TMI Blog2001 (3) TMI 271X X X X Extracts X X X X X X X X Extracts X X X X ..... : (1997) 224 ITR 414 (SC) did not allow the claim of revenue expenditure of Rs. 75,62,854, since the assessee has increased its spindlage capacity from 12,960 to 13,440 thereby increasing its production capacity. As the new machineries replaced give enduring benefit to the assessee, the AO capitalised the same and due depreciation allowed thereon. On appeal the CIT(A) after considering the matter in a detailed order dismissed the appeal of the assessee. Aggrieved, the assessee is in appeal before us. 3. The learned counsel for the assessee submitted that the CIT(A) erred in upholding the disallowance of expenditure of Rs. 75,62,854 incurred by the assessee on replacement of combers and lap formers as capital expenditure. He erred in not following the principles laid down in several decisions of the Supreme Court, various High Courts and the Tribunal relied on before him. The certificate from sitra furnished by the assessee and company's own report bring out that the replacement of the combers and lap formers had only contributed to the improvement in the quality of the yarn produced by the assessee and did not represent increase in capacity. The various points 'summed up' at pp 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit for consideration of allowances under ss. 31 and 32 of the Act, replacement of defective parts of a machinery with the objective of preserving and maintaining the machinery, though involving a substantial value is a revenue expenditure allowable under s. 31 as current repairs whereas replacement or renewal of the entire machinery or substantial replacement of parts of the entire machinery amounts to creation of new asset and the expenditure incurred is capital expenditure which cannot be allowed under s. 31. The question is whether there is an option available to the assessee regarding whether to claim depreciation and other capital allowance or whether to claim replacement as repairs. In view of the observations of the Hon'ble Madras High Court in CIT vs. Southern Petro Chemical (1998) 148 CTR (Mad) 520 : (1998) 233 ITR 400 (Mad) such an option is not available to the assessee. The principle of res judicata and estoppel do not apply to income-tax proceedings. 5. The learned counsel for the assessee replied that it is erroneous to have disallowed the sum of Rs. 75,62,854 being cost of replacement of 8 combers and one lap former by imported combers and lap former of the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial vehicle have been increased. The same is now 40 per cent and if a new vehicle is acquired in replacement of condemned vehicle of over 15 years, the rate of depreciation is 60 per cent. 6.3. This view is also supported by the observations of the Hon'ble Supreme Court in a recent decision in Mysore Minerals Ltd. vs. CIT (1999) 156 CTR (SC) 1 : (1999) 239 ITR 775 (SC). Explaining the nature of depreciation, it was, inter alia, observed: "An overall view of the above said authorities shows that the very concept of depreciation suggests that the tax benefit on account of depreciation legitimately belongs to one who has invested in the capital asset, is utilising the capital asset and thereby losing gradually investment caused by wear and tear, and would need to replace the same by having lost its value fully over a period of time." 6.4. The IT Act of 1961 is based mainly on the recommendations of the Report of the Taxation Enquiry Commission of 1955. The Commission received various representations and expressed its views in this regard. It is interesting to note that the commission had dealt with the issue of repairs as follows: "25(i) Repairs-Sec. 10(2)(v) of the Indian IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's submissions, to reiteration reference may be made to the decision of the Tribunal Pune Bench in Eagle Flask Industries Ltd. vs. Dy. CIT (1999) 65 TTJ (Pune) 422 : (2000) 72 ITD 455 (Pune) and the extract at pp 458 459 from the decision of the Supreme Court in Kamalakshi Finance Corporation Ltd.'s case wherein the Supreme Court has emphasised that the orders of the Tribunal should be followed by the AO and the first appellate authority and that utmost regard should be paid by the assessing and appellate authorities to the requirements of judicial discipline. 7.5. Reference may also be made in this connection to the following observations in C.D. Thadani, ITO vs. Universal Ferro Allied Chemicals Ltd. (1988) 69 CTR (Bom) 37: (1988) 172 ITR 30 (Bom) at p 37: "Take for example, the High Court considers and interprets the decision given by the Supreme Court on a certain issue. Now, is it permissible for the District Court to ignore the High Court judgment by claiming that the High Court has not properly interpreted the decision of the Supreme Court? If the District Court is permitted to do so it would make chaos in the administration of justice and this must be prevented a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons was only an integral part of the whole plant and they did not have independent existence. Further, the manufacturing operation itself was a continuous process in the case of sugar mills and the final product, the sugar crystal and by-product molasses emerged at the final stage. There was no scope for taking out the products in between. Therefore, the repairs and replacements done by the assessee were but only repairs and replacements of parts of an integrated machinery. By such repairs and replacements, no advantage of an enduring nature had come into existence. The profit status of the assessee was only maintained by doing such repairs and replacements. Hence, the repairs and replacements of machines were revenue in nature. 