IT: Where assessee, a manufacturer cum exporter, claimed deduction under section 80HHC on foreign exchange income received on account of cancellation of forward contract, following decision of Supreme Court rendered in case of CIT v. K. Ravindranathan Nair [2007] 295 ITR 228/165 Taxman 282, orders of lower authorities were set aside and matter was sent back to Assessing Officer for decision afresh in light of said decision
IT: Where assessee incurred certain expenditure on construction of vehicle parking shed and claimed depreciation thereon at rate of 100 per cent, since assessee itself submitted that shed would last for 20 years, it was entitled to depreciation on shed at rate of 10 per cent
IT: Where assessee, a manufacturer and exporter, incurred certain expenditure on replacement of dies and moulds and claimed deduction of same under section 31 as current repairs, assessee was entitled to deduction of expenditure
IT: Where assessee during year had given in advance certain amount for research and development equipment and claimed deduction of said expenditure under section 35, assessee was entitled to deduction
IT: Payment of entry tax is an allowable deduction even if it is set off against VAT liability of assessee
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[2014] 45 taxmann.com 94 (Madras)
HIGH COURT OF MADRAS
Commissioner of Income-tax, Chennai
v.
TVS Motors Ltd.*
TAX CASE (APPEAL) NOS. 173 & 174 OF 2009†
JANUARY 9, 2014
I. Section 80HHC of the Income-tax Act, 1961 - Deductions - Exporters (Computation of deduction) - Assessment year 2003-04 - Assessee-company was a manufacturer cum exporter - It claimed deduction under section 80HHC on foreign exchange income received on account of cancellation of forward contract - Assessing Officer held that above income could not be treated as directly derived from export activities and profit was more in nature of speculative profit - He further held that foreign exchange received on account of forward contract came within Explanation (baa) of section 80HHC, hence, 90 per cent of above receipt was to be excluded for purpose of eligible business profit of section 80HHC - Tribunal held that profit from foreign exchange fluctuation was part of export turnover, hence, could not be excluded from business profit for purposes of determination of deduction under section 80HHC - Whether in view of decision of Supreme Court rendered in case of CIT v. K. Ravindranathan Nair [2007] 295 ITR 228/165 Taxman 282, matter required to be sent back to Assessing Officer to find out whether forward contract was made in course of assessee's business of export and whether profit earned from exchange fluctuation was with reference to any particular contract for export of goods and decide issue in light of said decision - Held, yes [Para 25] [Matter remanded]
II. Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/rate of (Vehicle parking shed) - Assessment year 2003-04 - Assessee incurred certain expenditure on construction of vehicle parking shed - It claimed depreciation on cost of said shed at rate of 100 per cent - It stated that life span of vehicle parking shed would be around 20 years - Whether since assessee contended that shed itself would last for 20 years, it was entitled to depreciation on shed at rate of 10 per cent only - Held, yes [Para 27] [In favour of revenue]
III. Section 31 of the Income-tax Act, 1961 - Repairs and insurance of machinery, plant and furniture (Replacement of dies and moulds) - Assessment year 2003-04 - Assessee, a manufacturer and exporter, incurred certain expenditure on replacement of dies and moulds and claimed deduction of same under section 31 - It submitted that dies and moulds were not plant and machinery, but were attachments made to plant and machinery to make plant and machinery function as per requirements of business - Whether in view of decisions of Madras High Court rendered in cases of Super Spinning Mills Ltd. v. Asstt. CIT [2013] 357 ITR 720/218 Taxman 128/37 taxmann.com 290 and CIT v. Machado Sons Tax Case (Appeal) No. 1011 of 2005, dated 27-4-2012, assessee was entitled to deduction of expenditure in question under section 31 as current repairs expenditure - Held, yes [Para 31] [In favour of assessee]
IV. Section 35 of the Income-tax Act, 1961 - Scientific research expenditure (Research and development) - Assessment year 2003-04 - During previous year assessee had given in advance certain amount for research and development equipment and claimed deduction of said expenditure under section 35 - Assessing Officer disallowed claim of deduction on plea that assets had not come into existence - Tribunal following decision of Madras High Court rendered in case of CIT v. Rane Brake Linings Ltd. [2002] 255 ITR 395/[2003] 126 Taxman 231 allowed expenditure in question - Whether Tribunal was justified in its view - Held, yes [Para 28] [In favour of assessee]
V. Section 43B of the Income-tax Act, 1961 - Business disallowance - Certain deductions to be allowed only on actual payment (Entry tax) - Assessment year 2003-04 - During year assessee paid entry tax under provisions of Entry Tax Act and claimed deduction of same - Assessing Officer disallowed claim of deduction on plea that as per Tamil Nadu General Sales Tax Act entry tax paid would be set off as against sales tax paid by assessee and since set off under Sales Tax enactment was automatic, entry tax payment could not be claimed as deduction - Whether payment made by assessee on entry tax demand and its adjustment against sale tax assessment had nothing to do with deduction provision under Income-tax Act - Held, yes - Whether in peculiar facts of case entry tax actually paid by assessee during year under consideration was allowable as deduction under section 43B - Held, yes [Para 34] [In favour of assessee]
FACTS-I
