Income Tax Appellate Tribunal - Chennai
Kadri Mills (Cbe) Ltd. vs Joint Commissioner Of Income Tax on 22 March, 2002
ORDER
1. These appeals are by the assessee directed against the order of the learned CIT(A), Coimbatore, dt. 31st Aug., 2000, relating to the asst. yrs. 1996-97 and 1997-98.
2. We have heard Shri V. Jagadisan, C.A. for the assessee and Shri M. Narayanan, Departmental Representative, for the Revenue and perused the records.
3. The first issue in these appeals relates to the cost of replacement of machinery claimed as revenue expenditure. The assessee claimed a sum of Rs.
1,00,37,315 and Rs. 2,45,78,903, respectively for the asst. yrs. 1996-97 and 1997-98 as cost of replacement. The details are as under :
Name of new Name of old replacing machinery Jnv Value leplaced Cost Year of Name of the supplier No /Date Rs.
machinery Rs.
purchase Karthik Mills;
Karthic Mills Cone Winding 2/8-4 1995 3.48,433 Cone Windei 46.275 195S Machine 1 No. Sales Value Vijay Engg. Works 1 No. 60.000 Draw Fiame LMW 10-1-1996 64,44,252 Ltd. (4 Nos.) 153735 KG Mills Draw Frame LMW 19-2-1996 32.44,630 SKG Mills Ltd (2 Nos.] 154270 Draw Frame 4,20,162 1990 (3 Nos.) Tola! 1,00,37,315 5,46.082 Note : Value withdrawn in respect of 3 Draw Frames of two deliveries each Rs 1,50,000 Asst yr. 1997-98 Name ot new No Wet cost Name o! old No. Yeaiot Cost replacing (excluding replaced machinery purchase machinery Modvat credit) Kaithik MiUs Its.
Rs.
Cone Wmdei 1 3.95,015 marata Cone winder 1 3957 34.686 (sale valuei Rs 10.000) Carding 10 1,89,36,130 Howa Carding (sale 4 1953 43.080 Machines value re. 1.40.000) Howa Carding 3 1952 32,310 MMC Carding value 3 198B-89 1,22.589 Rs. 2,55,000) KG Mills LMW Diaw 1 17,22,600 Frame SKG Mills LR Draw Frame 2 35,25,158 Draw Flame DF 800 2 1990 2,89.628 (sale value Rs 50.000) 2 Deliveries each Total 2,45,78.903 The reasonings of the AO for disallowing the claim for the asst. yr. 1996-97were that the assessee has capitalised the above replacement in its books of account; there is no replacement of is in draw frame in Karthik Mills and K.G. Mills but there is only replacement in S.K.G. Mills whereas the addition is in Karthik Mills & K.G. Mills and no addition in S.K.G. Mills, the number of draw frames added is four numbers plus two numbers whereas the number of draw frames removed is only two numbers and that the replacement expenditure is to be disallowed as on capital account. Similarly, the reasons set out for the asst. yr. 1997-98 was that the expenditure is capitalised in the books of account and that the replacement expenditure is to be disallowed as on capital account.
4. Shri V. Jagadisan, the authorised representative of the assessee, submitted that there are catena of decisions that the expenditure incurred in respect of the machineries in textile mill or spinning mill is of revenue expenditure. Both the Tribunal and the High Court of Madras are consistently holding the same view. The assessee's case is firmly fit in and fortified by those decisions and, therefore, the Revenue authorities cannot deviate from the ratio drawn by the jurisdictional High Court in various decisions. The authorised representative has filed a list of decisions on identical matters which were decided in favour of the assessee.
5. In regard to the objection that the expenditure has been capitalised in the books, the learned authorised representative submitted that the manner of treatment of an expenditure in the books of account cannot decide the nature of a claim for the purpose of computing taxable income. The learned authorised representative relied on the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd v. CIT (1997) 227 ITR 172 (SC), Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC). Thus, the learned authorised representative submitted that the disallowance based on entry in the books of account is not proper.
6. In regard to the observation of the AO in the assessment for the asst. yr. 1996-97 that there is no replacement of draw frame either in Karthik Mills or K.G. Mills, the learned authorised representative submitted that there appears to be a mistake in understanding of the factual position. The inference has been drawn by the AO on the basis of certain working of depreciation for the block of assets for the different units. The correct position is that 4 number of draw frames were removed from Karthik Mills and 2 numbers of draw frames were removed from K.G. Mills and erected in S.K.G. Mills but while working the depreciation it was shown that there is no removal from Karthik Mills or K.G. Mills. The figure in the block of assets will be the same if the replacement in Karthik Mills and K.G. Mills is taken into account and a pro rata addition is taken in S.K.G. Mills at written down value. It was further submitted that the observation of the AO that there is no "one-to-one" replacement is not factually correct. The learned authorised representative further submitted that the assessee had acquired 6 numbers of draw frames of one delivery each aggregating to 6 deliveries whereas the replaced item is of 3 items of two delivery each aggregating to 6 deliveries whereas the replaced item is of 3 items of two delivery each aggregating to 6 deliveries and hence the replacement is also "one-to-one". The learned authorised representative relied on a catena of decisions of both the jurisdictional High Court as well as the Tribunal.
