Madras High Court
Commissioner Of Income Tax vs M/S. Fenner (India) Ltd on 11 February, 2022
Author: R. Mahadevan
Bench: R. Mahadevan, J.Sathya Narayana Prasad
T.C.A.Nos.38, 39, 47 and 48 of 2022
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 11.02.2022
CORAM :
THE HONOURABLE MR. JUSTICE R. MAHADEVAN
AND
THE HONOURABLE MR. JUSTICE J.SATHYA NARAYANA PRASAD
T.C.A.Nos.38, 39, 47 and 48 of 2022
and
C.M.P.Nos.1033, 1166 and 1161 of 2007
Commissioner of Income Tax,
Madurai. ... Appellant in all TCAs
Versus
M/s. Fenner (India) Ltd.,
3 Madurai Melakkal Road,
Kochadai, Madurai 625 016. ... Respondent in all TCAs
Tax Case Appeals filed under Section 260A of the Income Tax Act,
1961, against the order of the Income Tax Appellate Tribunal, Chennai, “C”
Bench, dated 31.07.2006 in I.TA.Nos.2636, 2637, 2638 & 2639/Mds/2004.
For Appellant : Mr.M.Swaminathan,
Senior Standing Counsel
M/s.V.Pushpa
Junior Standing Counsel in all TCAs
For Respondent : Mr.R.Venkata Narayanan
for M/s Subbaraya Aiyar in all TCAs
1/14
https://www.mhc.tn.gov.in/judis
T.C.A.Nos.38, 39, 47 and 48 of 2022
COMMON JUDGMENT
(Judgment of the Court was delivered by R. MAHADEVAN, J.) These tax case appeals have been filed by the appellant / Revenue, challenging the order dated 31.07.2006 passed by the Income Tax Appellate Tribunal, Bench 'C', Chennai, in I.TA.Nos.2636, 2637, 2638 & 2639/Mds/2004, relating to the respective assessment years 1997-98, 1998-99, 1999-2000 and 2000-01, by raising the following substantial questions of law:-
(i) 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?
(ii) Whether in the facts and circumstances of the case, replacement of independent complete machinery can be treated as revenue expenditure?
(iii) Whether in the facts and circumstances of the Tribunal was right in deciding the issue without going into the concept of Block of asset?
(iv) 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?2/14
https://www.mhc.tn.gov.in/judis T.C.A.Nos.38, 39, 47 and 48 of 2022
(v) Whether in the facts and circumstances of the case, the Tribunal was right in holding that the expenditure on payment of voluntary retirement scheme has not resulted in creation of any enduring benefit to the assessee?
2.Insofar as the substantial question of law Nos.1 to 3 are concerned, it is brought to the notice of this Court by the learned counsel for the appellant that a Co-ordinate Bench of this court by judgment dated 09.01.2014 in T.C.A. Nos. 173 & 174 of 2009, decided this issue against the Revenue. The relevant passage of the said judgment can profitably be extracted below:
"30. As far as this issue is concerned, learned counsel appearing for the assessee placed reliance on the decision of this Court reported in (2013) 357 ITR 720 (Mad) in the case of Super Spinning Mills Ltd., Vs. Assistant Commissioner of Income-tax related to the expenditure on replacement of the machinery parts. The assessee therein engaged in the business of manufacture and trading in cotton yarn and allied products and the assessee incurred expenditure in respect of replacement of certain textile machinery. On a question as to whether such replacement of parts would be current repairs of capital in nature, this Court considered the decisions in the case of CIT Vs. Saravana Spinning Mills P; Ltd., reported in (2007) 293 ITR 201 (SC), CIT Vs. Ramaraju Surgical Cotton Mills reported in (2007) 294 ITR 328 (SC) and CIT Vs. Mangayarkarasi Mills P.Ltd., reported in (2009) 315 ITR 114 (SC) and pointed out that the question as to whether the expenditure incurred on replacement of machinery is revenue or capital rests on the nature of capital incurred vis-a-vis the benefit derived. This Court referred to the decision in the case of CIT Vs. Saravana Spinning Mills P.Ltd., reported in (2007) 293 ITR 201 (SC) and in particular to the decision in the case of CIT Vs. Sri 3/14 https://www.mhc.tn.gov.in/judis T.C.A.Nos.38, 39, 47 and 48 of 2022 Mangayarkarasi Mills P.Ltd., reported in (2009) 315 ITR 114 (SC) and pointed out as under:-
"10. The question as to whether the expenditure incurred on replacement of machinery is revenue or capital expenditure, particularly in the nature of replacements of parts, thus rests on the nature of expenditure incurred, vis-a-vis the benefit that the assessee derives. The ratio deductible from the decisions referred to above are:
(i) To decide the applicability of Section 31(i), the test is not whether the expenditure is revenue or capital in nature, but whether the expenditure is "current repairs".