7.9. In view of the above cited direct decisions on replacement of machinery in textile mills, it is submitted that the discussion in the Department's paper book in on the meaning of plant and machinery, fixed and circulating capital, capital and revenue expenditure are purely academic and do not deserve any consideration on the present case. 7.10. The Department has attempted a distinction based on the IT (Sixth Amendment) Rules, 1969 and stated that u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion' the proper forum to agitate the issue is the apex Court and until the matter is reviewed by the apex Court the binding decisions of the Courts have to be followed by the assessing and appellate authorities as per the requirements of judicial discipline. 8.1. In turn, the learned representative for the Revenue highlighted that it has become a common feature in the cases of many of the spinning mills that the substantial sum is spent in buying and installing items of new machinery under the guise of "modernisation and replacement" of old machinery and claiming the expenditure as Revenue, though in many cases it is capitalised in the books. One of the cases often quoted in support of the above claim is that of CIT vs. Mahalakshmi Textiles Mills. The Supreme-Court in that case was ruling on the jurisdiction of the Appellate Tribunal. 8.2. In the case of CIT vs. Mahalakshmi Textile Mills cited supra, what was essentially decided by the apex Court was the jurisdiction of the Tribunal. In that case, the assessee had originally claimed development rebate on casablanca conversion system and subsequently for the first time before the Tribunal claimed that in the alternative, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a whole. 8.4. From asst. yr. 1970-71 the provisions of s. 32 r/w r. 5 of the IT Rules do not have any provision granting replacement of machinery as revenue expenditure. This is in contrast with the earlier provision (1922 Act with r. 8 and r. 5 upto asst. yr. 1969-70), wherein replacement cost of certain machineries were granted allowance by way of revenue expenditure. For example rollers used in flour mills and sugar works, rolling mill, rolls, etc. Under the new provision, these items get 100 per cent depreciation and not any allowance by way of revenue expenditure. The provision allowing replacement cost of machinery as revenue expenditure had been totally removed effective from 1st April, 1970 i.e. asst. yr. 1970-71. 8.5. The computation of written down value under the scheme of block of assets envisages that the value of all new replacing machinery be added to the opening WDV and that the value of old replaced machinery be reduced from the WDV. Provisions of s. 50 by which capital gains is computed on the net sale consideration of plant and machinery is further elucidation of the above concept. 8.6. Sec. 37(1) clearly states only revenue expenditure and not capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction until the original cost is recovered is to provide a fund for replacing the machinery and plant at the end of the term. 8.12. In Ballimal Naval Kishore vs. CIT the Supreme Court has approved the test laid down by the Bombay High Court in the case of New Shorrock Spinning Mfg. Ltd. vs. CIT. 8.13. Thus in the light of the changed legal environment from asst. yr. 1970-71 wherein plant and machinery itself is the unit for consideration of allowances under ss. 31 and 32 of the Act, replacement of defective parts of a machinery with the objective of preserving and maintaining the machinery, though involving a substantial value is a revenue expenditure allowable under s. 31 as current repairs whereas replacement/renewal of the entire machinery or substantial replacement of parts of the entire machinery, amounts to creation of a new asset and the expenditure incurred is capital expenditure which cannot be allowed under s. 31. In conclusion, the purpose of granting highly liberal rates of depreciation on the various blocks of assets had been elucidated by the Hon'ble Finance Minister in his Budget Speech for 1986-87 in the context of Taxation Laws (Amendment and Miscellane ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome under the Act and if he finds there are particulars for the grant of depreciation, as an officer to determine the correct income of the assessee, he has jurisdiction to grant the depreciation even where the assessee has not desired the deduction for reasons of its own and there is no question of bargain in the grant of statutory allowances. If the choice is granted to the assessee in the matter of grant of statutory allowances, it would in effect distort the determination of the total income and it will contort the priorities in the matter of granting statutory deduction available under the Act." 8.16. Principle of "Generalia specialibus non derogant" is a well settled principle of interpretation that a statute must be read an a whole and every provision must be construed with reference to the context and other clauses in the statute so as to make a consistent enactment of the whole statute. It is equally well-settled that the sub-sections or sub-clauses must be read as parts of an integral whole and as being interdependent and an attempt should be made in construing them to reconcile them if it is reasonably possible to do so, and to avoid repugnancy. If there are two confli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of cotton, paper manufacturing machinery, newspaper production plant and machinery, machine tools, etc. which statutorily retained their separate individual identity even though they were utilised in the mill/concern for manufacture of the final marketable product- cotton yarn, paper, etc. Depreciation at special rates in this category was specifically granted to the individual asset depending upon the purpose for which it was utilised. It is pertinent to point out at this juncture that depreciation on plant and machinery was granted depending upon the purpose for which they were used and not on the basis of capacity or the characteristics of the machinery. The Hon'ble Madras High Court in CIT vs. Vasan publications (P) Ltd. had held that "the grant of a higher special depreciation allowance was with reference to the purpose for which the machinery was used and not with reference to its capacity or the character of the machinery". 