Commissioner Of Income Tax Madurai v. M/S.l.s.mills Ltd., Madurai Road, Theni

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 8.2.2006 CORAM : THE HONOURABLE MR.JUSTICE P.D.DINAKARANAND THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (A) No.58,59,96 & 97 of 2006and T.C.M.P.Nos.46 & 82 of 2006 Commissioner of Income TaxMadurai ...Appellant in all the cases -Vs- M/s.L.S.Mills Ltd.,Madurai Road,Theni...Respondent inall the appeals. Prayer: Appeals filed under Section 260-A of the Income Tax Act1961 against the orders of the Income Tax Appellate Tribunal Madras'C' Bench, Chennai dated 23.6.2005 and 26.4.2005 in I.T.A.Nos. 433,434, 190, 220,/Mds/2001 for the assessment years 1993-94, 95-96,1996-97 and 1995-96 respectively.Against the order of the Commissioner of Income Tax (Appeals) XIII,Chennai dated 5.12.2000 made in I.T.A.Nos.454/1999-2000 and437/1999-2000 respectively against the order of the the DeputyCommissioner of Income Tax, Special Range II, Madurai dated 4.3.98and made in P.A.N. / G.I.R. No. 49-003-Cz-8024 for the Assessmentyear 1993-94 and 1995-96 respectively (T.C.58 and 59 of 2006) against the order of the Commissioner of Income tax (Appeals)Madurai dated 13.12.2000 made in I.T.A.No.217-99-2000 against theorder of the Deputy Commissioner of Income tax, Special Range II,Madurai dated 4.3.1998 made in P.A.N/G.I.R.No.49-003-C2-8024 forthe Assessment year 1995-96 (T.C.96/2006) against the order of the Commissioner of Income Tax (Appeals) XIII,Chennai-34 dated 5.12.2000 made in G.T/Appeal No. 454/199-2000against the order of the Deputy Commissioner of Income Tax, SpecialRange -II, Madurai dated 31.3.1999 and made in P.A.N/G.I.R. No. 49-003-C2-8024 for the Assessment year 1996-97 (T.C. 97/2006) For Appellant :Mr.Narayanaswamy Standing Counsel O R D E R (Order of the Court was made by P.D.DINAKARAN, J.) Heard. The above appeals are preferred under Section 260-A ofthe Income Tax Act 1961 against the orders of the Income TaxAppellate Tribunal Madras Bench "C" dated 23.6.2005 and 26.4.2005in I.T.A.Nos. 433, 434, 190, 220,/Mds/2001. 2. The facts in brief are : The assessee company is a privatelimited company engaged in the manufacture and sale of yarn. Forthe assessment years 1993-94, 1995-96, 1996-97 and 1995-96, theassessing officer, disallowed the claim of the assessee in respectof replacement of old machinery by new one on the ground that thesame cannot be treated as a revenue expenditure; treated the MODVATcredit relating to the replacement of machinery as capital;recalculated the benefit under Section 80 HHC by including theexcise duty and sales tax to the total turnover and also disallowedthe excess remuneration paid to the director. Aggrieved by the saidorder, the assessee filed appeals before the CIT(Appeals). TheCommissioner of Income Tax(appeals), allowed the above issues infavour of the assessee. Aggrieved by the same, the Revenue filedappeals before the Income Tax Appellate Tribunal. The AppellateTribunal dismissed the appeals filed by the Revenue. 3. Aggrieved by the said order of the appellate Tribunal, theRevenue has filed T.C.Nos.58 & 59 of 2006 by raising the followingsubstantial questions of law:- 1. Whether in the facts and circumstances of the case,the Tribunal was right in law in holding that theexpenditure incurred by the assessee during theaccounting year on the replacement of machinery wasdeductible as current repairs/revenue expenditure? 2. Whether on the facts and in the circumstances of thecae, the appellate Tribunal was right in law in holdingthat addition made on account of MODVAT credit relatingto the machinery is a revenue expenditure. 3. Whether in the facts and circumstances of the case,the Tribunal was right in holding that sales tax andexcise duty does not form part of the turnover, for thepurpose of calculation of deduction u/s.80 HHC? 1. Whether in the facts and circumstances of the case,the Tribunal was right in law in holding that theexpenditure incurred by the assessee during theaccounting year on the replacement of machinery wasdeductible as current repairs/revenue expenditure? 2. Whether on the facts and in the circumstances of thecae, the appellate Tribunal was right in law in holdingthat addition made on account of MODVAT credit relatingto the machinery is a revenue expenditure. 