2013 (11) TMI 1275 - AT - Income Tax

Expenses for Replacement of Machinery - Expenditure incurred for replacement of Ring Frames Revenue OR Capital expenditure - Held that - Following CIT v. Ramaraju Surgical Cotton Mills Ltd. 2007 (8) TMI 39 - SUPREME COURT OF INDIA and CIT v. Sri Mangayarkarasi Mills P. Ltd. 2009 (7) TMI 17 - SUPREME COURT - the expenditure incurred by the assessee is capital expenditure - AO held that the expenditure are capital in Nature and depreciation can be claimed - CIT(A), ITAT and High Court held that the expenditure revenue in nature and allowed the deduction - it is clear on record that the assessee has sought to treat the said expenditure differently for the purposes of computing its profit and for the purpose of payment of income tax - The expenditure has been treated as an addition to the existing assets in the former and as revenue expenditure in the latter - Though accounting practices may not be the best guide in determining the nature of expenditure here they are indicative of what the assessee itself thought of the expenditure it made on replacement of machinery - the claim for deduction was made merely to diminish the tax burden. Interest under Sections 234A and 234B of Income Tax Act - Whether interest can be charged in an order of rectification under Section 154 for the first time - Held that - If the return is not filed within time or if advance tax is not paid within time then the assessee is liable to pay interest and the payment of interest is mandatory Following - CIT v. M/s. Ruchira Papers Ltd. 2012 (10) TMI 60 - HIMACHAL PRADESH, HIGH COURT - if the AO or the appellate authority does not order the payment of interest, the assessee cannot be directed to pay interest by the demand notice - levy of interest u/s 234B and 234C of the Act for all the years sustained. Deduction u/s 80HHC - Exclusion of 90% of insurance receipts and miscellaneous income from the profits - Held that - There was no reason to interfere with the order of Commissioner of Income Tax (Appeals) in holding that 90% of the insurance receipts and miscellaneous income are to be excluded for the purpose of computing relief under sec.80HHC of the Act Following CIT vs. Ravindranathan Nair 2007 (11) TMI 10 - Supreme Court of India - it is clear that packing charges are received on waste cotton sales and are incidental to the sale of waste cotton - The waste cotton arises as a result of the manufacturing operation of the assessee. It cannot be said that it is directly related to the export activity of the assessee Decided against Assessee.

Summary

Issues Involved:
1. Disallowance of expenditure on replacement of machinery as capital expenditure.
2. Levy of interest under sections 234B and 234C of the Income Tax Act.
3. Exclusion of 90% of insurance receipts and miscellaneous income from profits while computing deduction under section 80HHC for the assessment year 2003-04.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure on Replacement of Machinery as Capital Expenditure:
The primary issue in the appeals for the assessment years 2005-06 to 2008-09 was whether the expenditure incurred on the replacement of machinery should be treated as capital expenditure or revenue expenditure. The assessee, a company engaged in the business of Spinning Mills, claimed the expenditure as revenue expenditure. The Assessing Officer treated it as capital expenditure. The Commissioner of Income Tax (Appeals) upheld the Assessing Officer's decision, relying on the Hon'ble Supreme Court's decision in the case of Sri Mangyarkarasi Mills (P) Ltd. (315 ITR 114), which held that the replacement of machinery constitutes capital expenditure. The Tribunal noted that this issue had already been decided in favor of the Revenue in the assessee's own case for earlier assessment years. The Tribunal, following its earlier decision and the Supreme Court's ruling, dismissed the assessee's appeals on this ground.

2. Levy of Interest under Sections 234B and 234C of the Income Tax Act:
The second common issue in the appeals for all assessment years except 2003-04 was the levy of interest under sections 234B and 234C without creating a charge in the assessment order. The Tribunal referred to its earlier decision in the assessee's own case, where it upheld the levy of interest, noting that the Assessing Officer had charged the interest in the assessment order itself. The Tribunal emphasized that, as per the Supreme Court's decision in CIT v. Anujm M.H. Ghaswala And Others (252 ITR 1), charging interest under section 234B is mandatory. Therefore, the Tribunal dismissed the assessee's appeals on this issue.

3. Exclusion of 90% of Insurance Receipts and Miscellaneous Income from Profits While Computing Deduction under Section 80HHC for the Assessment Year 2003-04:
For the assessment year 2003-04, the issue was whether 90% of insurance receipts and miscellaneous income should be excluded from profits while computing the deduction under section 80HHC. The Assessing Officer excluded these amounts, applying clause (baa) of Explanation to section 80HHC. The Commissioner of Income Tax (Appeals) upheld this exclusion, noting that the insurance receipts were not directly related to the export activity and that the miscellaneous income, including packing charges on waste cotton sales and sale of scrap material, was not inextricably linked to the export operations. The Tribunal, agreeing with the Commissioner of Income Tax (Appeals), found no reason to interfere with the decision and dismissed the assessee's appeal on this ground.

Conclusion:
The Tribunal dismissed the appeals of the assessee on all grounds, upholding the decisions of the lower authorities in treating the expenditure on replacement of machinery as capital expenditure, sustaining the levy of interest under sections 234B and 234C, and excluding 90% of insurance receipts and miscellaneous income from profits while computing the deduction under section 80HHC for the assessment year 2003-04.