2025 (3) TMI 1001 - HC - Income Tax

Nature of expenditure - expenditure incurred on replacement of old machinery by new machinery - Revenue or capital expenditure - HELD THAT - In view of this admitted position we propose to decide this issue based on the factual position that the production capacity has not increased. In fact the Departmental Representative accede to the fact that the production capacity has not been enhanced but only states that that is not the sole relevant parameter. Schedule M establishes categorically that there is no increase in the production capacity either in RR Nagar factory or in Jayanthipuram factory which remain constant at 7 50 000 and 11 00 000 tonnes per annum respectively both pre and post the year of replacement. In the RR Nagar factory in fact the actual production for the year ending 1996-97 is in excess of the installed capacity. This is attributable according to the learned assessee counsel on instructions to improved technology and better production efficiency. Thus seeing as the installed capacity has remained constant over the years in question without there being any increase thereof we are of the considered view that the expenditure incurred would be revenue in nature. Decided against the revenue. Eligibility for benefits u/s 35(i)(iv) while the matter is pending before the competent authority - HELD THAT - This very issue has come up for consideration in 2024 (12) TMI 1542 - MADRAS HIGH COURT we have decided the question adverse to the assessee following an order of the Tribunal for AY 1996-97 that has not been agitated by the assessee but accepted. Hence and in the interests of consistency this substantial question of law is answered in favour of the revenue. Allowance of 100% depreciation to fly ash silo treating it as a pollution control equipment - HELD THAT - We are of the considered view that the assessee must succeed. It is true that the entry in question reads Ash handling system and evacuation system . The grant of 100% depreciation is thus for a process that must both contain and evacuate fly ash that pollutes the air. It is nobody s case that the silos installed in the factory do not achieve the purpose of handling/containing the pollutant. The mode and manner of disposal is irrelevant so far as it is efficient and achieves the object of removal from the atmosphere. Needless to say the use of fly ash in the manufacturing process has effectively rid the premises of the pollutant and in a gainful manner. We wonder what could be a better mode of evacuation. We hence agree with the conclusions of the Tribunal that the method followed by the Assessee for containment and use of fly ash effectively achieves the twin objects of both handling/containing the fly ash as well as evacuates it from the premises by channelising it into the production process. Assessee is entitled for the grant of 100% depreciation in this regard. Decided against revenue. Payment of interest to IFCI - claimed the same as deduction under Section 43B on the ground that the payment had been made prior to the due date - Tribunal has reversed the orders of the lower authorities returning a finding that the claim was in order since the amount had actually been paid by the assessee - HELD THAT - We are unable to glean any support for the above conclusion by the Tribunal from the records. Findings of the assessing authority are contrary insofar as the assessee was specifically asked to provide materials in support of the submission that the loan had been disbursed which it had been unable to do. We too sought such a clarification from the assessee requiring it to produce some material either by way of bank statement or letter of corroboration from the bank to no avail. Findings of the Tribunal that the amount had actually been paid by the assessee is sans any material to support the same. The provisions of Section 43B insofar as they relate to the condition of actual payment call for a strict satisfaction and the failure of the assessee to have produced any material in this regard is fatal to its case. Decided against the assessee. Deduction u/s. 80HHC - excise duty customs duty windmill power receipts etc. form part of the total turnover for the purpose of calculating the benefit u/s. 80HHC or not? - HELD THAT - This issue is to be answered in favour of the assessee by virtue of Sudharshan Chemicals Industries Limited 2000 (8) TMI 73 - BOMBAY HIGH COURT Section 80HHC which is a separate code by itself. Hence the general definition of the word turnover or the case law dealing with the said definition under the Sales Tax Act which is a State levy cannot be imported into Section 80HHC of the Income-tax Act. Decided against the revenue. Depreciation on the dumpers - no evidence adduced that they had used it for more than 180 days or even received the same in their site prior to 180 days - ITAT allowed full claim - HELD THAT - As no evidence has been produced by the assessee before the authorities to establish that the dumpers had been received in its premises and put to use prior to 01.10.1995. This could very easily been done either by showing gate pass at the time of receipt of vehicles or any other documentation to indicate receipt and use of the same prior to 01.10.1995. Since the assessee has admittedly not done so we are of the view that the Tribunal ought not to have reversed the orders of the lower authorities. Tribunal proceeds on the concept of passive user which is not applicable to the fact and circumstances of the present case. The benefit of depreciation to a passive user would require the user to establish that it was in possession of the asset but was unable to use the asset for a certain period on account of factors beyond its control. In the present case even the assessee being in possession of the asset prior to 01.10.1995 is in doubt and has not been established. Hence we reverse the order of the Tribunal - Decided against the assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The Court considered the following core legal questions:

