Elgi Equipments Limited v. The Joint Commissioner of Income-tax, Range-1, Coimbatore
[Citation -2020-LL-0925-71]

Citation 2020-LL-0925-71
Appellant Name Elgi Equipments Limited
Respondent Name The Joint Commissioner of Income-tax, Range-1, Coimbatore
Court HIGH COURT OF MADRAS
Relevant Act Income-tax
Date of Order 25/09/2020
Assessment Year 2010-11
Judgment View Judgment
Keyword Tags disallowance of expenditure • repairs and maintenance • commercial expediency • business expenditure • revenue expenditure • capital expenditure • legal principle • capital asset • foreign travel • professional charges
Bot Summary: 10 of 2019: Whether on facts and circumstances of the case the Appellate Tribunal was right in law in holding that the Foreign Travel expenditure incurred by the appellant amounting to Rs.17,42,595/- cannot be stated as wholly and exclusively for the business of the appellant and thus not allowable under Section 37 of the Act 2) Whether on the facts and circumstances of the case the Appellate Tribunal was right in law in holding that the expenditure and overseas payment of Rs.19,55,555/- paid to M/s Stehlin Associates, Paris in connection with acquisition of M/s. Belair, France is a capital expenditure and therefore, not an allowable expenditure under Section 37 of the Act T.C.A.No. One pertaining to foreign travel expenditure incurred by the assessee to the tune of Rs.17,42,595/- and whether it is allowable as a deduction under Section 37 of the Act and the second issue is, with regard to the expenditure incurred by the assessee in effecting overseas payment to M/s Stehlin Associates, Paris, France in connection with acquisition of M/s Belair, France and whether it is a capital expenditure and therefore, not an allowable expenditure under Section 37 of the Act. With regard to the expenditure for import purchase, production and gear sourcing for Elgi India, the CITA held that it is in interest of the assessee company and it has to be treated as expenditure incurred for the business of the assessee company amounting to Rs.15,04,203/-. With regard to the other expenditure amounting to Rs.17,42,595/-, the CITA stated that those expenditure cannot be stated as exclusively and wholly for the business of the assessee and it is more in the interest of the subsidiary company at China and the assessee should have apportioned the major expenditure of foreign travel to the subsidiary. The CITA came to the conclusion that the expenditure is nothing to do with regular business and expenditure was incurred for acquisition of shares of M/s Belair, France and the assessee was not able to establish that the acquisition was in the course of carrying on the assessee's business and sustained the addition to the tune of Rs.19,55,555/-. The Tribunal, in our considered view lost sight of a very important issue, namely, that the expenditure was incurred for the expansion of the global operations of the assessee and the assessee was in the process of acquiring shares in a foreign company, namely, M/s Belair, France and had to incur expenditure in the nature of legal and professional fee for various services rendered by M/s Stehlin Associates and this expenditure ought to have been treated as wholly and exclusively for business purposes. If the expenditure is treated as revenue expenditure, it is either taken as an expenditure under Section 37(1) for computing income chargeable under the head Profits and gains of business or profession or treated as current repairs entitled to deduction under Section 31(i).