3. Whether in the facts and circumstances of the case,the Tribunal was right in holding that sales tax andexcise duty does not form part of the turnover, for thepurpose of calculation of deduction u/s.80 HHC? 4. Whether on the facts and in the circumstances of thecase, the Appellate Tribunal was right in law in holdingthat the excess remuneration paid to the Directors isallowable as a deduction? and filed T.C.Nos.96 and 97 by raising the following substantialquestion of law: "Whether on the facts and in the circumstances of thecase, the Appellate Tribunal was right in law in holdingthat the excess remuneration paid to the Directors isallowable as a deduction?" 4. It is fairly conceded by the learned counsel appearing forthe Revenue that the issue involved in question No.1 in T.C.Nos.58and 59 of 2006 is covered by the decision of this Court rendered inCOMMISSIONER OF INCOME TAX VS. JANAKIRAM MILLS LTD. (275 ITR 403),the issue involved in question No.2 is covered by the decision ofthe Supreme Court in COMMISSIONER OF INCOME TAX VS. INDO NIPPONCHEMICALS CO.LTD.(261 ITR 275) and the third question is covered bythe decision of this Court rendered in the COMMISSIONER OF INCOMETAX VS. WHEELS INDIA LTD. (275 ITR 319). 5.1. With regard to the first question, the replacement ofmachinery is capital or revenue is not determined by the treatmentgiven in the books of account or in the balance sheet. The claimhas to be determined only by the provisions of the act and not bythe accounting practice of the assessee. In the instant case, theCommissioner and the Appellate Tribunal, finding that replacementof machinery is a revenue expenditure, held that the claim of theassessee cannot be disallowed as the said replaced machinery didnot bring about any asset or any distinct advantage to the assesseeand no structural change was also brought in. 5.2. This Court, in the decision first cited supra in theCOMMISSIONER OF INCOME-TAX v. JANAKIRAM MILLS LTD. (2005) (275 ITR403), held that all plant and machinery put together amount to acomplete spinning mill which is capable of manufacturing yarn andhence, each replaced machine could not be considered as anindependent one and no intermediate marketable product wasproduced. 5.3. Hence, first question in T.C.Nos.58 and 59 of 2006 isanswered against the Revenue. 6.1. With respect to the second question in T.C.Nos.58 and 59of 2006 viz., the addition made on account of MODVAT creditrelating to the machinery is a revenue expenditure, admittedly, theMODVAT credit relates to replacement of machineries. Since thecost of replacement was allowed as revenue expenditure, additionmade on account of MODVAT credit relating to the machinery is arevenue expenditure. 6.2. The Supreme Court in the decision second cited supra viz., COMMISSIONER OF INCOME TAX VS. JANAKIRAM MILLS LTD. (275 ITR403), held that merely because the MODVAT credit was anirreversible credit available to manufacturers upon purchase ofduty-paid raw materials, that would not amount to income which wasliable to be taxed under the Act; income was not generated to theextent of the MODVAT credit on unconsumed raw material. 6.3. Hence, second question in T.C.Nos.58 & 59 of 2006 isanswered against the Revenue. 6.2. The Supreme Court in the decision second cited supra viz., COMMISSIONER OF INCOME TAX VS. JANAKIRAM MILLS LTD. (275 ITR403), held that merely because the MODVAT credit was anirreversible credit available to manufacturers upon purchase ofduty-paid raw materials, that would not amount to income which wasliable to be taxed under the Act; income was not generated to theextent of the MODVAT credit on unconsumed raw material. 6.3. Hence, second question in T.C.Nos.58 & 59 of 2006 isanswered against the Revenue. 7.1. With respect to the third question in T.C.Nos.58 & 59 of2006 viz., whether the excise duty and sales tax should beexcluded from the total turnover for the purpose of deduction underSection 80HHC, the Tribunal, following the decision rendered bythis Court in The Commissioner of Income Tax vs. Madras Motors Ltd.(257 ITR 60) confirmed the order of the Commissioner of Income Tax(Appeals) in directing the Assessing Officer to exclude the exciseduty and sales tax from the total turnover. 