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TMI Blog2012 (1) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment was made under section 143(3) on December 24, 2009. Out of various contentious additions, we are concerned now with only two issues-one, relating to expenses incurred on modernisation and alleged replacement of machinery; and second relating to captive consumption of electricity. The facts apropos the first issue are that the assessee has claimed Rs.9,21,48,805 as revenue expenditure. This amount was spent allegedly on modernisation and replacement of old textile machinery. The assessee has furnished the list of such machinery as part of the audit report in Form 3CD. The assessee has made this claim in the income computation statement. As per the Assessing Officer, this expenditure was seen as comprising of machinery such as autoconer, comber and lap former. The Assessing Officer was of the opinion that this expenditure was covered by the decision of the hon'ble Supreme Court rendered in the case of CIT v. Sri Mangayarkarasi Mills P. Ltd. [2009] 315 ITR 114 (SC) as according to him, the facts of that case are akin to the facts of the case in hand. As per the Assessing Officer, the apex court has treated similar expenditure as capital in nature. Accordingly, the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Explanation to sub-section (8) means the price that such goods or services would ordinarily fetch in the open market. Sub-section (8)(a) of the Act as amended as per the Finance Bill, 2009 envisages the method of determining the market value of such services while claiming deduction in respect of certain incomes under Chapter VI-A. As per the Explanation in the amended section, market value in relation to the services sold means the price that such services would fetch if sold by the undertaking in the open market subject to statutory or regulatory restrictions. Power generated by the windmill has to be either consumed by the assessee or sold to the Tamil Nadu Electricity Board, the statutory authority existing by virtue of the Tamil Nadu Electricity Act at the price determined by it. The same cannot be sold to any third party as per the agreement reached between the assessee and the Tamil Nadu Electricity Board while installing the windmill. In such a situation the price determined by the Tamil Nadu Electricity Board in respect of the power purchased by it from the windmill is to be adopted, i.e., at Rs. 2.70 per unit of power generated and supplied to Tamil Nadu Electricity Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 80-IA(8). The learned Commissioner of Income-tax (Appeals) has confirmed the action of the Assessing Officer and disallowed the assessee's claim of Rs. 2,51,43,840 made under section 80-IA of the Act. Aggrieved, the assessee is in appeal before us by raising the following grounds: "1. For that the order of the Commissioner of Income-tax (Appeals) is contrary to law, facts and circumstances of the case and at any rate is opposed to the principles of equity, natural justice and fair play. 2. For that the Commissioner of Income-tax (Appeals) failed to appreciate that the order of the Assessing Officer is without jurisdiction. 3. For that the Commissioner of Income-tax (Appeals) failed to appreciate that the expenditure incurred towards modernisation and replacement of machinery is revenue expenditure and not capital expenditure. 4. For that the Commissioner of Income-tax (Appeals) failed to appreciate that the expenditure incurred towards modernisation and replacement is allowable as deduction under section 37 since the expenditure has not resulted in increase in the production capacity. 5. For that the Commissioner of Income-tax (Appeals) failed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37 because this expenditure has not resulted in the increase in production capacity. It was argued that the modernisation and replacement of machinery has not brought into existence any new asset(s) of an enduring nature. He has dis tinguished the facts of this case from the facts of the hon'ble Supreme Court's decision in Sri Mangayarkarasi Mills P. Ltd.'s case [2009] 315 ITR 114 (SC) and has stated that in a way this decision supports the case of the assessee-company. Per contra, the learned Commissioner of Income-tax/ Departmental representative has supported the finding of the Assessing Officer as well as that of the learned Commissioner of Income-tax (Appeals) by further stating that this expenditure is nothing but incurred on replacement of machinery which cannot be treated as a revenue expenditure in view of the decision of the hon'ble Supreme Court rendered in the case of CIT v. Sri Mangayarkarasi Mills P. Ltd. [2009] 315 ITR 114 (SC). After cogitating the rival stands in the light of obtaining evidence/facts/ circumstances of the case, we have found that during the year the assessee company had installed a new technology called "compact spinning system". To unders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... replaced with the latest, hi-tech gadget. It was brought to our notice and it was found for a fact that all the ring frames have not been replaced with the latest gadget. Only