TMI Blog2007 (11) TMI 353X X X X Extracts X X X X X X X X Extracts X X X X ..... dras High Court in the case of CIT vs. Janakiram Mills Ltd. (2005) 196 CTR (Mad) 551 : (2005) 275 ITR 403 (Mad) as the decision in Janakiram Mills case has not reached finality and the Department has filed appeal before the Supreme Court. Ground 2: The learned CIT(A) erred in holding that excise duty and sales-tax are to be excluded from the turnover to work out deduction under s. 80HHC. Ground 3: The learned CIT(A) erred in directing that s. 80-IA deduction should be allowed on the eligible profits without reducing the deduction given under s. 80HHC. 2. Ground 1: The brief facts of the case are that during the year assessee company made an investment of Rs. 2,58,21,005 in plant and machinery and claimed that capital outlay as revenue expenditure under the head "Modernization and replacement". As per details filed, this represented purchase of three cone winding machines. The AO was of the opinion that purchase of these machines was in the nature of capital assets and gave enduring economic benefits to assessee over a period of time. Upon enquiry, it was submitted on behalf of the assessee as under: "During the year company has modernized three new cone winding machin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "After detailed deliberation which need not and therefore, not being discussed here for the sake of brevity, Hon'ble Madras High Court has upheld the above finding of the Tribunal and the appeal filed by the Revenue was dismissed. The facts of the present appeal have been verified and found to be exactly similar to the facts of the case decided by Hon'ble Madras High Court. Therefore, being the decision of the jurisdictional High Court, I am bound to follow this decision." Before us, the learned Departmental Representative submitted that decision of Madras High Court in case of CIT vs. Jankiram Mills Ltd. has been reversed by Hon'ble Supreme Court in case of CIT vs. Saravana Spinning Mills (P) Ltd. (2007) 211 CTR (SC) 281 : (2007) 293 ITR 201 (SC) and therefore now the issue stands covered in favour of the Revenue. 6. On the other hand, the learned counsel of the assessee objected to this proposition and submitted that issue raised by Revenue in its appeal is different from the issue considered by Hon'ble Supreme Court in the case of CIT vs. Saravana Spinning Mills (P) Ltd. He referred to the decision of Supreme Court in case of CIT vs. Saravana Spinning Mills (P) Ltd. and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of machinery in P L a/c is only revenue expenditure allowable under the Act." 9. He submitted that the above ground clearly shows that assessee claimed writing off of the modernization and replacement of machinery as revenue expenditure and, therefore, it cannot be said that the same was claimed as current repairs. Lastly, he referred to the decision of the Supreme Court in the case of CIT vs. Ramaraju Surgical Cotton Mills (2007) 212 CTR (SC) 345 : (2007) 294 ITR 328 (SC). In that case Supreme Court itself noted that a decision has been rendered in case of CIT vs. Saravana Spinning Mills (P) Ltd. under s. 31, but ss. 31 and 37 operate in different fields and that is why Supreme Court has segregated the appeals where claim was made for purchase of certain assets as replacement and to decide the issue whether such claim was allowable under s. 37 or not and after detailed discussion, the matter was sent back to the file of CIT(A) as requisite details were not available before the Supreme Court. 10. He also referred to the decision of the Hon'ble Madras High Court in the case of CIT vs. Sri Karthikeya Spg. Wvg. Mills Ltd. (2004) 186 CTR (Mad) 754 : (2004) 265 ITR 285 (Mad) whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntamination was removed from the yarn. Though auto cone winder costs several times more than manual cone winder, it was still necessary to go in for auto cone winder. This is so because consumers in the market were using hi-tech knitting and weaving machines to convert yarn into cloth and such machines do not allow yarn with any knots. In export markets, cones of 1 kg were not being accepted because foreign customers were accepting only yarn of 2 kgs. or more. In this background, it had become necessary to go in for auto cone machines and the assessee was compelled by the business circumstances to go in for such machinery. 12. Now, the question is whether replacement of manual cone machines with auto cone winders should be treated as revenue expenditure or capital expenditure. One of the principal tests laid down by the Hon'ble Supreme Court as well as Hon'ble Madras High Court was that if it leads to increase in manufacturing capacity of the assessee, then it would constitute capital expenditure. Otherwise, it would constitute revenue expenditure. In this regard he referred to p. 22 of the paper book where the quantitative details are given. He brought to our attention that inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uto cone winders because knotted yarn was not acceptable in the market and, therefore, at best it can constitute up-gradation of technology by installing auto cone and the same should be treated as revenue expenditure only. 15. While referring to the case law, he first of all cited the decision of the Hon'ble Supreme Court in the case of Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC) and brought to our attention, the following observation of the Court: "In Assam Bengal Cement Companies Ltd. vs. CIT (1955) 27 ITR 34 (SC) : TC 16R. 841, this Court observed: 'If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If, on the other hand, and it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure.' The aim and object of the expenditure would determine the character of the expenditure whether it is capital expenditure or a revenue expenditure." He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes and humidification plant was revenue expenditure allowable under s. 37 of the Act as they were only replacement of the existing machinery. He also relied on the following judgments: (i) Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC); (ii) Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC). 