The basic test is to find out whether expenditure is incurred to "preserve and maintain" an already existing asset and the expenditure must not be to bring a new asset into existence or to obtain a new advantage vide [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.)
(ii) Under Section 31(i), the deduction admissible is only for current repairs. Therefore, the question as to whether the expenditure incurred by the assessee conceptually is revenue or capital in nature is not relevant for deciding the question whether such expenditure comes within the etymological meaning of the expression "current repairs". In other words, even if the expenditure is revenue in nature, it may not fall in the connotation of "current repairs" – [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.)
(iii) A new asset or new/different advantage cannot amount to `current repairs'. - 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited)
(iv) Repair implies existence of a part of the machine which has malfunctioned, thereby requiring repair to that machinery, plant etc. Replacement cannot be a current repair, for, "replacement" and "current repair" do not go hand in hand . If one is to hold otherwise, it would only make Section 31(i) wholly redundant and absurd. Thus, 4/14 https://www.mhc.tn.gov.in/judis T.C.A.Nos.38, 39, 47 and 48 of 2022 replacement expenditure cannot be said to be `current repairs' vide [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.) and 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited)
(v) Expenditure is deductible under section 37 only if it
(a) is not deductible under sections 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. - 2009- TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited);
(vi) 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, bringing into existence a new asset or an enduring benefit for the assessee amounts to capital expenditure vide Lakshmiji Sugar Mills (P) Co. v. CIT (AIR 1972 SC 159) referred in 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited).
(vii) Therefore, whether an expenditure is revenue or capital in nature would depend on the facts of each case.
- [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.)" This Court also referred to the decision in the case of CIT Vs. Mahalakshmi Textile Mills Ltd., reported in (1967) 66 ITR 710 (SC) on the issue of current repairs and pointed out that so long as there is no change in the performance of the machinery and the parts that were replaced performing precisely the same function, expenditure could only be concerned as current repairs of the plant and machinery.
31. Applying the ratio of the decision cited above, when we look into the facts of the above cases, it is evident that with regard to the moulds and dies attached to the machinery like press designs specification, moulds and dies are not independent of the plant 5/14 https://www.mhc.tn.gov.in/judis T.C.A.Nos.38, 39, 47 and 48 of 2022 and machinery, but are parts of the machinery. Once the dies are worn out, the machines cannot turn out the product to the business specifications and this has to be obtained only on a replacement of the dies and moulds, a fact which is not refuted by the revenue. It is no doubt true that the assessee claimed depreciation on dies and moulds. Yet in the decision in the case of CIT Vs. Mahalakshmi Textile Mills Ltd., reported in (1967) 66 ITR 710 (SC), the Apex Court pointed out that all questions whether of law or of fact, which relate to the assessment year of the assessee could be raised in any year under consideration before the Officer as well as before the Income Tax Appellate Tribunal too and if, for reasons recorded by the departmental authorities in rejecting a contention raised by the assessee, the grant of relief to an assessee is justified on another ground, the Revenue is bound to consider such claim of granting the relief. The Apex Court pointed out that the right of the assessee to the relief is not restricted to the plea raised by him. On the facts before us, when the dies and moulds were attached to the machine to manufacture the designed product, we have no hesitation to accept the plea of the assessee that the claim would fall for consideration only under Section 31 of the Act.
