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TMI Blog2009 (9) TMI 633X X X X Extracts X X X X X X X X Extracts X X X X ..... for scrutiny and ultimately assessed under the provisions of section 143(3) of the Income-tax Act (hereinafter referred to us " the Act" ). On that basis, the assessment order was framed on February 6, 2003. 4. The Commissioner of Income-tax-III, New Delhi examined this file and felt that the assessment order was perfunctory and erroneous and it was prejudicial to the interest of the Revenue. According to the Commissioner of Income-tax no detailed investigation had been carried out by the Assessing Officer while making the assessment. Solitary objection of the Commissioner related to the expenditure on tools and dies aggregating to Rs. 10,56,69,367, which was claimed as revenue expenditure and was allowed as such. According to the Commissioner, he noticed that other-wise substantial expenditure during the year and details of the expenditure filed before the Assessing Officer also showed that the cost of some of the dies exceeded crores of rupees. The Commissioner of Income-tax accordingly issued notice on November 3, 2004 to the assessee to show cause why appropriate order under section 263 be not passed by him with a view to correct the lapse committed by the Assessing Officer. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d dies expenses and refrained the assessment. The detailed order passed by the Commissioner of Income-tax in this behalf reveals that the Commissioner of Income-tax took up certain items of purchase for discussion value whereof exceeded Rs. 10 lakhs in respect of item " die lower and upper transmission case" cost of which was Rs. 4,33,46,245. The Commissioner of Income-tax found that a set of two dies-one lower portion and one upper portion - was purchased from Maruti Udyog Ltd. on February 14, 2001. The cost of each was divided at Rs. 2,16,73,124 ; new lower die purchased on February 14, 2001, was replaced by the old die on February 28, 2001, from which he concluded that this new die was used only for one month during the previous year under consideration and the entire cost of die was debited against the profit and loss account, which was accepted by the Assessing Officer. According to the Commissioner of Income-tax, if the dies were treated to be capital assets, the assessee would have been entitled only 50 per cent. of the eligible depreciation since the die was used for less than 180 days. Even if, it was not to be treated as capital assets, then also only the prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not deriving any enduring benefit so as to treat it as capital expenditure. (c) The assessee was a manufacturer of car parts and in this manufacturing process, dies are fitted in the machines by which the car parts are manufactures. Therefore, it was a case of replacement of burnt out, and not a new one so as to treat as capital expenditure. By replacing these dies, the life of the existing machines was not enhanced either with the replacement of these parts, production capacity remains the same. The judgment of the Karnataka High Court in the case of CIT v. Mysore Spun Concrete Pipe P. Ltd. [1992] 194 ITR 159, was relied upon, wherein replacement of moulds, which was a part of the machinery was treated as revenue expenditure. (d) Though the Commissioner of Income-tax initiated the proceedings on the ground that the expenditure incurred on dies was a capital expenditure, while passing the final order he could not arrive at a definite finding that the expenditure was capital in nature, but remitted the matter back to the Assessing Officer to re-examine the issue as to whether the expenditure incurred on the dies and tools was revenue or capital expenditure. Such an order in exerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the Tribunal was clearly erroneous. In support he relied upon the case of Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. [2007] 291 ITR 500 (SC), which inter alia holds (headnote) : "The expression ' reason to believe' in section 147 would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, he can be said to have reason to believe that income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. What is required is ' reason to believe' but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed the requisite belief. Whether material would conclusively prove escapement of income is not the concern at that stage. This is so because the formation of the belief is within the realm of the subjective satisfaction of the Assessing Officer." 12. He also relied upon the following two judgments : (i) CIT v. Saravana Spg. Mills P. Ltd. [2007] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning of the expression 'current repairs'. In other words, even if the expenditure is revenue, it may not fall in the connotation of ' current repairs' in section 31(i). The test formulated above applies to cases where the assessee claims allowance under section 31(i). In the present case, the High Court has lost sight of the test to be applied for an expenditure to fall under section as 'current repairs'. It has embarked on the test which was not applicable, viz., whether the expenditure is revenue or capital in nature. The above test was not relevant during the assessment years in question as the Explanation to section 31(i) was inserted later on. In our view, applying the lest laid down by Chagla C. J. in the case of New Shorrock Spinning and Manufacturing Co. Ltd. [1956] 30 ITR 338 (Bom) the assessees were not entitled to claim allowance under section 31(i) for current repairs. In our view, the ring frame by itself constituted an independent machine with an independent function, which was replaced by a new ring frame giving enduring advantage to the assessee and, therefore, the expenditure incurred in that regard cannot come within the expression ' current repairs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, viz., whether the expenditure in question was revenue or capital expenditure. He argued that the assessment was carried out under section 143(3) of the Act and while doing so, the Assessing Officer had made certain queries on this aspect, which was clear not only from the order of the Assessing Officer, but even from the reading of paragraphs 2 and 3 of the Commissioner of Income-tax' s order wherein it is specifically noted that the assessee had filed its explanation before the Assessing Officer in support of its claim vide letter dated September 26, 2002, and that letter is also reproduced. He pointed out that the Commissioner of Income-tax had also noted that the explanation of the assessee was accepted by the Assessing Officer, which would clearly imply that specific consideration on this aspect was duly bestowed by the Assessing Officer. His argument was that when the Assessing Officer was accepting the plea of the assessee after the inquiries, it was not necessary for the Assessing Officer to give detailed reasons in his assessment order, as such an assessment order is not to be written as a judgment. He sought to draw a subtle distinction between " lack of inquiry" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. v. CIT [1983] 144 ITR 474, the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question. Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures." 16. He reiterated that in the present case, the tools and dies had a very short span of life and it could produce up to maximum one lakh permissible shorts and have to be replaced thereafter to retain accuracy, as explained by the assessee before the Commissioner of Income-tax duly noted by the Commissioner of Income-tax in his order. He further pointed out that most of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this aspect was discussed in the following manner (page 113) : " . . . From a rending of sub-section (1) of section 263, it is clear that the power of suo motu revision can be exercised by the Commissioner only if, on examination of the records of any proceedings under this Act, he considers that any order passed therein by the Income-tax Officer is 'erroneous in so far as it is prejudicial to the interests of the Revenue'. It is not an arbitrary or unchartered power, it can be exercised only on fulfilment of the requirements laid down in sub-section (1). The consideration of the Commissioner as to whether an order is erroneous in so far as it is prejudicial to the interests of the Revenue, must be based on materials on the record of the proceedings called for by him. If there are no materials on record on the basis of which it can be said that the Commissioner acting in a reasonable manner could have come to such a conclusion, the very initiation of proceedings by him will be illegal and without jurisdiction. The Commissioner cannot initiate proceedings with a view to starting fishing and roving enquiries in matters or orders which are already concluded. Such action will be agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee. The assessee had given detailed explanation in that regard by a letter in writing. All these are part of the record of the case. Evidently, the claim was allowed by the Income-tax Officer on being satisfied with the explanation of the assessee. Such decision of the Income-tax Officer cannot be held to be 'erroneous' simply because in his order he did not make an elaborate discussion in that regard. " 18. When we examine the matter in the light of the aforesaid principle, we find that the Assessing Officer had called for explanation on this very item, from the assessee and the assessee had furnished his explanation vide letter dated September 26, 2002. This fact is even taken note of by the Commissioner himself in paragraph 3 of his order dated November 3, 2004. This order also reproduces the reply of the respondent in paragraph 3 of the order in the following manner : "The tools and dies have a very short life and can produce upto maximum 1 lakh permissible shorts and have to be replaced there-after to retain the accuracy. Most of the parts manufactured are for the automobile industries which have to work on complete accuracy at high speed for a longer p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad)). No basis for this is disclosed. In sum and substance, the accounting practice of the assessee is questioned. However, that basis of the order vanishes in thin air when we find that this very accounting practice, followed for a number of years, had the approval of the income-tax authorities. Interestingly, even for future assessment years, the same very accounting practice is accepted. 22. It is in this context the question that assumes importance is as to whether powers could be exercised under section 263 of the Act when two views are possible and the following observations of the Tribunal, in this backdrop, become relevant : "38. Still further, the hon'ble Supreme Court in Malabar Industrial Co. [2000] 243 ITR 83 has held that when two views are possible and the Assessing Officer has taken one of the possible view, then the order cannot be held to be prejudicial to the interest of the Revenue. Since the Commissioner of Income-tax could not come to a definite finding that the expenditure in question was a capital expenditure in the proceedings under section 263, in our opinion, the order of the Assessing Officer could not be held to be erroneous." 23. Let us look in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pairs", a clear finding recorded was that ring frames would constitute independent and separate machine capable of independent and specific functions, as is clear from the following observations (page 209) : "In our view, the Assessing Officer was right in holding that each machine including the ring frame was an independent and separate machine capable of independent and specific function and, therefore, the expenditure incurred for replacement of the new machine would not come within the meaning of the words 'current repairs'. In the present case, it is not the case of the assessee that a part of the machine (out of 25 machines) needed repairs. The entire machine had been replaced. Therefore, the expenditure incurred by the assessee did not fall within the meaning of 'current repairs' in section 31(i)." 25. In the present case, the finding is just the opposite, viz., dies and tools are part of the machines. Replacing these dies the purpose is to maintain the existing assets, viz., machine and not to bring a new asset. Moreover, the case at hand is not a case of "repairs of machinery" which was the situation is Saravana Spg. Mills P. Ltd. [2007] 293 ITR 201 (SC). The present cas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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