Income Tax Appellate Tribunal - Chennai
M/S. Super Spinning Mills Ltd., ... vs Dcit, Coimbatore on 28 March, 2018
आयकर अपील य अ धकरण ,'सी' यायपीठ,चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH, CHENNAI
ी एन.आर.एस. गणेशन, या यक सद य एवं ी एस जयरामन, लेखा सद य केसम#
BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND
SHRI S. JAYARAMAN, ACCOUNTANT MEMBER
आयकर अपील सं/.I.T.A. No. 3199/Chny/2016
नधारण वष/Assessment Year : 2000-01
M/s. Super Spinning Mills Ltd., Deputy Commissioner of Income Tax,
Elgi Towers PB 7113, Green Fields, Vs. Company Circle 1(2),
Puliyakulam Road, Coimbatore.
Coimbatore.
[PAN: AADCS 0672G]
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ%क&ओरसे/Appellant by : Shri. S. Sridhar, Advocate
)*यथ%क&ओरसे/Respondent by : Shri. N. Madhavan, Addl. CIT
सुनवाईक&तार ख/Date of Hearing : 01.01.2018
घोषणाक&तार ख/Date of Pronouncement : 28.03.2018
आदे श/ O R D E R
PER S. JAYARAMAN, ACCOUNTANT MEMBER:
The assessee filed this appeal against the order of the Commissioner of Income Tax (Appeals)-1, Coimbatore in ITA No. 391/10-11 dated 31.08.2016 for assessment year 2000-01 :-2-: ITA No. 3199/Chny/2016
2. M/s. Super Spinning Mills Ltd., the assessee, is a public limited company engaged in the business of manufacture of cotton yarn and allied products.
While completing the assessment u/s 143(3) r.w.s 147 dated 11/03/2004 for the assessment year 200-01 , the Assessing officer disallowed Rs.5,32,27,669 debited as replacement of machineries as capital in nature & Rs.2,84,51,521 being VRS compensation paid to employees. The assessee went on appeal before the Commissioner of Income Tax(Appeals). The Commissioner of Income tax (Appeals) vide order dated 30/ 11 /2004 partly allowed the appeal ie the CIT(A) allowed the following claim as replacement of machinery:
Schlafhorst Autoconers - Model 338 4,02,11,641
Elgi Jacobi Overhead Travelling Cleaners 13,93,418
Aircooled Fluid Coolers 10,60,505
Total 4,26,65,564
and allowed the expenditure incurred on VRS payments.
2.1 Against the above order of Commissioner of Income Tax (A) , the department went on appeal before the Honorable ITAT. The Honorable tribunal vide order dated 18/05/2006 dismissed both the issues and upheld the order of the Commissioner of Income Tax (Appeals). In respect to the matter of the appeal taken up for the remaining machinery by the assessee, the Honorable ITAT vide order dated 02/07/2008 has remitted the issue back to the CIT(A) to decide the issue. The Income tax Department went on appeal :-3-: ITA No. 3199/Chny/2016 against the order of the Honorable ITAT to the Honorable Madras High court, which by the order dated 23/11/2006 in TCA no 2627 of 2006 dismissed the appeal of the Department holding that no substantial question of law arises for consideration. The department went on appeal against that order to the Supreme Court and the Honorable Apex court vide order dated 10/10/2011 has disposed the appeal in the following manner:
a) "Learned Counsel for the department does not press the issue relating to VRS
b) On the other issue, this matter is squarely covered by the judgements of this court in the cases ofCIT vsSaravana spinning mills Pvt ltd (2007) 293 ITR 201 and CIT vsRamaraju Surgical cotton mills, reported in (2007) 294 ITR 328.
Accordingly the civil appeals filed by the department is disposed of in terms of the judgements of this Court to the extent indicated above."