32. In the unreported decision of this Court dated 27.04.2012 in Tax Case (Appeal).No.1011 of 2005 (The Commissioner of Income Tax, Madurai Vs. M/s.Machado Sons) on the question of repair made to a ship, this Court pointed out that when the object of the expenditure was not for bringing into existence a new asset or to obtain a new advantage, the said expenditure qualifies to be considered as current repairs under Section 31 of the Act. In so holding, after referring to the decision of the Apex Court in the case of CIT Vs. M/s.Saravana Spinning Mills P.Ltd., reported in (2007) 293 ITR 201, this Court further pointed out to the decision of the Apex Court where it cautioned that all repairs are not current repairs on Section 31(1) of the Act; Section 31(1) of the Act limits the scope of allowability of expenditure as deduction in respect of repairs made to machinery, plant or furniture by restricting it to the concept of "current repairs". Thus, this Court pointed out that what is allowable as revenue expenditure under 6/14 https://www.mhc.tn.gov.in/judis T.C.A.Nos.38, 39, 47 and 48 of 2022 Section 37 of the Act are those expenditure other than one falling for consideration under Sections 30 to 36 of the Act. The Apex Court further pointed out the example that when the picture tube in a television set is replaced, such repairs would come within the connotation of the phrase "current repairs". Thus, applying these two decisions, we have no hesitation in rejecting the Revenue's appeal. We hold that the claim being considered as current repairs, the same would fall under Section 31 of the Act as current repairs. To that extent, we modify the order of the Tribunal."
3. In addition, the learned counsel for the appellant / Revenue fairly submitted that the fourth substantial question of law raised herein has been decided in favour of the assessee, as per the decision of the Hon'ble Supreme Court in the case of Commissioner of Income-tax, Chennai v.Shiva Tex Yarn Ltd., (2012) 25 taxmann.com 302 (SC) in which, the judgment rendered in CIT v. Lakshmi Machine Works (2007) 290 ITR 667/160 Taxman 404 (SC), was followed, the relevant passage of which is profitably, extracted below:
"We do not find any merit in the above contentions advanced on behalf of the Department. It is important to note that tax under the Act is upon income, profits and gains. It is not a tax on gross receipts. Under Section 2(24) of the Act the word "income" includes profits and gains. The charge is not on gross receipts but on profits and gains. The charge is not on gross receipts but on profits and gains properly so-called. Gross receipts or sale proceeds, however, include profits. According to "The Law and Practice of Income Tax" by Kanga and Palkhivala, the word "profits" in Section 28 should be understood in normal and proper sense. However, subject to special requirements of the income tax, profits have got to be assessed provided they are real 7/14 https://www.mhc.tn.gov.in/judis T.C.A.Nos.38, 39, 47 and 48 of 2022 profits. Such profits have to be got to be ascertained on ordinary principles of commercial trading and accounting. However, the income tax has laid down certain rules to be applied in deciding how the tax should be assessed and even if the result is to tax as profits what cannot be construed as profits, still the requirements of the income tax must be complied with. Where a deduction is necessary in order to ascertain the profits and gains, such deductions should be allowed. Profits should be computed after deducting the expenses incurred for business though such expenses may not be admissible expressly under the Act, unless such expenses are expressly disallowed by the Act [SEE: page 455 of "The Law and Practice of Income Tax" by Kanga and Palkhivala]. Therefore, schematic interpretation for making the formula in Section 80HHC workable cannot be ruled out. Similarly, purposeful interpretation of Section 80HHC which has undergone so many changes cannot be ruled out, particularly, when those legislative changes indicate that the legislature intended to exclude items like commission and interest from deduction on the ground that they did not possess any element of "turnover" even though commission and interest emanated from exports. We have to read the words "total turnover" in Section 80HHC as part of the formula which sought to segregate the "export profits" from the "business profits". Therefore, we have to read the formula in entirety. In that formula the entire business profits is not given deduction. It is the business profit which is proportionately reduced by the above fraction/ratio of export turnover w