IT : Where assessee was engaged in business of manufacturing of yarn, expenditure incurred by assessee on introducing 'compact spinning system' was revenue in nature and was thus an allowable expenditure
■■■
[2013] 40 taxmann.com 47 (Chennai - Trib.)
IN THE ITAT CHENNAI BENCH 'C'
Assistant Commissioner of Income-tax
v.
Prabhu Spinning Mills (P.) Ltd.*
DR. O.K. NARAYANAN, VICE-PRESIDENT
AND VIKAS AWASTHY, JUDICIAL MEMBER
AND VIKAS AWASTHY, JUDICIAL MEMBER
IT APPEAL NO. 593 (MDS.) OF 2013
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
JULY 9, 2013
Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Repairs] - Assessment year 2008-09 - Assessee, engaged in business of manufacturing of yarn, purchased a hi-tech gadget, 'compact spinning system', and expenditure thereon was claimed as revenue expenditure - Tribunal in assessee's own case in earlier year found that said 'compact spinning system' was not a machinery by itself but only an attachment to existing machine and said gadget could not function independently; it functioned only if it was fixed in spindles - Tribunal, accordingly, allowed expenditure incurred by assessee on introducing compact spinning system as revenue expenditure - Whether following order of Tribunal, expenditure in question to be allowed as revenue expenditure - Held, yes [Para 9] [In favour of assessee]
CASE REVIEW
Prabhu Spinning Mills (P.) Ltd. v. Dy. CIT [2013] 33 taxmann.com 398 (Chennai) (para 9) followed.
CASES REFERRED TO
Prabhu Spinning Mills (P.) Ltd. v. Dy. CIT [2013] 33 taxmann.com 398 (Chennai) (para 4), CIT v. Sri Mangayarkarasi Mills (P.) Ltd. [2009] 315 ITR 114/182 Taxman 141 (para 5), Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) (para 8), Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 (SC) (para 8), Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377/43 Taxman 312 (SC) (para 8) andVijayeswari Textiles Ltd. [IT Appeal No. 963 (Mds.) of 2011, dated 23-8-2011] (para 8).
P. Peerya for the Appellant. T. Banusekhar for the Respondent.
ORDER
Vikas Awasthy, Judicial Member - The present appeal has been filed by the Revenue against the order of the Commissioner of Income-tax (Appeals)-II, Coimbatore, dated January 30, 2013.
2. The assessee is a company engaged in the business of manufacturing of yarn. The assessee filed its return of income for the assessment year (AY) 2008-09 on September 28, 2008 declaring its income as Rs. 4,55,98,940 under normal computation and Rs. 16,61,85,390 under section 115JB of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). The case of the assessee was selected for scrutiny and notice under section 143(2) was issued to the assessee on September 24, 2009. During the course of assessment, the Assessing Officer made additions in the income returned by the assessee on account of expenditure incurred by the assessee on replacement of plant and machinery. During the relevant assessment year, the assessee had made an investment of Rs. 4,25,47,573 on purchase of new machineries and introduced a new technology called "compact spinning system". The advantage of new technology is :
| 1. | Improved quality of yarn, | |
| 2. | Optimize utilisation of fibre substance (i.e., raw-material), | |
| 3. | Substitution of products, and | |
| 4. | Cost saving in raw material. |
3. The assessee claimed the expenditure on introducing this new technology as revenue expenditure under section 37 of the Act. The Assessing Officer rejected the claim of the assessee and treated the new machinery purchased as capital expenditure.
4. Aggrieved against the assessment order dated December 29, 2010, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals)-II, Coimbatore. The Commissioner of Income-tax (Appeals) following the order of the Tribunal in the assessee's own case in Prabhu Spinning Mills (P.) Ltd. v. Dy. CIT [2013] 33 taxmann.com 398 (Chennai) for the assessment year 2007-08 allowed this ground of appeal of the assessee. Now the Revenue has come in appeal before us assailing the order of the Commissioner of Income-tax (Appeals).
5. Shri P. Peerya, Commissioner of Income-tax representing the Revenue submitted that the Commissioner of Income-tax (Appeals) has erred in allowing the expenditure towards compact spinning system as revenue expenditure under section 37 of the Act. The learned Departmental representative (DR) submitted that the case of the assessee is covered by the judgment of the hon'ble Supreme Court of India in the case of CIT v. Sri Mangayarkarasi Mills (P.) Ltd. [2009] 315 ITR 114/182 Taxman 141. The learned Departmental representative further submitted that the compact spinning system introduced by the assessee in manufacturing process of yarn is not replacement of old machinery parts, but state of art technology which is added to the existing machinery and hence needs to be capitalised. The assessee has got an advantage of enduring nature with the introduction of this technology.