2.2. Subsequently in the assessee's own case, the Honourable Madras High court by a common order in TCA no 140 to 143 of 2013 and 489 to 491 and 319 of 2013 on 24/07/13 set aside the order of the ITAT and remitted the matter back to the CIT(A) for denovo consideration and observed that:
a) That the order of the CIT(A) as well as that of the ITAT has summary of case law alone and admittedly, there is no discussion on the facts as to the impact of such expenditure on the profit earning capacity or mechanism of the assessee.
b) Keeping in view the law declared by the Apex court in the case of CIT vsRamaraju surgical cotton mills reported in (2007) 294 ITR 328 and in the case of CIT vs Sri Mangayakarasi Mills P ltd(315 ITR 114), the CIT(A) shall grant an opportunity to the assessee to state its case in a proper perspective and decide on the issue as to whether the expenditure, in effect, could be treated as 'revenue expenditure'.
c) Directed the CIT(A) to pass a detailed order on the impact of the replaced material as well as the functioning of the machinery after hearing the assessee in detail.
:-4-: ITA No. 3199/Chny/2016 Thereafter, the CIT(A) examined the issues and dismissed the assessee's appeal in ITA no 243/09-10 dated 31/08/16 against which the assessee filed this appeal.
3. The AR submitted that the CIT(A) erred in not allowing its claim regarding the expenditure incurred on Schlafhorst Autoconers - Model 338, Elgi Jacobi Overhead Travelling Cleaners, Aircooled Fluid Coolers as revenue expenditure, on the ground that the replacement of machinery resulted in enduring benefit, though it was demonstratively explained that there is no enduring benefit due to the expenditure incurred on this machinery. The CIT(A) erred in not considering in the relevant year, the addition of Schlafhorst Autoconers - Model 338, Elgi Jacobi Overhead Travelling Cleaners, Aircooled Fluid Coolers made by it were necessitated in each case by business needs such as meeting quality parameters etc., which are for the survival of the business, are of revenue in nature. The CIT(A) has erred in not drawing a distinction between enduring benefit in the capital field and enduring benefit in the revenue field, and that an expenditure, if results in enduring benefit in the revenue field, constitute revenue expenditure etc .
4. Per contra, the DR submitted that the assessee has purchased the above machinery and shown it as capital expenditure in the Balance Sheet.
However, they have claimed it as revenue expenditure for tax purpose for the :-5-: ITA No. 3199/Chny/2016 reason that they were replacement of machinery. Before the CIT(A), the assessee furnished the following details of the equipments replaced during the year and pleaded that the above replacements did not increase either the spindleage capacity or production capacity of the assessee etc. The CIT(A) after examining the assessee's claim with reference to the ratios laid by the Supreme Court in various cases held, inter alia, that a perusal of the above machines indicate that they perform vital and important in the textile machinery chain:
i) improving the quality of yam ie Strength and smoothness
ii) the yam produced from the new machines gives better price in the market
iii) Reducing the power consumption.
iv) Reducing the manpower requirement for running the plant
v) Improved profitability and efficiency of the plant.
All the above items indicate that the assessee has derived enduring benefit from the purchase of new machinery. Thereafter, he applied the ratio of the Apex court in the case of Sri Mangayarkarasi (P) Ltd, and held that the assessee has derived enduring benefit for all the items mentioned above. And held that Rs. Rs.5,32,27,669/- incurred on account of replacement of machinery mentioned above will be treated as capital expenditure. Thus, the DR submitted that the order of the CIT(A) may be upheld.
:-6-: ITA No. 3199/Chny/2016 5. We heard the rival submissions. The fact is that the assessee has
purchased the impugned machinery and shown them as capital expenditure in its books . However, for the tax purposes, the assessee claimed that they were replaced and hence the expenditure should be treated as revenue expenditure. The CIT(A) following the ratios of the Supreme Court held that each machine in a textile mill has to be separately and independently as such and not as a mere part of entire composite machinery of the spinning mill.
