Income Tax Appellate Tribunal - Ahmedabad
Deputy Commissioner Of Income Tax vs Govind Glass Industries Ltd. on 17 May, 2001
Equivalent citations: [2002]80ITD336(AHD)
ORDER
T.N. Chopra, A.M.
1. This appeal filed by the Revenue is directed against the order of CIT(A), dt. 4th Nov., 1994 for asst. yr. 1991-92.
2. The only issue involved is regarding the expenditure of Rs. 4,20,66.274 claimed as cold repairs of the furnace and allowed by the learned CIT(A) as revenue expenditure.
3. The relevant facts may be briefly indicated as under. The assessee-company derives income from manufacturing of figured and wired glass during the asst. yr. 1991-92. The assessee claimed deduction of Rs. 4,21,35, 886 on account of cold repairs to the figured glass furnace as revenue expenditure. This furnace was constructed by the assessee on 30th June, 1985 at the cost of Rs.
1,80,75,000. No cold repairs of the furnace had been done till the Financial year. 1990-91. The assessee submitted that it was for the first time in March, 1991 that the assessee undertook to carry on cold repairs of the furnace. Before the AO the assessee explained that the furnace in which the figure and wired glass are manufactured works at 1450°. This furnace worked upon 18th March, 1991, and after that it was left for cooling down. As per the details submitted before the AO, the assessee purchased raw materials for the construction of furnace like refractories, cement, steel etc. upto 31st March, 1991, and the construction work was started from 31st March, 1991, and completed on 19th April, 1991, i.e., in the accounting year relevant to the succeeding asst. yr, 1992-93. The assessee submitted a report of Shri V.H. Danial, a technical expert under those supervision the construction work was carried on which reads as under :
"As per the planning programme and schedule, closing down (stopping of production) of the furnace was done on 18th March, 1991, i.e., 17th night at 11.00 p.m. and glass draining started at 12.00 midnight. About 40 per cent of glass was drained out during night shift. On 18th till 22nd of March, furnace cooling and dismentalling was done. From 22nd March till 30th March, 1991, the following work has been carried out:
(1) Dismentalling of annealing lehr ;
(2) glass drilling of main furnace;
(3) total dismentalling of furnace refractories; and (4) dismentalling of batch house, partially for extension.
From 31st March and refractory construction of furnace was started."
It is further stated in the report :
"This furnace was dismantled and erected within one month. The reason for making a new furnace is that previously we were not able to draw more than 80 m.t. of glass because life of the furnace was over and we were facing stones problems. In new furnace following changes have been made.
(1) instead of flat throat-sunken throat has been made. (2) W-end has been extended for 1 metre for higher speed. (3) Regenerators---Viecher Chimney Blocks has been used instead of ordinary checkers bricks for better efficiency of regenerator. (4) This time closed-Muffle type annealing Lehr has been made instead of open Lehr. (5) Lehr is extended for better cooling of glass.
This time preheating was done by heating up expert of U.K. (Hot Work U.K). to avoid refractory damage by heating up of the furnace, so heating up of the furnace was excellent."
Shri Danial has further illustrated the advantages of the new furnace as under:
"First we will get stone (refractories), free glass; second, we can go for higher pull than previous pull with the same quantity of natural gas."
4. Bifurcation of expenses claimed by the assesses as revenue expenditure as submitted before the AO is as under:
Before the AO the assessee submitted that since the refractories, cement, steel etc. are not items of stores and spares, there should be allowed as revenue expenditure in the year in which they have been purchased irrespective of the fact that they have been used in April, 1991.
5. The AO, however, disallowed the claim of expenditure mainly on the following two grounds :
1. Since the construction work of the furnace has been started after 31st March, 1991, the expenses in question in any case would fall for consideration in the succeeding asst. yr 1992-93.
2. The expenses in question incurred for construction of a new furnace are capital in nature and, therefore, the same are disallowable.
