1983 (12) TMI 142 - AT - Income Tax

Appeal To Tribunal, Business Expenditure, Capital Expenditure, High Court, Plant And Machinery, Revenue Expenditure

Issues Involved:
1. Classification of expenditure on replacement of machinery as capital or revenue expenditure.
2. Allowability of expenditure incurred in settlement of an industrial dispute as a business expense.
3. Computation of depreciation allowance, particularly extra shift allowance.

Detailed Analysis:

1. Classification of Expenditure on Replacement of Machinery:
The primary issue was whether the expenditure incurred by the assessee on replacing ring frames and draw frames should be classified as capital expenditure or revenue expenditure. The assessee argued that these frames were minor yet essential parts of the machinery involved in the cotton yarn manufacturing process. The ITO treated the expenditure as capital expenditure, reasoning that the replacement after nearly 70 years could not be considered current repairs.

The Commissioner (Appeals) disagreed, holding that the frames were subordinate parts of the whole machinery and their replacement did not amount to a reconstruction of the entire machinery. The Tribunal upheld this view, applying the test from the case of CIT v. Mahalakshmi Textile Mills Ltd., which states that the nature of the expenditure should be considered in the context of the productive unit as a whole. The Tribunal concluded that no new asset was created by merely replacing parts of the machinery, and thus, the expenditure was correctly classified as revenue expenditure.

2. Allowability of Expenditure Incurred in Settlement of Industrial Dispute:
The second issue concerned the deductibility of sums paid in settlement of an industrial dispute. The ITO disallowed these payments, treating them as excessive bonus not allowable under the Payment of Bonus Act, 1965. The Commissioner (Appeals) found that these payments were not bonuses but were made to maintain industrial peace, thus allowable under section 37 of the Income-tax Act, 1961.

The Tribunal supported this view, noting that the payments were not made under the Payment of Bonus Act and did not need to be adjusted against allocable surplus. Even if considered as bonus, the payments were within the permissible ceiling of 20% under the Act. Therefore, the expenditure was deemed allowable as it was incurred wholly for business purposes.

3. Computation of Depreciation Allowance:
The final issue involved the method of computing extra shift allowance for depreciation. The assessee computed depreciation based on the entire plant and machinery working multiple shifts, while the ITO limited it to new machinery that worked extra shifts. The Commissioner (Appeals) directed the ITO to follow the CBDT's circular, which allowed extra shift allowance for the entire plant and machinery, irrespective of the actual number of days each machine worked extra shifts.

The Tribunal emphasized that the CBDT's circular is binding on the ITO, even if it deviates from the legal position. The Tribunal criticized the revenue's appeal as unjustified and arbitrary, noting that similar appeals had not been pressed in other cases. The Tribunal concluded that the ITO must adhere to the CBDT's instructions, and thus, the appeal on this point was not maintainable.

Conclusion:
The appeals were dismissed, affirming the Commissioner (Appeals)'s decisions on all points. The Tribunal upheld the classification of the machinery replacement expenditure as revenue expenditure, allowed the settlement payments as deductible business expenses, and mandated adherence to the CBDT's circular for computing depreciation, thereby rejecting the revenue's contentions.

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