T.C.A.Nos.10 and 11 of 2019 IN HIGH COURT OF JUDICATURE AT MADRAS Reserved on : 21.09.2020 Pronounced on : 25.09.2020 Coram HONOURABLE Mr. JUSTICE T.S.SIVAGNANAM AND HONOURABLE Mrs. JUSTICE V.BHAVANI SUBBAROYAN T.C.A.Nos.10 and 11 of 2019 M/s. Elgi Equipments Limited Elgi Industrial Complex, Trichy Road, Singanallur, Coimbatore - 641 005 .. Appellant in both appeals Vs. Joint Commissioner of Income Tax, Range-1, Coimbatore ..Respondent in T.C.A.No.10 of 2019 Deputy Commissioner of Income Tax, Corporate Circle - 1, Coimbatore ..Respondent in T.C.A.No.11 of 2019 1/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 Tax Case Appeals filed under Section 260-A of Income Tax Act, 1961, are directed against Common Order passed by Income Tax Appellate Tribunal, Chennai Bench C Bench in I.T.A Nos.2769/Mds/2014 and 2943/Mds/2014 dated 28.06.2016 for assessment years 2010-2011. For Appellant : Mr.R.Sivaraman For Respondents : Mr.T.R.Senthilkumar Senior Standing Counsel and Mrs.K.G.Usha Rani COMMON JUDGMENT T.S.SIVAGNANAM, J. These appeals have been filed by assessee under Section 260-A of Income Tax Act, 1961 [the 'Act' for brevity] challenging common order dated 28.06.2016 in I.T.A.No.2769/Mds/2014 and I.T.A.No.2943/Mds/2014 passed by Income Tax Appellate Tribunal, Chennai 'C' Bench, [hereinafter referred to as 'Tribunal'] for assessment year [for brevity 'AY'] 2010-2011. 2/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 2. appeals were admitted on 08.01.2019 to decide following substantial questions of law:- T.C.A.No.10 of 2019: (1) Whether on facts and circumstances of case Appellate Tribunal was right in law in holding that Foreign Travel expenditure incurred by appellant amounting to Rs.17,42,595/- cannot be stated as wholly and exclusively for business of appellant and thus not allowable under Section 37 of Act? 2) Whether on facts and circumstances of case Appellate Tribunal was right in law in holding that expenditure and overseas payment of Rs.19,55,555/- paid to M/s Stehlin & Associates, Paris in connection with acquisition of M/s. Belair, France is capital expenditure and therefore, not allowable expenditure under Section 37 of Act? T.C.A.No.11 of 2019: (1) Whether on facts and circumstances of cases Appellate Tribunal was right in law in remitting issue with regard to disallowance of expenditure incurred under head Repairs and Maintenance without any finding or conclusion? (2) Whether on facts and circumstances of case Appellate Tribunal was right in law in not considering fact that what was replaced is only 3/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 operating system of machine and not replacement of new machine and hence expenditure is revenue expenditure? 3. assessee is in business of manufacturing air compressors and engines. For assessment year under consideration, AY-2010-2011, assessee filed its return of income on 14.10.2010 with total income of Rs.88,06,76,132/-. return was processed under Section 143(1) of Act. Subsequently, case was selected for scrutiny and notice under Section 143(2) of Act dated 26.08.2011 was issued. 4. In TCA No.10 of 2019, two issues arises for consideration. One pertaining to foreign travel expenditure incurred by assessee to tune of Rs.17,42,595/- and whether it is allowable as deduction under Section 37 of Act and second issue is, with regard to expenditure incurred by assessee in effecting overseas payment to M/s Stehlin Associates, Paris, France in connection with acquisition of M/s Belair, France and whether it is capital expenditure and therefore, not allowable expenditure under Section 37 of Act?. 4/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 5. In T.C.A.No.11 of 2019, though two substantial questions of law have been framed for consideration, both are interconnected pertaining to disallowance of expenditure incurred by assessee under head 'repairs and maintenance' and whether Tribunal was justified in remanding matter for fresh consideration to assessing officer?. 6. assessing officer upon perusal of profit and loss account, disallowed foreign travel expenditure of subsidiary companies. With regard to legal and professional charges paid by assessee in connection with acquisition of French Company, M/s. Belair, France was disallowed holding that expenditure incurred towards acquisition of French Company is not related to assessee's business earnings and income. assessing officer concluded that such expenditure was incurred in connection with new unit's feasibility and acquisition of capital asset and hence not allowable as deduction under Section 37(1) of Act. With above finding, assessment was completed under Section 143(3) of Act by order dated 13.03.2013. 