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* IN THE HIGH COURT OF DELHI AT NEW DELHI
14
+ ITA 259/2014
COMMISSIONER OF INCOME TAX II ..... Appellant
Through: Mr. Kamal Sawhney, Senior
standing counsel with Mr Raghvendra
Singh, Junior standing counsel and Mr.
Shekhar Garg, Advocate.
versus
MODI RUBBER LTD. ..... Respondent
Through: Mr. Ajay Vohra, Senior
Advocate with Ms. Kavita Jha and Mr.
Vaibhav Kulkarni, Advocates.
CORAM:
HON'BLE DR. JUSTICE S. MURALIDHAR
HON'BLE MR. JUSTICE VIBHU BAKHRU
ORDER
% 04.08.2015
Dr. S. Muralidhar, J.
1. This appeal by the Revenue under Section 260A of the Income Tax Act,
1961 (,,Act) is directed against the impugned order dated 23 rd August 2013
passed by the Income Tax Appellate Authority (,,ITAT) in ITA No.
1846/Del/2010 (appeal of the Revenue) and ITA No. 1816/Del/2010 for
the Assessment Year (,,AY) 2001-02.
2. There are three broad issues projected by the Revenue for consideration.
The first pertains to deletion by the Commissioner of Income Tax
(Appeals) [,,CIT (A)] and affirmed by the ITAT of addition made by the
Assessing Officer (,,AO) of Rs. 30,450 and Rs. 46,40,822 under Section
43 (B) of the Act on account of delayed contribution of ESI, provident
ITA 259/2014 Page 1 of 11
fund (,,PF) and superannuation fund.
3. As regards the deletion of the addition of Rs. 30,450 relatable to the
delayed contribution of ESI and PF, the Court declines to frame a question
since the sum is insubstantial. The question is left open for the
consideration in the appropriate place.
4. As regards the deletion of the addition pertaining to the delayed
contribution of Rs. 46,40,822 on account of the superannuation fund, the
Court has been shown a copy of the Employees' Superannuation Scheme of
the Respondent-Assessee. Clause 6 of Section-II is titled ,,Contributions
and Annuities. Clause (a) envisages the payment of contribution by the
employer and not by the employee. Clause (d) clearly states that "the
employer shall be liable to pay the total contributions under the Scheme
and shall pay the entire contributions to the Trustees in one or more
instalments as the case may be." The remaining clauses of Section-II also
envisage payment of expenses of scheme by only the employer. In other
words, there is no question of employee's contribution under the Scheme in
question. Consequently, the Court finds that there was no occasion to apply
Section 43B of the Act to disallow the delayed contribution by the
Assessee to the superannuation fund for the months of February and March
2001. The order of the CIT (A), as affirmed by the ITAT, does not call for
any interference. The Court declines to frame a question in that regard.
5. The second issue projected by the Revenue concerns the expenditure
incurred by the Assessee on purchase of machinery from foreign countries
as revenue in nature by treating them as expenses on ,,repair and
maintenance.
6. The relevant facts are that the Respondent-Assessee filed its return of
ITA 259/2014 Page 2 of 11
income on 31st October 2001 declaring a loss of Rs. 40,11,55,746. The
assessment was completed by the Assessing Officer (,,AO) under Section
143 (3) of the Act on 26th March 2004 at an income of Rs. 28,49,40,760
after adjusting all brought forward losses and depreciation. In response to
the rectification application filed by the Assessee, the income assessed was
revised at Rs. 27,77,93,470.
7. The appeal of the Assessee was partly allowed by the CIT (A). Certain
disallowances and additions made by the AO were upheld. The order
giving the appeal effect was passed on 12th January 2005 at a loss of Rs.
22,93,75,375. Both the Revenue and the Assessee preferred appeals before
the ITAT against the order of the CIT (A).
8. By an order dated 1st June 2007 in the Assessee's the ITAT noted that
the Assessee had not furnished its books of accounts before the AO.
Meanwhile the Assessee had got its accounts audited and was declared a
sick company. Accordingly, the order of the CIT (A) was set aside by the
ITAT with a direction to the AO to frame the assessment de novo in
respect of the additions/disallowance made by the AO. The ITAT disposed
of the Revenue's appeal by a separate order dated 1st June 2007.