7. The learned Departmental Representative submitted that the AO has mentioned that the modernisation were carried on Blow Room Division, Carding Division. Draw Frame Division/Spinning Division. Cone Winding Division, Auto Coner, Generator, Open and Spinning Division, etc. of the assessee mills at different locations. The AO is perfectly justified in treating it as capital expenditure for the exhaustive reasons given in his order. The learned Departmental Representative further submitted that insofar as the claim of replacement was concerned, there was no "one-to-one" replacement, inasmuch as in Karthik Mills 4 draw frames were purchased but there was no corresponding removal, in K.G. Mills 2 draw frames were purchased but there was no removal; while in S.K.G. Mills 2 draw frames had been removed but no new draw frames had been brought in. Therefore, the learned Departmental Representative submitted that the AO is perfectly justified in disallowing the claim of the assessee. It is further submitted that the old draw frames had been kept in store for. subsequent sale. These intervening transfers were not shown in the depreciation statement as depreciation is granted for the entire block irrespective of the location of the assets. The assessee had not produced any evidence in support of their claim. The learned Departmental Representative fully supported the observations made by the learned CIT(A) in his orders.
7.1 It is further argued that the replacement of machinery is not permitted as a revenue expenditure as a situation cannot be envisaged whereby a capital asset is converted into a trading asset used for generating income through sale of goods by such replaced assets. The concept of modernisation and replacement are inbuilt in the concept of depreciation. After making the above submissions, the learned Departmental Representative drew our attention to the decision of this Tribunal in the case of Nagammal Mills Ltd. v. Dy. CIT in ITA No. 2774/Mad/93, dt. 31st Oct., 1997. The learned Departmental Representative referred to paras 10 and 11 of that order. In para 10 of the aforesaid order of the Tribunal, it was observed that after inspecting similar machinery in Indira Cotton Mills, Chennai, they opined that the machineries are independent new machines and they are in the nature of assets. However, after considering the various decisions of the Tribunal, on the judicial compulsion the expenditure was treated as revenue expenditure. The learned Departmental Representative pointed out this particular portion of the aforesaid order and vehemently contended that an inspection of the assessee mill will clarify several doubts and will also help to come to a correct conclusion in the issues in hand. The learned authorised representative for the assessee also accepted the suggestion made by the learned Departmental Representative. Accordingly, an inspection had been conducted on 8th Feb., 2002, in the premises of M/s Surya Prabha Mills (P) Ltd. Kuniamuthur, Coimbatore, and two units of Kadri Mills, namely, M/s Karthik Mill and M/s K.G.S. Mill. During the inspection, the assessee's representative Shri J. Prabhakar of M/s Jagadeesan & Co., C.As., Chennai, Shri R. Mahadevan, chartered accountant, M/s Gopalaiyer and Subramaniam, chartered accountants, Coimbatore, and Shri M.J. Vijayaraghavan chartered accountant of M/s M.S. Jagannathan & Vishvanathan, chartered accountant, Coimbatore and on behalf of the Revenue Shri N. Rangarajan, Dy. CIT, Shri M. Dhandapani, Asstt. CIT, and Shri G. Swamydas, Inspector of Income-tax, were present.
8. We have inspected M/s Surya Prabha Mills (P) Ltd., Coimbatore. In the case of this assessee. for the asst. yr. 1994-95 in ITA No. 1601/Mds/98. the Tribunal 'A' Bench, on identical facts decided the issue in favour or the assessee following the decision of the Tribunal in the cases of Sambandam Spg. Mills (P) Ltd. v. Dy. CIT (ITA No. 3531/Mad/1989, asst. yr. 1986-87, order dt. 8th Nov.. 1996 and Dy. CIT v. Karthikeya Psg. Mills Ltd ITA No. 2150/Mad/1990 asst. yr. 1987-88, order dt. 24th Dec., 1997. The Tribunal also relied on the decision of the Hon'ble Madras High Court, dt 19th Dec., 1997, in the case of CIT v. Shree Bhaiati Cotton Mills (P) Ltd. in T.C.P. No. 28/1997. This order of the Tribunal dt. 23rd Feb., 1999, in ITA No. 1601/Mds/98 in the case of M/s Suryaprabha Mills Ltd. was confirmed by the Hon'ble Madras High Court in TC No. 339 of 2000 by judgment, dt. 20th Feb., 2001, wherein their Lordships observed in para 3 that:
"On consideration, we find no substantial question of law is involved in this tax case. That apart, the controversy had already been set at rest by this Court by judgment, dt. 19th Dec., 1997. passed in TCP No. 28 of 1997 [CIT v. Shree Bharathi Cotton Mills (P) Ltd.] which has not been disputed by the learned standing counsel for the Department, in view of the above, this tax case is dismissed. No costs."
