Commissioner Of Income Taxmadurai v. M/S.indian Ocean Garnetsands Company (P) Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 02.01.2007 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MRS.JUSTICE CHITRA VENKATARAMAN T.C.(A) No.2693 of 2006Appeal NO. 1339/06 Commissioner of Income TaxMadurai...Appellant/Appellant Vs. M/s.Indian Ocean GarnetSands Company (P) Ltd.,No.146, Palayamkottai Road,Tuticorin...Respondent/Respondent Appeal under Section 260A of the Income Tax Act, 1961against the order of the Income Tax Appellate Tribunal,Madras 'C' Bench dated 7.7.2006 made in ITA No.887/Mds/2004for the assessment year 2000-01 against order of theCommissioner of Income Tax Appeals Madurai in ITA NO.304/02-03 dated 23.01.04 against the order of DeputyCommissioner of Income Tax Circle I Tuticorin in PAN GIRNO. I-104/Cir-I/TTN 2000/2001 dated 20/12/2002. For Appellant:Mr.J.Narayanaswamy The above tax case appeal is directed against theorder of the Income-tax Appellate Tribunal dated 7.7.2006made in ITA No.887/Mds/2004 for the assessment year 2000-01.2. The Revenue is the appellant. The issue raised in thisappeal relates to the assessment year 2000-01. TheAssessing Officer, on completing the assessment, disallowedthe claim of the assessee in respect of replacementexpenditure on magnetic roll separator and treated the sameas capital expenditure. Aggrieved, the assessee went onappeal and the Commissioner of Income-tax (Appeals) held infavour of the assessee. The Revenue took up the issue https://hcservices.ecourts.gov.in/hcservices/ before the appellate Tribunal and the Tribunal held theissue in favour of the assessee. Hence, this appeal by theRevenue raising the following questions of law:- "1. Whether in the facts andcircumstances of the case, the Tribunalwas right in allowing a deduction of theamounts spent on replacement ofmachinery as revenue expenditure ? 2. Whether in the facts andcircumstances of the case, replacementof independent complete machinery can betreated as revenue expenditure ? 3. Whether in the facts andcircumstances of the case, theTribunal was right in deciding the issuewithout going into the concept of blockof asset ?" 3. Mr.N.Muralikumaran, learned Senior Standing Counselfor the appellant fairly concedes that the issues raised inthis appeal are covered against the Revenue in view of thedecision of this Court in COMMISSIONER OF INCOME-TAX v.JANAKIRAM MILLS LTD., [2005] 275 ITR 403. 4. With regard to question Nos.1 and 2, the questionwhether the expenditure on replacement of machinery iscapital or revenue is not determined by the treatment givenin the books of account or in the balance sheet. The claimhas to be determined only by the provisions of the Act andnot by the accounting practice of the assessee. In theinstant case, the Appellate Tribunal, finding thatreplacement of machinery is revenue expenditure, held thatthe claim of the assessee cannot be disallowed. 5. This Court, in COMMISSIONER OF INCOME-TAX v.JANAKIRAM MILLS LTD., referred supra, held that all plantand machinery put together amounts to a complete spinningmill which is capable of manufacturing yarn and hence, eachreplaced machine could not be considered as an independentone and no intermediate marketable product was produced. 6. In view of the ratio laid down by this Court in thedecision cited supra, we hold that the expenditure onreplacement of machinery is revenue expenditure andtherefore, the Tribunal was right in allowing the claim ofthe assessee. 7. With regard to question No.3, this Court, in thedecision cited supra, explained the principle or object ofintroducing the concept of 'Block of Assets' in detail. Itis apposite to refer the following: 5. This Court, in COMMISSIONER OF INCOME-TAX v.JANAKIRAM MILLS LTD., referred supra, held that all plantand machinery put together amounts to a complete spinningmill which is capable of manufacturing yarn and hence, eachreplaced machine could not be considered as an independentone and no intermediate marketable product was produced. 6. In view of the ratio laid down by this Court in thedecision cited supra, we hold that the expenditure onreplacement of machinery is revenue expenditure andtherefore, the Tribunal was right in allowing the claim ofthe assessee. 