5/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 7. assessee filed appeal before Commissioner of Income Tax Appeals - I, Coimbatore [for brevity 'CITA']. CITA by order dated 04.09.2014 partly allowed appeal. With regard to foreign travel expenses, expenses for vendor development related travel and expenses for production and gear sourcing for Elgi India was allowed. With regard to balance amount of Rs.17,42,595/-, same were disallowed stating that same was to promote business of subsidiary company and not of assessee. With regard to addition made by assessing officer for legal and professional charges, CITA sustained disallowance of expenditure of Rs.19,55,555/-, but deleted addition of Rs.1,77,984/-. Aggrieved by order passed by CITA dated 04.09.2014, assessee preferred appeal before Tribunal. appeal was dismissed by impugned order. 8. With regard to claim made by assessee regarding expenses incurred towards 'repairs and maintenance' of machinery, which is subject matter of T.C.A.No.11 of 2019, assessing officer came to conclusion that expenditure incurred for importing and 6/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 erecting Holroyd Dual Type PC Technology is capital expenditure and disallowed same. However, depreciation was allowed by assessing officer. 9. Before CITA, assessee provided details with regard to said machine and after considering all material, CITA found on facts, that operating system of machine was only replaced and there is no replacement of new machine with existing machine. Therefore, CITA, allowed assessee's appeal holding that said expenditure is revenue expenditure. revenue filed appeal before Tribunal, which was allowed by setting aside finding of CITA and matter stood remanded to assessing officer to decide issue afresh. 10. We have elaborately heard Mr.R.Sivaraman, learned counsel appearing for appellant / assessee and Mr.T.R.Senthilkumar, learned senior standing counsel assisted by Mrs.K.G.Usharani, learned junior standing counsel for respondents / revenue. 7/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 11. In profit and loss account filed by assessee along with return of income, they have debited sum of Rs.1,76,97,063/- being expenses incurred towards foreign travel during financial year 2009- 2010. assessee was called upon to furnish complete details of foreign travel expenses including name of employee, designation in company etc., details were furnished in full and assessing officer came to conclusion that middle and senior level management personnel were sent to countries for executing work relating to subsidiary. assessing officer put assessee on notice to explain as to why expenditure incurred / related to subsidiary companies should not be disallowed, as same are not related for earning of income by assessee company. Though assessee had given elaborate reply, assessing officer opined that reply was not satisfactory and assessee has not proved as to how expenses are related to earning assessee's income?. 12. Before CITA, assessee, once again explained as to how foreign travel expenditure was necessitated to develop business of assessee and it did not pertain to subsidiary 8/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 company at China. Upon considering materials placed before CITA by assessee, it was held that vendor development related travel is definitely in interest of holding company, since procurement of components for holding company was also done from China. Accordingly, expenditure incurred under said head to tune of Rs.1,11,80,255/- was allowed. 13. With regard to expenditure for import purchase, production and gear sourcing for Elgi India, CITA held that it is in interest of assessee company and it has to be treated as expenditure incurred for business of assessee company amounting to Rs.15,04,203/-. With regard to other expenditure amounting to Rs.17,42,595/-, CITA stated that those expenditure cannot be stated as exclusively and wholly for business of assessee and it is more in interest of subsidiary company at China and assessee should have apportioned major expenditure of foreign travel to subsidiary. We find that CITA did not give any specific reasons as to how he came to conclusion that other expenditure amounting to Rs.17,42,595/- cannot be stated as 9/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 exclusively and wholly for business of assessee. finding is cryptic as it is not borne out by any reasons or based on factual analysis. If CITA was of opinion that few of expenses incurred by assessee were permissible and allowable as deduction, then, reason should have been set out as to why other expenses should not be also allowed as deduction?. This would be sufficient for us to interfere with finding of CITA. CITA failed to note that following expenses, which were incurred by assessee company towards foreign travel:- Particulars Amount (Rs.) ERP Implementation related travel amounts to 4,36,063/- Business Review Related Travel 2,63,995/- Dealer Review & After Sales 3,80,817/- For Business Strategy & Market Study Strategy 4,36,653/- Production Process Implementation work 2,25,067/- 14. It is important to note that CITA did not express any doubt or genuineness with regard to above business expenditure, namely, foreign travel expenditure incurred by assessee's employees, if such is factual position, then, CITA should have allowed expenditure in its entirety. 