7.2. This Court in the decision third cited supra in theCOMMISSIONER OF INCOME TAX VS. WHEELS INDIA LTD. (275 ITR 319),held that it is highly impossible to accept the contention that theterm 'turnover' would include the excise duty and sales taxcomponents which are all indirect taxes and which the assessee hasto collect and pay over to the Government and such statutory dueswill not have any element of profit of business and therefore, theSales tax and excise duty are not to be included in the totalturnover while computing the deduction under Section 80HHC. 7.3. Hence, question No.3 in T.C.Nos.58 & 59 of 2006 isanswered against the Revenue. 8.1. As far as the fourth question in T.C.Nos.58 and 59 of2006 and the only question in T.C.Nos.96 and 97 of 2006 viz., theexcess remuneration paid to the directors is allowable as adeduction is concerned, the assessing officer disallowed a sum ofRs.16,29,000/- being the excessive remuneration paid to theDirectors. The details of the payment of remuneration to theDirectors are as under: Shri L.S.ManivannanRs.6,08,250Shri L.S.PrabhakaranRs.6,08,250Smt.Shanthi ManivannanRs.6,08,250Smt.usha DeviRs.6,08,250 the Assessing Officer restricted the claim of payment ofremuneration to the first two Directors at Rs.25,000/- per monthand payment to the two lady Directors at Rs.8,500/- per month.Accordingly excess claim was disallowed as under:- Name of the Remuneration Allowable Disallowance Director Shri L.S.Manivannan Rs.6,08,250 300000 308250Shri L.S.Prabhakaran Rs.6,08,250 300000 308250Smt.Shanthi Manivannan Rs.6,08,250 102000 506250Smt.usha Devi Rs.6,08,250 102000 506250 the assessing officer disallowed a sum of Rs.16,29,000/- out of thetotal payment of remuneration to the Directors. Aggrieved by thatorder, the assessee filed appeals to the Commissioner of Income Tax(Appeals), who, after looking into the issues, has come to theconclusion that the salary paid to the lady Directors was excessivedictated by non-business consideration. Accordingly, he had givendirections that monthly salary of Rs.15,000/- would be a reasonableproposition in view of the services that would have been totallyrendered and directed the assessing officer to allow the claim ofpayment of salary to the first two directors and to restrict thepayment of salary to lady Directors at Rs.15,000/- per month.Accordingly, the appellant got relief of Rs.7,72,500/-. 8.2. Aggrieved by the said order, the Revenue filed appeals tothe Income Tax Appellate Tribunal, which, considering the factualsituation, allowed the claim of the assessee and dismissed theRevenue appeal. 8.2. Aggrieved by the said order, the Revenue filed appeals tothe Income Tax Appellate Tribunal, which, considering the factualsituation, allowed the claim of the assessee and dismissed theRevenue appeal. 8.3. It could be seen that both the authorities below hadconcurrently given finding that these Directors have renderedservices. Hence, disallowance made by the assessing officertowards the remuneration payable to the Directors is not fair.That apart, the learned standing counsel appearing for the Revenue,did not place any material to show that the remuneration wasexcessive. When there is a factual finding that the remunerationpaid by the assessee to its Directors is reasonable, we find noerror or infirmity in the order of the Appellate Tribunal. 8.4. Hence, question No.4 in T.C.Nos.58 & 59 of 2006 and theonly question in T.C.Nos.96 & 97 of 2006 is answered against theRevenue. 9. In view of the foregoing conclusion, we do not find anyerror in the orders of the Tribunal and no question of law muchless a substantial question of law arises for consideration of thisCourt. Hence, the appeals are dismissed. Consequently, connectedT.C.M.Ps. are dismissed. Sd/-Asst. Registrar. /true copy/Sub Asst. Registrar. msk To 1.The Assistant Registrar,Income Tax Appellate Tribunal, Madras Bench "C". BenchRajaji Bhavan, Besant Nagar, Chennai-90. 2.The Commissioner of Income Tax (Appeals) XIII, 121, Mahatma Gandhi Road, Chennai-600 034. 3.The Deputy Commissioner of Income-tax, Spl. Range II, Madurai 4.The Commissioner of Income Tax, Madurai. 2 ccs to Mrs.Pushya Sitaraman, Advocate, Sr. 5763, 5773 T.C.(A)Nos.58, 59, 96 & 97 of 2006 VC (CO)kk 17/3