8.20. However from asst. yr. 1970-71 there was a total break from the past methods. From asst. yr. 1970-71 onwards, all plant and machinery, wherever and for whichever purpose they were utilised, retained their separate individual identities and they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fact that s. 38(2) of the IT Act empowers an AO to restrict the depreciation on an asset building, plant, machinery, or furniture-to a fair proportionate part in case the asset had not been put to use for the purposes of the business. The present provisions of s. 32 and the r. 5 clearly indicate that plant and machinery have distinct independent identities as individual assets forming part of block of assets with distinct rates of allowances. The Tribunal (Special Bench) Chandigarh in Gulati Saree Centre vs. Asstt. CIT (2000) 66 TTJ (Chd) (SB) 286 : (1999) 240 ITR 94 (AT) and Bansal Contractors (India) ltd. Anr. vs. Union of India Ors. (2000) 160 CTR (Del) 20 : (2000) 241 ITR 97 (Del) had held that the present provisions relating to depreciation "stipulate the concept of various individual assets entering or going out of the block of assets and that the individual assets retain their identity." 8.23. Both the statute and the judiciary/appellate authorities have given recognition to the dissection of the plant and machinery of the mills, works, factory machinery and concern, into several dependent identifiable units of plant and machinery in various blocks of assets with va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al benefits and that, in such a matter, it would not be possible for the Court to place an elastic interpretation and enlarge the scope of the relief, for, in that event, the Court will be legislating in fiscal sphere and granting relief which the legislature did not expressly grant by a process of interpretation." 8.26. Further one should also bear in mind the caution sounded by the Supreme Court in CIT vs. N.C. Budharaja Co. (1993) 14 CTR (SC) 420 : (1993) 204 ITR 412 (SC). Speaking for the Supreme Court, his Lordships, B.P. Jeevan Reddy J. observed. "The principles of adopting a liberal interpretation which advances the purpose and object of beneficent provisions cannot be carried to the extent of doing violence to the plain and simple language used in the enactment. It would not be reasonable or permissible for the Court to rewrite the section or substitute words of its own for the actual words employed by the legislature in the name of giving effect to the supposed underlying object. After all, the underlying object of any provision has to be gathered on a reasonable interpretation of the language employed by the legislature." In the light of the changed law and the no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 : (1985) 155 ITR 120 (SC); (b) Smt. C. Krishnammal vs. Dy CIT (1998) 61 TTJ (Mad) 99 : (1998) 66 ITD 83 (Mad); and (c) Shriram Transport Finance Co. Ltd. vs. Asstt. CIT (1999) 70 ITD 406 (Mad). 8.30. The Hon'ble Madras High Court in Mir Mohammed Ali vs. CIT (1960) 38 ITR 413 (Mad), whose judgment has been affirmed by the Hon'ble Supreme Court in CIT vs. Mix Mohammed Ali adopted the following steps to decide the issue of machinery and allowance of depreciation: (a) Machinery must be given the same meaning with reference to each of the statutory provisions in s. 10(2)(vi) and s. 10(2)(via) of IT Act, 1961. (b) A diesel engine (fitted in a bus) is machinery the test laid in the case of Corporation of Calcutta vs. Chairman, Cossipore and Chitpore Municipality. (c) Machinery does not cease to be machinery merely because it has to be used in conjunction with one or more machines. Nor does it cease to be machinery merely because it is, for instance, installed as part of manufacturing or industrial plant. (d) The statutory provision for depreciation is in the alternative. Whether it is plant or whether it is machinery without its being itself a plant, the assessee is entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the expenditure is made for the initial outlay or for extension of a business or for a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital of the income of the concern is certainly in the nature of capital expenditure." From this judicial dictum, it is obvious that expenditure incurred on replacement of old machinery/capital assets by new machinery/capital assets is a capital expenditure and hence not allowable under s. 37(1) of the Act. The Supreme Court like the statute never envisaged a situation of transmogrification of a capital asset into a revenue asset in the guise of an allowance under s. 37(1) of the Act. 9.1. Rival submission heard and relevant orders read including the various case laws torrentially showered by both the parties before us as well as the concerned provisions of law over the issue in question, besides the contents of the paper book in detail filed by both the parties before us. Before we proceed further, we have to record our appreciation of the str ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rch, 1999 in ITA No. 1757/Mad/1998 in the case of Sri Narendraraja Textiles Ltd. vs. Dy. CIT, the Tribunal has followed the earlier order of the Tribunal in the case of Nagammal Mills Ltd.'s case. Nagammal Mills Ltd.'s case has also been relied upon by the CIT(A) which is a decision in favour of the assessee on the question of expenditure on replacement of textile machinery, but has expressed the contrary view that the expenditure is capital in nature. In our considered view, such order of the CIT(A) insofar as it contains a different finding while relying upon the Tribunal's decision referred to earlier is apparently wrong. 