Madras High Court
Commissioner Of Income Tax vs M/S.Madura Coats on 22 December, 2011
Author: Elipe Dharma Rao
Bench: Elipe Dharma Rao, R.Subbiah
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 22.12.2011 CORAM THE HONOURABLE MR. JUSTICE ELIPE DHARMA RAO and THE HONOURABLE MR. JUSTICE R.SUBBIAH Tax Case (Appeal) Nos.322 to 324 of 2008 Commissioner of Income Tax, Madurai. ... Appellant in all the TCs. Vs M/s.Madura Coats, New Jail Road, Madurai. ... Respondent in all the TCs. Prayer:- Tax Case Appeals filed under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, Madras 'D' Bench, dated 28th February, 2007 in I.T.A.Nos.105(Mds)/2002, 1140 (Mds)/1998 and 1437 (Mds)/2004 for the assessment years 1995-1996, 1994-1995 and 1996-1997 respectively. For Appellant : Mr.K.Suresh Kumar For Respondent : No appearance. J U D G M E N T
(Judgment of the Court was delivered by ELIPE DHARMA RAO,J.) As the issue involved in these tax case appeals are one and the same, the following common order is passed.
2.These tax case appeals are directed against the common order passed by the Income Tax Appellate Tribunal, dated 28.02.2007, made in I.T.A.Nos.105(Mds)/2002, 1140 (Mds)/1998 and 1437 (Mds)/2004 for the assessment years 1995-1996, 1994-1995 and 1996-1997 respectively.
3.The assessee is a Public Limited Company engaged in the manufacture of clothes, industrial fabrics, readymade garments, sewing threads etc. They have filed income tax returns for the assessment years 1994-95, 1995-96 and 1996-97.
4.The assessing officer, for the assessment years 1994-95 and 1995-96, inter alia disallowed the claim of the assessee in respect of replacement expenditure of Auto Coners etc. by holding that replacement of old by new machinery cannot be treated as revenue expenditure. The Assessing Officer also disallowed the claim of the assessee with respect to repairs to rented premises, for the assessment years 1994-95, 1995-96 and 1996-1997, by holding that the said expenditure represents capital expenditure, as the assets created were for use for a longer period.
5.Aggrieved by the orders passed by the Assessing Officer, the assessee filed appeals before the Commissioner of Income Tax (Appeals), who allowed the appeals after following the earlier orders passed by the Income Tax Appellate Tribunal.
6.Aggrieved by the orders passed by the Commissioner of Income Tax (Appeals), the Revenue filed appeals before the Income Tax Appellate Tribunal and the Tribunal, relying on the decision of the Madras High Court reported in the case of Janakiram Mills Ltd [(2005) (275 ITR 403)], wherein it was held that the entire spinning mills is a plant and no intermediate product arises and as such, the expenditure on the replacement of individual machinaries is revenue in nature and allowed the appeal in favour of the assessee and with respect to repairs to rented premises, following the assessee's own case in ITA No.123/Mds/1995, dated 07.01.1997, allowed the appeals.
7.Aggrieved by the order of the Income Tax Appellate Tribunal, the Revenue has filed the aforesaid tax case appeals.
8.The Tax Case Appeals were admitted on the following substantial questions of law:-
1."Whether on the facts and in the circumstances of the case, the Tribunal was right in allowing a deduction of the amounts spent on replacement of machinery as revenue expenditure?
2.Whether on the facts and in the circumstances of the case, replacement of independent complete machinery can be treated as revenue expenditure?
3.Whether on the facts and in the circumstances of the case, the Tribunal was right in deciding the issue without going into the concept of Block of asset?
4.Whether on the facts and in the circumstances of the case, the Tribunal was right in allowing the expenditure incurred on repairs of the rented building as a deductible expense under Section 37(1) of the Act, ignoring the provisions of explanation 1 to Section 32 of the Act?"
9. We have gone through the entire materials placed on record. It is seen from the perusal of the records that the Revenue has filed appeals before the Income Tax Appellate Tribunal in I.T.A.Nos.105(Mds)/2002, 1140 (Mds)/1998 and 1437 (Mds)/2004 for the assessment years 1995-1996, 1994-1995 and 1996-1997 respectively, aggrieved of the reversion of the findings of the Assessing Officer by the Commissioner of Appeals, with regard to the expenditure incurred by the assessee towards repairs on rented buildings, by contending that as per the agreement entered into between the owner of the buildings and the assessee, the assessee need not carry out any repairs and the repairs are to be carried out only by the building owners.
10.It is also seen from the perusal of the records that the Commissioner of Income Tax (Appeals) reversed the order passed by the Assessing Officer on the ground that the expenses were incurred for the effective use of the assets leased out to the appellant and these expenses were not reimbursed to the appellant by the landlords. It is further seen that a similar disallowance made in the assessment year 1991-92 was partly deleted by the Commissioner of Income Tax(Appeals) and on further appeal, it was fully deleted by the Income Tax Appellate Tribunal. It is also seen that the Commissioner of Income Tax (Appeals), following the similar order passed by the Income Tax Appellate Tribunal deleting the disallowance in full by its order in ITA.No.123/Mds/95, dated 07.01.1997, as the circumstances are similar in the present case, deleted the disallowance and the said view was confirmed by the Income Tax Appellate Tribunal by holding that the expenditure incurred by the assessee was revenue in nature and it had to be allowed in its entirety. Aggrieved by the said order, the revenue has filed the aforesaid tax case appeals.
