOR TH E ASSESSEE AND AS SUCH THE SAME AMOUNTS TO CAPITAL EXPENDITURE. HENCE , IT IS CLEAR THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IN THE CASE UNDER CONSIDERATION IS NOT OF REVENUE NATURE AND THE SAME CANN OT BE CLAIMED AS DEDUCTION UNDER S.37 OF THE ACT. 9. IN THE LIGHT OF THE ABOVE DISCUSSION, WE UPHOLD TH E ORDERS OF THE LOWER AUTHORITIES AND REJECT THE GROUNDS OF THE ASS ESSEE IN BOTH THESE APPEALS. 10. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE COURT ON 31ST MARCH, 20 10 SD/- SD/- G.C.GUPTA AKBER BASH A VICE PRESIDENT ACCOUNTANT MEMBER DT/- 31ST MARCH, 2010. VNR/ B.V.S. COPY FORWARDED TO: 1. M/S SURYALAKSHMI COTTON MILLS LTD., 6 TH FLOOR, SURYA TOWERS, 105, S.P.ROAD, SECUNDERABAD. 2 THE ADDL. CIT, RANGE-3, HYDERABAD. 3. 4 CIT(A) IV, HYDERABAD. CIT, AP., HYDERABAD. 5. THE D.R., ITAT, HYDERABAD. 8