10/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 15. It is note worthy to point out at this juncture that subsidiaries in foreign country were exclusive companies, which dealt only with products of assessee. products, which were manufactured by assessee were shipped to subsidiaries in foreign country in knock down condition and they were to reassemble same and products were marketed under Trade mark 'Elgi'. Therefore, there was no reason as to why CITA had disallowed portion of expenditure without noting fact that expenditure was incurred by assessee to safeguard interest of assessee, holding company and its normal business expenditure of holding company. 16. Furthermore, CITA failed to note that all those expenditure incurred by assessee, holding company was to keep subsidiary companies in foreign country to continue to do their business. Tribunal, which tested finding of CITA did not assign any reasons as to why expenditure was not for benefit of assessee, holding company. order passed by Tribunal is devoid of reasons. 11/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 17. Though assessee was able to produce their annual report along with accounts prepared in accordance with AS-18 that there was gradual increase in sales compare to early years by subsidiary companies in foreign country, Tribunal in single stroke held that it is not convinced with stand taken by assessee. 18. As pointed out earlier, bonafides and genuineness of expenses incurred by assessee towards foreign travel was never in doubt before assessing officer or before CITA or before Tribunal, thus, we have no hesitation to hold that disallowance done by CITA, as affirmed by Tribunal, is erroneous. 19. With regard to second issue pertaining to expenses paid to M/s Stehlin and Associates, Paris, France in connection with acquisition of M/s Belair, France, assessee furnished breakup details before assessing officer with regard to payments made to M/s Stehlin & Associates, for services rendered by them which included translation, documentation, corporate matters and associated filing, assessing officer opined that expenditure was incurred 12/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 towards acquisition of French company and it is not related to assessee's business earnings and income and expenditure was incurred in connection with new unit feasibility and acquisition of capital asset and not allowable under Section 37(1) of Act. 20. Before CITA, assessee contended that they paid fees to Overseas Consultancy Firm towards services and market survey in Asia and Southafrica incurred by foreign company in India. details regarding legal and professional charges were also onceagain placed before CITA and submitted that these expenditures being part of regular business expenditure to facilitate acquisition and smooth conduct of business in Europe has to be treated as revenue expenditure. However, CITA came to conclusion that expenditure is nothing to do with regular business and expenditure was incurred for acquisition of shares of M/s Belair, France and assessee was not able to establish that acquisition was in course of carrying on assessee's business and sustained addition to tune of Rs.19,55,555/-. Before Tribunal, assessee reiterated that said expenditure was incurred in 13/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 connection of acquisition of Belair, France, towards expansion of assessee's business in Europe and incurred wholly and exclusively in connection with business. Several decisions were relied on by assessee. Tribunal noted that expenditure is in nature of legal and professional fee paid for various services. However, dismissed assessee's appeal on ground that necessity for incurring expenditure and overseas payment was in connection with acquisition and it is in capital field and cannot be permitted as deduction. 21. Tribunal, in our considered view lost sight of very important issue, namely, that expenditure was incurred for expansion of global operations of assessee and assessee was in process of acquiring shares in foreign company, namely, M/s Belair, France and had to incur expenditure in nature of legal and professional fee for various services rendered by M/s Stehlin & Associates and this expenditure ought to have been treated as wholly and exclusively for business purposes. In this regard, it is relevant to refer to decision of Hon'ble Supreme Court in case of S.A.Builders Limited V. CIT reported in [2007] 288 ITR Page 1, in 14/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 said decision while interpreting words "for purpose of business" used in Section 37(1) of Act, while computing income chargeable under head "Profits and Gains of business or Profession", it was held that such expenditure is to be tested in light of commercial expediency, which is one of wide import and includes such expenditure as prudent businessman incurs for purpose of business. This decision was referred by Division Bench of this Court in case of Commissioner of