Therefore, we have decided to inspect M/s Surya Prabha Mills (P) Ltd. to have a direct knowledge of its functioning to decide the issue, as agreed by both the sides to the dispute.
9. On inspection of the said mill and its function and production, it is found that the machineries replaced are not independent one from blow room to cone winding, various machines are functioning but none of them produce any material that has marketability. The functioning of one machine is depended upon the others comprised in the unit of the mill. After seeing this, we called for the production process chart from the mill authorities. Accordingly, they were furnished along with a note containing the process of manufacture, which are kept on record. For better appreciation, the note on process of manufacture as furnished, is extracted hereunder:
"Mixing : Raw material requires a homogeneous mixing to get the yarn in the desired quality and condition. It may be a composition of different varieties of cotton blended with or without the addition of reusable waste. Blow Room : This process involves opening of cotton and elimination of impurities such as trash, sand, seeds, etc. Cotton duly cleaned is collected in the form of uniform compressed sheets which is rolled into a lap. These laps have predetermined weight per unit length to meet the desired standard.
Carding: The impurities still lying in the laps and certain amount of short fibers are eliminated in this process. Individualisation and parallelisation of the fibers are effected by repeated brushing. The final product of carding is delivered in the form of sliver.
Combing : The carded slivers are fed into the sliver lapping machine to get sliver laps which are again drafted into ribbon laps. The ribbon laps are then combed by feeding into comber machines. Combing process is used for removing greater part of short fibres and for achieving a high degree of fibre parallelisation which is necessary for the spinning of high quality yarn.
Drawing : In this process several slivers received from carding and on combing are drawn and reduced to the thickness of one sliver by doubling and drafting to get improved blending and parallelisation of fibers. This process helps to enhance uniformity and strength of the yarn.
Simplex . The finished drawing sliver passes through a stage of processing called simplex. In this process, necessary drafts are employed to make the sliver into further thinner ends and a limited twist is applied to bind the fibers and then it is wound on bobbins as roves."
10. Subsequently, we have visited M/s Karthik Mill and K.G. Mill, one by one, on the same day i.e., on 8th Feb., 2002. The inspection was done in the presence of Revenue authorities and other officials of the Mills and the representative of the assessee. On our inspection of these mills we found no difference in the process of manufacture of yarn and the machineries are not independent to each other, but they are dependent on each other. They have more than one unit like this. We had inspected a particular unit wherein current repairs are claimed. We have also taken note of the machineries replaced. Both these mills are belonging to M/s Kadri Mills, the assessee herein.
11. On inspection of M/s. K.G. Mills, (another unit of the assessee) we found the same facts as were found in the previous mills. On query it is explained that M/s Karthik Mill is a unit manufacturing superfine quality of yarn. Therefore, it is explained that keeping good and latest part of machineries in such units always help the mill authorities to compete in the market and to produce expected fine quality as demanded and ordered by the consumers. The mill authorities on demand had given a note with regard to the manufacturing process done in the mill along with a chart, which is kept on record. For better appreciation, the note of manufacturing process, as furnished by the assessee-mill is reproduced hereunder :
"Mixing : Raw material requires a homogeneous mixing to get the yarn in the desired quality and condition. It may be a composition of different varieties of cotton blended with or without the addition of reusuable waste.
Blowroom : This process involves opening of cotton and elimination of impurities such as trash, sand, seeds, etc., cotton duly cleaned is collected in the form of uniform compressed sheets which is rolled into a lap. These laps have predetermined weight per unit length to meet the desired standard.
Carding : The impurities still lying in the laps and certain amount of short fibres are eliminated in this process. Individualisation and a parallelisation of the fibres are effected by repeated brushing. The final product of carding is delivered in the form of sliver.
Combing : The carded slivers are fed into the sliver lapping machine to get sliver laps which are again drafted into ribbon machines. Combing process is used for removing greater part of short fibres and for achieving a high degree of fibre parallelisation which is necessary for the spinning of high quality yarn. Drawing : In this process several slivers received from carding and/or combing are drawn and reduced to the thickness of one sliver by doubling and drafting to get improved blending and parallelisation of fibres. This process helps to enhance uniformity and strength of the yarn.
Simplex : The finished drawing sliver passes through a stage of processing called simplex. In this process, necessary drafts are employed to make the sliver into further thinner ends and a limited twist is applied to bind the fibres and then it is wound on bobbins as roves."