total turnover which constitute 80HHC concession (deduction). Income in the nature of "business profits" was, therefore, apportioned. The above formula fixed a ratio in which "business profits" under Section 28 of the Act had to be apportioned. Therefore, one has to give weightage not only to the words "total turnover" but also to the words "export turnover", "total export turnover" and "business profits". That is the reason why we have quoted hereinabove extensively the illustration from the Direct Taxes (Income tax) Ready Reckoner of the relevant word. In the circumstances, we cannot interpret the words "total turnover" in the above formula with reference to the definition of 8/14 https://www.mhc.tn.gov.in/judis T.C.A.Nos.38, 39, 47 and 48 of 2022 the word "turnover" in other laws like Central Sales Tax or as defined in accounting principles. Goods for export do not incur excise duty liability. As stated above, even commission and interest formed a part of the profit and loss account, however, they were not eligible for deduction under Section 80HHC. They were not eligible even without the clarification introduced by the legislature by various amendments because they did not involve any element of turnover. Further, in all other provisions of the income tax, profits and gains were required to be computed with reference to the books of accounts of the assessee. However, as can be seen from the Income Tax Rules and from the above Form No.10CCAC in the case of deduction under Section 80HHC a report of the auditor certifying deduction based on export turnover was sufficient. This is because the very basis for computing Section 80HHC deduction was "business profits" as computed under Section 28, a portion of which had to be apportioned in terms of the above ratio of export turnover to total turnover. Section 80HHC(3) was a beneficial section. It was intended to provide incentives to promote exports. The incentive was to exempt profits relatable to exports. In the case of combined business of an assessee having export business and domestic business the legislature intended to have a formula to ascertain export profits by apportioning the total business profits on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. This method earlier existed under Excess Profits Tax Act, it existed in the Business Profits Tax Act. Therefore, just as commission received by an assessee is relatable to exports and yet it cannot form part of "turnover", excise duty and sales tax also cannot form part of the "turnover". Similarly, "interest" emanates from exports and yet "interest" does not involve an element of turnover. The object of the legislature in enacting Section 80HHC of the Act was to confer a benefit on profits accruing with reference to export turnover. Therefore, "turnover" was the requirement. Commission, rent, interest etc. did not involve any turnover. Therefore, 90% of such commission, interest etc. was excluded from the profits derived from the export. Therefore, 9/14 https://www.mhc.tn.gov.in/judis T.C.A.Nos.38, 39, 47 and 48 of 2022 even without the clarification such items did not form part of the formula in Section 80HHC(3) for the simple reason that it did not emanate from the "export turnover", much less any turnover. Even if the assessee was an exclusive dealer in exports, the said commission was not includible as it did not spring from the "turnover". Just as interest, commission etc. did not emanate from the "turnover", so also excise duty and sales tax did not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover, such taxes had to be excluded. Commission, interest, rent etc. do yield profits, but they do not partake of the character of turnover and, therefore, they were not includible in the "total turnover". The above discussion shows that income from rent, commission etc. cannot be considered as part of business profits and, therefore, they cannot be held as part of the turnover also. In fact, in Civil Appeal No.4409 of 2005, the above proposition has been accepted by the A.O. [See: page no.24 of the paper book], if so, then excise duty and sales tax also cannot form part of the "total turnover" under Section 80HHC(3), otherwise the formula becomes unworkable. In our view, sales tax and excise duty also do not have any element of "turnover" which is the position even in the case of rent, commission, interest etc. It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government. Therefore, if they are made relatable to exports, the formula under Section 80HHC would become unworkable. The view which we have taken is in the light of amendments made to Section 80HHC from time to time.