Income-Tax, Chennai Vs. Sabena Detergents (P.) Ltd., reported in [2008] 303 ITR 320 (Madras). In Judgment of Division Bench, reliance was placed on decision of Full Bench of Hon'ble Supreme Court in CIT Vs. Malayalam Plantations Ltd., reported in [1964] 53 ITR 140 (SC), Judgment of House of Lords in Southern (H.M.Inspector of Taxes) Vs. Borax Consolidated Ltd., reported in [1942] 10 ITR Page 1 (King's Bench Division), decision of Hon'ble Supreme Court in Travancore Titanium Product Ltd., Vs. CIT reported in [1966] 60 ITR 277 (SC), CIT Vs. Walchand & Co., (P.) Ltd., reported in [1967] 65 ITR 381 (SC) and Sassoon J.David & Co., (P) Ltd., Vs. CIT reported in [1979] 118 ITR 261. relevant portion of Judgment is quoted herein below:- 15/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 '6.2. Justice.Shah, as he then was, speaking for Full Bench of Apex Court in Travancore Titanium Product Ltd. v. Commissioner of Income-tax [1966] 60 I.T.R. 277, held that to claim expenditure incurred as permissible deduction under Section 10(2)(xv) of old Act, (now under Section 37(1) of Act), there must be direct and intimate connection between expenditure and business, i.e., between expenditure and character of assessee as trader, and not as owner of assets even if they are assets of business. It is thus held that nature of expenditure or outgoing must be adjudged in light of accepted commercial practice and trading principles and expenditure must be incidental of business and must be necessitated or justified by commercial expediency and that it must also be directly and intimately connected with business and be laid out by taxpayer in his character as trader. 6.3. In applying test of commercial expediency for determining whether expenditure was wholly and exclusively laid out for purpose of business, reasonableness of expenditure has to be adjudged from point of view of businessman and not of revenue, vide Commissioner of Income-tax v. Walchand and Co. Private Ltd. [1967] 65 I.T.R. 381. 6.4. In Sassoon J.David and Co.P.Ltd. v. Commissioner of Income-tax, [1979] 118 I.T.R. 261, while interpreting words "any expenditure laid out or expended wholly and exclusively for purposes of business or profession" to assail that expression "wholly and exclusively" used in Section 10(2)(xv) of old Act (now Section 37(1) of Act), does not mean "necessarily", Apex Court has held that ordinarily, it is for assessee to decide whether any expenditure should be incurred in course of his or its business and such expenditure may be incurred voluntarily and without any necessity and if it is 16/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 incurred for promoting business and to earn profits, assessee can claim deduction under section 10(2)(xv) of old Act, even though there was no compelling necessity to incur such expenditure. It was further held that fact that somebody other than assessee (like in instant case, sister concerns) is also benefitted by expenditure should not come in way of expenditure being allowed by way of deduction under section 10(2)(xv) of old Act (now Section 37(1) of Act), if it satisfies otherwise tests laid down by law, referred to above. 6.5. Recently, Apex Court, in S.A.Builders Ltd. v. Commissioner of Income-tax (Appeals), [2007] 288 I.T.R. Page 1, interpreting words "for purpose of business" used in Section 37(1) of Act, while computing income chargeable under head "Profits and gains of business or profession", reiterated its earlier views referred to above and held that such expenditure is to be tested in light of commercial expediency, which is one of wide import and includes such expenditure as prudent businessman incurs for purpose of business. expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. It is further held that expenditure incurred for purpose of business meant in Section 37(1) of Act includes expenditure voluntarily incurred for commercial expediency and it is immaterial if third party also benefits thereby. It is not for authorities or Court to examine purpose for which assessee incurred expenses for its commercial expediency. What is relevant is whether amount was advanced as measure of commercial expediency and not from point of view whether amount was advanced for earning profits. Once it is established that there was nexus between expenditure and purpose of business (which need not necessarily be business of assessee itself), Revenue cannot justifiably claim to put itself in 17/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 arm-chair of businessman or in position of Board of Directors and assume role to decide how much is reasonable expenditure having regard to circumstances of case and no businessman can be compelled to maximize his profit. 