For each of these processes, there is different unit of machinery. A perusal of the functions discharged by the new machines indicate that with the technological advances the assessee has enduring benefit and new machines brought into existences have more efficiency and the quality of the yarn produced is the best. The expenditure was incurred to create a new asset which is capital expenditure. The advantage is in a commercial sense in the capital field. The expenditure resulted in acquisition of a capital asset with an enduring benefit. The expenditure is also incurred in the field of fixed capital which is on capital account. He held that the assessee has brought into existence a new asset and has obtained a new advantage. The CIT(A) has also applied the ratio of the Hon'ble Supreme Court in the case of CIT vs Shri Mangyarkarasi Mills (P) Ltd., (2009) 315 ITR 114 (SC). The relevant portion of the order is extracted as under:
""3. The relevant facts as arising from the case made out by the parties, leading to the filing of this appeal, and which will help us in understanding the controversy involved, can be summarized as under:
The respondent in this appeal is engaged in the manufacture and sale of cotton yarn. During the asst. yr. 1995-96 the assessee claimed an amount of :-7-: ITA No. 3199/Chny/2016 Rs. 61,28,150, being expenditure incurred on replacement of machinery, as revenue expenditure. The assessee believed that such expenditure was merely expenditure on replacement of spare parts in the spinning mill system and, therefore, amounted to revenue expenditure.
4. The AO did not, however, accept this view of the assessee because, according to him, each machine in a spinning mill does a different function and the product from one machine is taken and manually fed into another machine and the output is taken, all the machines are, thus, not integrally connected. Based on this reasoning, the AO disallowed the above claim of the assessee and held the said expenditure to be of a capital nature. The AO, in passing this order dt. 31st Dec., 1997, followed the decision of the Income-
tax Appellate Tribunal (Tribunal) Madras "C" Bench in the case of Nagammal Mills Ltd. vs. Dy. CIT, dt. 31st Oct., 1997 (rendered in ITA No. 2774/Mad/1993/1990-91) and also the decision of this Court in Ballimal Naval Kishore vs. CIT (1997) 138 CTR (SC) 284 : (1997) 224 ITR 414 (SC) in which it was held that any capital expenditure claimed by the assessee for acquiring plant and machinery, buildings, fixed assets, etc., cannot be treated as repairs or renewals, and, therefore, it cannot be held as revenue expenditure in the year of acquisition of such fixed assets. The AO further held that the assessee had treated the said expenditure as capital expenditure by capitalizing the assets in the books of account and had, thus, shown profit in its P&L a/c to third parties, like bankers, financial institutions, creditors, shareholders, etc. However, from the tax point of view, the respondent wanted to reduce the net profit and the total taxable income by claiming such huge expenditure in the statement of total income computation for acquisition of fixed assets, as revenue expenditure. Therefore, he disallowed such expenditure of the assessee to be covered under s. 31 of the Act or as revenue expenditure under s. 37 of the Act. The AO further held that the assessee could claim depreciation on the said assets as per the IT Rules.
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8. ................................................................................................
9. The main question that needs to be decided in this appeal may be formulated as follows:
"Whether expenditure incur-red on replacement of machinery, in the facts and circumstances of this case, amounts to 'revenue expenditure' deductible under s. 37 of the Act or 'current repairs' deductible under s. 31 of the Act."
10.......................................................................................................................................... .....................11..................................................................................................................... ..........................................12................................................................................................ ...............................................................13........................................................................... .......
14. The first issue that needs to be resolved is whether each machine in a textile mill is an independent item or merely a part of a complete spinning mill, which only together are capable of manufacture, and there is no intermediate marketable product produced. In our view, this issue has been satisfactorily answered by the recent decision of this Court in CIT vs. Saravana Spinning Mills (P) Ltd. (2007) 211 CTR (SC) 281 : (2007) 7 SCC
298. In that case this Court has held unambiguously that "each machine in a segment of a textile mill has an independent role to play in the mill and the output of each division is different from the other". Dealing with a ring frame in a textile mill, this Court has held that it is an "independent and separate"
machine. Further, it is accepted that each machine in a textile mill is part of the integrated process of manufacture of yarn and is integrally connected to :-8-: ITA No. 3199/Chny/2016 the other machines in the mill for production of the final product. However, this interconnection does not take away the independent identity and distinct function of each machine. Thus, each machine in a textile mill should be treated independently as such and not as a mere part of an entire composite machinery of the spinning mill. As stated above, it can at best be considered part of an integrated manufacture process employed in a textile mill.
