The Commissioner Of Income Tax, Coimbatore v. Prabhu Spinning Mills (P) Ltd.,Tirupur

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 20.11.2018 Coram :The Honourable Mr.Justice T.S.SIVAGNANAMandThe Honourable Mr.Justice N.SATHISHKUMAR Tax Case Appeal No.260 of 2009 The Commissioner of Income Tax, Coimbatore. Vs Prabhu Spinning Mills (P) Ltd.,Tirupur ...Appellant ...Respondent APPEAL under Section 260A of the Income Tax Act, 1961against the order of the Income Tax Appellate Tribunal Madras'D' Bench dated 30.11.2007 in ITA No.2902/Mds/2005 for theassessment year 2002-03 against the order of commissioner IncomeTax(Appeals)-II made in ITA 76-C/05-06 dated 14.10.2005 in PANAABCPO750E passed by the Assistant Commissioner of Income TaxCircle-I, Tiruppur dated 23.03.2005. For Appellant :For Respondent: Mr.T.R.Senthil KumarMr.R.Sivaraman Judgment was delivered by T.S.SIVAGNANAM,J This appeal by the Revenue filed under Section 260A of theIncome Tax Act, 1961 is directed against the order of the IncomeTax Appellate Tribunal Madras 'D' Bench, dated 30.11.2007 in ITANo.2902/Mds/2005 for the assessment year 2002-03. 2. The above appeal has been admitted on 24.4.2009 on thefollowing substantial question of law : “Whether,inthefactsandcircumstances of the case, the Tribunal wasright in holding that the claim ofmodernization/expenditure incurred amountingto Rs.2,58,21,005/- is allowable as revenueexpenditure?” 3. Heard Mr.T.R.Senthil Kumar, learned Senior StandingCounsel for the Revenue and Mr.R.Sivaraman, learned counsel forthe assessee. https://hcservices.ecourts.gov.in/hcservices/ 4. The short question which falls for consideration is as towhether the expenditure incurred by the assessee on replacementof old machinery by purchase and installation of new machinery,replacement of spares of textile machinery be allowable as aRevenue expenditure. The law has been settled by the Hon'bleSupreme Court in the case of CIT, Madurai & others Vs. SaravanaSpinning Mills Pvt. Ltd. [reported in (2007) 293 ITR 201]wherein it has been held as follows: “13. On behalf of the assessee,reliance was placed on the judgement of thisCourt in the case of CIT v. MahalakshmiTextile Mills Ltd., MANU/SC/0142/1967:reported in [1967] 66 ITR 710 (SC). In thatcase, the assessee carried on the businessof manufacture and sale of cotton yarn. Inthe previous year relevant to assessmentyear 1956-57, the assessee spent Rs.93,000/-approx. For introduction of “CasablancaConversion System” in its plant. The I.T.Odisallowed the claim of the assssee. TheAppellate Authority agreed with I.T.O.Before the Tribunal, the assessee contendedthat the amount expended for introducingCasablanca Conversion System was currentexpenditure under Section 10(2)(v) of theIndian Tax Act, 1922 (Section 31(i) of the1961 Act). The Tribunal inspected thespinning factory of the assessee. It studiedthe working of the machinery with theCasablanca Conversion System. It alsostudied the literature published by themanufacturer of Casablanca ConversionSystem. After a detailed study, the Tribunalheld that on account of the stress andstrain of production over a long periodthere was a need for change and that theassessee had replaced old parts byintroducing the said system. Accordingly,the Tribunal treated the expenditureincurred for introducing the CasablancaConversion System as allowance under Section10(2)(v) of the Indian Income Tax Act, 1922.The High Court accepted the findingsrecorded by the Tribunal saying that by theintroduction of Casablanca Conversion Systemno new machinery or plant was installed, butthe introduction of the system amounted tofitting of improved version and theexpenditure in that behalf was of revenuenature. The High Court observed that certain parts of the machinery had worn-out, theyneeded replacement, and when it was foundthat the old type of replacement parts werenot available in the market, the assesseehad to introduce the Casablanca ConversionSystem. This finding was accepted by thisCourt in the above judgement. In our view,the said judgement has no application withthe facts of the present case. At theoutset, we may state that replacementgenerally may not fall under the expression“current repairs” but, in certain cases,where the old parts were not available inthe market or where the old parts had workedfor 50 to 60 years, replacement can, in suchcases of exception, fall within theexpression of “current repairs”. InMahalakshmi Textile Mills case (supra) thefinding recorded by the Tribunal and thehigh Court was that old type of replacementparts were not available in the market and,therefore, the expenditure came within theexpression “current repairs”. That is notthe case before us, hence, the saidjudgement has no application to the facts ofthe present case. Moreover, the judgement ofthis Court in Mahalakshmi Textile Mills(supra) has not defined the word “asset” tomean the entire production system in thetextile mill. In the said judgement, it isnowhere stated that the entire textile millis one single asset and that it representsone single integrated process.” 