2001 (2) TMI 292 - AT - Income Tax

Summary

Issues Involved:
1. Replacement of machinery as revenue expenditure.
2. Claiming 100% depreciation for overhead cleaners.
3. Inclusion of interest earned in deductions u/s 80HH and 80-I.
4. Inclusion of sales-tax in total turnover for deduction u/s 80HHC.

Summary:

1. Replacement of Machinery as Revenue Expenditure:
The primary issue was whether the replacement of certain machinery by the assessee, a limited company, for the assessment years 1994-95 to 1997-98, could constitute revenue expenditure. The CIT(A) had rejected the assessee's claim, considering the replacement as capital expenditure. The Tribunal, however, referred to the Kerala High Court decision in Co-operative Sugars Ltd. and the Supreme Court decision in Mahalakshmi Textile Mills Ltd., concluding that replacement of machinery that is part of a whole plant, even if it is an improved version, constitutes revenue expenditure. The Tribunal emphasized that the extent of expenditure is not material; what matters is whether the replaced machine is part of a larger plant and not the end-product itself.

2. Claiming 100% Depreciation for Overhead Cleaners:
The assessee claimed 100% depreciation for overhead cleaners, asserting they were pollution control equipment. The authorities below required a certificate from the Pollution Control Board, which the assessee did not provide. The Tribunal directed the Assessing Officer to reconsider the issue, allowing the assessee to present notifications or circulars from the Ministry of Industries to support its claim.

3. Inclusion of Interest Earned in Deductions u/s 80HH and 80-I:
The authorities below excluded interest income from the computation of deductions u/s 80HH and 80-I, arguing it was not related to industrial activity. The assessee contended that the interest was earned on deposits and guarantees given to the Electricity Board for power supply. The Tribunal directed the Assessing Officer to verify the connection between the deposits and the industrial activity and to allow the deduction if the deposits were indeed necessary for power supply.

4. Inclusion of Sales-Tax in Total Turnover for Deduction u/s 80HHC:
The assessee argued that sales-tax should not be included in the total turnover for computing deductions u/s 80HHC, relying on the Bombay High Court decision in Sudarshan Chemicals Industries Ltd. The Tribunal agreed, noting that the intention of the Legislature was to exclude amounts with no nexus to sale proceeds from the total turnover. The Tribunal directed the Assessing Officer to exclude sales-tax from the total turnover while calculating the deduction.

Conclusion:
The appeals of the assessee were allowed in part, with the Tribunal ruling in favor of the assessee on the issues of machinery replacement as revenue expenditure and exclusion of sales-tax from total turnover, while directing reconsideration on the issues of 100% depreciation for overhead cleaners and inclusion of interest earned in deductions.