1. Whether the expenditure incurred on the replacement of old machinery by new machinery should be treated as revenue expenditure.
2. Whether the assessing officer can make a finding on the eligibility for benefits under Section 35(i)(iv) while the matter is pending before the competent authority.
3. Whether 100% depreciation should be allowed for a fly ash silo as pollution control equipment.
4. Whether the amount adjusted by IFCI from a new loan towards interest payable on earlier loans qualifies as interest actually paid under Section 43AB.
5. Whether excise duty, customs duty, windmill power receipts, etc., should form part of the total turnover for calculating the benefit under Section 80HHC.
6. Whether full depreciation on dumpers is justified without evidence of use for more than 180 days or receipt on site prior to 180 days.

ISSUE-WISE DETAILED ANALYSIS

1. Replacement of Old Machinery as Revenue Expenditure

The legal framework involved Section 37 of the Income Tax Act, 1961, concerning revenue expenditure. The Court examined whether the replacement of a pneumatic system with a Belt Bucket Elevator (BBE) was capital or revenue in nature. The Tribunal had inspected the mill and found that the replacement was for power conservation and pollution reduction. The Court noted that the production capacity remained unchanged, supporting the claim as revenue expenditure. The Court upheld the Tribunal's decision, finding the expenditure to be revenue in nature.

2. Eligibility for Benefits under Section 35(i)(iv)

The Court referenced a previous decision where the question was resolved against the assessee. The Tribunal's finding that the assessing officer cannot make a determination while the matter is pending was consistent with prior rulings. The Court maintained this stance, answering the question in favor of the revenue.

3. Depreciation on Fly Ash Silo

The issue involved the interpretation of depreciation rules under the Income Tax Act, specifically for pollution control equipment. The Tribunal found that the silos used for fly ash containment fulfilled the dual purpose of handling and evacuating pollutants. The Court agreed, noting that effective use of fly ash in production satisfied the statutory requirements. The Court concluded that the assessee was entitled to 100% depreciation.

4. Interest Payment under Section 43AB

The Court examined whether the adjustment of interest through a new loan constituted "actual payment." The Tribunal had allowed the claim, but the Court found no supporting evidence for the Tribunal's conclusion. The Court emphasized that Section 43B requires strict adherence to actual payment, which was not demonstrated by the assessee. Thus, the Court ruled in favor of the revenue.

5. Inclusion of Duties and Receipts in Total Turnover

The Court considered whether excise duties and similar receipts should be included in total turnover for Section 80HHC benefits. Citing a precedent from the Bombay High Court, the Court agreed that such items should not be part of the total turnover as they do not relate to profits derived from exports. The Court ruled in favor of the assessee.

6. Depreciation on Dumpers

The issue was whether full depreciation was justified without evidence of use for more than 180 days. The Tribunal had granted full depreciation, but the Court found no evidence supporting the claim of usage or receipt before the stipulated period. The Court reversed the Tribunal's decision, ruling in favor of the revenue.

SIGNIFICANT HOLDINGS

The Court established several principles through its rulings:

1. Replacement of machinery that does not enhance production capacity can be considered revenue expenditure under Section 37.
2. The assessing officer cannot determine eligibility for benefits under Section 35(i)(iv) while the matter is pending with a competent authority.
3. Pollution control equipment that effectively handles and uses pollutants qualifies for 100% depreciation.
4. Actual payment, as required by Section 43B, must be strictly evidenced; adjustments do not suffice.
5. Excise duties and similar receipts should not be included in total turnover for Section 80HHC calculations.
6. Full depreciation requires evidence of asset use or receipt within the specified period.

Final determinations were made as follows: Questions 1, 3, and 5 were resolved in favor of the assessee, while Questions 2, 4, and 6 were resolved in favor of the revenue.