5. The decision in the case of Saravana Spinning MillsPrivate Limited was relied on by the Hon'ble Supreme Court inthe case of CIT, Madurai Vs. Mangayarkarasi Mills (P) Ltd.[reported in (2009) 315 ITR 114] wherein it has been held asfollows: “14. The first issue that needs to be resolvedis whether each machine in a textile mill is anindependent item or merely a part of a completespinning mill, which only together are capable ofmanufacture, and there is no intermediate marketableproduct produced. In our view, this issue has beensatisfactorily answered by the recent decision oftis Court in CIT v. Saravana Spinning Mills (P)Ltd., MANU/SC/3308/2007. In that case this Court hasheld unambiguously that each machine in a segment ofa textile mill has an independent role to play inthe mill and the output of each division is different from the other. “Dealing wit a ring framein a textile mill, this Court has held that it is an“Independent and separate” machine. Further, it isaccepted that each machine in a textile mill is partof the integrated process of manufacture of yarn andis integrally connected to the other machines in themill for production of the final product. However,this interconnection does not take away theindependent identity an distinct function of eachmachine. Thus, each machine in a textile mill shouldbe treated independently as such and not as a merepart of an entire composite machinery of thespinning mill. As stated above, it can at best beconsidered part of an integrated manufacture processemployed in a textile mill.” 6. A Division Bench of this Court in the case of SuperSpinning Mills Ltd. Vs. ACIT [reported in (2013) 357 ITR 0720]considered an identical substantial question of law as framed inthis appeal and after taking note of the decisions of theHon'ble Supreme Court in the case of Saravana Spinning MillsPvt. Ltd., and Mangayarkarasi Mills (P) Ltd., remanded thematter to the Commissioner of Income Tax (Appeals) [for short,the CIT (A)] to decide the issue as to whether the expenditure,in effect, could be treated as revenue expenditure. 7. In the light of the legal position as enunciated by theHon'ble Supreme Court in Saravana Spinning Mills Pvt. Ltd., andMangayarkarasi Mills (P) Limited, we are of the considered viewthat the matter has to be remanded for fresh consideration.Though in the case of Super Spinning Mills Ltd., the DivisionBench thought fit to remand the matter to the CIT(A), we are ofthe considered view that the matter should be remanded to theAssessing Officer. 7. In the light of the legal position as enunciated by theHon'ble Supreme Court in Saravana Spinning Mills Pvt. Ltd., andMangayarkarasi Mills (P) Limited, we are of the considered viewthat the matter has to be remanded for fresh consideration.Though in the case of Super Spinning Mills Ltd., the DivisionBench thought fit to remand the matter to the CIT(A), we are ofthe considered view that the matter should be remanded to theAssessing Officer. 8. In the light of the above, the appeal filed by theRevenue is allowed and the orders passed by both the Tribunal aswell as the CIT (A) and the assessment order are set aside andthe matter is remanded to the Assessing Officer for a freshconsideration, who shall afford an opportunity to the assesseeto state their case in a proper perspective and decide the issueas to whether the expenditure, in effect, could be treated asrevenue expenditure. 9. Accordingly, the substantial question of law is leftopen and the appeal stands allowed to the extent indicatedabove. No costs. Sd/- Assistant Registrar(CS-II) //True Copy// Sub Assistant Registrar To 1. The Income Tax Appellate Tribunal Madras 'D' Bench 2. The Commissioner of Income Tax (Appeals)-II, Coimbatore. 3. The Assistant Commissioner of Income Tax, Circle-I, Tiruppur. +1CC To Mr.T.R.Senthil Kumar, Advocate SR.No.79385 +1CC To Mr.R.Siva Raman, Advocate SR.No.79625. T.C.A.No.260 of 2009 RGN(CO)KAK(12/12/2018)