TMI Blog2003 (10) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as actual payment and accordingly allowing the deduction in respect of the same under section 43B of the Act, even though the sum has not been actually paid before the due date of filing the return under section 139(1) of the Act? (2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in allowing the depreciation on research and development assets which related to the closed business of fast food division/unit of the assessee-company as such not used during the previous year? (3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in deleting the addition of Rs. 2,77,887 being made treating the expenditure incurred in purchase of new transformer as capital expenditure even when the old transformer still exists in the block of asset and is not sold, discarded or demolished or destroyed?" Question No. 1 dwells on the claim of the assessee-respondent for deduction of amount of bottling fee payable under the Rajasthan Excise Act, 1950, and the relevant rules framed thereunder, liability for which was incurred during the accounting period relevant to the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so arises in this appeal for consideration and it is required to be decided for deciding the appeal on the merits on the contentions raised by the parties before the Tribunal as well as before us: "(1A) Whether, on the facts and circumstances of the case, bottling fees chargeable from the assessee under the Rules framed under the Rajasthan Excise Act, 1950, and interest chargeable on late payment of bottling fees, amounts to tax, duty, cess or fees within the meaning of section 43B of the Income-tax Act, 1961, so as to attract the said provisions while considering allowability of deduction of such expenses?" In D. B. Income-tax Appeal No. 8 of 2002-CIT v. Udaipur Distillery Company Ltd. (No. 1) [2004] 268 ITR 305 (Raj), the respondent-assessee in this case also, in which the same issues were raised in respect of the assessment year 1988-89, this court vide its judgment dated September 3, 2003, has answered question No. 1 holding that furnishing of a bank guarantee cannot be treated equivalent to actual payment. Therefore, if the bottling fee is to be considered as "fee" in its technical sense, the requirement of section 43B is not fulfilled. However, on the newly framed que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of its running business during the relevant accounting period and formed part of the block of assets of the assessee's business, therefore, the depreciation in respect thereof is also allowable as deduction. Following the aforesaid decision, we hold that the Tribunal was right that the assessee was entitled to claim deduction by way of depreciation on the assets which formed part of the research and development division and such claim to deduction cannot be disallowed merely because part of the assessee's business ceased to operate during the relevant period when the assets were being used for the remaining business of manufacture and sale of alcohols. Coming to the third question, the assessee has claimed deduction of Rs. 2,77,867 as revenue expenditure for replacing the old transformer by a new transformer as an essential part of the plant and machinery already installed. The said claim of the assessee was disallowed by the Assessing Officer by treating it to be an expenditure of capital nature on two grounds, firstly, that this was purchased by a single bill and secondly, there was no replacement of the transformer as part of the existing plant because the old tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pairs and maintenance by replacement of worn out part with the new one for efficient running of the existing plant. We may notice that at no stage this contention has been controverted that the transformer by itself is not used as an independent plant and machinery but is only used as a part of the entire set up of plant. Only because the old transformer has not been disposed of and was still with the assessee as part of the block of assets held by the assessee, it cannot be treated as a replacement of old machinery. That must be a new machinery itself. This contention is wholly fallacious. Whenever any part of the existing plant and machinery is worn out or becomes unusable or degenerates or notwithstanding, even if it can be used it may increase the cost factor, replacement of the same has been considered by consensus of judicial opinion to be part of existing plant and machinery and it has been treated as revenue expenditure laid out in the ordinary course of business and not acquiring a new asset in the block of assets so as to be termed as capital expenditure. The Supreme Court in CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 approved the decision of the Madras ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the spinning machinery had to be replaced periodically because of "wear and tear", and when it was found that the old type of replacement parts were not available in the market, the assessee introduced the Casablanca conversion system, but thereby there was merely replacement of certain parts which were a modified version of the older parts. The High Court had also confirmed the order of the Tribunal and allowed deduction of the expenditure to be of revenue nature. Notwithstanding, the assessee had not originally claimed it as a revenue expenditure. (The judgment of the Madras High Court is reported in CIT v. Mahalakshmi Textile Mills Ltd. [1965] 56 ITR 256). Significantly, the Madras High Court observed that whether a new asset is brought into existence or a new advantage is derived, is a question of fact. The Supreme Court affirmed the judgment of the High Court. The court said that in rejecting a contention raised by the assessee, grant of relief to him on another ground is justified. It would be open to the departmental authorities and the Tribunal, and indeed they would be under a duty, to grant that relief. The right of the assessee to relief is not restricted to the plea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or discarded immediately and remain with the assessee and which had constituted as part of car, which still is a part of block of assets without excluding the price which such discarded parts may fetch from its written down value. In such event it may amount to a revenue expenditure. It depends on the facts and circumstances of the case, depending on the purpose for which it has been purchased. The Allahabad High Court considered this question about the replacement of the transformer in the case of CIT v. Kanodia Cold Storage [1975] 100 ITR 155. It held that replacement of worn out parts does not by itself bring in a new asset. In considering the nature of an expenditure one should consider the productive unit as a whole and not pick out parts therein which are new. If the productive unit to the assessee remains the same but a part of it which has become unsuitable for its use is replaced by something which makes it possible for the existing plant to function efficiently, the cost incurred on such replacement would be revenue expenditure. In that case, the assessee had made a payment of Rs. 14,742 to an electric supply undertaking towards cost of transformer and service line for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disputed, was the manufacture of penicillin. Even after the agreement, the product manufactured continued to be penicillin ... there was no material for the Tribunal to hold that the area of improvisation was not a part of the existing business or that the entire gamut of the existing manufacturing operations for the commercial production of penicillin in the assessee's existing plant had become obsolete or in appropriate in relation to the exploitation of the new subcultures of the high yielding strains of penicillin supplied by Meiji and that the mere introduction of new biosynthetic source required the erection and commissioning of a totally new and different type of plant and machinery ....the mere improvement in or updating of the fermentation process would not necessarily be inconsistent with the relevance and continuing utility of the existing infrastructure, machinery and plant of the assessee, therefore, held to be revenue expenditure." The court had approved the test that where acquisition of know-how which results in efficient running of the existing plant, and does not alter the basic nature of the product manufactured by existing machinery notwithstanding the fact t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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