certain number of ring frames are fitted with this new gadget and the remaining continued to manufacture earlier quality of yarn catering to the requirement of lower strata of the society. Out of 50 ring frames, only 37 ring frames are fitted with this gadget and the remaining are running with conventional gadget. This fact was also found to be undeniable and to be correct. It was also found to be a fact that the old drafting systems simply become scrap on replacement and cannot be used again as such. We are convinced that the yarn normally contains "hairy" substance like bristles on the side of the thread and when this yarn is sent through the "compact spinning system", these hairy substances are removed and yarn gets a shining. Manufacturing premium quality of yarn which fetches higher price in the market, attracts high income group customers. We have also under stood the need for installing these compact spinning systems because these are used in manufacture of T-shirts and the manufacturers of T-shirts n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Prabhu Spinning Mills P. Ltd. has during the previous year relevant to the assessment year 2007-08 installed new technology called compact spinning system whereby the conventional drafting system was replaced with the latest, state of the art gadget called 'compact spinning'. 4. During the previous year relevant to the assessment year 2007 08, the company has purchased compact spinning system for a sum of Rs. 8,45,86,999. 5. The Assessing Officer has in his order dated December 24, 2009 passed under section 143(3) of the Income-tax Act at page 23, stated that 'the expenditure is seen to comprise of machinery such as auto coner, comber and lap former'. 6. The observation to this effect of the Assessing Officer is contrary to the facts as the company has purchased compact spinning system to the tune of Rs. 8,45,86,999, carding machine for Rs. 64,51,249 and chute feed FBK for Rs. 11,10,557. 7. Further, the Commissioner of Income-tax (Appeals) also in his order dated August 29, 2011, at page 4, paragraph 5, has stated that 'Out of Rs. 9,21,48,805 added back as revenue expenditure on account of replacement of machinery, the assessee, vide letter dated Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvinced that this observation of the learned Commissioner of Income tax (Appeals) is not correct being contrary to the facts of the case. This affidavit remained uncontroverted. The company has purchased 18 sets (20,736 Nos.) of gadget for 18 ring frames and not 2 nos. of spinning drafting system as mentioned in paragraph 5 and further through letter dated August 10, 2011, the assessee has withdrawn the claim of expenditure to the tune of Rs. 75,61,806 which pertain to machinery other than "compact spinning system" and not for replacement. Thus, we observe that this is a wrong finding of facts given by the learned Commissioner of Income-tax (Appeals) based on misconception of the version of the letter dated August 10, 2011. Having stated as above, now we turn to the decisions. The learned authorised representative has relied on various decisions which are contained in the paper book showing index of cases are as under : (i) CIT v. Sri Mangayarkarasi Mills P. Ltd. [2009] 315 ITR 114 (SC) ; (ii) Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) ; (iii) Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC) ; (iv) Alembic Chemical Works Co. Ltd. v. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite period. (f) It relied on the decision in Hallston's Property Ltd. v. Federal Commissioner of Taxation 72 CLR 634 "what is an outgoing of capital and what is an outgoing on account of revenue, depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal right, if any, secured, employed or exhausted in the process". (g) The question must be viewed in the larger context of business necessity or expediency. (h) It applied the principle laid down in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC) "in considering allocation of expenditure between the capital and income accounts, it is almost unavoidable to argue from analogy". There are always cases falling indisputably on the one or the other side of the line and it is a familiar argument in tax courts that the case under review bears close analogy to a case falling on the right side of the line ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e account and the test of enduring benefit may break down. Summing up: Courts while laying down the guidelines on capital expenditure vis-a vis revenue expenditure had expressed the following : (a) It should be based on the facts and circumstances of a particular case and would be difficult to lay down any general rules. (b) Subsequent English decisions and the hon'ble Supreme Court, both in Empire Jute Co. Ltd. [1980] 124 ITR 1 (SC) and Alembic Chemical Works Co. Ltd. [1989] 177 ITR 377 (SC) have held in the given case the test of enduring benefit might break down. (c) It should be decided on the basis of ordinary commercial understanding. (d) Outlay is deemed to be capital when it is made for initiation of a business, for expansion of a business or for substantial replacement of the equipment. (e) Expenditure made for acquiring or bringing into existence an asset or advantage is capital and 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 profit is a revenue expenditure. (f) The apex court had held in Assam Bengal Cement Co. Ltd.'s case [1955 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act, 1961. The court also held that the expenditure of an assessee for replacement of parts of a textile mill for spinning yarn is not revenue expenditure under section 37 of the Act. The hon'ble Kerala High Court in the case of Vanaja Textiles Ltd. v. CIT [1994] 208 ITR 161 (Ker), has held that expenditure on modernisation of machinery of a textile mill was deductible as revenue expenditure. 