12. A careful study of the entire material pointing out to the one answer, i.e., the replacement to the existing machineries are nothing but current repairs and the expenditure incurred is of revenue in nature. At no stretch of imagination, this can be considered as capital in nature. The machines are dependent on each other and they are not independent. What has been produced before the final stage of the spinning has no marketability. Further, the facts in the case of M/s Surya Prabha Mills are the same as in the case of the assessee regarding the working and positioning of the various machineries which are part and parcel of the plant working in continuous sequence in the production of the end product, namely, yarn from the raw materials. Therefore, we do not find any force in the stand taken by the Revenue and the same are hereby rejected.
13. On our personal inspection we found that the claim of the assessee that 4 numbers of draw frames are removed from Karthik Mills and 2 numbers of draw frames are removed from K.G. Mills and erected in S.K.G. Mill are factually correct. The observation of the AO that there is no one-to-one replacement is also not factually correct. The assessee had acquired 6 numbers of draw frames of one delivery each aggregating to 6 deliveries whereas the replaced item is of 3 items of two delivery each aggregating to 6 deliveries and hence the replacement is also one-to-one,
14. The learned authorised representative of the assessee relied on the following decisions in support of his arguments :
1. CIT v. Mahalakshmi Textile Mills Ltd. (1965) 56 ITR 256 (Mad):
2. CIT v. Mahalakshmi Textile Mills Ltd. (1967) 66 ITR 710 (SC);
3. CIT v. Salem Co-op. Spinning Mills Ltd. (1984) 148 ITR 176 (Mad);
4. CIT v. Co-op. Sugars Ltd. (1999) 235 ITR 343 (Ker);
5. CIT v. Sree Narasimha Textiles (P) Ltd. (1999) 238 ITR 351 (Mad);
6. CIT v. Sri Hari Mills Ltd. (1999) 237 ITR 188 (Mad);
7. CIT v. Haridas Bhagath & Co. (P) Ltd. (1999) 240 ITR 169 (Mad);
8. CIT v. Andavar Calendering Mills Ltd. (1994) 210 ITR 815 (Mad);
9. CIT v. Ooty Dasprakash (1999) 237 ITR 902 (Mad);
10. CIT v. Rex Talkies (1984) 148 ITR 560 (Kar);
11. CIT v. Madras Auto Service (P) Ltd. (1998) 233 ITR 468 (SC)
12. Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC);
13. CIT v. Jagatjit Inds. Ltd. (2000) 241 ITR 509 (Del);
14. CIT v. Hindustan Times Ltd. (2000) 241 ITR 509 (Del);
15. CIT v. Steel Complex Ltd. (1999) 238 ITR 1054 (Ker);
16. CIT v. Asher Textiles Ltd. (1999) 240 ITR 483 (Mad);
17. Surya Prabha Mills ; ITA No. 1051/Mad/1998;
18. Sri Venkatesa Mills Ltd.; ITA No. 1709/Mad/1995;
19. Super Spinning Mills Ltd.; ITA No. 2932/Mad/1987;
20. Surya Prabha Mills Ltd.; ITA No. 1501/Mad/1998;
21. Sir Varadaraja Textiles; ITA Nos. 937 & 938/Mad/1983;
22. Ambika Cotton Mills Ltd.; ITA Nos. 1698-1700/Mad/1999 ITA No. 216/Mad/2000;
23. Durairaj Mills Ltd.; ITA No. 1364/Mad/1999;
24. Suguna Mills Ltd.; ITA No. 1856/Mad/1999; ITA No. 1540/Mad/2000
25. CIT v. Sakthi Textiles Ltd. (2001) 120 Taxman 268 (Mad).
15. Further, we may mention here that the assessee's authorised representative had filed a certificate issued by The South India Textiles Research Association, Coimbatore, dt. 6th Dec., 1999, which reads as under :
"On scrutiny of the data furnished by M/s The Kadri Mills (Cbe) Ltd. Coimbatore to Sitra vide their letter, dt. 1st Dec,, 1999, regarding modernisation work of Karthik Mills, K.G. Mills, K.G.S. Mills and S.K.G. Mill, we are of the opinion that most of the works reportedly carried out by these mills during 1st April, 1995 to 31st March. 1996 are towards repairs and maintenance of machinery and replacement of store items excepting electronic yam clearers for cone widing and apron doffing devices and 'C' clears attachments for carding which are attachments to the existing machinery mainly for enhancement of yam quality."
16. Thus, the decisions relied upon by the learned authorised representative of the assessee and the certificate of the South India Textile Research Association, Coimbatore, fully support the claim of the assessee. The decisions cited supra are based on idential facts and as such they are squarely applicable to the facts of the present case.