15. Moving on to the issue of 'current repairs' under s. 31 of the Act, the decision of this Court in CIT vs. Saravana Spinning Mills (P) Ltd. is again relevant. This Court has laid down that in order to determine whether a particular expenditure amounts to 'current repairs' the test is "whether the expenditure is incurred to 'preserve and maintain' an already existing asset and not to bring a new asset into existence or to obtain a new advantage. For 'current repairs' determination, whether expenditure is revenue or capital is not the proper test". It is our opinion that the entire textile mill machinery cannot be regarded as a single asset, replacement of parts of which can be considered to be for 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 such an old machine with a new one would constitute the bringing into existence of a new asset in place of the old one and not repair of the old and existing machine. Also, a new asset in a textile mill is not only for temporary use. Rather it gives the purchaser an enduring benefit of better and more efficient production over a period of time. Thus, replacement of assets as in the instant case cannot amount to 'current repairs'. The decision in Saravana Spinning Mills (P) Ltd. case clearly mentions that replacement of a derelict ring frame by a new one does not amount to 'current repairs'. Further in Ballimal Naval Kishore this Court has held that a new asset or new/different advantage cannot amount to 'current repairs', which has been subsequently approved in the Saravana Spinning Mills (P) Ltd. case. For these reasons, the expenditure made by the assessee cannot be allowed as a deduction under s. 31 of the Act. The judgment of this Court in the Saravana Spinning Mills (P) Ltd. case mentions two exceptions in which replacement could amount to current repairs, namely:
"- Where old parts are not available in the market (as seen in the case of CIT vs. Mahalakshmi Textile Mills Ltd. AIR 1968 SC 101, or
- Where old parts have worked for 50-60 years."
In the instant case, the assessee has not claimed any of the above stated exceptions. The Saravana Spinning Mills (P) Ltd. case also restricts the scope of 'current repairs' to repairs made to machinery, plant and/or furniture. In this case, replacement of machine can at best amount to a repair made to the process of manufacture of yarn. Further this Court has also observed in Saravana Spinning Mills (P) Ltd. case that if replacement was held to be 'current repair' in such cases, s. 31(i) will be completely redundant and absurdity will creep in because repair implies existence of a part of the machine which has malfunctioned, which is impossible in the case of such replacement. Thus, this replacement expenditure cannot be said to be 'current repairs' after the decision in the Saravana Spinning Mills (P) Ltd. case.
16. Given that s. 31 of the Act is not applicable to the said expenditure of the assessee, the next issue is whether it can be considered 'revenue expenditure' of the nature envisaged under s. 37 of the Act. The Saravana Spinning Mills (P) Ltd. case holds that expenditure is deductible under s. 37 only if it (a) is not deductible under ss. 30-36, (b) is of a revenue nature, (c) is incurred during the current accounting year and (d) is incurred wholly and exclusively for the purpose of the business. We are satisfied that the assessees' expenditure satisfies requirements (a), (c) and (d) as stated above. The :-9-: ITA No. 3199/Chny/2016 dispute is with respect to the nature of expenditure, that is, whether it is revenue or capital in nature.
17. We are of the opinion that the expenditure of the assessee in this case is capital in nature and there is sufficient judicial precedent to support this view. In the case of Travancore Cochin Chemicals Ltd. vs. CIT 1977 CTR (SC) 148 :
(1997)(sic-1977) 2 SCC 20 this Court held that expenditure is of a capital nature when it amounts to an enduring advantage for the business and repair is different from bringing a new asset for the business. Further, in Lakshmiji Sugar Mills (P) Co. vs. CIT AIR 1972 SC 159 it has been held by this Court that bringing into existence a new asset or an enduring benefit for the assessee amounts to capital expenditure. We have already explained why replacement, in this case, amounts to bringing into existence a new asset, and also an enduring benefit for the assessee. It is clear then that expenditure of the assessee here is not of a revenue nature and thus, cannot be claimed as a deduction under s. 37 of the Act.