16. The learned Departmental Representative, on the other hand, referred to p. 2 of the assessment order and invited our attention to the note submitted by the assessee. He particularly referred to point 5 of the note which reads as under: "Our company is a textile mill and several High Courts and the Supreme Court have decided that replacement of any machinery which is forming part of the unit as whole is only a replacement expenditure." He submitted that this explanation will make it clear that the assessee was claiming the expenditure only on account of current repairs. Then he referred to p. 15 of the assessment order and submitted that the AO mainly discussed the issue on repairs only. He referred to the grounds raised before the CIT(A) and submitted that ground No. 4 was clearly referring to current repairs. In fact, before the CIT(A), the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 71.63 crores to Rs. 83.08 crores from the year ending 31st March, 2003 to 31st March. 2004 and here also, wages had almost remained same at Rs. 38.34 lakhs in the year ending 31st March, 2003 to Rs. 39.30 lakhs in the year ending 31st March, 2004. Then he referred to the annual accounts for the financial year 2004-05 and submitted that the processing charges have gone down from Rs. 8.17 crores to Rs. 5.92 crores which means that the efficiency of these machines must have increased. 19. The learned Departmental Representative also referred to various case law. He invited our attention to the decision in the case of Modi Spg. Wvg. Mills Co. Ltd. vs. (1993) 109 CTR (Del) 40 : (1993) 200 ITR 544 (Del) where even amount spent towards cost of marble, charges for cutting stones and renovating of administrative block was held to be not allowable as current repairs. Then he referred to the decision of Hon'ble Supreme Court in the case of Pingle Industries Ltd. vs. CIT (1960) 40 ITR 67 (SC) wherein it was observed that enduring benefit does not mean everlasting. It only means that life of machinery is going to be for many years. He also submitted that even the magnitude of the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding machines, but the total cost had increased because of increased electricity expenditure which becomes clear from Sch. XIV and the total expenditure on power and fuel had gone up from Rs. 8.66 crores to Rs. 9.05 crores. This only shows that no cost advantage was derived by the assessee by installation of the auto cone winders. It was a mere case of survival in the business because the assessee would not have been able to sell the thread with knots but for the decision to go in for auto cone winder. 21. The learned counsel for the assessee further contended that the case law referred to by the learned Departmental Representative are clearly distinguishable and have been considered by the Hon'ble Supreme Court in the decision cited supra. However, as far as the issue regarding magnitude of payment is concerned, the Hon'ble Supreme Court in the case of P.H. Divecha Anr. vs. CIT (1963) 48 ITR 222 (SC) has clearly observed in para 13 of the judgment that it may also be stated as a general rule that the fact; that the amount involved was large or that it was periodic in character has no decisive bearing upon the matter. In this case also, the Hon'ble Supreme Court has considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ef on the basis of decision of Madras High Court in case of CIT vs. Janakiram Mills Ltd. does not mean that assessee had made a claim under s. 31 in respect of current repairs. 25. We further find that Hon'ble Supreme Court in the case of CIT vs. Ramaraju Surgical Mills (P) Ltd. had clearly observed as under: "At the outset it may be stated that vide the judgment dt. 10th Aug., 2007, in civil appeals Nos. 7604-05 etc. of 2005 in the case of CIT vs. Saravana Spinning Mills (P) Ltd., this Court has set aside the impugned judgment herein of the Madras High Court in the case of Janakiram Mills Ltd., principally on the ground that s. 31 and s. 37 of the IT Act, 1961, operate in different spheres and the tests applicable to s. 31 cannot be read into s. 37 of the IT Act. However, we segregated the present civil appeal No. 7594 of 2005 from the earlier batch of civil appeal Nos. 7604-05 of 2005 as we were told that in the present case the assessee M/s Ramaraju Surgical Cotton Mills had claimed deduction only under s. 37 of the IT Act. Having heard learned counsel for the parties we are of the view that in the present case it is not clear as to the ground on which the assessee had c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... textile mill as a whole is to be treated as one unit. 7. This view has been accepted by the Tribunal, Madras in our own group case of M/s Sivaraj Spinning Mills (P) Ltd., ITA Nos. 1427 to 1429/Mad/2002, dt. 28th Feb., 2003 for the asst. yrs. 1993-94 to 1995-96." Ground 2 above clearly shows that the assessee debited and claimed expenditure on modernization and replacement of machinery only under s. 37 of the Act. In view of these facts, we are of the view that the issue to be decided by us is whether the claim made by the assessee under modernization and replacement can be treated as revenue expenditure under s. 37 or is in the nature of capital expenditure. 