17. We may mention here that the learned Departmental Representative had specifically pointed out the observation made by the Bench in the case of Nagammal Mills (supra). In our view, since the Bench has given a finding in the operative part of the order following various decisions, what has been observed is nothing but obiter dictum (according to Webster's 3rd New International Dictionary obiter" dictum means an incidental and collateral opinion uttered by a Judge and, therefore, not material to his decision or judgment and not binding). Further, only the ultimate ratio enunciated in a particular decision of Tribunals/Courts is to be applied to identical/similar facts and circumstances obtaining in yet another case and obiter dicta or passing observation in a particular decision will not differentiate the "Ratio of the decision". Further, any decision of any Tribunal or Court is to be read as a whole to understand as to what facts and circumstances a particular decision was rendered. Picking out few sentences or observations here and there from a particular decision and applying the sum without any basis is not permitted under law because as we have already discussed the ratio of the particular decision is alone crucial which have a binding force Therefore, we are unable to agree with the stand taken by the learned Departmental Representative.
18. At the time of hearing the learned Departmental Representative also requested that these appeals may be referred to larger Bench pointing out the observations made in the case of Nagamal Mills (supra) and also in the case of other mills. As already seen that there are catena of decisions both by the High Court and the Tribunal, all in favour of the assessee in similar facts and circumstances. The stand of the Revenue that each case has to be examined in the light of the circumstances of the case and that the principle of res judicata is not applicable to income-tax proceedings including appeals before the Tribunal and those cases relied upon by the Department m this regard, are not convincing to us and being those case laws not directly relevant We may state in this regard that worthy of being quoted is the decision of the jurisdictional High Court in the case of CIT v. L.G. Ramamurthi (1977) 110 ITR 453 (Mad) as follows :
"No Tribunal of fact has any right or jurisdiction to come to a conclusion entirely contrary to the one reached by another Bench of the same Tribunal of the same facts. It may be that the members who constituted the Tribunal and decided on the earlier occasion were different from the members who decided the case on the present occasion. But what is relevant is not the personality of the officers presiding over the Tribunal or participating in the hearing but the Tribunal as an institution. If it is to be conceded that simply because of the change in the personnel of the officers who manned the Tribunal, it is open to the new officers to come to a conclusion which had been reached by the earlier officers manning the same Tribunal on the same set of facts, it will not only shake the confidence of the public in judicial procedure as such, but it will also totally destroy such confidence. The result of this will be conclusions based on arbitrariness and whims and fancies of the individuals presiding over the Courts or the Tribunals and not reached objectively on the basis of facts placed before the authorities.
If a Bench of a Tribunal on the identical facts is allowed to come to a conclusion directly opposed to the conclusion reached by another Bench of the Tribunal on an earlier occasion, that will be destructive of the institutional integrity itself. That is the reason why m a High Court, if a single Judge takes a view different from the one taken by another Judge on a question of law, he does not finally pronounce his view and the matter is referred to a Division Bench. Similarly if a Division Bench differs from the view taken by another Division Bench it does not express disagreement and pronounce its different views, but has the matter posted before a Fuller Bench for considering the question. If that is the position even with regard to a question of law, the position will be a fortiori with regard to a question of fact. If the Tribunal wants to take an opinion different from the one taken by an earlier Bench, it should place the matter before the President of the Tribunal so that he could have the case referred to a Full Bench of the Tribunal consisting of three or more members for which there is provision in the IT Act itself."
In the light of the ratio decidendi above we are of the considered opinion that no varying decisions on the similar or identical facts or circumstances in the instant case is there deserving us to refer this matter to the Hon'ble President for reference to a larger Bench and, therefore, the ratio decidendi rendered by the earlier orders of the Tribunal has necessarily to be followed by us in line and tune with the judicial discipline and decorum. That is why while rendering the decision in the case of Nagammal Mills Ltd. (supra) the Tribunal has adopted judicial compulsion and discipline.
19. If the decision in the case of Nagammal Mills Ltd. would have been taken as differing from the earlier decisions of the Tribunal, there would be necessity to refer this case to the Hon'ble President for constitution of a Full (Special Bench. Now the earlier orders of the Tribunal only having been followed in accordance with the said fundamental principle of law and jurisprudence, reference for larger Bench does not arise. Hence, this is not referred to the Hon'ble President for such constitution.
20. A well settled position should not be disturbed when there are catena of decisions by various High Courts and Tribunal. To this proposition our view is fortified by the decision of the apex Court in the case of CIT v. Balakrishna Malkotra (1971) 81 ITR 759 (SC) wherein their Lordships observed as under :
"affirming the decision of the High Court, that, since the decision of the Madras High Court had been rendered as long back as 1953, and no other High Court had taken a contrary view, and the Revenue must have in all the years thereafter acted on the basis of that decision, and the Courts could not ignore the harm that was likely to be caused by unsettling the law, and the corresponding scheme in the 1961 Act was materially different, the Supreme Court was not justified in departing from the interpretation placed by the Madras High Court in Viswanathan Chettiar's case though a different view of the law might be reasonably possible."
Here in this case various case laws cited supra are only supporting the case of the assessee. Thus, the well settled position and well settled case laws should not be disturbed.
21. We, therefore, direct the AO to allow the claim of the assessee by treating the expenditure incurred towards replacement of machineries as revenue in nature. We order accordingly.