| ■ | The assessee-company was a manufacturer cum exporter. In the return of income filed for the assessment year 2003-04, it claimed deduction under section 80HHC on the foreign exchange income received on account of cancellation of forward contract. It submitted that (i) the forward contract was booked for import of materials and export of goods, (ii) when the exchange rate moved favourably to it, the forward contract was cancelled and gain was realized and was kept in the separate account of the general ledger, and (iii) therefore, the gain was business related and deserved to be treated as business income. | |
| ■ | The Assessing Officer held that the said income could not be treated as directly derived from the export activities and the profit was more in the nature of speculative profit. He further held that the foreign exchange received on account of cancellation of forward contract came within theExplanation (baa) of section 80HHC. Hence 90 per cent of the above receipt was to be excluded for the purpose of eligible business profit of section 80HHC. | |
| ■ | On appeal, the Commissioner (Appeals) held that the income earned from forward contract would not be treated as derived from export of goods or merchandise. There could be no nexus between the said income and the export business and the said income did not qualify straight away for deduction under section 80HHC. | |
| ■ | On second appeal, the Tribunal referring to the decision of the Supreme Court rendered in the case of CIT v. K. Ravindranathan Nair [2007] 295 ITR 228/165 Taxman 282 held that as far as profit from foreign exchange fluctuation was concerned, the same was part of the export turnover. Hence it could not be excluded from the business profits for the purposes of determination of deduction under section 80HHC. | |
| ■ | On appeal to High Court: |
HELD-I
| ■ | The assessee does not deny the fact that the forward contract was entered into in the regular course of business. It, however, contended that in respect of the export and import made by it, based on the anticipated movement of the dollar and rupee it maintained the forward cover with the bank and later on it withdrew the contract and in this process it made gain of certain amount which was credited to a separate account in the general ledger of the company. As far as the claim on this amount as eligible profit for deduction under section 80HHC is concerned, the assessee placed heavy reliance on the Tribunal's order as well as the Commissioner (Appeals)'s order only to submit that in respect of export house, it was entitled to deduction fully. [Para 21] | |
| ■ | Section 80HHC is more concerned about the deduction on the profits derived by the assessee engaged in the business of export out of India of any goods or merchandise. Unless the assessee is in a position to point out that the income earned is derived by it from export of such goods and merchandise, such income would not qualify for deduction under section 80HHC. In the decision in the case of K. Ravindranathan Nair (supra), the Apex Court considered the question as regards the extent of deduction available to the assessee particularly as regards the income falling under Explanation (baa) to section 80HHC. The Supreme Court pointed out that in computing deduction under section 80HHC, there are four variables viz., business profits, export turnover, total turnover and 90 per cent of the sums referred to in clause (baa) to the said Explanation. The Court pointed out that every receipt is not an income and every income would not necessarily include element of export turnover. In other words, receipts constituting independent income having no nexus with exports are required to be reduced from business profit under clause (baa). | |
| ■ | On reading all the variables, the Apex Court pointed out that (i) every receipt cannot constitute sale proceeds from exports, (ii) every receipt is not income under the Income-tax Act, and (iii) every income may not be attributable to the business of export. Applying the said decision to the facts of the instant case, it is clear that even though the assessee is an exporter, there is no material on record to point out as to whether the assessee's forward contract was with reference to any particular contract or not or generally kept as an export house and not by way of speculative business. [Para 23] | |
| ■ | The assessee submitted that such forward contract was done on account of its export business and not in speculative manner and hence would qualify for deduction under section 80HHC. [Para 24] | |
| ■ | Since the material facts are lacking in the instant case, the matter requires further consideration as to the extent of deduction that the assessee would be entitled to. Accordingly, the order of the Tribunal was liable to be set aside. The matter required to be sent back to the Assessing Officer to find out whether forward contract was made in the course of assessee's business of export and whether the profit earned from exchange fluctuation was with reference to any particular contract for export of goods and decide the issue in the light of the decision in the case of K. Ravindranathan Nair (supra). [Para 25] |
FACTS-II
| ■ | The assessee incurred certain expenditure on the construction of the vehicle parking shed. It claimed depreciation on the cost of the said vehicle parking shed at the rate of 100 per cent. It stated that the life span of the vehicle parking shed would be around 20 years. | |
| ■ | The Assessing Officer allowed depreciation only at the rate of 10 per cent on the cost of the said vehicle parking shed. | |
| ■ | On appeal, the Commissioner (Appeals) held that the expenditure had resulted in the creation of a new asset, which had given the assessee a benefit of enduring nature and the claim of the assessee for deduction at 100 per cent of the entire structure was not in order. He, therefore, confirmed the order of the Assessing Officer. | |
| ■ | On second appeal, the Tribunal held that the Assessing Officer had not brought any material on record to show that the construction was not temporary. On going through the nature of the expenditure incurred on putting up the vehicle shed, it directed 100 per cent depreciation and set aside the order of the Commissioner (Appeals). | |