22. In Commissioner of Income Tax Vs. Bombay Dyeing & Manufacturing Company Limited reported in (1996) 219 521 (SC), question which fell for consideration was whether Tribunal was right in holding that professional charges paid by assessee company to its solicitors for effecting amalgamation of company, was of revenue nature and should be allowed as deduction in computation of its total income. We find facts in said case is identical to that of case on hand where assessee had incurred expenditure by way of professional fees to M/s Stehlin and Associates, Paris, France. said question was answered in favour of assessee and it was held that expenditure incurred towards professional charges of solicitor's firm was deductable as revenue expenditure. relevant portion of Judgment reads as follows:- ' ..The Tribunal was of opinion that as both companies were carrying on complementary business and their amalgamation was necessary for smooth and efficient conduct of business , it is expenditure laid out wholly and exclusively for purpose of business of assessee. In 18/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 view of said finding and also in view of decision of this Court in Bombay Steam Navigation Co. (1953) (P) Ltd. v. CIT 1965 56 ITR 52, we are of opinion that Tribunal was right in its conclusion. decision in Bombay Steam Navigation also pertains to amalgamation of two shipping companies. assessee-Company took over assets of other company and part of price was treated as loan secured by promissory note and hypothecation of all moveable properties of assessee-Company. loan was to carry simple interest at 6 per cent. question that arose in said case was whether interest paid upon said loan was deductible as revenue expenditure. It was held by this Court that it was expenditure deductible under Section 10(2)(xv) of Income Tax Act. It was held that transaction of acquisition of asset was closely related to commencement and carrying on of assessee's business and, therefore, interest paid on unpaid balance of consideration for assets acquired had, in normal course, to be regarded as expenditure for purpose of business which was carried on in accounting periods. In course of judgment this Court referred to earlier decision of this Court in State of Madras v. G.J Coelho 1964 53 ITR 186 wherein it was held that interest on amount borrowed for acquiring capital asset is deductible as revenue expenditure.....' Thus by taking note of factual position and above referred decisions, substantial questions of law in T.C.A.No.10 of 2019 are to be answered in favour of appellant / assessee. 23. With regard to substantial questions of law in T.C.A.No.11 of 2019, reference was made to decision of High Court of Bombay in Cresent Organics (P.) Ltd., Vs. Deputy Commissioner of 19/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 Income-Tax, Range-8(1), Mumbai [2014] 49 Taxmann.com 128 [Bombay]. We find that said decision to be wholly on factual position prevailing to said case and Court came to conclusion that order of Tribunal restricting disallowance of foreign travel expenses to 10% of amount, was reasonable approach. We have in preceding paragraphs noted facts and we found that assessing officer CITA and Tribunal did not dispute genuineness, bonafides of expenditure incurred by assessee for foreign travel. That apart, CITA granted partial relief to assessee, did not assign any reasons as to why other expenditure is not allowable as deduction, therefore, we find that on facts, decision in Cresent Organics (P.) Ltd.,is distinguishable. In light of above decision, first question of law in TCA No.11 of 2019 is decided in favour of assessee. 24. assessee had debited sum of Rs.5,26,35,475 being expenses incurred towards Repairs and Maintenance towards machinery. assessee furnished breakup details for various expenditure. assessing officer on examining materials placed 20/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 before him held that assessee had incurred expenditure for purchasing new Dual Type PC Technology base controlling system with CAN [Control Area Network] by replacing existing CNC [Computer Numerical Control] drive system. 25. assessee was called upon to explain as to why expenditure should not be treated as capital expenditure? We find that assessee had given detailed submission along with catalogues and photographs. However, assessing officer disallowed expenditure and held it to be capital expenditure on ground that replacement of CAN System instead of existing CNC system is major replacement of existing machine with new machine, consequence thereof, efficiency of machine will improve resulting in increased production. Furthermore, old machinery had become obselete and installation of equipment in machine resulting in increase production will give enduring benefit to assessee. 