TMI Blog2001 (2) TMI 292X X X X Extracts X X X X X X X X Extracts X X X X ..... aced in assessment year 1991-92 and three more carding machines were added subsequently. Two MCC carding machines replaced in assessment year 1994-95 for Rs. 22.45 lakhs was noted as five times the cost as it was in 1991-92. The CIT(A) considered the decision of the Supreme Court in State of Punjab v. Surinder Kumar [1992] 194 ITR 434 and observed that a decision could be treated as a precedent only if it decides a question of law. This observation was so made because the assessee had placed reliance on the decision of the Tribunal and the decision of Kerala High Court in CIT v. Co-operative Sugars Ltd. [1999] 235 ITR 343. The CIT(A) was of the opinion that he had not come across any decision that held that after the setting up of the mill, all subsequent replacement of any plant or machinery would have to be treated as revenue expenditure. He considered the meaning of the term "current repairs" and referring to another decision of the Apex Court in Assam Bengal Cement Co. Ltd v. CIT [1955] 27 ITR 34 observed: "In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment there is no doubt that it is a cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny other machine. The assessee does not merely carry on the business of cleaning of cotton and in fact it does not carry on the business of cleaning cotton alone. Cleaning of cotton is done for further process by it. It is, therefore, necessary to appreciate, he submitted, that carding machine is attached to the entire plant of textile mills and in order to improve the product the assessee had to replace its worne out carding machines as such. He submitted that a person carrying on only carding activity, if replaces the entire carding machine with a new and improved machine may have to be treated as having acquired an asset of enduring nature. However, if an assessee who replaces its worne out carding machine which is one set of machines belonging to a group of plant and machinery, their replacement including substantial replacement would result in revenue expenditure. He pleaded that the Kerala High Court decision in Co-operative Sugars Ltd.'s case is a direct authority on the proposition. He submitted that in that case the assessee had incurred Rs. 27.49 lakhs under the head 'Machinery maintenance' and this covered machineries like high velocity juice heter, sugar grader, centrif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve Sugars Ltd.'s case must be applied, because, as stated earlier, auto coners prepare cones comprising of yarn which yarn is used in textile manufacture and yarn as such is not sold. Mr. V. Ramachandran, the learned counsel insisted that the decision of the Supreme Court in CIT v. Mahalakshmi Textile Mills Ltd [1967] 66 ITR 710 still holds good and should be applied to the facts of the case. He submitted that in that case there was clear appreciation by the Madras High Court, which was upheld by the Supreme Court, that replacement of a machine by an improved one would still remain a replacement and would have to be allowed as revenue expenditure. 5. The learned Sr. Departmental Representative, Mr. Gorakhnathan, submitted a paper book and to facilitate us had filed in the shape of written submissions comprising of 22 pages the various aspects of the issue. He had also placed in the paper book the decisions of the Supreme Court in Mahalakshmi Textile Mills Ltd.'s case and the decision of the Tribunal in Nagammal Mills Ltd.'s case. The point that Mr. Gorakhnathan was making was that the Supreme Court in Mysore Minerals Ltd. v. CIT [1999] 239 ITR 775 had considered an earlier decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e there was no reference to the decision of the Supreme Court in Mahalakshmi Textiles Mills Ltd.'s case it has been able to appreciate the fact that when there is wear and tear over the years by use and the old type replacement parts were not available in the market, or the machines as such became not economical for use, the same being replaced by improved version, the replacement of an existing machine which was part of the entire plant was revenue in nature. The Kerala High Court has been able to appreciate that sugar mill has various machineries and it carries on several processes before the end-product, namely sugar, is brought out. They have further appreciated the proposition that the intermediary product, namely sugarcane juice is not the end-product of the assessee but as intermediary product which undergoes further processes and it is only the final product, namely sugar, that is sold by it. The Kerala High Court had carried out extensive tests as laid down by the Supreme Court in Alembic Chemical Works Co. Ltd v. CIT [1989] 177 ITR 377 for the proposition once for all payment and enduring benefit with reference to their treatment whether capital or revenue. The broad prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us processes like carding, yarn making etc. Combination of all of these machineries constitute one wholesome plant and machinery of the mill. Replacement of any of the machinery that carries on one of the processes by even a new and improved version, as was held in Mahalakshmi Textile Mills Ltd 's case, 'Casablanca conversion system', would still constitute revenue expenditure. Replacement of a diesel engine in place of a petrol engine after carrying out certain modification was held to be revenue expenditure. No doubt, the petrol engine was capable of being sold separately and the diesel engine also. But so far as the user is concerned, he uses the vehicle, of which vehicle the engine is a part. The vehicle comprises of various parts, namely engine, body, seats, wheels, suspension foundation for holding the body and so on. Insofar as the manufacturers of each of these items is concerned, it may be a different story. But so far as the buyer of the vehicle is concerned, what he buy is the vehicle and if he replaces any item, which is part of the vehicle, by another and improved item, the vehicle will still remain a vehicle. This is in fact the proposition brought out by the Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier process, it is clearly in the nature of replacement and hence revenue expenditure. Accordingly, the common issue in regard to replacement of machinery by cotton mills would constitute revenue expenditure is decided in favour of the assessee and against the Department. 8. One other common issue raised is with regard to claiming 100% depreciation for overhead cleaners. The claim of the appellant is that overhead are used for dust collection and thus is able to control air pollution and accordingly are eligible for enhanced depreciation. The claim of the assessee that these are pollution control equipments, they have been installed in textile mills and hence have to be given 100% depreciation as prescribed in the rules was supported by a certificate from the manufacturer only. The authorities below were of the opinion that certificate from the Pollution Control Board is necessary. 9. On this issue considering the insistence by the Central Government and the State Government to the industries for controlling various kinds of pollution that the industry generates, this issue requires reconsideration at the level of the Assessing Officer. The Ministry of Industries together wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. He pleaded that sale price means the price that is charged by the assessee but it is the customers that gives the assessee some profit. The learned counsel Mr. V. Ramachandran relied on the Bombay High Court decision in CIT v. Sudarshan Chemicals Industries Ltd [2000] 245 ITR 769 for the above proposition and submitted that in that case it had been clearly held that excise duty and sales-tax are not includible in total turnover for the purpose of special deduction under section 80HHC of the Act. The Sr. Departmental Representative, Mr. Gorakhnathan, relied on the various decisions of the Supreme Court which had held that sales-tax is part of the sale price and would have to be included in the total turnover. 12. After considering the rival contentions on the above issue, we find that the issue is squarely covered by the decision of the Bombay High Court. In that case profits derived from exports, profits and gains of business as computed in the same proportion as export turnover bears to the total turnover, were all considered with reference to the deduction to be allowed under section 80HHC of the Act. Their Lordships of the Bombay High Court found considerable merit in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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