18. As far as reliance on the High Court decision in Janakiram Mills Ltd. case is concerned, the Saravana Spinning Mills (P) Ltd. case has clearly set aside the said judgment of the Madras High Court by its finding on the scope of 'current repairs' under s. 31 of the Act. In CIT vs. Ramaraju Surgical Cotton Mills (2007) 212 CTR (SC) 345 : MANU/SC/8156/2007, where this Court decided on the validity of the Madras High Court judgment in Janakiram Mills Ltd., this Court clarified that this High Court judgment has been set aside in the Saravana Spinning Mills (P) Ltd. case mainly on the ground that s. 31 and s. 37 of the Act, operate in different spheres and the tests applicable to s. 31 cannot be read into s. 37 of the Act. Further, even in the Ramaraju Surgical Cotton Mills case, where this Court distinguished the Saravana Spinning Mills (P) Ltd. case on the ground that that appeal was with respect to deduction only under s. 37 of the Act unlike the Saravana Spinning Mills (P) Ltd. case, this Court set aside the High Court judgment in Janakiram Mills Ltd. case and remitted the matter to the CIT(A) to dispose of the matter in accordance with law. In the light of the observations made hereinabove, it is thus clear that the High Court decision in Janakiram Mills Ltd. case is not good law on which reliance may be placed.
19. Consideration of the definition of 'assets' and 'block of assets' and the concept of depreciation under the Act is not required to be decided upon whether the expenditure incurred by the assessee is a deductible expenditure or not. Hence we are not inclined to discuss the same.
20. It is clear on record that the assessee has sought to treat the said expenditure differently for the purposes of computing its profit and for the purpose of payment of income-tax. The said expenditure has been treated as an addition to the existing assets in the former and as revenue expenditure in the latter. Though accounting practices may not be the best guide in determining the nature of expenditure, in this case they are indicative of what the assessee itself thought of the expenditure it made on replacement of machinery and that the claim for deduction under the Act was made merely to diminish the tax burden, and not under the belief that it was actually revenue expenditure.
21. For the reasons aforesaid, we set aside the impugned judgment of the High Court, thereby restoring the judgment of the AO disallowing the claim of deduction of the respondent."
From the above, it is clear that the facts and circumstances of this case exactly fits into the above case, viz., assessee's treatment in its books of :-10-: ITA No. 3199/Chny/2016 account, its claim of replacement as revenue expenditure . The Hon'ble SC has clearly held that replacement of an old machine with a new one would constitute the bringing into existence of a new asset in place of the old one and not repair of the old and existing machine. Also, a new asset in a textile mill is not only for temporary use. Rather it gives the purchaser an enduring benefit of better and more efficient production over a period of time. Hence, we do not find any reason to interfere with the order of the CIT(A). The assessee's appeal is dismissed.
6. In the result, the assessee's appeal is dismissed.
Order pronounced on Wednesday, the 28th day of March, 2018 at Chennai.
Sd/- Sd/-
(एन.आर.एस .गणेशन) (एस जयरामन)
(N.R.S. GANESAN) (S. JAYARAMAN)
!या यकसद"य/Judicial Member लेखासद"य/Accountant Member
चे नई/Chennai,
0दनांक/Dated: 28th March, 2018
JPV
आदे शक&) त1ल2पअ3े2षत/Copy to:
1. अपीलाथ%/Appellant 2. )*यथ%/Respondent 3. आयकरआय4
ु त) अपील(/CIT(A)
4. आयकरआय4
ु त/CIT 5. 2वभागीय) त न ध/DR 6. गाड7फाईल/GF