2002 (3) TMI 242 - AT - Income Tax

Summary

Issues Involved:
1. Cost of replacement of machinery claimed as revenue expenditure.
2. Computation of relief u/s 80HHC.
3. Disallowance towards Holiday Home rent.
4. Modernisation expenses claimed as revenue expenditure.

Summary:

1. Cost of Replacement of Machinery Claimed as Revenue Expenditure:
The assessee claimed substantial amounts for machinery replacement for the assessment years 1996-97 and 1997-98, which the AO disallowed, treating them as capital expenditure. The assessee argued that such expenses have been consistently treated as revenue expenditure by the Tribunal and High Court. The AO's objections included the capitalization of the expenditure in the books and the lack of "one-to-one" replacement. The Tribunal, after inspecting the mills and considering the interdependence of the machinery, concluded that the replacement expenses were indeed revenue in nature and directed the AO to allow the claim.

2. Computation of Relief u/s 80HHC:
The AO excluded 90% of other incomes (conversion charges, miscellaneous income, insurance claim, etc.) from the adjusted business profit for computing relief u/s 80HHC. The Tribunal held that these items do not fall under the exclusions mentioned in Explanation (baa) of sub-s. (4B) of s. 80HHC, except for yarn conversion charges, which were considered as "charges" and rightly excluded. The Tribunal directed the AO not to exclude other items from the business profits.

3. Disallowance Towards Holiday Home Rent:
The AO disallowed Rs. 45,000 for both years under s. 40A(2)(b), based on a similar disallowance in an earlier year. The Tribunal found merit in the assessee's contention that what was excessive rent in 1991-92 need not be excessive in the assessment years under consideration. The matter was remanded to the AO to reassess the rental value of similar properties and decide accordingly.

4. Modernisation Expenses Claimed as Revenue Expenditure:
For the assessment year 1996-97, the assessee claimed Rs. 1,02,16,229 as revenue expenditure under "modernisation expenses," which the AO treated as capital expenditure. The CIT(A) allowed most of it as revenue expenditure except Rs. 8,36,302 for yarn cleaners. The Tribunal, relying on a report and a similar decision by the Kerala High Court, held that yarn cleaners are attachments to existing machinery and should be allowed as revenue expenditure.

Conclusion:
The Tribunal partly allowed the appeals, directing the AO to treat the replacement and modernisation expenses as revenue in nature, exclude certain incomes from the computation of relief u/s 80HHC, and reassess the disallowance towards Holiday Home rent.