TMI Blog2005 (12) TMI 225X X X X Extracts X X X X X X X X Extracts X X X X ..... llant of treating expenditure on replacement of dies and moulds as revenue expenditure, which has been consistently accepted by the Department for past two decades. VI. That the order of the CIT may be cancelled." 2. Since the grounds of appeal are interconnected they are disposed off together for the sake of convenience. 3. The brief facts of the case are that the assessee filed return of income on 25th Oct., 2001 declaring income of Rs. 9,57,53,430 along with statutory audit report, statement of accounts and tax audit report. The assessment was completed under s. 143(3) and order passed on 6th Feb., 2003 after hearing Shri M.P. Singh, Vice President (Finance) and Shri L.D. Seth, divisional manager of the assessee-company, who attended the proceedings on various dates and filed details/evidences and written submissions at the returned income of the assessee. 4. Thereafter, the learned CIT-III, Delhi, issued notice on 3rd Nov., 2004 to the assessee to show cause why appropriate order under s. 263 be not passed with a view to correcting the lapse committed by the AO. In response to this notice, the Authorised Representative, Shri Bansal contended as under: A. Assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2001 replaced the old die on 28th Feb., 2001. Thus, he observed that the new die was put to use for only one month during the previous year under consideration. Yet the entire cost of the die i.e., Rs. 2,16,73,124 was debited in the P L a/c of the current year and was accepted by the AO. He observed that if the die were to be treated as a capital asset, the assessee would have been entitled to only 50 per cent of the eligible depreciation as the die was used for less than 180 days. He also observed that even if the item was not treated as a capital asset, then only the proportionate cost of the die, determined with reference to the number of parts manufactured from it during the previous year under consideration vis-a-vis total number of parts which it is capable of producing (according to the learned Authorised Representative, MUL laid down that maximum 75,000 parts can be manufactured from this die) could have been claimed as a revenue expenditure. 8. He also noted that the assessee in his letter dt. 18th Dec., 2004 further stated that old die was replaced by new die which was purchased from M/s DCM Tools Dies vide invoice No. 10, dt. 21st Dec., 1999 and was installed for us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 to 2002-03 the cost of tools and dies debited varied very significantly as follows: ---------------------------------------- Asst. yr. No. of parts Cost of tools produced and dies ---------------------------------------- 2000-01 1,69,000 5,63,58,842 2001-02 1,77,000 2,16,73,123 2002-03 2,07,000 1,78,70,013 ---------------------------------------- 13. The learned CIT, therefore, concluded that there was no satisfactory explanation of such variation in the method of accounting followed by the assessee to debit the entire cost of tools and dies in the year of installation itself and that the system followed was incorrect. Hence, he concluded that the AO accepted this practice and allowed profits determined in this manner while making the assessment which is erroneous and prejudicial to the interest of the Revenue. He, therefore, directed the AO to examine all aspects of the issue of allowability of tools and dies expenses and reframe the assessment. 14. The learned Authorised Representative for the assessee argued and submitted that the ground Nos. 1 and 2 of the appeal relate to the legality of passing order und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is not allowable as deduction under s. 37(1) of the IT Act, 1961. In the notice it is further stated that since the AO allowed the expenditure as a revenue expenditure it appears to him that the assessment framed is erroneous and prejudicial to the interest of the Revenue. He submitted that from p. 40 to p. 56 of the paper book the detailed replies to the CIT are placed which were submitted during the course of the hearing. It was also submitted by the learned counsel for the assessee that at p. 62 the details of the turnover net of excise, tools and dies expenditure claimed and tools and dies expenditure allowed are tabulated for the financial years 1987-88 till 2003-04. He submitted that from the financial year 1987-88 till financial year 1999-2000 the manufacturing activity was carried out as an independent unit of Highway Cycle Industries Ltd., Ludhiana. It was submitted that from the financial year 2000-01, the assessee became an independent company in the name and style Sunbeam Auto Ltd. 16. The learned Authorised Representative for the assessee further submitted that the learned CIT has observed in his order that the assessee manipulates the time of purchase of die so th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to be changed in a subsequent year. He also relied on the decision of the Hon'ble Delhi High court in CIT vs. A.R.J. Security Printers (2003) 183 CTR (Del) 323 : (2003) 264 ITR 276 (Del) wherein the decision of the Hon'ble Supreme Court in Radhasoami Satsang was followed. He also placed reliance on the decision of the Hon'ble Delhi High Court in CIT vs. Neo Poly Pack (P) Ltd. (2000) 245 ITR 492 (Del) wherein also the decision of the Hon'ble Supreme Court in Radhasoami Satsang was followed. 