6. On the other hand, Shri Banusekhar, representing the assessee strongly supported the order of the Commissioner of Income-tax (Appeals) on the issue. The learned authorised representative referred to the decision of the Tribunal in the assessee's own case in Prabhu Spinning Mills (P.) Ltd.(supra), wherein it has been held that the expenditure incurred on new technology called "compact spinning system" is a revenue expenditure. The learned authorised representative placed on record a copy of the order of the Tribunal in the aforesaid case at pages 50 to 79 of the compilation of the case laws paper book.
7. We have heard the submissions made by the representative of both sides and have perused the orders of the authorities below as well as the case laws relied on by the representatives of both sides. We find that the issue in hand has already been adjudicated by the co-ordinate Bench of the Tribunal in the assessee's own case for the assessment year 2007-08 in Prabhu Spinning Mills (P.) Ltd. (supra) wherein the Tribunal has discussed in detail the process of compact spinning system to determine the nature of expenditure. The relevant extract of the order of the Tribunal is reproduced hereinbelow (page 113) :
"11. 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 understand the exact nature of this expenditure we have to examine the process involved in this case. The yarn from the stage of simplex is sent to drafting before spinning. The drafting system is situated in the ring frames. The conventional drafting system has been replaced with the latest, state-of-the-art gadget called 'compact spinning'. After examining the relevant details, we have found that this is a single piece gadget which is fixed to each spindle. It is not a 'machinery' by itself but only an 'attachment to the machine' (like manual analog wall clock is fixed with battery operated system). It has been claimed as revenue expenditure. The old drafting systems have become scrap on replacement. The learned authorised representative has taken us through a set of colour photographs to illustrate the nature and working of this 'compact spinning system'. It is seen from the records (paper book page 5) that the assessee had purchased 33 number of ring frames and 18 ring frames fitted with gadgets. The company has purchased 18 number of sets, as one set is required for one ring frame. Thus, the total number of gadgets for 18 ring frames comes to Rs. 20,736 and the rate per gadget so purchased comes to Rs. 4,079. We have seen the commercial invoices enclosed in the paper book and found the submission of the learned authorised representative to be correct. We have found that during the year the assessee-company has installed new technology gadgets called 'compact spinning system'. The yarn from the stage of simplex is sent through the drafting for spinning by ring frames. The drafting system is situated in the ring frames. The conventional drafting system is replaced with the latest, state of the art gadget called 'compact spinning'. This is a single piece gadget and this is fixed to each spindles. Each gadgets cost Rs. 4,100 each because the assessee has purchased 37,296 such gadgets in 37 sets (batches) for Rs. 15.39 crores. Thus, it is not a machinery by itself but only an attachment to the existing machine. We have understood that this gadget cannot function independently. It functions only and only if it is fixed in the spindles. Each ring frame comes with conventional drafting gadget as we have understood from the pictograph and photographs produced by the learned authorised representative. Therefore, in order to produce high quality of yarn, the conventional type is 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 and attracts high income group customers. We have also understood the need for installing these compact spinning systems because these are used in manufacture of T-shirts and the manufacturers of T-shirts need such premium brand products. This change was necessitated to compete in the market and this step of the assessee cannot be taken as a surprise but has to be treated as taken in business exigency. When a question regarding life of these gadgets was put to the learned authorised representative, he stated that each gadget itself consist of many small parts and each part is assembled together to have one single gadget so, they are subject to heavy wear and tear due to continuous running. It was brought to our notice with certitude that these gadgets require constant replacement almost every four years at the maximum."
8. We find that the Tribunal while adjudicating the matter has also taken into consideration various case laws decided by the hon'ble Supreme Court of India including Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34; Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 (SC) ;Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377/43 Taxman 312 (SC) ; and the order of the Tribunal in the case of Vijayeswari Textiles Ltd., in I.T.A. No. 963/Mds/2011 for the assessment year 2006-07 dated August 23, 2011. The co-ordinate Bench of the Tribunal after discussing the facts of the case and the aforesaid decisions of the hon'ble apex court came to the conclusion that the expenditure incurred by the assessee on introducing the compact spinning system is revenue in nature and is thus an allowable expenditure.
9. Since the issue in hand is similar to the one decided by the co-ordinate Bench of the Tribunal, we respectfully follow the decision of the Tribunal in the assessee's own case in Prabhu Spinning Mills (P.) Ltd. (supra) for the assessment year 2007-08, and dismiss this appeal of the Revenue holding the expenditure incurred by the assessee on introducing compact spinning system as revenue expenditure.
10. Accordingly, the appeal of the Revenue is dismissed.
Regards
Prarthana Jalan
__._,_.___
No comments:
Post a Comment