7. With regard to question No.3, this Court, in thedecision cited supra, explained the principle or object ofintroducing the concept of 'Block of Assets' in detail. Itis apposite to refer the following: "Regarding the argument relating to “block ofassets”, it is the claim of learned counsel forthe assessees that the said principle or object ofintroduction of the above concept is totally notapplicable relating to the nature of expenditureincurred by the respondent. These provisions wereintroduced from April 2, 1987, as defined undersection 2(11) of the Income-tax Act, 1961 and theyare in operation on different field. It is statedthat they were intended to replace the provisionson depreciation of capital assets. The block ofassets concept was introduced with a view tostreamline the excess depreciation allowed and toallow terminal depreciation. When the block ofassets concept was introduced, the provisionsrelating to terminal depreciation and the profitresult from the sale of assets, which wereoriginally considered under sections 32(1)(iii)and 41(2), were suitably amended to fall in linewith the proposed simplification of the concept ofblock of assets. The circular describing theconcept of block of assets is explained by theCentral Board of Direct Taxes by Circular No. 469dated September 23, 1996 reported in [1986] 162ITR (St.) 21, 24. In the instant case, noacquisition of any new asset, much less capital ofany enduring advantage resulted to the assessee-respondent. The assessees replaced the worn outpart of machineries without discontinuing theirproduction activities. No claim for depreciationwas ever made before any authorities either by theassessees or by the Revenue to consider thequestion as block of assets nor was there anynecessity to do so. The Department did not raiseany objection before the Tribunal regarding theclaim of allowance on the premise of the block ofassets concept. It is, therefore, stated thatsuch question does not arise out of the order ofthe Appellate Tribunal for considering the same bythis court under section 260A." 8. In the instant case also, the assessee had onlyreplaced the magnetic roll separator without discontinuingtheir production activities and that there was noacquisition of any new asset, much less capital of any https://hcservices.ecourts.gov.in/hcservices/ enduring advantage. A perusal of the orders of theauthorities below shows that no claim for depreciation wasever made before any authorities either by the assessee orby the Revenue to consider the question of block of assetsnor was there any necessity to do so. Moreover, theDepartment did not raise any objection before the Tribunalregarding the claim of allowance on the premise of theblock of assets concept. Therefore, applying the law laiddown by the decision cited supra, such question does notarise out of the order of the Appellate Tribunal forconsidering the same by this court under section 260A ofthe Act. 9. The above view was also taken by this Court inCommissioner of Income Tax v. Loyal Textile Mills Ltd.,[2006] 284 ITR 658. In view of the ratio laid down by this Court in thedecisions cited supra, no substantial question of lawarises for our consideration in this appeal and therefore,the same is dismissed. No costs.Sra To: Sd/Asst.Registrar/true copy/Sub Asst.Registrar 9. The above view was also taken by this Court inCommissioner of Income Tax v. Loyal Textile Mills Ltd.,[2006] 284 ITR 658. In view of the ratio laid down by this Court in thedecisions cited supra, no substantial question of lawarises for our consideration in this appeal and therefore,the same is dismissed. No costs.Sra To: Sd/Asst.Registrar/true copy/Sub Asst.Registrar 1.The Assistant Registrar,Income Tax Appellate TribunalMadras Bench "C". Chennai.Income Tax Appellate TribunalMadras Bench "C". Chennai. 2.The Secretary, Central Board of Direct Taxes, New Delhi.of Direct Taxes, New Delhi.3.The Commissioner of IncomeTax (Appeals), I Madurai.Tax (Appeals), I Madurai. 4.The Asst. Commissioner of Income Tax, Circle-I Tuticorin. Income Tax, Circle-I Tuticorin. 5. The Commissioner of Income Tax, Madurai 6. The Assistant RegistrarIncome Tax Appellate TribunalBesant Nagar, Chennai 600 090 + one cc to Mrs. Pushya Sitaraman, Advocate sr no. 741 MJ(CO)NM(10.01.07)T.C.(A) No.2693 of 2006