| ■ | On appeal to High Court: |
HELD-II
| ■ | Going by the nature of expenditure incurred by the assessee on other temporary shed for keeping spares and other expenditure incurred on storage facilities, there is no justifiable ground to accept the plea of the assessee that the parking shed put up by it should be treated as temporary one for the purpose of granting depreciation at 100 per cent. The shed itself would last for 20 years. Taking note of both these aspects, the depreciation on the expenditure incurred on putting up of temporary shed for parking vehicle would be at 10 per cent only. [Para 27] |
FACTS-III
| ■ | During the year, the assessee incurred certain expenditure on replacement of dies and moulds and claimed deduction of same under section 31 as current repairs expenditure. It submitted that dies and moulds were not plant and machinery, but were attachments made to plant and machinery to make plant and machinery function as per the requirements of the business. Within a period of one year of installation, the life of the dies and moulds would become obsolete and this was due to high production involved. Thus replacement of the new dye in the place of old dye would qualify for current repairs under section 31. | |
| ■ | The Assessing Officer rejected the claim taking the view that the assessee itself claimed depreciation at 25 per cent on dies and moulds upto the assessment year 1999-2000. It changed the system of claiming depreciation and started claiming 100 per cent relief under section 31 instead of 25 per cent applicable under section 32. Further on items below Rs. 5,000 depreciation at 100 per cent was allowed. Since the provision was deleted, the assessee was not entitled to any relief. | |
| ■ | On appeal, the Commissioner (Appeals) following the decision of the Madras High Court rendered in the case of CIT v. Janakiram Mills Ltd. [2005] 275 ITR 403/146 Taxman 40 allowed the assessee's claim. | |
| ■ | On second appeal, the Tribunal held that the dies and moulds were not plant and machinery. The replacement of dies and moulds were not in the nature of installation of machinery in the factory. Such moulds and dies were normally attached to the machines to suit the individual requirement of particular product. So the expenditure incurred on replacement of dies and moulds was revenue in nature. | |
| ■ | On appeal to High Court: |
HELD-III
| ■ | Applying the ratio of the decision of the Madras High Court rendered in the case of Super Spinning Mills Ltd. v. Asstt. CIT [2013] 357 ITR 720/218 Taxman 125/37 taxmann.com 290 to the instant case, it is evident that moulds and dies attached to the machinery like press designs specification are not independent of the plant and machinery, but are parts of the machinery. Once the dies are worn out, the machine cannot turn out the product to the business specifications and this has to be obtained only on a replacement of the dies and moulds, a fact which is not refuted by the revenue. | |
| ■ | It is no doubt true that the assessee claimed depreciation on dies and moulds. Yet in the decision in the case of CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 (SC), the Apex Court pointed out that all questions whether of law or of fact, which relate to the assessment year of the assessee, could be raised in any year under consideration before the Officer as well as before the Tribunal too and if, for reasons recorded by the departmental authorities in rejecting a contention raised by the assessee, the grant of relief to an assessee is justified on another ground, the revenue is bound to consider such claim of granting the relief. The Apex Court pointed out that the right of the assessee to the relief is not restricted to the plea raised by him. | |
| ■ | In the instant case, when the dies and moulds were attached to the machine to manufacture the designed product, the plea of the assessee that the claim would fall for consideration only under section 31 deserved to be accepted. [Para 31] | |
| ■ | The expenditure being considered as current repairs, the same would fall under section 31 as current repairs. To that extent, the order of the Tribunal was liable to be modified. [Para 32] |
CASE REVIEW-I
CIT v. K. Ravindranathan Nair [2007] 295 ITR 228/165 Taxman 282 (SC) (para 25) followed.
CIT (Central) v. Soorajmull Nagarmull [1981] 129 ITR 169/5 Taxman 289 (Cal.) (para 22) and CITv. Badridas Gauridu (P.) Ltd. [2003] 261 ITR 256/[2004] 134 Taxman 376 (Bom.) (para 22)distinguished.
CASE REVIEW-II
CIT v. Amrutanjan Finance Ltd. [2011] 203 Taxman 295/15 taxmann.com 392 (Mad.) (para 27)distinguished.
CASE REVIEW-III
Super Spinning Mills Ltd. v. Asstt. CIT [2013] 357 ITR 720/218 Taxman 125/37 taxmann.com 290 (Mad.) (para 32) and CIT v. Machado Sons [Tax Case (Appeal) No. 1011 of 2005, dated 27-4-2012] (para 32) followed.
CASE REVIEW-IV
CIT v. Rane Brake Linings Ltd. [2002] 255 ITR 395/[2003] 126 Taxman 231 (Mad.) (para 28)followed.
CASES REFERRED TO
CIT v. Janakiram Mills Ltd. [2005] 275 ITR 403/146 Taxman 40 (Mad.) (para 12), CIT v. K. Ravindranathan Nair [2007] 295 ITR 228/165 Taxman 282 (SC) (para 16), CIT v. Rane Brake Linings Ltd. [2002] 255 ITR 395/[2003] 126 Taxman 231 (Mad.) (para 18), CIT v. Mysore Spun Concrete Pipe (P.) Ltd. [1992] 194 ITR 159/60 Taxman 170 (Kar.) (para 19), CIT v. Jagat Jit Industries Ltd. [2000] 241 ITR 556/108 Taxman 230 (Delhi) (para 19), CIT v. Soorajmull Nagarmull[1981] 129 ITR 169/5 Taxman 289 (Cal.) (para 22), CIT v. Badridas Gauridu (P.) Ltd. [2003] 261 ITR 256/[2004] 134 Taxman 376 (Bom.) (para 22), CIT v. K. Ravindranathan Nair [2007] 295 ITR 228/165 Taxman 282 (SC) (para 23), CIT v. Amrutanjan Finance Ltd. [2011] 203 Taxman 295/15 taxmann.com 392 (Mad.) (para 26), Super Spg. Mills Ltd. v. Asstt. CIT [2013] 357 ITR 720/218 Taxman 125/37 taxmann.com 290 (Mad.) (para 30), CIT v. Mangayarkarasi Mills (P.) Ltd. [2009] 315 ITR 114/182 Taxman 141 (SC) (para 30), CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 (SC) (para 30) and CIT v. Machado Sons [Tax Case (Appeal) No. 1011 of 2005, dated 27-4-2012] (para 32).