Aggrieved the assessee carried the matter in appeal before the CIT(A). The CIT(A) held that the expenses in question have been incurred merely for the purpose of replacement of refractories and these are of revenue nature. In support of his conclusion the CIT(A) placed reliance on various decisions including inter alia following decision :
1. CIT v. Mahalaxmi Textile Mills Ltd. (1967) 66 ITR 710 (SC);
2. Empire Jute Mills v. CIT(1980) 17CTR(SC) 113 : (1980) 124 ITR 1 (SC);
3. CIT v. Kalyanji Mavji & Co. (1980) 122 ITR 49 (SC);
4. Alembic Chemical Works Co. Ltd. v. CIT (1989) 177 ITR 377 (SC);
5. Addl. CIT v. Desai Brothers (1977) 108 ITR 14 (Guj); and
6. CIT v. Seraikella Glass Works (P) Ltd. (1986) 157 ITR 584 (Pat).
Out of the assessee's claim of Rs. 4,21,35,886 the CIT(A) disallowed expenses to the extent of Rs. 69,612 and deleted the balance disallowance of Rs. 4,20,66,274. The Revenue is aggrieved and hence the appeal.
6. Shri R.V. Nabar the learned Sr. Departmental Representative assailing the impugned conclusion by the CIT(A) argued that the disallowance made by the AO on the twin grounds namely expenses not falling in the assessment year under appeal and the expenses being capital in nature deserve to be sustained. With regard to the issue regarding incurring of expenses, the learned senior Departmental Representative argued that during the year under consideration the assessee has carried out dismantling of the furnance upto 31st March, 1991 and the construction, etc. as per Mr. Daniel's report, has been carried out from 1st April, 1991 to 21st April, 1991. According to the learned Sr. Departmental Representative the deduction of Rs. 4,21,35,886 on account of purchase of refractories, cement, steel, etc. cannot be claimed merely on the ground that the purchases have been made during the year under appeal. The learned Sr. Departmental Representative strongly urged that the expenses do not fall for consideration in asst. yr. 1991-92 since the assessee's method of accounting of consumable stores involves debits of the items of stores to the P&L a/c as and when they are consumed/used and closing balance of stores has been shown on the last day of the accounting year, the assessee cannot be allowed to claim deduction of cost of refractories, cement, steel, etc. merely on the basis of purchase thereof.
7. On the second question concerning the nature of expenses, the learned senior Departmental Representative very vehemently asserted that the assessee has dismentled the old furnace and constructed a new furnace incurring capital expenditure of Rs. 4.21.35,886 in the process. Such expenses are capital in nature. The decision of Calcutta High Court in the case of CIT v. Hindustan Pilkington Glass Works Ltd. (1991) 73 Taxman 631 (Cal) has been strongly relied upon by the learned Departmental Representative support of his contention. The learned senior Departmental Representative referred to the observations of their Lordships in para 23 of the judgments wherein it has been observed that the very fact that the assessee demolished the old furnace and constructed new furnance in its place takes out the case from the pale of repairs. The learned Departmental Representative emphasised that the facts in the instant case before us are squarely identical with those of Hindustan Pilkington Glass Works Ltd. (supra) and, therefore, the expenditure in question deserves to be treated as capital in nature. The learned Departmental Representative further contended that the impugned order of the CIT(A) suffers from grievous factual inaccuracies which have vitiated the conclusion regarding the nature of the expenses in question. The learned Departmental Representative submitted that the first appellate authority misdirected itself on facts in proceedings on the basis that the expenses have been incurred merely for replacement of the refractories by the assessee whereas the correct facts according to the learned Departmental Representative are that the assessee has dismantled the old furnace and constructed an entirely new furnace with certain technical improvements as is evidently manifested from the report of the technical expert namely Mr. Danial who supervised the entire operation. With regard to the decision of Gujarat High Court in the case of Desai Bros. (supra) relied upon by the learned CIT(A), the learned Departmental Representative argued that the decision in entirely distinguishable on facts inasmuch as in the said case there was merely a replacement of petrol engine by a diesel engine employed by the assessee whereas in the instant case before us, the assessee has demolished the old furnace and constructed a new furnace incorporating improvements so as to ensure better quality and efficiency. Regarding the decision in the case of CIT v. Seraikella Glass Works (P) Ltd. (supra) relied upon by the learned CIT(A) the learned Departmental Representative submitted that the facts in that case were entirely different and the expenses claimed by the said assessee were of the nature of current repairs being 3.4 per cent only and the expenses were incurred merely to replace and repair the damaged parts of the furnace on a periodic basis. As against these facts, the assessee in the case before us, has replaced the entire furnace by a new furnace and, therefore, the Patna High Court decision in the case of CIT v. Seraikella Glass Works (P) Ltd. (supra) does not render any assistance to the assessee's case. The learned Departmental Representative concluded his arguments with the submissions that the expenses in question have been incurred for construction of a new furnace and have resulted in enduring benefit and advantage to the assessee. The learned Departmental Representative pleaded that the conclusion of the learned CIT(A) in treating the expenses as revenue expenditure be reversed.