Before concluding we may state that profits are of three types, namely, book-profits, statutory profits and actual profits. The amendments to Section 80HHC(3) indicate exclusion of book profits. For example, commission, interest, etc. do form part of the profit and loss account but for the purposes of calculation of profits derived from local sales and exports, they stand excluded. The difficulty arises because the formula is based on the Hybrid System of Profits, namely, actual and statutory profits. Therefore, this judgment should be read in the context of the above 10/14 https://www.mhc.tn.gov.in/judis T.C.A.Nos.38, 39, 47 and 48 of 2022 parameters. Our reasoning in this judgment is confined to the workability of the formula in Section 80HHC(3) of the Act as it stood at the material time.
For the above reasons, we see no merit in these appeals filed by the Department and, accordingly, they are dismissed with no order as to costs."
4. Further, the learned counsel appearing for the appellant /Revenue submitted that the fifth substantial question of law is covered against the Revenue in the light of a decision of this Court, in Commissioner of Income -
tax vs. Simpson & Co. Ltd. [(1998) 230 ITR 703 (Madras)], wherein, the Division Bench held as follows:
"In so far as question No.2 is concerned, that was not pressed by learned standing counsel for the Department. In so far as question No.1 is concerned, it relates to the assessment year 1976-77, relevant to the accounting year ending on May 31, 1975. The Income - tax Officer in the assessment had disallowed the assessee's claim for deduction of the sum of Rs.10,00,803 being the amount paid under the Voluntary Retirement Scheme. The Income-tax Officer rejected this claim as in the earlier years. On the assessee's appeal the Commissioner of Income -tax (Appeals) held that the payment was deductible following his order for assessment year 1975-76. On further appeal by the Revenue, the Tribunal sustained the Commissioner of Income
-tax's view, following the earlier order of the Tribunal in I.T.A.Nos.2104 to 2107 (Mds) 1979 for the assessment years 1972-73 to 1975-76 in the assessee's own case. A similar view was also taken by the Tribunal in the case of George Oakes Ltd., in I.T.A.Nos.979 to 981 (Mds) 1977-78, dated August 3, 1973. This decision of the Tribunal, came up on reference before this 11/14 https://www.mhc.tn.gov.in/judis T.C.A.Nos.38, 39, 47 and 48 of 2022 Court in CIT v. George Oakes Ltd., [1992] 197 ITR 288, where under this Court held that retrenchment was done for reorganising the branch and thereby reducing the wage bill as well. Therefore, it was considered that these matters pertain to business considerations and expediency and the expenditure incurred by the assessee in this regard was for the purposes of business and also with a view to maintaining good relationship with the labour and that expenditure had to be considered as having been laid out wholly and exclusively for the purpose of business of the assessee. Therefore, this Court ultimately came to the conclusion that the expenditure incurred was deductible. In doing so, this Court also followed the decision of the Supreme Court in Sassoon J.David and Co. P. Ltd. v. CIT [1979] 118 ITR 261. A similar view was also taken by this Court in a matter like this in CIT v. Sri Ramavilas Service Ltd., [1995] 211 ITR 763. In view of the foregoing decisions, we answer question No.1 in the affirmative and against the Department. No costs."
5.In view of the proposition of law enunciated in the decisions referred supra, these appeals are dismissed, answering the substantial questions of law against the revenue and in favour of the assessee. No costs. Consequently, connected miscellaneous petitions are closed.
(R.M.D., J.) (J.S.N.P., J.) 11.02.2022 av Internet : Yes Index : Yes / No 12/14 https://www.mhc.tn.gov.in/judis T.C.A.Nos.38, 39, 47 and 48 of 2022 To
1. The Income Tax Appellate Tribunal, Chennai, “C” Bench.
2. Commissioner of Income Tax, Madurai.
13/14https://www.mhc.tn.gov.in/judis T.C.A.Nos.38, 39, 47 and 48 of 2022 R. MAHADEVAN, J.
and J.SATHYA NARAYANA PRASAD, J.
av T.C.A.Nos.38, 39, 47 and 48 of 2022 and C.M.P.Nos.1033, 1166 and 1161 of 2007 11.02.2022 14/14 https://www.mhc.tn.gov.in/judis