Mrs. Hema Muralikrishna for the Appellant. C.V. Rajan and R. Venkata Narayanan for the Respondent.
JUDGMENT
Mrs. Chitra Venkataraman, J. - These two Tax Case (Appeals) filed by the Revenue arising out of the common order of the Income Tax Appellate Tribunal in the assessee's appeal as well as the Revenue's appeal were relating to the assessment year 2003-04. The following substantial questions of law are raised by the Revenue in both the Tax Case (Appeals):—
| "1. | Whether on the facts and circumstances of the case, the Tribunal was right in holding that the foreign exchange gains arising from cancellation of forward contracts would form part of the export turnover for benefit of Section 80HHC ? | |
| 2. | Whether on the facts and circumstances of the case, the Tribunal was right in holding that 100% depreciation can be granted on the parking sheds when even as per the assessee it would last for 20 years ? | |
| 3. | Whether on the facts and circumstances of the case, the Tribunal was right in allowing expenditure related to advance given for R & D equipment under Section 35(1)(iv) of the Income Tax Act ? | |
| 4. | Whether on the facts and circumstances of the case, the Tribunal was right in holding that the expenditure on replacement of dies and moulds are to be allowed as a revenue expenditure contrary to its own orders in other cases, and when such expenditure was not debited in the profit and loss account, but only claimed in the Income Tax Adjustment statement ? | |
| 5. | Whether on the facts and circumstances of the case, the Tribunal was right in holding that the assessee is entitled to deduction of entry tax paid under Section 43B without verifying whether such entry tax had been set off against sales tax paid and the treatment given to the same in its account ?" |
2. The assessee is a company, which filed its return of income for the assessment year 2003-04 admitting total income of Rs.179,91,77,850/-. Subsequently, it filed a revised return. In the revised return, the assessee claimed expenditure under Section 31 on the dies and moulds replaced in the place of worn out dies and moulds; 100% depreciation on the temporary vehicle parking shed to the extent of Rs.1,89,72,571/-; deduction under Section 80HHC of the Income Tax Act, 1961 (hereinafter called as the "Act") in respect of foreign exchange income received on account of forward contracts of Rs.49,79,898/-. Apart from this, the assessee also claimed expenditure on Research & Development work and on the payment of Entry Tax of an amount of Rs.1,19,77,063/-.
3. As far as the claim under Section 80HHC of the Act on the foreign exchange received on account of forward contract is concerned, the assessee contended that 80HHC did not distinguish interest income as related to the business or not related to business; further, the foreign exchange income received on account of forward contract and other miscellaneous income also come within the ambit of other receipts. However, the Assessing Officer rejected such contention holding that the Foreign Exchange received on account forward contracts come within the Explanation (baa) of Sub Section (iii) of Section 80HHC of the Act, hence, 90% of the above receipts were to be excluded for the purpose of eligible business profit of Section 80HHC of the Act.
4. As far as the claim on 100% depreciation on various items which included temporary parking shed is concerned, the Assessing Officer rejected the same and held that the depreciation applicable to Buildings at 10% would be allowed on the above claim.
5. As regards the claim on expenditure under Section 31 of the Act on replacement of dies and moulds, the assessee contended that they being part of the machinery, replacement of dies and moulds would be allowed under Section 31 of the Act. The Assessing Officer rejected the said claim taking the view that the assessee itself claimed depreciation at 25% on dies and moulds upto assessment year 1999-2000. The assessee changed the system of claiming depreciation and it started claiming 100% relief under Section 31 of the Act instead of 25% applicable under Section 32 of the Act. Further on items below Rs.5,000/-, depreciation at 100% was allowed and since the provision was deleted, the assessee was not entitled to any relief.
6. On the claim of Research & Development (R&D), the Assessing Officer held that since the assets had not come into existence, expenditure claimed under Section 35D of the Act was not allowed; the expenditure would be allowed in the subsequent year if the assets had come into existence; the expenditure on R & D work in progress which was disallowed in the assessment year 2002-03 was allowed during the year under consideration as the assets had been put to use. Thus, the balance amount of Rs.1,68,85,332/- was added to the total income of the assessee.
7. On the claim of deduction on the Entry Tax paid, the Assessing Officer pointed out that as per the Tamil Nadu General Sales Tax Act, the entry tax paid would be set off as against the sales tax paid by the assessee. Since the set off under the Sales Tax enactment is automatic, the entry tax payment could not be claimed as deduction. Thus, this claim was also disallowed.
8. On the Foreign Exchange forward contracts, the assessee pointed out that foreign contracts were booked for import of materials and export of goods. When the exchange rate moved favourably to the assessee, the forward contract was cancelled and gains were realized and were kept in the separate account of the general ledger and thus, these were business related, consequently, they had to be treated as business income. The Assessing Officer however rejected this contention that the said income could not be treated as directly derived from the export activities and the profits were more in the nature of speculative profits.