9.5. Regarding the decision in the case of Ballimal Naval Kishore, which has been relied upon by the order impugned, is a binding decision which has been considered duly by the decision of the Madras High Court in Sree Narasimha Textiles (P) Ltd.'s case. The test laid down in the case of New Shorrock Spinning Manufacturing Co. Ltd. vs. CIT, has been applied by the Madras High Court and has also been applied and approved by the Supreme Court in the case of Ballimal Naval kishore. The assessee, a manufacturer of textiles, replaced certain electric motors and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set of facts, it will not only shake the confidence of the public in judicial procedure as such, but it will also totally destroy such confidence. The result of this will be conclusions based on arbitrariness and whims and fancies of the individuals presiding over the Courts or the Tribunals and not reached objectively on the basis of the facts placed before the authorities. If a Bench of a Tribunal on the identical facts is allowed to come to a conclusion directly opposed to the conclusion reached by another Bench of the Tribunal on an earlier occasion, that will be destructive of the institutional integrity itself. That is the reason why in a High Court, if a single Judge takes a view different from the one taken by another Judge on a question of law, he does not finally pronounce his view and the matter is referred to a Division Bench. Similarly if a Division Bench differs from the view taken by another Division Bench it does not express disagreement and pronounce its different views, but has the matter posted before a Fuller Bench for considering the question. If that is the position even with regard to a question of law, the position will be a fortiori with regard to a ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mal Mills Ltd. that in the aforesaid cases the Tribunal allowed similar expenditure incurred by the assessees on replacement of ring frames, etc. as revenue expenditure and that, therefore, despite the Tribunal's finding given at paras 8 to 10 of that order, the expenditure on replacement of cone winder, spinning frame and 110KVA diesel generator is allowed as revenue expenditure by respectfully also following the earlier decisions of the Tribunal cited supra. Thus the concerned ground raised by the assessee in that case was allowed by Tribunal in favour of the assessee. In other words, paras 8 to 10 thereof are only obiter dicta which have no binding force like the ratio decidendi at para 11 thereof. 9.8. In the case of Janakiram Mills Ltd. the Tribunal by its order dt. 16th July, 1993 on similar issue has decided in favour of the assessee after duly considering the decisions relied upon by both the sides, the relevant submissions and the materials on record on both the sides. It would be worthwhile to further state that in support of the assessee's contention the assessee relied upon the decision of the Supreme Court in the case of CIT vs. Mahalakshmi Textiles Mills Ltd., and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of Mahalakshmi Textile Mills Ltd., where similar expenditure had been allowed as revenue expenditure. The argument of the Revenue that the ring frames should be regarded as independent machinery and should be considered as capital outlay was rejected by the Tribunal. The Tribunal further observed that it was not disputed by the Revenue that even if it is regarded as a machine, it was in fact replaced as part of the system and such replacement expenditure fell within s. 31 as current repair. The Tribunal found that there was no justification for the authorities below in disregarding the decision of the Tribunal which was on all fours with the facts of that case. Hence it had no hesitation in deleting such disallowance, besides also further observing that at least hereafter the authorities below would maintain judicial discipline in accordance with he decision in the case of Union of India vs. Kamalakshi Finance Corporation Ltd., (1991) (55) ELT 43 SC). Similar is the position in the case of Sundaram Textiles Ltd. cited supra. 