22. Now let us turn to the second common issue relating to computations relief under Section 80HHC of the IT Act, 1961. Briefly stated the facts of the case are that while framing the assessment under Section 143(3) of the IT Act, 1961, for the asst. yrs. 1996-97 and 1997-98, the AO excluded 90 per cent of other incomes, details of which are listed below :
Income from business while arriving at the adjusted business profit for the purpose of computation of relief under Section 80HHC of the Act :
Asst. yr.
1996-97 1997-98 Yarn conversion charges 30,476 3,82,19,441 Miscellaneous income lifee gunny bag sales, scrap sales, etc. 11,46,809 5,96,856 Insurance claim 2,87,550 12,40,902 Premium on hank yarn obligation 2,80,674 The AO made the above disallowance as according to him the assessee has other incomes which are to be excluded while arriving at the adjusted business profit as per Explanation (baa) of Sub-section (4B) of Section 80HHC of the IT Act, 1961. Aggrieved by these disallowance for both the years, the assessee moved the matter in appeal before the first appellate authority, who also confirmed the order of the AO in deducting 90 per cent of other incomes listed above for the reason that none of the items has anything to do with the export. The assessee is aggrieved and in second appeal before the Tribunal on this issue, with the following ground of appeal : "The CIT(A) erred in confirming the exclusion of conversion charges, miscellaneous income, insurance claim, handling charges, interest income as not forming part of business profits in the computation of relief under Section 80HHC "
23. At the time of hearing the learned counsel for the assessee apart from relying on the grounds of appeal raised before us, contended, to say in brief, that : It is submitted that it is not proper to deduct 90 per cent of the above receipts as a deduction to arrive at adjusted business profit under Section 80HHC since the statute has not specifically referred to items of the nature as stated above. Further, under similar circumstances the Bombay High Court held that even 90 per cent of interest income under certain circumstances cannot be deducted to arrive at adjusted business profits. In this connection the decision of the Bombay High Court in the case of CIT v. Punit Commercial Ltd. (2000) 245 ITR 550 (Bom) is relied upon. Even otherwise, the words used in Section 80HHC(4B), Expln. (baa), refers only to "Receipts by way of brokerage, commission, interest, rent charges or any other receipts of a similar nature". The items deducted at 90 per cent in this case are not items of similar nature to interest, etc. Hence, deducting 90 per cent of the above items are not proper.
24. On the other hand, the learned Departmental Representative strongly supported the orders of the Revenue authorities. He contended that these receipts, viz. yarn conversion charges, miscellaneous income like gunny bag sales, insurance claim and premium on hank yarn obligation are all not derived from the export business of the assessee. These are all items of incomes and hence the Revenue authorities were correct in deducting 90 per cent of such incomes while computing deduction under Section 80HHC in arriving at the adjusted business profits He relied on the following case laws :
(i) CIT v. Eastern Seafoods Exports (P) Ltd. (1995) 215 ITR 64 (Mad);
(ii) CIT v. Pandian Chemicals Ltd. (1998) 233 ITR 497 (Mad);
(iii) CIT v. Sterling Foods (1999) 237 ITR 579 (SC), and
(iv) CIT v. Rane (Madras) Ltd. (1999) 238 ITR 377 (Mad) The learned Departmental Representative further contended that in the case laws relied upon by the learned authorised representative for the assessee, the above decisions were not considered.
25. We have heard rival submissions and considered the facts and materials available on record including that of the decisions relied upon by both the parties. After a careful consideration of the same, we are of the opinion that the Expln. (baa) of Sub-section (4B) of Section 80HHC speaks of only "Profits of business" as computed under the head "Profits and gains of business or profession" and not profits derived from export. Further, the items of receipts such as miscellaneous incomes like gunny bag sales, scrap sales, insurance claim, premium on hank yarn obligation, etc. do not have even a semblance of the items mentioned in Expln. (baa) viz., brokerage, commission, interest, rent, charges or any other receipts of similar nature. The purpose of Expln. (baa) is only to exclude certain items mentioned therein while arriving at the "profits of the business" and not the profits derived from the export. There is force in the contention of the learned counsel that the case laws relied upon by the learned Departmental Representative are not relevant or applicable to the facts of the case on hand as we are not arriving at the income derived from export as contended by the learned Departmental Representative but only arriving at the profits of the business. Hence, we are of the opinion that the Revenue authorities have committed a mistake in removing these items of income from the profits of the business while computing deduction under Section 80HHC of the Act. Hence, we direct the AO not to exclude the above items as not forming part of business profits in computing relief under Section 80HHC of the Act.