9. Aggrieved by the above order of the Assessing Officer, the assessee went on appeal before the Commissioner of Income Tax (Appeals).
10. The Commissioner of Income Tax (Appeals), however, rejected the plea of the assessee, taking the view that income earned from forward contract would not be treated as derived from export of goods or merchandise; there could be no nexus between the said income and the export business and the said income did not qualify straight away for deduction under Section 80HHC of the Act.
11. On the depreciation claimed on the temporary parking shed put up, the Commissioner of Income Tax (Appeals) pointed out that the assessee constructed the vehicle parking shed at the cost of Rs.2.5 crores, the assessee claimed it as revenue expenditure. It was stated that the life span of the said vehicle parking shed would be around 20 years. However, the Commissioner of Income Tax (Appeals) rejected the said plea and took the view that expenditure had resulted in the creation of a new asset, which had given the assessee a benefit of enduring nature and the claim of the assessee for deduction at 100% of the entire structure is not in order. Thus, he confirmed the order of the Assessing Officer and held that the action of the Assessing Officer in allowing depreciation only at the rate of 10% on the cost of the said vehicle parking shed was justified.
12. On the issue pertaining to dies and moulds, the First Appellate Authority followed the decision in the case of CIT v. Janakiram Mills Ltd. [2005] 275 ITR 403/146 Taxman 40 (Mad.) and directed the Assessing Officer to delete the entire addition made under this head.
13. On the question of expenditure on Research & Development, the Commissioner of Income Tax (Appeals) allowed the appeal following the order made in the assessee's own case for the assessment year 2002-03 and 2005-06.
14. On the Entry Tax claimed as deduction, the First Appellate Authority agreed with the assessee that it was entitled to deduction on the Entry Tax paid. The Commissioner of Income Tax (Appeals) pointed out even though the General Sales Tax Act permitted the adjustment of the entry tax paid in the sales tax liability, Revenue was not concerned as to in what manner Entry Tax was adjusted with the Sales Tax liability.
15. Thus the First Appellate Authority allowed the assessee's appeal on the issue of R & D expenditure, on the expenditure of dies and moulds and on payment of Entry Tax, but rejected the assessee's appeal on receipts on forward contract claim under Section 80HHC of the Act. Aggrieved by this, both the assessee and Revenue went on appeal before the Income Tax Appellate Tribunal.
16. As far as the claim for deduction towards income earned on forward contract was concerned, the Income Tax Appellate Tribunal (hereinafter called as "Tribunal") allowed the assessee's appeal holding that the decision of the Apex Court in the case of CIT v. K. Ravindranathan Nair [2007] 295 ITR 228/165 Taxman 282 was directly applicable to the facts of the case. Referring to the decision of the Apex Court in the case of K. Ravindranathan Nair (supra), the Tribunal pointed out that as far as profit from foreign exchange fluctuation was concerned, the same was part of the export turnover, hence, could not be excluded from the business profits for the purposes of determination of deduction under Section 80HHC of the Act. Thus, the Tribunal allowed the assessee's appeal in this regard.
17. As regards the depreciation claimed on temporary parking shed was concerned, the Tribunal pointed out that the Assessing Officer had not brought any material on record to show that these constructions were not temporary. On the plain reading of the expenditure incurred on putting up the car shed, the Tribunal directed 100% depreciation and set aside the order of the Commissioner of Income Tax (Appeals). Thus on the claim of 100% depreciation, the assessee's appeal was allowed.
18. As regards the expenditure on Research and Development was concerned, the Tribunal applied the decision in the case of CIT v. Rane Brake Linings Ltd. [2002] 255 ITR 395/[2003] 126 Taxman 231 (Mad.) and rejected the Revenue's appeal.
19. On the expenditure incurred towards dies and moulds, the assessee took the plea that dies and moulds were not plant and machinery, but were attachments made to plant and machinery to make plant and machinery function as per the requirements of the business. In this connection, the assessee pointed out to the decision in the case of CIT v. Mysore Spun Concrete Pipe (P.) Ltd. [1992] 194 ITR 159/60 Taxman 170 (Kar.) and contended that moulds normally undergo damage frequently and hence the same was to be allowed as revenue expenditure. It also relied on the decision of the Delhi High Court in the case of CIT v. Jagatjit Industries Ltd. [2000] 241 ITR 556/108 Taxman 230. The Tribunal further referred to the decision of this Court in the case of Janakiram Mills Ltd. (supra) and pointed out that the decision was reversed by the Supreme Court and held that the said decision would have no relevance to the facts of the case. However, the Tribunal applied the decision of the Karnataka High Court in the case of Mysore Spun Concrete Pipe (P.) Ltd. (supra) and the Tribunal held that the expenditure incurred towards dies and moulds was revenue expenditure.
20. On the aspect of deduction claimed on the entry tax paid, the Tribunal once again confirmed the view of the Commissioner of Income Tax (Appeals) and rejected the Revenue's appeal. Thus, aggrieved by the order of the Tribunal, the Revenue is on appeal before this Court.