21/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 26. On appeal before CITA, elaborate examination of facts was done and it was held that CNC system was part of machine and this technology has become obsolete was replaced by 'modified electronic system' and it did not amount to replacement of existing machine with new machine and expenditure was treated as 'revenue expenditure'. Tribunal which examined correctness of this finding, at instance of revenue, after noting contention of department representative and authorised representative of assessee, held that considering apparent facts, functional test, submissions and judicial decisions, order of CITA was to be set aside and remanded to assessing officer to decide entire disputed issue. Tribunal has recorded that assessee has submitted photographs and materials before it, which needs to be examined by assessing officer. We find that tribunal has not given any reasons to set aside finding of CITA. That part, materials which were placed before Tribunal were already on record, as it had been placed before assessing officer with detailed explanatory note as well as before CITA, hence we find that there is no justifiable reason for remanding matter to assessing officer. 22/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 27. learned senior standing counsel for revenue placed reliance on decision of Hon'ble Supreme Court in Ballimal Naval Kishore Vs. Commissioner of Income Tax reported in [1997] 90 Taxman 402 (SC). case arose under Section 31 of Act and on facts, Court found that assessee, who was carrying on business of exhibiting films in theatre, purchased building, converted it into cinema theatre, installed new machinery, furniture, sanitary fittings and electrical wiring and spent substantial amount on repairs to walls, flooring, roofing, doors, windows and to stage sides etc., Considering this factual position, it was held that by no stretch of imagination, it could be said that said repairs qualify as 'current repairs' within meaning of Section 10(2)(v) of Act. In case on hand, CITA has noted that replacement done by assessee was not entire machine, but one component of machine, as earlier technology had become obsolete. Therefore, decision in case of Ballimal Naval Kishore cannot be applied to case on hand. 28. Further, reliance was placed on decision of Hon'ble Supreme Court in Commissioner of Income Tax, Gujarat Vs. Sarangpur 23/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 Cotton Mfg. Co., Ltd., reported in [2017] 393 ITR 108. In said case also, assessee had incurred expenditure on 'repairs and replacement of old machinery' and following decision in CIT V. Saravana Spinning Mills (P.) Ltd., reported in [2007] 293 ITR 201, case was decided against assessee. We find that expenditure incurred by assessee in said case was towards replacement of machinery with new machinery, which is not case of assessee on hand. 29. Also, reliance was placed on decision of this Court in Commissioner of Income Tax III, Coimbatore Vs. M/s Vijayeswari Textiles Limited, Coimbatore in T.C.(Appeal) Nos.1316 to 1322 of 2008 dated 30.10.2018. said case also pertain to replacement of old machinery by purchasing and installing new machinery and following decision in CIT Vs. Saravana Spinning Mills Pvt. Ltd., reported in MANU/SC/3308/2007; Commissioner of Income Tax, Madurai Vs. Mangayarkarasi Mills (P) Ltd., reported in 2009 (315) ITR 114 (SC) and Super Spinning Mills Ltd., Vs. Assistant Commissioner of Income Tax reported in 2013 (357) ITR 0720 (Mad.), case was remanded to 24/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 CITA for fresh consideration. As noted in said Judgment, expenditure incurred was for replacement of old machinery with that of new machinery and said decision would not assist revenue. 30. While dealing with this issue, it will be beneficial to refer to decision of Division Bench of this Court in Commissioner of Income Tax Vs. Neyveli Lignite Corporation Ltd., reported in (2016) 388 ITR 0172 (Mad), one of substantial questions of law, which was considered in said case was whether Tribunal is correct in concluding that each machine in Thermal Power Station is not capable of generating power independently and hence to be viewed as composite asset, contrary to decision of Hon'ble Supreme Court in case of Mangayarkarasi Mills (P) Ltd., reported in [315 ITR 114], wherein, it is held that each machine should be treated independently as such and not as mere part of entire composite machinery of spinning mill?. said question was answered in favour of assessee on following terms:- '17. careful look at above decisions would show that though different tests had been formulated by Courts, application of those tests had posed lot of difficulties, depending upon facts and circumstances of each case. 25/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 This is why Supreme Court pointed out in Saravana Spinning Mills that answer to question would depend upon facts and circumstances of each case. Therefore, we shall now get back to facts of case. 20. On basis of nature of repairs and replacement carried out by assessee to boiler as well as to BWE, it is contended by Mr.Vijayaraghavan, learned counsel for assessee that expression "current repairs" denotes repairs for purpose of preserving or maintaining already existing asset. It does not bring about new asset into existence, nor does it give new or different advantage. Therefore, he contends that test of improvement or advantage is not relevant to determine whether repair was current repair or not. It is his further contention that magnitude of expenditure cannot also determine whether something is current repair or not. 21. In order to test correctness of above contention, it is necessary to have look at provisions of Sections 31 and 37. 