25.1. Now corning to yarn conversion charges amounting to Rs. 30,476 and Rs. 3,82,19,441 respectively, in our considered opinion the same would fall under the term "charges" appearing in Expln. (baa)(1) to Section 80HHC(4B) of the IT Act. In this connection the Madras Bench of the Tribunal in ITA No. 736/Mds/1999 for asst. yr. 1994-95 in the case of Sethu Leathers v. Asst. CIT (order dt. 23rd March, 2001) has already held that the job receipts towards work done for other parties are to be excluded while arriving at the profits of the business in computing the deduction under Section 80HHC of the Act. In our considered opinion yarn conversion charges are nothing but job work receipts received by the assessee and hence following our earlier decision cited supra, we are inclined to uphold the orders of the Revenue authorities in excluding 90 per cent of this ]ob receipts "yarn conversion charges" from the profits of the business while computing deduction under Section 80HHC of the Act. Thus, the above ground is partly decided in favour of the assessee.
26. The 3rd common ground of appeal reads as under :
"The CIT(A) erred in holding that sales-tax, excise duty collections, etc. form part of total turnover for purposes of computing relief under Section 80HHC." We have heard rival submissions and considered the facts and materials on record. In our considered opinion the point at issue is now squarely governed by the only decision of the Bombay High Court in the case of CIT v. Sudarshan Chemicals Industries Ltd. (2000) 245 ITR 769 (Bom) wherein it has been held as follows :
"The turnover should be restricted to such receipts which have an element of profit in it. It is only the actual sale price which is relevant. Anything charged by the assessee by way of excise duty and sales-tax cannot be taken into account as they do not have any element of profit. Even, according to accounting principles, such levies do not form part of the P&L a/c. In fact, they are shown as liability in the balance-sheet. In the circumstances the above cannot be included in the total turnover. Section 80HHC is a separate code by itself. Hence, the general definition of the word 'turnover' or the case law dealing with the said definition under the ST Act which is a State levy, cannot be imported into Section 80HHG of the Act."
Respectfully following the only available decision of the High Court, we are inclined to decide the issue in favour of the assessee by directing the AO not to include sales-tax and excise duty collections as forming part of total turnover while computing the relief under Section 80HHC of the Act. Thus, this ground of appeal of the assessee is allowed.
27. The 4th common issue for our consideration is relating to the disallowance of Rs. 45,000 towards Holiday Home at Coonoor. Briefly stated the facts of the case are that a sum of Rs. 45,000 has been disallowed for both the years under appeal in respect of rent paid in term of provisions of Section 40A(2)(b) on the basis that the disallowance has been confirmed in the earlier year by the CIT(A) for asst. yr. 1991-92. The assessee-company paid rent to Holiday Home at Coonoor which belongs to a relative of the chairman of the assessee-company. Similar disallowance was made for asst. yr. 1991-92 and confirmed by the CIT(A) against which appeal has been filed before the Tribunal on 2nd March, 1995. Following the earlier order of 1991-92, for these two assessment years similar disallowance has been made by the AO and confirmed by the CIT(A) and hence the assessee is in appeal before us with the following ground of appeal :
"CIT(A) erred in confirming the disallowance of Rs. 45,000 towards Holiday Home at Coonoor purely based on order of the CIT(A) for earlier years The CIT(A) for earlier year. The CIT(A) ought to have accepted the claim that the expenditure is incurred for purpose of business of the assessee."
28. At the time of hearing, the learned counsel for the assessee, apart from relying upon the ground of appeal as extracted above, contended, to say in brief that : It is submitted that the disallowance made is without proper appreciation of less than the market rent paid by the assessee to the close relation and no attempt was made to ascertain the market value as set out in Section 40A(2)(b) of the Act. While the rent paid is the same as in asst. yr. 1991-92, the disallownace is the same without considering the escalation in rental value of similarly situated building at Coonoor.
It is further submitted that what was excessive rent for the year 1991-92, need not be the excessive rent for the assessment years under consideration. On the other hand, the learned Departmental Representative relied on the orders of the authorities below and urged us no interference is called for at this stage.
29. We have heard rival submissions and considered the materials on hand. It is evident from the copy of the order of the first appellate authority for the asst. yr. 1991-92, which forms part of the paper book at pp. 32 to 37, that during that year the assessee paid an amount of Rs. 90,000 as rent for nine months and amenity charges for the Holiday Home taken on lease by the assessee-company. The property belonged to the wives of the chairman of the assessee-
company. In that year the AO was of the view that the rent paid was excessive and hence he disallowed 50 per cent of the same by invoking the provisions of Section 40A(2)(b) of the IT Act, 1961. The learned first appellate authority restricted the addition in a sum of Rs. 33,750 as against Rs. 45,000 made by the AO. Similar amount of Rs. 45,000 has been disallowed in these two assessment years under consideration also. Even though the rent paid in these two assessment years were Rs. 1,30,000 each, there is force in the contention of the learned counsel for the assessee that what was excessive during the asst. yr. 1991-92, viz., Rs. 45,000 need not be excessive for the asst. yrs. 1996-97 and 1997-98 in like amounts. There is also force in the contention of the learned counsel for the assessee that the AO without considering the escalation in rental value of similarly situated building at Coonoor made the disallowance. Hence, we are inclined to set aside this matter to the file of the AO with a direction to consider the rental value of similarly situated building at Coonoor at relevant time and decide the issue according to law, after giving adequate opportunity of being heard to the assessee. This ground of appeal is accordingly allowed for statistical purposes only.