9. Pursuant to the remand, the Assessee was given an opportunity to
furnish all the necessary evidence to support its claim. As regards the claim
of Rs. 3,97,53,676 incurred on installation of plant and machinery, the AO
noted that the Assessee had claimed 1/5th of the expenditure in the profit
and loss account whereas in the computation of the income attached to the
return, the Assessee had claimed the entire amount as revenue expenditure.
The AO disallowed 80% of the said amount as capital expenditure under
Section 37 (1) of the Act.
ITA 259/2014 Page 3 of 11
10. In the remand proceedings the Assessee furnished invoices dated 15th
September 1999 and 12th October 2000 for purchase of ,,one heavy duty
internal (Banbury) mixer G.K. 255N and purchase of ,,reduction gear box
for 3 roll calendar respectively. The Assessee also furnished a Bill of
Entry (B/E) dated 3rd November 2000 corresponding to the aforementioned
invoice dated 15th September 1999 in respect of the Banbury internal mixer
G.K. 255N.
11. The AO in his order dated 19th December 2008 noted that no other
documentary evidence was produced by the Assessee. The AO after
examining the documents and the written submissions noted that the
Assessee had described the machines as ,,part of the tyre manufacturing
plant', 'vital part of the process of manufacture of tyres' and 'equipment for
mixing the rubber and chemical. The AO concluded that the Assessee was
unable to establish that the said machines were part of some other
machines. The AO also rejected the claim of the Assessee that the
expenditure was incurred on ,,current repairs. It was concluded that the
expenditure was ,,capital expenditure and depreciation as per the rules
would be allowed to the Assessee.
12. The above order dated 19th December 2008 of the AO was challenged
before the CIT (A). By an order dated 12th February 2010 the CIT (A)
disagreed with the AO and held that the AO had not recorded any finding
as to how the Banbury mixture and gear boxes could function
independently and how the other plant and machinery were expected to run
without the support of the aforesaid components. The CIT (A) held that the
AO appeared to have been influenced by the heavy amount of expenditure.
Moreover, the expenditure on identical items incurred in the earlier years
were allowed as revenue expenditure. No distinguishing feature was
ITA 259/2014 Page 4 of 11
pointed out by the AO as regards the AY under consideration. The CIT (A)
accordingly deleted the disallowance by holding that the expenditure
incurred on the Banbury internal mixer G.K. 225N and reduction gear box
would fall within the meaning of repairs and maintenance only.
13. In the impugned order dated 23rd August 2013 the ITAT agreed with
the CIT (A) and held that the cost of importing the Banbury internal mixer
GK 225N and reduction gear box respectively would fall within the
meaning of expenditure on 'current repairs and maintenance' and entitled to
deduction as such.
14. With reference to the above issue this Court by its order dated 6th July
2015 required the Assessee to file copies of the entire submissions/
documents placed by it before the AO on remand. Along with affidavit
dated 29th July 2015 the Respondent filed those details. It is seen that by a
letter dated 3rd December 2008 addressed to the Deputy Commissioner of
Income Tax, the Assessee gave details of the expenditure in the sum of Rs.
3,97,53,676 as under:
S.No. Particulars of Amount Remarks
machinery (Rs.)
1. Banbury G.K. 255N 3,22,57,936 The Banbury mixer is the
most important part for tyre
manufacturing plant. Mixing
of raw materials is the first
process in tyre
manufacturing. The Banbury
mixture is used to for
mixing natural rubber,
synthetic rubber, carbon
black, chemicals and other
raw material. The compound
obtained after the aforesaid
mixing is fed in the further
processes of tyre
manufacture as the basic
ITA 259/2014 Page 5 of 11
material. Its body is put to
the rigorous use while
mixing rubber compound.
The mixer body thus wears
out after regular use. The
mixer body thus wears out
after regular use. The body
needs regular extensive
repair to be kept in running
condition.