8. Shri J.P. Shah, the learned counsel for the assessee on the other hand, supported the conclusion of the learned CIT(A) and cited the English decision in the case of Samuel Jones & Co. (Devonvale) Ltd. v. IRC 32 Taxman 513. In this case, the cost of replacing the old chimney in the factory of the assessee was treated as revenue expenditure. Shri Shah further referred to pp. 732 and 733 in Law and Practice of Income-tax Taxman 1999 Vol. I wherein cluster of decision on the issue have been indicated by the author. Shri Shah particularly referred to the Full Bench decision of Andhra Pradesh High Court in the case of Nathmal Bankatlal Parikh & Co. v. CIT (1980) 122 ITR 168 (AP) (FB) wherein replacement of old diesel engine of motor van by a new diesel engine has been held to be a revenue expenditure. Relying upon the ratio of aforesaid decision, Shri Shah pleaded that the expenses incurred by the assessee for dismantling the old furnace and construction of a new furnace would be revenue in nature and hence have been correctly allowed by the learned CIT(A).
9. We have carefully considered the facts and circumstances of the case as well as the orders of the tax authorities below. Various judicial authorities cited by the learned representatives before us have also been carefully gone through by us. We have also perused the string of judgments cited by the AO as well as the learned CIT(A) in their orders. After giving our thoughtful consideration to the entire issue, we have come to the conclusion that the expenses in question incurred by the assessee on dismantling the old furnace and construction of a new furnace are clearly capital in nature. These expenses obviously result in the acquisition of new asset by the assessee. What the assessee has replaced during the year is not merely a subsidiary part of machinery like a chimney in a factory or petrol engine in van or truck. In the glass factory, the main plant and machinery consist of furnace and other ancillary of the furnace. The furnace is made by using refractories, steel, mortar and cement etc. The assessee has imported substantial amount of refractories for an amount of Rs. 4,03,00,000. Further expenses on steel, cement, mortar, etc. have also been incurred for construction of the new furnace. The technical report of Shri V.H. Danial who supervised the entire dismantling and construction process clearly indicates that the old furnace has been dismantled and new furnace has been constructed incorporating certain technical improvements which ensured better quality and efficiency of production. The expenses thus essentially resulted in strengthening and expansion of the profit-earning apparatus of the assessee-company and are covered in the capital field.