26. We have perused all the judgments cited by the parties and we are of the view that most of the judgments stand on their own facts and need not be discussed individually. However, we find that whether a particular expenditure incurred is revenue or capital has been discussed elaborately by the Hon'ble Supreme Court in the following three cases, viz.: 1. Empire Jute Co. Ltd. vs. CIT; 2. Alembic Chemical Works Co. Ltd. vs. CIT; 3. Assam Bengal Cement Co. Ltd. vs. CIT. 27. In the case of Empire Jute Co. Ltd. vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial production had not become obsolete of inappropriate in relation to the exploitation of the new product of high yielding variety and when it did not require an erection and commissioning of a totally new and different type of plant and machinery the expenditure incurred is revenue in nature. (b) Mere improvement in or updating of a process would not necessarily be inconsistent with the relevance and continuing utility of an existing infrastructure, machinery and plant of the assessee. (c) It is unrealistic to ignore the rapid advances in research and to attribute a degree of insurability and permanence with the technical know-how at any particular stage in this fast changing area of medical science. (d) The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-hole an outlay such as this as capital. (e) The improvisation in the process and technology in some areas of enterprise was supplemental in the existing business and there was no material to hold that it amounted to a new or fresh venture. (f) What was stipulated was an improvement in the operations of the existing business and its efficien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " payment may not be a relevant test. In nutshell, the above principles show that the nature of expenditure has to be determined in an individual case depending upon the surrounding circumstances of such expenditure and while considering such surrounding circumstances, the developments in business and scientific field have to be considered. 30. Now we will proceed to examine the circumstances and facts of the assessee's case in the light of the above principles. 31. We find that the assessee had installed manual cone winding machines which were leading to two defects; (i) when yarn was spinned and went into the winding process in manual cone winding, each cone could take only 1 kg. of yarn and could accept yarn from 20 cops of 50 gms. each. The yarn was manually joined through knots leading to 20 knots. In the meantime most of the knitting manufacturers had installed advanced machines which were not accepting the knotted yarn for knitting of cloth. However, such knotted yarn and that too with 1 kg of each cone was not acceptable in the export market. At the same time in the market auto cone winders were available which were used in the process of fusing of yarn which led to j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22.75 3,531.50 ------------------------------------------------------------------ Additional 2,491.25 expenses due to auto coner ------------------------------------------------------------------ Quality of Result Knotless yarn With knots yarn Contamination cleared uncleared yarn ------------------------------------------------------------------ Marketability Knot-less yarn is Cannot be exported essential in the market Density of More uniform Un-uniform package ------------------------------------------------------------------ 33. From the above chart it becomes clear that though capital cost in replacing the manual cone winders is very high, it has not given any cost advantage to the assessee and because of heavy interest on investment and additional electricity expenditure, the cost per unit has increased from Rs. 3,531 to Rs. 6,022 which clearly shows that no cost advantage was derived by the assessee. We further find that there is no reduction in wages as argued by the learned Dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at it amounted to a new or fresh venture. The further circumstance that the agreement pertained to a product already in the line of the appellants established business and not to a new product indicated that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day-to-day business of the appellant's established enterprise. The financial outlay under the agreement was for the better conduct and improvement of the existing business and was revenue in nature and was allowable as a deduction in computing the business profits of the appellant." In view of the above detailed discussions, we hold that expenditure incurred by the assessee on purchase of new auto cone winders would constitute revenue expenditure. Therefore, we confirm the order of the CIT(A) on this issue. 38. The next ground in this appeal is that the CIT(A) erred in holding that excise duty and sales-tax are to be excluded from the turnover to work out deduction under s. 80HHC of the IT Act. 39. After hearing both the parties, we find that this issue is squarely covered against the Revenue by the judgment of the Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X
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