30. Now let us turn to the exclusive and independent issue relating to the asst. yr. 1996-97. For the asst. yr. 1996-97, the assessee claimed a sum of Rs. 1,02,16,229 as revenue expenditure under the head "modernisation expenses". The AO was of the view that the items of expenditure recorded under the head "modernisation" aggregating to Rs. 1,02,16,229 was capital expenditure and thus negatived the claim of the assessee. Being aggrieved the assessee carried the matter in appeal before the first appellate authority. The learned CIT(A) was of the opinion that the expenditure listed are to be allowed as on revenue account excepting to the extent of Rs. 8,36,302 being the cost of yarn cleaner bases on a report from SITRA. Aggrieved, the assessee is in second appeal before this Tribunal.
31. The ground of appeal raised by the assessee reads as under ;
"The CIT(A) having accepted that claim towards repairs is on revenue account is not justified in singling out the expenditure incurred in the sum of Rs. 8,36,302 spent on yam cleaners as not eligible for deduction under the head "Repairs". The CIT(A) erred in holding that these are independent machines in any event, even, if these are independent items, these are to be allowed as on revenue account as per the decisions of Courts of law."
At the time of hearing the learned counsel for the assessee contended that even according to the report of SITRA, the item in question is only an attachment for carding machine and hence is to be allowed as a revenue expenditure, though not as replacement expenditure. Yarn cleaner is not an independent machinery and is a fixture to an existing carding machine for purposes of clearning the yarn in production. In view of this the learned counsel for the assessee submitted that the item in question is to be allowed as a revenue expenditure especially considering the decision of Kerala High Court in CIT v. Steel Complex Ltd (supra). On the other hand, the learned Departmental Representative vehemently supported the orders of the Revenue authorities and contended that there is no necessity for the Tribunal to interfere with the same.
32. We have heard rival submissions and considered the facts and materials on hand including the case law relied upon by the learned counsel for the assessee. We have also gone through the copy of the certificate, dt. 6th Dec., 1999, issued by SITRA. In that certificate it has been mentioned that :
"............SKG Mill, we are of the opinion that most of the works reportedly carried out by these mills during 1st April, 1995, to 31st March, 1996, are towards repairs and maintenance of machinery and replacement of shore items excepting electronic yarn clearers for cone winding and apron doffing devices and 'C' cleaner attachments for carding which are attachments to the existing machinery mainly for enhancement of yam quality."
Thus, it can be seen from the above that as rightly contended by the learned counsel for the assessee that yam clearer is not an independent machinery and is only an attachment to the existing machinery. The Hon'ble Kerala High Court in the case of CIT v. Steel Complex Ltd. (supra) has held as under :
"The assessee-company engaged in manufacture of steel, claimed expenditure incurred on installation of water treatment plant and fume extraction plant as revenue expenditure. The AO disallowed the claim for deduction on the ground that the expenditure was capital in nature. The first appellate authority affirmed the order of the AO. On further appeal, the Tribunal found that the assessee installed two plants, that they were for the purposes of improvement in the operation of the existing systems with greater efficiency and profitably, that originally the municipality was supplying water to the assessee for running the factory, that since it was found that the municipality was not supplying sufficient quantity of water, the assessee dug wells, but the well water was found to be salty, that, therefore, they installed the water treatment plant for getting pure water with an intention to improve the functioning of the factory, that this did not in anyway enhance the production of steel, that the fume extraction plant also did not lead to any increase in the volume of production and it was also installed to ward off the health hazards and in compliance with statutory requirements and that, therefore, the expenditure incurred was revenue in nature. On a reference :
Held, affirming the decision of the Tribunal, that the expenditure incurred for the water treatment plant and the fume extraction plant was revenue expenditure and hence an allowable deduction."
In the case on hand also, on going through the copy of the certificate issued by SITRA, it transpires that the yarn clearers are attached to cone winding and apron doffing devices and they are only attachments for carding section to the existing machinery and they are mainly for enhancement of yarn quality. On the installation of yarn clearers volume of production is not increasing but it wards off health hazards of the workers Considering the facts and materials of the case on hand, we find that the same are in line with the facts and materials found in the case Steel Complex Ltd., cited supra. Hence, respectfully following the decision of the Kerala High Court, we are inclined to direct the AO to allow Rs. 8,35,302 being the cost of yarn clearer as revenue expenditure. Thus, this ground of appeal is decided in favour of the assessee.
33. In the result, both the appeals preferred by the assessee are partly allowed.