9. Keeping in mind the propositions laid down by the courts in the above mentioned judgments, we have to see that whether an expenditure amounted to current repair or an expenditure amounted to a revenue expenditure depends upon the facts of each case and has to be ascertained after examining whether the expenditure was incurred to preserve and maintain an already existing asset and the expenditure must not be to bring a new asset into existence or to obtain a new advantage. 10. In the present case, the assessee has replaced the mechanical yarn clearers with the electronic yarn clearers. The replacement was not made for the purpose of opting electronic device against the existing mechanical device. The existing mechanical yarn clearers were almost worn-out after wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Kerala High Court in the case of Vanaja Textiles Ltd. v. CIT [1994] 208 ITR 161 (Ker), has considered an analogous situation. In that case the assessee-company was carrying on business in the manufacture of yarn. It undertook a comprehensive scheme of modernisation and rehabilitation of old machinery in its mills in line with modern mills. The assessee had as a first step converted 14 carving engines to metallic card clothing. The Tribunal found that only unserviceable parts were replaced and the whole system had not been changed and that no new asset was brought into existence. The court held that the expenditure incurred by the assessee was for better conduct and improvement of the existing business on a scheme of modernisation and not for a fresh and new venture and the object of modernisation was for facilitating the assessee's trading operations and for the conduct of the assessee's business to be carried on more effectively and to update the facilities on the lines of modern trends in business. The court held therefore that the expenditure was revenue in nature. 13. When compared to the above case, the present case is absolutely non-consequential. Here it is not the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee should have set-up an undertaking or an enterprise and from and out of such an undertaking or an enterprise set-up, any profit or gain is derived, falling under sub-sec tion covered by sub-section (4) of section 80-IA of the Income-tax Act such profit or gain derived by the assessee can be deducted in its entirety for a period of 10 years starting from the date of functioning of the set-up. The contention that profit or gain can be claimed by the assessee only if such profit or gain is derived by the sale of its product or power generated to an outsider cannot be the manner in which the provisions contained in section 80-IA(1) can be interpreted. The expression 'derived' used in the said section 80-IA in the beginning as well as in the last part of sub-section (4) makes it abundantly clear that such profit or gain could be obtained by one's own consumption of the outcome of any such undertaking or business enterprise as referred to in sub-section (4) of section 80-IA. The dictionary mean ing of the expression 'derive' in the New Oxford Dictionary of Eng lish states 'obtaining something from a specified source'. In section 80-IA(1) also no restriction has been imposed as r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; 1571/Mds/2011 Eveready Spinning Mills P. Ltd v. Asst. CIT [2012] 145 TTJ (Chennai) 393 30-11-2011 5. 1790/Mds/2011 Excel Cotspin (India) P. Ltd. v. Deputy CIT [2012] 15 ITR (Trib) 57 (Chennai) 13-01-2012 Respectfully following the above decisions, we allow the claim of the assessee. In the result, the appeal of the assessee stands allowed. I. T. A. No. 1848/Mds/2011-M/s Sudhan Spinning Mills P. Ltd. This appeal of the assessee, for the assessment year 2007-08, is directed against the order of the learned Commissioner of Income-tax (Appeals)-II, Coimbatore, dated August 29, 2011. The following grounds have been raised in this appeal : "1. For that the order of the Commissioner of Income-tax (Appeals) is contrary to law, facts and circumstances of the case and at any rate is opposed to the principles of equity, natural justice and fair play. 2. For that the Commissioner of Income-tax (Appeals) failed to appreciate that the order of the Assessing Officer is without jurisdiction. 3. For that the Commissioner of Income-tax (Appeals) failed to appreciate that the expenditure incurred towards modernis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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