Madras High Court
Commissioner Of Income-Tax vs Metal Power Co. Ltd. on 14 March, 2007
Equivalent citations: [2008]300ITR48(MAD)
Author: P.D. Dinakaran
Bench: P.D. Dinakaran, Chitra Venkataraman
JUDGMENT P.D. Dinakaran, J.
1. The above tax case appeals are directed against 1 the order of the Income-tax Appellate Tribunal dated January 27, 2006, in I.T.A. Nos. 737-739/Mds/2001 and 251, 282/Mds/2002, 2070-2072/Mds/ 2001 and C.O. No. 30/Mds/2002 in I.T.A. No. 282/Mds/2002, raising the following substantial questions of law:
1. Whether, in the facts and circumstances of the case, the Tribunal was right in holding that excise duty and sales tax collection does not form part of the turnover, for the purpose of calculation of deduction under Section 80HHC?
2. Whether, in the facts and circumstances of the case, the Tribunal was right in holding that conversion charges does not form part of the turnover, for the purpose of calculation of deduction under Section 80HHC?
3. Whether, in the facts and circumstances of the case, the Tribunal was right in allowing a deduction of the amounts spent on replacement of machinery as revenue expenditure?
4. Whether, in the facts and circumstances of the case, replacement of independent complete machinery can be treated as revenue expenditure?
5. Whether, in the facts and circumstances of the case, the Tribunal was right in deciding the issue of replacement of machinery without going into the concept of block of asset?
2. The Revenue is the appellant in all the appeals. The assessee claimed deduction under Section 80HHC of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), but the Assessing Officer recomputed the same after holding that sales tax and excise duty were part of the total turnover. The Assessing Officer also included the conversion charges in the total turnover for the purpose of deduction under Section 80HHC of the Act. Though the assessee claimed the expenditure on replacement of machinery as revenue expenditure, the Assessing Officer disallowed the same treating it as capital expenditure.
3. Against the said order, the assessee filed an appeal before the Commissioner of Income-tax (Appeals), who decided the issue of inclusion of sales tax as well as excise duty and conversion charges for the purpose of deduction under Section 80HHC of the Act in favour of the assessee. The Commissioner of Income-tax (Appeals) also held the expenditure on replacement of machinery as revenue expenditure.
4. On appeal at the instance of the Revenue, the Income-tax Appellate Tribunal held that the cost towards replacement of part of the machinery would be revenue expenditure. The Appellate Tribunal also decided the issue of inclusion of excise duty as well as sales tax and conversion charges for the purpose of deduction under Section 80HHC of the Act in favour of the assessee. Aggrieved by the same, the Revenue has preferred the appeals raising the common questions of law referred to above.
5. With regard to the first question, viz. whether the excise duty and sales tax do not form part of the turnover for the purpose of calculation of deduction under Section 80HHC of the Act, this Court in CIT v. Wheels India Ltd. and CIT v. Sundaram fasteners ltd which were followed by this Court in CIT v. India Pistons Ltd. held that it is highly impossible to accept the contention that the term "turnover" would include the excise duty and sales tax components which are all indirect taxes and which the assessee has to collect and pay over to the Government and such statutory dues will not have any element of profit of business and, therefore, the sales tax and excise duty are not to be included in the total turnover, while computing the deduction under Section 80HHC of the Act.
6. In view of the ratio laid down by this Court in the decisions cited supra, we hold that the sales tax and excise duty are not to be included in the total turnover, while computing the deduction under Section 80HHC of the Act. With regard to the second question which deals with the includibility of conversion charges in the turnover for the purpose of calculation of deduction under Section 80HHC of the Act, the Bombay High Court in CIT v. Bangalore Clothing Co. held that Explanation (baa) to Section 80HHC of the Income-tax Act, 1961, was inserted by the Finance (No. 2) Act, 1991, with effect from April 1, 1992 and under that Explanation, "profits of the business", for the purposes of Section 80HHC does not include receipts which do not have an element of turnover like rent, commission, interest, etc. This Court in CIT v. Sundaram Clayton Ltd. also held that the charges of miscellaneous income and commission do not form part of the turnover for the purpose of calculation of deduction under Section 80HHC of the Act. Applying the above ratio to the facts of the case, we are of the view that the conversion charges has to be excluded from the business profit for the purpose of calculation of deduction under Section 80HHC of the Act.
8. As regards other questions, the issue whether the expenditure on replacement of machinery is capital or revenue is not determined by the treatment given in the books of account or in the balance-sheet. The claim has to be determined only by the provisions of the Act and not by the accounting practice of the assessee.
9. This court in CIT v. Janakiram Mills Ltd held that all plant and machinery put together amount to a complete spinning mill which is capable of manufacturing yarn and hence, each replaced machine could not be considered as an independent one and no intermediate marketable product was produced. Applying the above ratio to the facts of the case, we hold that the Appellate Tribunal was right in holding that the entire plant and machinery being one common unit, the cost towards replacement of part of the machinery would be revenue expenditure.
10. With regard to the concept of block of assets, this Court, in CIT v. Janakiram Mills Ltd. explained the principle or object of introducing the concept of "block of assets" in detail in the following words (page 427):
Regarding the argument relating to 'block of assets', it is the claim of learned Counsel for the assessees that the said principle or object of introduction of the above concept is totally not applicable relating to the nature of expenditure incurred by the respondent. These provisions were introduced from April 2, 1987, as defined under Section 2(11) of the Income-tax Act, 1961, and they are in operation on different field. It is stated that they were intended to replace the provisions on depreciation of capital assets. The block of assets concept was introduced with a view to streamline the excess depreciation allowed and to allow terminal depreciation when the block of assets concept was introduced, the provisions relating to terminal depreciation and the profit result from the sale of assets, which were originally considered under Sections 32(1)(iii) and 41(2), were suitably amended to fall in line with the proposed simplification of the concept of block of assets. The circular describing the concept of block of assets is explained by the Central Board of Direct Taxes by Circular No. 469, dated September 23, 1996 reported in [1986] 162 ITR (St.) 21, 24. In the instant case, no acquisition of any new asset, much less capital of any enduring advantage resulted to the assessee - respondent. The assessees replaced the worn out part of machines without discontinuing their production activities. No claim for depreciation was ever made before any authorities either by the assessees or by the Revenue to consider the question as block of assets nor was there any necessity to do so. The Department did not raise any objection before the Tribunal regarding the claim of allowance on the premise of the block of assets concept. It is, therefore, stated that such question does not arise out of the order of the Appellate Tribunal for considering the same by this Court under Section 260A.
11. In the instant case also, the assessee had only replaced certain machinery without discontinuing their production activities and we have already held that there was no acquisition of any new asset, much less capital of any enduring advantage. A perusal of the orders of the authorities below shows that no claim for depreciation was ever made before any authorities either by the assessee or the Revenue to consider the question of block of assets.
12. Therefore, applying the law laid down by the decision cited supra, such question does not arise out of the order of the Appellate Tribunal for considering the same by this Court under Section 260A of the Act. Therefore, finding no substantial questions of law that arise for our consideration, all the appeals are dismissed. Consequently, M.P. No. 1 of 2007 in T.C.(A) Nos. 172 to 175 and 278 to 281 of 2007 are also dismissed.