21. The assessee is a manufacturer cum exporter. The assessee does not deny the fact that the forward contracts were entered into in the regular course of business. It however contended that in respect of the exports and imports made by the Company, based on the anticipated movement of the dollar and rupee, a forward cover is normally booked with the company's bankers; depending on the fluctuation, the assessee maintained the forward cover or withdrew the contract and that in this process, the assessee made gains which was credited to a separate account in the general ledger of the company and a sum of Rs.49,79,898/- was realised. As far as the claim on this amount as eligible profit for deduction under Section 80HHC of the Act is concerned, learned counsel appearing for the assessee placed heavy reliance on the Tribunal's order as well as the Commissioner's order only to submit that in respect of export house, it was entitled to deduction fully.
22. Learned counsel appearing for the assessee placed reliance on the decision of the Calcutta High Court in the case of CIT v. Soorajmull Nagarmull [1981] 129 ITR 169/5 Taxman 289 as well as the decision of Bombay High Court in the case of CIT v. Badridas Gauridu (P.) Ltd. [2003] 261 ITR 256/[2004] 134 Taxman 376. Those decisions were concerned about the question as to whether forward transaction on foreign exchange was speculative or incidental to export and import business. The said issues arose on the question of loss arising in forward transaction. The Bombay and Calcutta High Courts took the view that transaction not being speculative, the loss was deductible as business loss.
23. As far as the present case is concerned, we are on deduction under Section 80HHC of the Act. Section 80HHC of the Act is more concerned about the deduction on the profits derived by the assessee engaged in the business of export out of India of any goods or merchandise. Unless the assessee is in a position to point out that the income earned is derived by the assessee from export of such goods and merchandise, such income would not qualify for deduction under Section 80HHC of the Act. In the decision in the case of CIT v. K. Ravindranathan Nair [2007] 295 ITR 228/165 Taxman 282, the Apex Court considered the question as regards the extent of deduction available to the assessee particularly as regards the income falling under Explanation (baa) to Section 80HHC of the Act. The Supreme Court pointed out that in computing deduction under Section 80HHC of the Act, there are four variables viz., business profits, export turnover, total turnover and 90 per cent of the sums referred to in clause (baa) to the said Explanation. The Apex Court pointed out that every receipt is not an income and every income would not necessarily include element of export turnover. In other words, receipts constituting independent income having no nexus with exports are required to be reduced from business profit under clause (baa). On reading all the variables, the Apex Court pointed out that every receipt cannot constitute sale proceeds from exports; that every receipt is not income under the Income-tax Act and every income may not be attributable to the business of export. Applying the said decision to the facts of the case herein, we find that even though the assessee is an exporter, we do not have necessary materials to point out as to whether the assessee's forward contracts were with reference to any particular contract or not or generally kept as an export house and not by way of speculative business.
24. Learned counsel appearing for the assessee submitted that such forward contracts were done on account of its export business and not in speculative manner and hence would qualify for deduction. Although we do not have material facts to decide on this issue and the contentions are general, we may point out that in the written statements before the Commissioner of Income Tax (Appeals), the assessee submitted that as an exporter of goods, forwards contracts were kept for export as well as import. But the written statement did not lead any further to know whether the receipt of the income on account of fluctuation was the income derived from any particular forward contract cancelled. Thus, question arises as to what extent the assessee would be entitled to deduction under Section 80HHC of the Act. After referring to the decision in the case of K. Ravindranathan Nair (supra), the Tribunal straightaway allowed the case, holding that the profit from foreign exchange fluctuation was part of the export turnover.
25. Since the material facts are lacking in this case, we agree with the submission of the Revenue that the matter requires further consideration as to the extent of deduction that the assessee would be entitled to. Accordingly, the right course herein would be to set aside the order of the Tribunal and we remit the matter back to the Assessing Officer to find out whether forward contract were made in the course of its business of export and whether the profit earned from exchange fluctuation were with reference to any particular contract for export of goods and decide the issue in the light of the decision in the case of K. Ravindranathan Nair (supra). The Assessing Officer may decide the issue in accordance with law and the assessee is at liberty to produce necessary material to support its contention before the Assessing Officer.
26. As regards the claim on depreciation on temporary parking shed put up by the assessee is concerned, learned counsel appearing for the Revenue submitted that going by the extent of expenditure incurred and the admission by the assessee that it could withstand for 20 years or so, it is evident that the structure is permanent and hence entitled to depreciation at the rate of 10%. However, learned counsel appearing for the assessee submitted that going by the temporary shed put up, the extent of expenditure should not be a guiding factor in the matter of grant of depreciation. He also placed reliance on the decision of this Court in the case of CIT v. Amrutanjan Finance Ltd.[2011] 203 Taxman 295/15 taxmann.com 392 (Mad.).
27. We have perused the decision cited by the assessee. We do not find any justifiable ground to apply the said decision to the facts of the above tax cases, since factually, the same is distinguishable. The facts in the said decision relates to false ceiling and wooden partition inclusive of furniture, electrical wiring and interior decoration. The present case relates to the claim on temporary parking shed put up by the assessee. The expenditure incurred was Rs.1,89,72,571/-. Apart from the extent of expenditure thus incurred, we do not know whether the parking shed is a temporary one for parking vehicle or the shed itself is temporary one. Leaving this aside, going by the nature of expenditure incurred on other temporary shed for keeping spares -ware-house and other expenditure incurred on storage facilities, we do not find any justifiable ground to accept the plea of the assessee that the parking shed put up by the assessee should be treated as temporary one for the purpose of granting depreciation at 100%. We agree with the Revenue's contention that the shed itself would last for 20 years. Taking note of both these aspects, we agree with the Revenue and set aside the order of the Tribunal and allow the Tax Case (Appeal) that the depreciation on the expenditure incurred on putting up of temporary shed for parking vehicle would be at 10% only. Hence, we restore the order of the Assessing Officer.
