2007 (4) TMI 199 - HC - Income Tax

Export - sales tax & excise duty collections - such statutory dues will not have any element of profit of business therefore, the sales tax & excise duty are not to be included in the total turnover while computing special deduction u/s 80 HHC - assessee had only replaced certain machinery without discontinuing their production activities so Tribunal was right in allowing a deduction of the amounts spent on replacement of machinery as revenue expenditure - no substantial questions of law arise

Summary

Issues Involved:
- Deduction of amounts spent on replacement of machinery as revenue expenditure
- Treatment of replacement of independent complete machinery as revenue expenditure
- Decision on replacement of machinery without considering the concept of block of assets
- Exclusion of excise duty and sales tax collection from turnover for calculating deduction under section 80HHC

Analysis:

Issue 1: Deduction of amounts spent on replacement of machinery as revenue expenditure
The appeals were against the order of the Income-tax Appellate Tribunal regarding the deduction of amounts spent on the replacement of machinery as revenue expenditure for the assessment years 1997-98, 1995-96, and 1996-97. The Appellate Tribunal found that the replacement of machinery constituted revenue expenditure, which led to the allowance of the claim by the assessee. The court referred to previous judgments, such as CIT v. Janakiram Mills Ltd., to establish that each replaced machine could not be considered independent, supporting the view that the expenditure on replacement of machinery is revenue expenditure.

Issue 2: Treatment of replacement of independent complete machinery as revenue expenditure
The court clarified that the treatment of replacement of machinery as capital or revenue expenditure should be determined by the provisions of the Income-tax Act and not by the accounting practice of the assessee. It was emphasized that all plant and machinery together form a complete unit capable of manufacturing a product, and thus, the replacement of machinery should be considered revenue expenditure. The court relied on precedents to support this interpretation.

Issue 3: Decision on replacement of machinery without considering the concept of block of assets
Regarding the concept of block of assets, the court explained the introduction and purpose of this concept, emphasizing that it was not applicable in cases where there was no acquisition of new assets with enduring advantages. The court held that since the assessee replaced machinery without acquiring new assets and without discontinuing production activities, the question of block of assets did not arise in this case.

Issue 4: Exclusion of excise duty and sales tax collection from turnover for calculating deduction under section 80HHC
The court addressed the issue of whether excise duty and sales tax collections should be excluded from turnover for calculating deductions under section 80HHC. Relying on previous judgments like CIT v. Wheels India Ltd., the court held that excise duty and sales tax, being statutory dues without profit elements, should not be included in the turnover for calculating deductions under section 80HHC. Consequently, the court dismissed the appeals, finding no substantial questions of law for consideration.