18. He also placed reliance on the decision of the Chandigarh Bench of the Tribunal in the case of Malhotra Industrial Corporation vs. Dy. CIT (2001) 247 ITR 8 (Chd)(AT) wherein the Tribunal held that the material on record showed that the assessee has always been claiming expenditure on replacement of rolls as revenue expenditure upto asst. yr. 1991-92. The Department had allowed the same as deduction. In none of the assessment years was the expenditure treated as capital expenditure. Hence, the expenditure incurred on replacement of damaged rolls was in the nature of revenue expenditure and not capital in nature. 19. The learned counsel for the assessee further argued and submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue unless the view taken by the ITO is unsustainable in law. He further submitted that the learned CIT has violated the principle, of natural justice as it made out an entirely new case without giving an opportunity to the assessee. He started the proceedings by saying that the expenditure incurred on dies was a capital expenditure but while passing the order he himself could not arrive at the conclusion that the expenditure incurred was a capital expenditure. He restored the matter back to the file of the AO to re-examine the issue of allowability of tools and dies expenses and reframe the assessment. He relied on the decision of the Hon'ble Bombay High Court in CIT vs. Gabrial India Ltd. (1993) 114 CTR (Bom) 81 : (1993) 203 ITR 108 (Bom) wherein it was held that the ITO had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given a detailed explan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance on the decision of the Hon'ble Delhi High Court in Gee Vee Enterprises vs. Addl. CIT 1975 CTR (Del) 61 : (1975) 99 ITR 375 (Del) wherein it was held that it is incumbent on the ITO to further investigate the facts stated in the return when circumstances would make such an enquiry prudent (and) that the word "erroneous" in s. 263 includes the failure to make such an enquiry. He submitted that to the same effect was the decision of the Hon'ble Delhi High Court in CWT vs. Anokha Singh (2000) 162 CTR (Del) 222 : (2000) 246 ITR 26 (Del). Hence, he submitted that since the AO has not enquired into the matter about the allowance of the dies as a revenue expenditure the CIT was justified in passing (order) under s. 263 of the Act. 25. The learned Departmental Representative further submitted that the CIT can exercise his powers under s. 263 of the IT Act, 1961, even in a case where the issue is debatable. He submitted that the revisional powers under s. 263 are not comparable with powers of rectification of mistake under s. 154 of the IT Act, 1961. For this proposition, he placed reliance on the decision of the Hon'ble Gujarat High Court in CIT vs. M.M. Khambhatwala (1992) 198 ITR 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowed by the assessee of writing off of the entire cost of dies in the year of its installation without considering the useful life of the same was not a correct accounting procedure adopted by the assessee. Hence, the order passed by the CIT was justified. 29. The learned Departmental Representative further submitted that in the asst. yr. 1999-2000 there was no income shown by the assessee and, therefore, no expenditure was claimed under this head by the assessee. He further submitted that in the asst. yr. 2000-01 the claim of the assessee was accepted by the AO while processing the return of income under s. 143(1)(a) of the Act and therefore, did not have the occasion to verify the expenses claimed and thus, it cannot be said that the expenditure claimed was allowed to the assessee after carrying out necessary verification of the expenditure claimed and by application of mind by the AO. He submitted that in the asst. yrs. 2001-02 and 2002-03, the same position remained as the return was processed under 143(1)(a) of the Act. Hence, it was his submission that the claim of the assessee for allowing the expenditure cannot be accepted on the ground that the same was allowed in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the learned Authorised Representative of the assessee that the expenditure on dies was claimed as a revenue expenditure by the assessee since financial year 1988-89 till financial year 1999-2000 when it was a suit of M/s Highway Cycle Industries Ltd., Ludhiana. From financial year 2000-01, it became an independent company in the name of M/s Sunbeam Auto Ltd. and has followed the same accounting practice. 35. We also note that the CIT has given a finding that the life of the die was approximately a year or so. We fail to appreciate as to how the CIT was of the view that the assessee was deriving any enduring benefit from dies so as to be treated as a capital expenditure. 36. We find that the assessee is a manufacturer of car parts. In this manufacturing process, dies are fitted in machines by which the car parts are manufactured. In our considered opinion, by replacement of worn out dies no new capital asset is brought into existence so that the expenses can be held to be a capital expenditure. It also does not enhance the life of the existing machines of which it is a part only and it has not increased the production capacity of the existing machines of the assessee-com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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