28. As regards the expenditure on Research & Development, after analysing the facts, the Tribunal rightly applied the decision in the case of Rane Brake Linings Ltd. (supra).Consequently, we have no hesitation in rejecting the Revenue's plea.
29. As regards the expenditure on dies & moulds, the assessee pointed out that it debited an amount of Rs.11,17,68,169/- towards dies and moulds only to replace them in the place of worn out dies and moulds. The assessee in the memorandum of income added this amount to the total income and claimed the cost of dies and moulds of Rs.22,66,52,504/- under Section 31 of the Act. The assessee stated that within a period of one year of installation, the life of the dies and moulds would become obsolete and this was due to high production involved. Thus, replacement of the new dye in the place of old dye would qualify for current repairs under Section 31 of the Act. The Assessing Officer, however, rejected the contention of the assessee and the Assessing Officer pointed out that the assessee was claiming depreciation upto 1999-2000 under Section 32 of the Act and only in the year under consideration, it started claiming deduction under Section 31 of the Act. The Tribunal pointed out that the dies and moulds were not plant and machinery, yet the replacement of dies and moulds were not in the nature of installation of machinery in the factory. Such moulds and dies were normally attached to the machines to suit the individual requirement of particular product. So holding, the Tribunal held that expenditure incurred on replacement of dies and moulds was revenue in nature. It relied on the decision of Karnataka High Court in the case of Mysore Spun Concrete Pipe (P.) Ltd.(supra).
30. As far as this issue is concerned, learned counsel appearing for the assessee placed reliance on the decision of this Court reported in the case of Super Spg. Mills Ltd. v. Asstt. CIT [2013] 357 ITR 720/218 Taxman 128/37 taxmann.com 290 (Mad.) related to the expenditure on replacement of the machinery parts. The assessee therein engaged in the business of manufacture and trading in cotton yarn and allied products and the assessee incurred expenditure in respect of replacement of certain textile machinery. On a question as to whether such replacement of parts would be current repairs of capital in nature, this Court considered the decisions in the case of Saravana Spinning Mills (P.) Ltd.(supra), Ramaraju Surgical Cotton Mills (supra) and CIT v. Mangayarkarasi Mills (P.) Ltd. [2009] 315 ITR 114/182 Taxman 141 (SC) and pointed out that the question as to whether the expenditure incurred on replacement of machinery is revenue or capital rests on the nature of capital incurred vis-a-vis the benefit derived. This Court referred to the decision in the case of Saravana Spg. Mills (P.) Ltd. (supra) and in particular to the decision in the case of Sri Mangayarkarasi Mills (P.) Ltd.(supra) and pointed out as under:—
"10. The question as to whether the expenditure incurred on replacement of machinery is revenue or capital expenditure, particularly in the nature of replacements of parts, thus rests on the nature of expenditure incurred, vis-a-vis the benefit that the assessee derives. The ratio deductible from the decisions referred to above are:
| (i) | To decide the applicability of Section 31(i), the test is not whether the expenditure is revenue or capital in nature, but whether the expenditure is "current repairs". The basic test is to find out whether expenditure is incurred to "preserve and maintain" an already existing asset and the expenditure must not be to bring a new asset into existence or to obtain a new advantage vide CIT v. Saravana Spinning Mills (P.) Ltd. [2007] 293 ITR 201 (SC). | |
| (ii) | Under Section 31(i), the deduction admissible is only for current repairs. Therefore, the question as to whether the expenditure incurred by the assessee conceptually is revenue or capital in nature is not relevant for deciding the question whether such expenditure comes within the etymological meaning of the expression "current repairs". In other words, even if the expenditure is revenue in nature, it may not fall in the connotation of "current repairs" CIT v. Saravana Spinning Mills (P.) Ltd. [2007] 293 ITR 201 (SC). | |
| (iii) | A new asset or new/different advantage cannot amount to 'current repairs'. - 2009-TIOL-86-SC-II (CIT v. Sri Mangayarkarasi Mills (P.) Ltd.). | |
| (iv) | Repair implies existence of a part of the machine which has malfunctioned, thereby requiring repair to that machinery, plant etc. Replacement cannot be a current repair, for, "replacement" and "current repair" do not go hand in hand . If one is to hold otherwise, it would only make Section 31(i) wholly redundant and absurd. Thus, replacement expenditure cannot be said to be 'current repairs' vide CIT v. Saravana Spg. Mills (P.) Ltd.and 2009-TIOL-86-SC-II (CIT v. Sri Mangayarkarasi Mills (P.) Ltd. [2007] 293 ITR 201 (SC). | |
| (v) | Expenditure is deductible under section 37 only if it (a) is not deductible under sections 30-36, (b) is of a revenue nature, (c) is incurred during the current accounting year and (d) is incurred wholly and exclusively for the purpose of the business. - 2009-TIOL-86-SC-II (CIT v. Sri Mangayarkarasi Mills (P.) Ltd.); | |
| (vi) | Expenditure is of a capital nature when it amounts to an enduring advantage for the business and repair is different from bringing a new asset for the business. Further, bringing into existence a new asset or an enduring benefit for the assessee amounts to capital expenditure vide Lakshmiji Sugar Mills (P.) Co. v. CIT (AIR 1972 SC 159)2009-TIOL-86-SC-II(CIT v. Sri Mangayarkarasi Mills (P.) Ltd.). | |
| (vii) | Therefore, whether an expenditure is revenue or capital in nature would depend on the facts of each case. - CIT v. Saravana Spg. Mills (P.) Ltd. [2007] 293 ITR 201 (SC)." |
This Court also referred to the decision in the case of CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 (SC) on the issue of current repairs and pointed out that so long as there is no change in the performance of the machinery and the parts that were replaced performing precisely the same function, expenditure could only be concerned as current repairs of the plant and machinery.