9.9. The Revenue seems to have accepted the finality of those decisions, since no opinion of the Hon'ble High Court has been sought or reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nduct of their affairs, as well as a basis for orderly development of legal rules. The judgment of any Court is authoritative only as to that part of it, i.e., para 11 of the order in the case of Nagammal, which is called the ratio decidendi, the reason or ground of decision of the actual issue between the litigants. It is the principle/s denied from authority on which the Court reached its decision, or, negatively, the principle/s without which the Court would not have reached the decision that in did reach, as said by Allen at p 259 in his Treatise on "Law in the Making". It is for a Court whatever degree which is called upon to consider a precedent to determine what the true ratio was. The doctrine of precedents means merely that precedents which may be cited and the followed by the Courts when it is squarely applied to similar situation with identical issues. Hence, weight has to be attached to them. Precedent can be urged as an authority where the circumstances of the case to which it is sought to be applied are precisely similar to the circumstances of that case. This is the legal proposition laid down per Lord Chelmsford, L.C. in the case of Dundee Magistrates vs. Morris for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether excluded. Our view taken in the instant case on the judicial compulsion is also fortified by the decision in the case of Produce Brokers Company vs. Plympia Oil Cake Company Ltd. in 1916 IAC 314, wherein Buckley L.J. remarks, "I am unable to adduce any reason to show that the decision which I am about to pronounce is right. On the contrary, if I were free to follow my own opinion, my own powers of reasoning such as they are, I should say that it is wrong. But I am bound by the authority, which of course it is my duty to follow and following authority, I feel bound to pronounce the judgment which I am about to deliver." Hence these decisions cannot be disregarded by the lower Courts including Tribunals. 9.13. While so, a persuasive precedent may be disregarded, not being of binding nature like those of non-jurisdictional High Courts and of foreign Courts. Conditionally authoritative precedent may be disregarded only if two conditions are satisfied, viz. that the maxim 'cessante ratione legis cessat lex ipsa', i.e., when the reason for any particular law ceases, so does the law itself, should be applicable. Further, that the maxim 'communis erro facit jus', i.e. common erro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he lower Courts are found to violate this principle and follow decisions of other High Courts. This can be too strongly condemned". 9.17. Blackstone propounded the theory in Jurisprudence that the function of the Judge is "Jus dicere et non jus dare", i.e. to declare the law and not to make law. In the instant case also, the law has been only declared and not made by the Tribunal, by following its own decisions as well as particularly the decisions of the jurisdictional High Court and especially of the Supreme Court. The great jurist Salmond is of the view that judicial precedents are original and these original precedents give rise to new law. Hence, judicial precedent is a material source of law which has necessarily to be followed. England follows the principle of stare decisis. Past decisions are binding upon Courts in similar future cases. So in England judicial precedent is a legal material source of law. The doctrine of stare decisis has been accepted in India and USA as well as in the legal system based upon that of England. Thus and therefore a judicial precedent is accepted by all these legal systems as a legal material source. Only in the continental countries this doc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... replacement and, therefore, it is wrong to say that any new asset of enduring nature has come into existence. Whether or not a new asset has come into existence-this question has to be considered vis-a-vis the integrated sugar plant and not vis-a-vis each integral know how on consideration of 'once for all payments' was held to be the expenditure as revenue in nature in the case of Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) : (1989) 177 ITR 377 (SC) we see no reason why expenditure incurred on purchasing of new machinery to ensure sound functioning of the sugar mill to replace the old ones should not be held as revenue expenditure." The apex Court has also dismissed special leave petition filed by the Department against the judgment of the Kerala High Court as reported in (1998) 234 ITR (St) 31. 9.21. Our attention has also been invited to the decision in the case of Asstt. CIT vs. Shree Datta Dairy (1998) 67 ITD 357 (Pune) at 364 to 366 at paras 8 to 11. The Revenue before us repeatedly emphasised that the assessee treated the replacement as capital expenditure in the books of account. The treatment in the books cannot determine the nature and taxability of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the opinion that: (a) cone winders, spinning frame and 110 KVA diesel generator are independent new machines and they are in the nature of assets; (b) investments in these machineries are also in the nature of fixed capital and the nature of advantage to the assessee is in the capital field; (c) investment in these machineries brings enduring benefit to the assessee mills; (d) some assessees have also shown such machinery and plant as addition to the assets in their balance sheet and therefore, keeping in view the sound accountancy principles the installation of these machineries forms part of the addition to the assets in the balance sheet. The possession of such machinery is necessary for carrying on manufacturing and business operations; and (e) the object of incurring expenditure on these machineries was not repair of old machineries but installation of new machineries because some old machinery/assets were sold by the assessee." The above finding of fact have been held to be applicable to the case of Kalaivani Spinners (P) Ltd. wherein also assessee has capitalised value of the above plant and machinery in the books of account and shown such value of machinery and plant a ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