It has been held by the Hon'ble Supreme Court in Empire Jute Co. Ltd. v. CIT (supra) and in Alembic Chemical Works Co. Ltd. v. CIT (supra) if the expenses incurred by the assessee are in the capital field and are inextricably connected with the capital structure of the company, this would be held to be capital in nature. On the other hand, if the expenses have been incurred in connection with operation and running of assessee's business, these are of revenue nature. In the instant case, a new furnace constructed by the assessee with improved efficiency and quality has obviously strengthened and augmented the profit-earning apparatus of the assessee. These expenses are, therefore, clearly of capital nature. Reliance placed by the learned counsel for the assessee on various judicial authorities is entirely misplaced inasmuch as the facts and features of these cases are entirely distinguishable and, therefore, these decisions do not support the case of the assessee. In our opinion the decision of the Calcutta High Court in CIT v. Hindustan Pilkington Glass Works ltd. (supra) squarely applies to the facts and issue involved in the present appeal before us. Now we may refer to a few decisions cited by the learned counsel for the assessee in support of the assessee's case. In Samuel Jones & Co. (Devonvale), Ltd. v. IRC (supra) the facts were that a chimney in assessee's factory was replaced and the expenditure was held to be, revenue on the ground that chimney is merely a subsidiary part of assessee's factory and replacement thereof is revenue in nature. In the instant case before us, it is a replacement of the furnace which constitutes the main plant and machinery of the assessee utilised for its manufacturing activities. It is not merely a spare part or a subsidiary part which has been replaced due to war arid tear. In fact substantially the entire machinery has been replaced and a new machinery has been put in place thereof. The decision, therefore, does not support the assessee's case.
10. The next decision heavily relied upon by the learned counsel has been rendered by Hon'ble Patna High Court in the case of CIT v. Seraikella Glass Works (P) Ltd. (supra). However, we find that in this decision repairs of the furnace were of the nature of current repairs carried out from year to year and the expenses incurred by the assessee on such repairs were in the vicinity of 3.4 per cent. Treating the repairs as revenue expenditure, their Lordships observed at p. 587 of the report:
"The case before us, however, stands entirely on a different footing. The assessee had repaired the furnace. The furnace itself had not been replaced while it had been repaired."
Thus the facts in the instant case before us are entirely distinguishable inasmuch as the assessee before us, has dismantled the old furnace and constructed a new furnace in its place. The Patna High Court decision, therefore, rather supports the case of the Revenue and not the assessee.
11. The learned counsel for the assessee has next relied upon the Full Bench decision of the Andhra Pradesh High Court in the case of National Bankatlal Parikh & Co. (supra) wherein it has been held that replacement of old diesel engine of motor van by a new diesel engine constitute revenue expenditure. The Court held that expenditure incurred by the assessee with a view to preserve and maintain an already existing asset would be revenue in nature whereas if the object of the expenditure is to obtain a new and fresh advantage or to bring a new asset into existence, the expenditure would be capital in nature. The principle enunciated in this decision in fact supports the case of the Revenue since in the present case before us, it is not merely the replacement of a subsidiary part of the machinery but the replacement of the machinery itself resulting in acquisition of new asset.
12. The learned counsel has next referred to pp. 732 and 733 of Taman's Law and Practice of Income-tax 1999 Edn. wherein a cluster of cases have been cited on the issue concerning the nature of expenditure whether capital or revenue.
13. We have gone through these cases and we find that in cases where subsidiary part (s) of plant and machinery have been replaced due to wear and tear, the expenditure has been treated as revenue in nature whereas when there is replacement of entire machinery or substantially whole of it, the expenditure has been treated as capital in nature. The authors have extracted the proposition from various decisions namely :
(i) CIT v. Darbhanga Sugar Co. Ltd. (1956) 29 ITR 21 (Pat);
(ii) CIT v. Sri Rama Sugar Mills Ltd. (1952) 21 ITR 191 (Mad); and
(iii) Dehri Rohtas Light Railway Co. Ltd. v. CIT (1962) 46 ITR 533 (Pat);
at p. 732 of Vol. I of the Taxman, referred to by the learned counsel for the assessee and photocopies produced before us. In our considered opinion these cases rather than rendering any assistance to the assessee's case, support the Revenue's case for treating the expenditure in the present case as capital expenditure.
14. For the foregoing reasons we would hold that the expenditure incurred by the assessee, claimed as old repairs of the furnace, is capital in nature.
15. In the result, the appeal of the Revenue is, therefore, allowed.