31. Applying the ratio of the decision cited above, when we look into the facts of the above cases, it is evident that with regard to the moulds and dies attached to the machinery like press designs specification, moulds and dies are not independent of the plant and machinery, but are parts of the machinery. Once the dies are worn out, the machines cannot turn out the product to the business specifications and this has to be obtained only on a replacement of the dies and moulds, a fact which is not refuted by the revenue. It is no doubt true that the assessee claimed depreciation on dies and moulds. Yet in the decision in the case of Mahalakshmi Textile Mills Ltd. (supra), the Apex Court pointed out that all questions whether of law or of fact, which relate to the assessment year of the assessee could be raised in any year under consideration before the Officer as well as before the Income Tax Appellate Tribunal too and if, for reasons recorded by the departmental authorities in rejecting a contention raised by the assessee, the grant of relief to an assessee is justified on another ground, the Revenue is bound to consider such claim of granting the relief. The Apex Court pointed out that the right of the assessee to the relief is not restricted to the plea raised by him. On the facts before us, when the dies and moulds were attached to the machine to manufacture the designed product, we have no hesitation to accept the plea of the assessee that the claim would fall for consideration only under Section 31 of the Act.
32. In the unreported decision of this Court dated 27.04.2012 in Tax Case (Appeal). No.1011 of 2005 (CIT v. Machado Sons) on the question of repair made to a ship, this Court pointed out that when the object of the expenditure was not for bringing into existence a new asset or to obtain a new advantage, the said expenditure qualifies to be considered as current repairs under Section 31 of the Act. In so holding, after referring to the decision of the Apex Court in the case of Saravana Spg. Mills (P.) Ltd. (supra), this Court further pointed out to the decision of the Apex Court where it cautioned that all repairs are not current repairs on Section 31(1) of the Act; Section 31(1) of the Act limits the scope of allowability of expenditure as deduction in respect of repairs made to machinery, plant or furniture by restricting it to the concept of "current repairs". Thus, this Court pointed out that what is allowable as revenue expenditure under Section 37 of the Act are those expenditure other than one falling for consideration under Sections 30 to 36 of the Act. The Apex Court further pointed out the example that when the picture tube in a television set is replaced, such repairs would come within the connotation of the phrase "current repairs". Thus, applying these two decisions, we have no hesitation in rejecting the Revenue's appeal. We hold that the claim being considered as current repairs, the same would fall under Section 31 of the Act as current repairs. To that extent, we modify the order of the Tribunal.
33. On the question of deduction under Entry Tax, the Tribunal rightly considered the claim of the assessee for deduction of entry tax payment made by the assessee. The Assessing Officer admitted that the deduction on account of Entry Tax is allowable if the payment is actually made and admittedly, payment of entry tax has been made by the assessee; the entry tax paid would get the adjustment as against the Sales Tax liability, consequently, any deduction would amount to total deduction.
34. We do not agree with the said line of reasoning. The payment made on the entry tax demand and its adjustment against the Sales Tax assessment has nothing to do with deduction provision under the Income Tax Act on the entry tax paid. Consequently, we reject the Revenue's plea on double deduction. The provisions of Sales Tax Act and the Income Tax Act are on the different lines. The adjustment or the treatment given under the Sales Tax Act cannot be read in to the Income Tax Act and the only question is whether the entry tax actually paid by the assessee during the year under consideration is allowable as deduction or not. The Tribunal rightly allowed the deduction claimed by the assessee on account of tax payment made under Entry Tax Act. Consequently, we reject the Revenue's appeal.
35. Insofar as T.C.(A).No.173 of 2009 is concerned, the first question on the claim of foreign exchange fluctuation of forward contract is concerned, the matter stands remitted back to the Assessing Officer for de novo consideration to the extent as indicated above. The order of the Tribunal is set aside.
36. As regards the claim of 100% depreciation by the assessee on the temporary parking shed, the Revenue's appeal stands allowed.
37. In the result, T.C(A).173 of 2009 stands partly allowed.
38. Insofar as T.C.(A).No.174 of 2009 is concerned, as regards the first question on Research and Development under Section 35(1)(iv) of the Act, the same is held against the Revenue. So too the expenditure on replacement of dies and moulds, we hold that the expenditure falls under Section 31 of the Act and not under Section 37 of the Act. To that extent, the Tribunal's order stands modified.
39. As regards the Entry Tax under Section 43B of the Act, the question is answered against the Revenue. Consequently, the Tax Case (Appeal) No.174 of 2009 stands dismissed. No costs.
SKJ†Arising out of order of Tribunal in IT Appeal Nos. 792 and 893 (Mds) of 2007, dated 22-5-2008.
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