Commissioner of Income Tax III vs Sudhan Spinning Mills Ltd.

K. Raviraja Pandian, J.—This appeals are at the instance of the revenue against the order of the Income Tax Appellate Tribunal dated

16.06.2005 made in ITAs Nos. 93 and 295 (Mds)/02. The assessment years are 1998-99 and 1995-96.

The facts are : The assessee is a closely held company engaged in the manufacture of cotton yarn. The assessee filed returns for the relevant

assessment years. The assessment of the assessee for the assessment years 1995-96 was complted on 16.10.2001 and for the assessment year

1998-99 was completed on 28.02.2001 on a total income of Rs. 3,81,12,330/- and Rs. 1,24,95,870/-. In respect of assessment year 1995-96,

the assessee had claimed a sum of Rs. 4,71,76,136.24 in the profit and loss account as modernization and replacement expenses. The assessing

officer found from the details of machineries purchased and installed that the expenditure on the same was capital in nature since the replacements

by way of modernization gave enduring economic benefits to the assessee over a long period of time. The assessing officer has also referred to the

new scheme of allowing depreciation as per which new machineries would be entitled to depreciation at the appropriate rates. The assessing

officer, relied on the accounting standards 6 and 10 issued by the Institute of Chartered Accountants of India which made it clear that expenditure

on replacement of old machinery by new machinery was not to be allowed as revenue expenditure. The assessing officer, relying on the judgments

of the apex Court, Gujarath High Court and the Tribunal decisions, disallowed the expenditure of Rs. 4,71,76,136.24 as capital expenditure. He,

however, allowed admissible depreciation. The assessing officer included the excise duty and sales tax in the total turnover for the purpose of

deduction u/s 80HHC of the Act and revised the computation accordingly. In respect of assessment year 1998-99, the assessee had debited a

sum of Rs. 2,02,19,186/- as modernization and replacement in the profit and loss account. The machineries for which expenditure was made were

brand new machineries and were capable of functioning independently. The assessing officer held that the expenditure was capital in nature.

Relying on the report of the Taxation Enquiry Commission, 1995 and the judgments of the apex Courts, the assessing officer disallowed the

assessee''s claim of the expenditure as of revenue in nature. The assessing officer also found that the assessee had computed the deduction u/s

80HHC of the Act excluding sales tax and excise duty collections from the total turnover for the purpose of computing the deduction u/s 80HHC

of the Act, which are includible in the total turnover and recomputed the deduction accordingly.

Aggrieved by these assessments for the two assessment years, the assessee filed appeals before the Commissioner of Income Tax (Appeals),

who accepted the case of the assessee''s case and allowed the appeals. The revenue took the matter on appeal to the Tribunal. The Tribunal,

following the decision of the Madras High Court in the case of The Commissioner of Income Tax Vs. Janakiram Mills Ltd., held that the

expenditure on replacement of machinery is revenue expenditure. Regarding the deduction u/s 80HHC of the Act, the Tribunal, following the

decision of the Madras High Court in the case of The Commissioner of Income Tax Vs. Sundaram Fasteners Ltd., , held that the sales tax and

excise duty had to be excluded from the total turnover. Aggrieved by the same, the revenue is on appeals before us, by following the following

substantial questions of law:

Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that expenditure on

replacement of old machinery by purchase and installation of new machinery was allowable as revenue expenditure?

Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that sales tax and excise duty

have to be excluded from the total turnover for the purpose of computing the deduction u/s 80HHC of the Act in relation to export profits

When the appeals came up for admission, it was submitted by the learned Counsel for the revenue that the second question of law is covered

against the revenue by the decision reported in 298 ITR 669. Recording the same, the appeal in respect of the second question of law was

dismissed on 08.12.2008 and notice was ordered in respect of the first question of law.

When the matter came up today for hearing, learned Counsel for the revenue submits that the issue whether the expenditure on replacement of

old machinery by purchase and installation of new machinery was allowable as revenue expenditure was dealt with by the apex Court in the case of

Commissioner of Income Tax Vs. Ramaraju Surgical Cotton Mills, , wherein the apex Court, without expressing any opinion on the merits,

remanded the matter to the Commissioner (Appeals) to decide the issue afresh by observing as follows:

There are a number of tests which are required to be considered while deciding whether the expenditure was revenue or capital in nature. A

number of judgments have been cited before us in that regard. However, in the absence of the requisite details regarding the production capacity

remaining constant even after replacement, the matter needs to be remitted to the Commissioner (Appeals). There is one more reason why we are

inclined to remit the matter. As stated above, the impugned judgment of the Madras High Court in the case of The Commissioner of Income Tax

Vs. Janakiram Mills Ltd., has been set aside by this Court as there was confusion between the tests to be applied in respect of Section 31 vis-a-vis

the test to be applied in respect of Section 37 of the Income Tax Act. Without expressing any opinion on the merits of the case, we remit the

matter to the Commissioner (Appeals), who will decide the question in accordance with law.

The said decision has been followed by this Division Bench in the case of Commissioner of Income Tax Vs. Jeyabharath Textiles P. Ltd., .

In the light of the decisions cited supra, the matter is remitted to the Commissioner of Income Tax (Appeals) for considering the matter afresh in

accordance with the decision of the apex Court in the case of Ramaraju Surgical Cotton Mills, cited supra.

The appeals stand disposed of in the above terms. No costs.