2. 3 Roll Calendar 41,23,890 The 3 Roll calendar is one
of the vital part in the
process of manufacturing of
tyres. It is used for the
treatment of fabric and it
plays vital role in ensuring
the smooth production and
quality parameters and is
single unit in the entire
plant. Any breakdown in the
plant would lead to total
stoppage of production line.
Therefore, the regular up
keep and maintenance of
this machinery is of
paramount importance.
The aforesaid expenditure
on gear box and the Roll
were incurred keeping in
mind the aforesaid.
3. Banbury F-370 33,71,850 F 370 is the major
equipment and is used for
mixing the rubber and
chemical on regular basis
and needs to be kept in
perfect condition to ensure
uninterrupted production
and quality parameters.
15. In the same letter, the Assessee further stated as under:
"It will kindly be appreciated that all the aforesaid expenditure
were incurred by the Assessee for the maintenance and upkeep of
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the machinery and replace the old and worn out parts of plant and
machinery, which was necessary for keeping the machines in
working order. It is further respectfully submitted, that no new
asset came into existence by incurring of the said expenditure and
there was no enhancement in the capacity/efficiency of the
machines."
16. Enclosed with the affidavit is also inter alia the details submitted
justifying the expenditure on the three equipments aforementioned. As
regards the Banbury GK 255N mixer, the justification provided reads as
under:
"Justification for expenditure
The Banbury mixer is the most important machine for tyre
manufacturing. Its body is put to the rigorous use while mixing
rubber compound. The mixer body thus wear out after regular use
of 4-5 years. The body needs to be normally changed on
completion of the period. Since the advantage of overhauling is
accrued over a period of 4-5 years hence the expenditure has been
amortised over for a period of 5 years by charging 20% of the total
expenditure every year in profit and loss account."
17. A similar justification provided for the Banbury F-370 mixer as under:
"F-370 is the major equipment of the company and is used for
mixing the rubber and chemical on regular basis and needs to be
kept in perfect condition to ensure uninterrupted production and
quality parameters. The aforesaid expenditure was incurred
keeping in mind the aforesaid."
18. The justification shown for the 3 Roll calendar was as under:
" The 3 Roll calendar is one of the vital machinery in the process
of manufacturing of tyres. It is used for the treatment of fabric and
it play vital role in ensuring the smooth production and quality
parameters and is single unit in the entire plant. Any breakdown in
the plant would lead to total stoppage of production line.
Therefore, the regular up keep and maintenance of this machinery
is of paramount importance."
ITA 259/2014 Page 7 of 11
19. Mr. Ajay Vohra, learned Senior counsel appearing for the Respondent-
Assessee, submitted that what was in fact imported was only the body of
the Banbury mixer and not the mixer itself. Since the body of the Banbury
mixer had got worn out it required to be replaced. According to him, the
expenditure was incurred only on replacing the body of the mixer.
20. The Court is unable to accept the above submission. Both the invoice
dated 15th September 1999 and the corresponding bill of entry, copies of
which have been placed on record, describe the equipment imported as
,,one heavy duty internal mixer G.K. 255N. There is no indication
whatsoever that what has been imported is only the body and not the entire
mixer. There was sufficient opportunity to the Assessee to produce before
the AO in the remand proceedings, sufficient documentation to substantiate
its plea that what was imported was only the body of the mixer. The
Assessee however, failed to do so.
21. Turning to the decisions on when the cost of import of an equipment
could be treated as 'repairs and maintenance', and therefore whether of a
capital or revenue nature, in CIT v. Saravana Spg. Mills (P) Limited
(2007) 293 ITR 201 the Supreme Court was dealing with the issue whether
a ring frame in a textile mill was an ,,independent and separate machine.
It was held that each machine in a textile mill may be part of the integrated
process of manufacture of yarn and integrally connected to the other
machines in the mill for production of the final product. However, such
interconnection did not take away the independent identity and distinct
function of each machine. Accordingly, it was held that each machine in a
textile mill was required to be considered independently. As regards the
question whether a particular item of expenditure amounted to expenses
towards ,,current repairs the Supreme Court explained that the question to
ITA 259/2014 Page 8 of 11
be asked was "whether the expenditure is incurred to ,,preserve and
maintain an already existing asset and not to bring a new asset into
existence or to obtain a new advantage. For ,,current repairs determination,
whether expenditure is revenue or capital is not the proper test." It was
held that the replacement of a ring by a new one did not amount to ,,current
repairs.