22. Under Section 31, amount paid on account of current repairs to plant or furniture used for purpose of business or profession shall be allowed as deduction. But, Explanation to Section 31 qualifies general rule by stating that amount paid on account of current repairs shall not include any expenditure in nature of capital expenditure. 23. Though Act defines expression "income", it does not define either expression "expenditure" or expression "repairs or current repairs". However, several heads of expenditure are separately dealt with under Sections 35 and 35A to 35E. 24. Section 37(1) states that any expenditure laid out or expended wholly and exclusively for purpose of business or profession shall be allowed in computing income chargeable under head "Profits and gains of business or profession". But, Section 37 (1) excludes three items of expenditure. They are (i) expenditure of nature described in Sections 30 to 36, (ii) expenditure in nature 26/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 of capital expenditure, and (iii) expenditure in nature of personal expenses of assessee. 25. Therefore, if item of expenditure falls within any of categories indicated in Sections 30 to 36, same is entitled to deduction as per provisions of those Sections. But, any expenditure which does not fall within scope of Sections 30 to 36, but which may still qualify while computing income chargeable under head "Profits and gains of business or profession", will be covered by Section 37(1). 26. But, what is important to note is that under both provisions, namely Section 31 as well as Section 37(1), capital expenditure is excluded. If amount paid on account of current repairs is in nature of capital expenditure,Section 31 cannot be invoked. Similarly, Section 37(1) cannot also be invoked. 31. On contention of Mr.T.Ravikumar, learned Standing Counsel that assessee originally capitalised expenditure, but reversed same later, we have to point out that there cannot be any estoppel in such cases. question whether particular expenditure would fall within definition of expression "current repairs" under Section 31(i) or not, does not depend upon what assessee did or did not. After all if expenditure is capitalised, assessee takes benefit of depreciation. If expenditure is treated as revenue expenditure, it is either taken as expenditure under Section 37(1) for computing income chargeable under head "Profits and gains of business or profession" or treated as "current repairs" entitled to deduction under Section 31(i). Therefore, contention of learned Standing Counsel cannot be accepted.' 31. Bearing above legal principle in mind, if we examine facts of this case, as rightly noted by CITA, who has gone into 27/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 working of various parts of Holyroid machine and examining photos, it was held that CNC control can only be termed as part of machine and cannot be itself machine. Further, CITA noted that manufacturer had recommended to assessee to go for electronic systems modification without modifying machine technology and machine specifications. CITA perused literature, design of CNC system, which was furnished in form of floppy disk and held in favour of assessee. Further, one more important fact which needs to be noted is cost of full machine, was Rs.534 Lakhs in year 1985 and cost of same machine, full machine, at time when CITA decided appeal, i.e., in year 2014, was Rs.1250 Lakhs. This is also very relevant factor, which needs to be borne in mind while approving finding rendered by CITA. 32. As noted by us, Tribunal had erroneously stated as if assessee for first time had placed photographs and materials and held that matter has to be remanded to assessing officer, when fact remains that entire material along with detailed write-up 28/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 was placed before assessing officer and also before CITA, who had done thorough factual examination and granted relief to assessee. Therefore, order of Tribunal in remanding matter to assessing officer was wholly unjustified. For all above reasons, both Tax Case Appeals are allowed and substantial questions of law are answered in favour of assessee. No costs. (T.S.S.J.) (V.B.S.J.) 25.09.2020 Index :Yes / No Internet :Yes / No Speaking Judgment / Non Speaking Judgment ssd 29/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 To Income Tax Appellate Tribunal C Bench 30/31 http://www.judis.nic.in T.C.A.Nos.10 and 11 of 2019 T.S.SIVAGNANAM,J., AND V.BHAVANI SUBBAROYAN, J., ssd Pre-delivery Common Judgment in T.C.A.Nos.10 and 11 of 2019 25.09.2020 31/31 http://www.judis.nic.in Elgi Equipments Limited v. Joint Commissioner of Income-tax, Range-1, Coimbatore
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