2012 (7) TMI 18 - HC - Income Tax

Machinery replacement expenditure - revenue or capital expenditure - Held that - In respect of oxygen analyser it is held that CIT(A) has rightly held that since the whole machinery was not performing well, new machines were installed, they being independent item of machinery. Since replacement had brought about enduring benefit by the installation of new machines, the expenditure was capital in nature - Decided in favor of Revenue. Replacement of SS Shell and other machinery - Held that - Considering the fact that what was done was only refurnishing of the existing one and packed with refractories, bricks etc, the same is current repairs and allowed as revenue expenditure - Decided against the Revenue. Depreciation on wind mills - dis-allowance on ground that actual commissioning of the windmill took place only after the relevant accounting period - Held that - Considering the fact that the department itself had not questioned the State Electricity Board s certificate that the wind mill was commissioned during the year under consideration, being a factual finding, question is decided against Revenue. Deduction u/s 80HH - inclusion of profit margin of goods captively consumed - Held that - Since the items were transferred from one unit to another by the same company, hence, the assessee could not make profit from itself. Therefore, the profit margin element had to be excluded for computing deduction u/s 80HH - Decided against Revenue. Deduction u/s 80HHC - Revenue contended inclusion of conversion charges and sundry sales as forming part of the turnover - Held that - Conversion charges and the sundry charges did not form part of the turnover for the purpose of deduction u/s 80HH. However, sundry sales being part of the gross total income as profit of the business, the same has to be included in the total turnover for the purpose of deduction u/s 80HHC.

Summary

Issues:
1. Whether conversion charges and sundry sales form part of turnover for deduction under Section 80HHC?
2. Whether amounts spent on replacement of independent machinery are revenue expenditure?
3. Whether profit margin of goods captively consumed should be excluded for deduction under Section 80HH?
4. Whether depreciation on windmills is allowable when commissioned after the relevant accounting period?

Analysis:

Issue 1: Conversion charges and sundry sales for deduction under Section 80HHC
The Tribunal held that conversion charges and sundry sales do not form part of the turnover for the purpose of deduction under Section 80HHC. The Court referred to a previous decision and upheld this view, ruling against the Revenue.

Issue 2: Replacement of independent machinery as revenue expenditure
The Commissioner of Income Tax (Appeals) disallowed the claim on replacement expenditure of machinery, holding it as capital in nature. The Tribunal confirmed this decision for certain items but allowed it for others, distinguishing between capital and revenue expenditure based on the enduring benefit brought about by the replacement.

Issue 3: Exclusion of profit margin of captively consumed goods for deduction under Section 80HH
The Commissioner of Income Tax (Appeals) held against the assessee, stating that profit margin of captively consumed materials should be included for deduction under Section 80HH. However, the Tribunal disagreed, ruling in favor of the assessee, as the items were transferred within the same company.

Issue 4: Depreciation on windmills commissioned after the relevant accounting period
The Tribunal allowed depreciation on windmills as the State Electricity Board certified their commissioning during the relevant period. The Court rejected the Revenue's appeal on this issue, as the factual finding was not challenged by the department.

In conclusion, the Court partly allowed the appeals, with decisions on various issues favoring both the assessee and the Revenue. The judgment provides detailed reasoning for each issue, considering factual findings and legal precedents to arrive at the final decisions.