22. The issue was re-visited by the Supreme Court in Commissioner in
Income Tax v. Sri Mangayarkarasi Mills (P) Ltd. (2009) 315 ITR 114
(SC). There the question was whether the expenditure incurred by the
Assessee, which was engaged in the manufacture and sale of cotton yarn,
on replacement of machinery was the revenue expenditure. On the facts of
the case, and applying the tests enunciated in CIT v. Saravana Spg. Mills
(P) Limited (supra), the claim of the Assessee was negatived.
23. Turning to the case on hand, the Court notes that the two Banbury
mixers have been described by the Assessee itself as equipment used for
mixing natural rubber, synthetic rubber, carbon black, chemicals and other
raw materials and that it "is the most important part for tyre manufacturing
plant". It has described the Banbury F 370 equipment as a "major
equipment and is used for mixing the rubber and chemical on regular basis
and needs to be kept in perfect condition to ensure uninterrupted
production and quality parameters." The invoices produced by the
Assessee do not support its plea that the expenditure was incurred only on
replacement the body of the mixers. The Assessee had sufficient
opportunities to demonstrate before the AO that the expenditure incurred
by it was not of a capital nature. The Assessee was unable to succeed in
that effort. The only documents produced by it to show that the Banbury
mixers imported were vital to the tyre manufacturing plant and were of
ITA 259/2014 Page 9 of 11
enduring benefit to it. The expenditure incurred in that behalf was rightly
held by the AO, in terms of the tests laid down by the Supreme Court in
Saravana Spg. Mills (P) Ltd. (supra) and Sri Mangayarkarasi Mills (P)
Ltd (supra) to be of a capital nature.
24. However the expenditure on the reduction gear box for the 3 coil
calendar stands on a different footing. From the invoice produced by the
Assessee, it is clear that the said imported item was part of the 3 roll
calendar. Therefore, the Court concurs with the decisions of the CIT (A)
and ITAT holding it to be revenue expenditure and deleting the
disallowance of the AO.
25. The conclusion as far as the second question projected by the Revenue
is that ITAT erred in deleting the disallowance of the expenditure on the
purchase of Banbury mixers as ,,repair and maintenance. The said
expenditure on the import of the two Banbury mixers is required to be
treated as capital expenditure. It is further held that the ITAT and the CIT
(A) were right in deleting the disallowance of the expenditure on the
reduction gear forming part of the 3 Roll calendar to the extent of Rs.
41,23,890.
26. The third and final issue projected by the Revenue pertains to deletion
of the notional interest of Rs. 24 lakhs which was sought to be added by
the AO on the ground that an interest free loan of Rs. 2 crores was given
by the Assessee to its sister concern, Modi Stone Limited.
27. In this regard it is seen that the ITAT noted that the sum of Rs. 2 crores
was advanced to Modi Stone Limited on account of commercial
expediency as the said company was declared sick by the BIFR by its order
ITA 259/2014 Page 10 of 11
dated 15th April 1998. No interest was accrued on the above amount. From
a perusal of the financial statements for the year ended 30 th September
1997 it was seen that the Assessee was having mixed pool of funds
comprising owned funds and loan funds. It was held that in such a situation
where the one to one nexus between the borrowed funds and the loan
advanced to Modi Stone Limited was unable to be established, the loan to
Modi Stone had to be held as having come out of its own funds.
Consequently, the order of AO and CIT (A) was set aside.
28. The Court finds that the decision of the ITAT on the above aspect is
turned purely on facts. The view taken by the ITAT on facts was a
plausible one. Consequently, the Court finds that no substantial question of
law arises for determination as far as the said issue is concerned.
29. The appeal is disposed of in the above terms but in the facts and
circumstances of the case, with no orders as to costs.
S. MURALIDHAR, J
VIBHU BAKHRU, J
AUGUST 04, 2015
Rk
ITA 259/2014 Page 11 of 11
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