11.When the tax case appeals came up for consideration, it is submitted by the learned counsel for the Appellant/Revenue that with regard to the substantial questions of law 1 and 2 they are covered as per the judgment of this Court, dated 25.04.2011 in Tax Case (Appeal) Nos.71 and 72 of 2008.
12.In view of the above, following the same, the substantial questions of law 1 and 2 raised in this tax case appeal are answered against the assessee and in favour of the revenue.
13.With regard to the third substantial question of law, it is submitted by the learned counsel for the appellant that when each of the machinery in question, such as Ring Frames, Draw Frames and Speed Frame is purchased for the first time, then it is a capital asset, on which, depreciation should be granted. Whereas, it is submitted that, the sale of a worn out machinery and replacement thereof by new machinery can only be treated as reduction and addition to the block of assets, which is a part of replacement. It is also submitted that while under the law, as it stood prior to 1988-89, the fact of treating the entire mill as an integrated unit may have had the effect of treating the replacement of machinery as replacement of parts of a larger whole and thus treated as revenue expenditure, and once the concept of block of assets has been brought in by the Parliament, from the assessment year 1988-89, whether the mill is an integrated whole or not, whether the replacement of machines resulted in increased capacity or not, will have no bearing and when any item belonging to the block is removed, its value is reduced and if any new item comes in its place, its value is added to the block. In view of the above, it is submitted that the third substantial question of law is also covered as per the judgment of this Court, dated 25.04.2011 in Tax Case (Appeal) Nos.71 and 72 of 2008.
14.In view of the said submission made by the learned counsel for the appellant, we hold that the third question of law is also answered in favour of the revenue and against the assessee.
15.With regard to the fourth substantial question of law, viz., whether on the facts and in the circumstances of the case, the Tribunal was right in allowing the expenditure incurred on repairs of the rented building as a deductible expense under Section 37(1) of the Act, ignoring the provisions of explanation 1 to Section 32 of the Act, it is submitted by the learned counsel for the appellant that Section 37(1) of the Income Tax Act permits deduction of only such expenses not being capital expenditure of the nature prescribed under Sections 30 to 36. It is also submitted that when the major repairs in the nature of capital expenditure is carried out, it cannot be treated as deductible under Section 37(1) of the Income Tax Act, merely because the premises is rented.
16.It is also submitted by the learned counsel for the appellant that the Tribunal failed to see that Explanation 1 to Section 32 clearly says that depreciation is available in respect of expenses incurred on a premises not owned by the assessee for 'doing of any work in or in relation to, and by way of renovation or extension or improvement to the building' as if the building was owned by him. Finally, it is submitted by the learned counsel for the appellant that the Tribunal ought to have applied the provisions of Explanation 1 to Section 32 of the Act instead of Section 37(1) of the Act while allowing the expenditure incurred on repairs of the rented building.
17.In view of the aforesaid submission made by the learned counsel appearing for the appellant, we perused Explanation (1) to Section 32 and Section 37(1) of the Income Tax Act.
18.Explanation 1 to Section 32 of the Income Tax Act reads as follows:-
"Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee."
19. Section 37(1) of the Income Tax Act contemplates that any expenditure, which is not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession.
20.Further, in similar circumstances, this Court, after following the decision of the Honourable Apex Court in Commissioner of Income Tax -vs- Saravana Spinning Mills Limited [(2007) 7 SCC 298 = 293 ITR 201], as per judgment dated 08.11.2011 made in T.C.A.No.39 of 2008, reported in 2011 Current Indian Judgements 482 Madras (The Commissioner of Income Tax -vs- Universal Cold Storage Limited), held that the extensive repairs/renovations carried out by the assessee cannot be said to be incurred to preserve and maintain an already existing asset, since many new objects have been brought into existence, as could be seen from the list of constructions made and thus, the object of expenditure incurred by the assessee is definitely to bring a new asset into existence to obtain new advantage, further giving enduring benefit to the assessee.
21.On going through the entire materials placed on record, we are of the considered opinion that when the Section itself clearly says that the expenditure, which is not in the nature of capital or personal, can be allowed to be deducted under Section 37(1) of the Income Tax Act, the Tribunal has committed an error in allowing the expenditure incurred on repairs of the rented building as a deductible expense under Section 37(1) of the Income Tax Act, ignoring the provisions of Explanation 1 to Section 32 of the Act.
22.In view of the above, the fourth substantial question of law framed by this Court is also answered against the assessee and in favour of the revenue. No costs.
Index :Yes/No Website :Yes/No (E.D.R.,J.) (R.P.S.,J.) 22.12.2011 bs/ ELIPE DHARMA RAO,J. And R.SUBBIAH,J. Bs/ T.C.(A)Nos.322 to 324 of 2008 22.12.2011