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TMI Blog2012 (1) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... on of power inasmuch as the assessee is able to save to that extent which would certainly be covered by section 80-IA(1). When such will be the outcome out of own consumption of the power generated and gained by the assessee by setting up its own power plant, we do not find any lack of merit in the claim of the respondent/assessee when it claimed by relying upon section 80-IA(1) of the Income-tax Act by way of deduction of the value of such units of power consumed by its own plant by way of profit and gains for the relevant assessment years. - I.T.A. No. 1847/Mds/2011 and I.T.A No. 1848/Mds/2011 - - - Dated:- 20-1-2012 - Order The order of the Bench was delivered by Hari Om Maratha (Judicial Member).-In the above captioned cases identical issues are involved, therefore, for the sake of convenience and brevity, we proceed to decide them by a common order. I. T. A. No. 1847/Mds/2011-M/s. Prabhu Spinning Mills P. Ltd. This appeal is directed against the order of the learned Commissioner of Income-tax (Appeals)II, Coimbatore, dated August 28, 2011, pertaining to the assessment year 2007-08. Briefly stated, the facts of the case are that the assessee, a company, engaged i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Board in respect of the quantity of captive power generated by its windmill and consumed therefrom. Such method is not acceptable for the following reasons. The assessee claims that the cost reduction achieved due to consumption of electricity produced by the windmill in the manufacture of yarn leads to enhancement of profitability. It is true but it is not the profit derived from the operation of the windmill, rather a result of the power consumed by the spinning mill at a lower rate. Hence, any enhancement in profitability has resulted only to the spinning mill and not to the windmill. Sub-section(1) puts fetters on the assessee, and empowers the Assessing Officer to tax the amount of profit as may be reasonably deemed to have been derived therefrom, if it appears to the Assessing Officer that, owing to the close connection between the assessee and any other person, or for any other reason, the course of business between them is so arranged that the business trans acted between them produces the assessee more than ordinary profits. Sub-section (8) envisages the situation where the goods or services held for the purpose of eligible business are transferred to any other business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y ; it has fixed the price for purchase of power. It is the price fixed by a statutory authority. Whether the price at which it purchases or sells power to the assessee is to be adopted, presents a real difficulty in adopting the open market value. Hence, in view of the observations of the apex court in Liberty India's case [2009] 317 ITR 218 (SC) that the assessee shall not be permitted to inflate its profit, and by virtue of the proviso to sub-section (8), the learned Commissioner of Income tax (Appeals) has adopted the purchase price of power by the Tamil Nadu Electricity Board from the assessee as the market value for the value of power consumed by the assessee in respect of the power generated by the windmill installed by it. While determining the profit of the windmills in the case of captive consumption, the rate adopted is the rate at which the Electricity Board (EB) charges for consumption. But the Department's view is to adopt the rate at which Electricity Board purchases from the windmills in the case of the sale to Electricity Board cases. The Assessing Officer was of the opinion that concept of the market value as described in section 80-IA(8) is not applicable to cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Electricity Board. 9. For that the Commissioner of Income-tax (Appeals) failed to appreciate that the cost of saving of power is profit derived by the windmill undertaking. 10. For that the Commissioner of Income-tax (Appeals) failed to appreciate that the transactions between the windmill undertaking and the textile undertaking which are two distinct undertakings are at arm's length. 11. For these grounds and such other grounds that may be urged before or during the hearing of the appeal it is most humbly prayed that the hon'ble Tribunal may be pleased to: (a) Direct the Assessing Officer to treat the expenditure incurred towards modernisation and replacement of machinery as revenue in nature ; (b) Consider the explanation that the profits of the eligible under taking shall be determined on the basis of the annual landed cost of electricity purchased by the captive unit from the Tamil Nadu Electricity Board ; (c) pass such other orders as the hon'ble Tribunal may deem fit." We have considered the rival submissions and have perused the entire material available on record including the paper book and paper compila tions and decisions relied before us. It was arg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook page 5) that the assessee had purchased 33 number of ring frames and 18 ring frames fitted with gadgets. The company has purchased 18 number of sets, as one set is required for one ring frame. Thus, total number of gadgets for 18 ring frames comes to 20,736 and the rate per gadget so purchased comes to Rs. 4,079. We have seen the commercial invoices enclosed in the paper book and found the submission of the learned authorised representative to be correct. We have found that during the year the assessee-company has installed new technology gadgets called "compact spinning system". The yarn from the stage of simplex is sent through the drafting for spinning by ring frames. The drafting system is situated in the ring frames. The conventional drafting system is replaced with the latest, state of the art gadget called "compact spinning". This is a single piece gadget and this is fixed to each spindles. Each gadgets cost Rs.4,100 each because the assessee has purchased 37,296 such gadgets in 37 sets (batches) for Rs. 15.39 crores. Thus, it is not a machinery by itself but only an attachment to the existing machine. We have understood that this gadget cannot function independently. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned authorised representative that in fact this decision is not applicable to the facts of the given case but if it is accepted that it applies then it helps the case of the assessee and not that of the Revenue. In paragraph 5 of the learned Commissioner of Income-tax (Appeals)'s order, a narration has been made by him stating that the assessee vide its letter dated August 10, 2011 has submitted that Rs. 75,61,806 pertains to compact spinning and that the same is not being pressed by the appellant. Hence the remaining amount is only in dispute now. The learned Commissioner of Income-tax/Depart mental representative brought our attention towards this observation by the learned Commissioner of Income-tax (Appeals). To counter this, the learned authorised representative invited our attention towards this letter as well as an affidavit of Shri P. S. Velusamy, managing director of M/s. Prabhu Spinning Mills P. Ltd., the assessee, which has controverted the entire observation so made by the learned Commissioner of Income-tax (Appeals). We incorporate the averments of this affidavit in toto here in below: "I, P. S. Velusamy, managing director of M/s. Prabhu Spinning Mills P. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the assessee would clearly indicate that he has purchased new machinery, viz, 2 nos. of spinning drafting system for Rs. 4,20,73,074 and Rs. 4,25,13,925, one DK 800 carding machine for Rs. 64,51,249 and chute feed FBK for Rs. 11,10,557 amounting in all Rs. 9,21,48,805. Out of the above Rs. 75,61,806 has been admitted by the assessee to be for replacement. 10. The observation to this effect of the Commissioner of Income tax (Appeals) is contrary to the facts as the company has purchased 18 sets (20,736 nos. of gadgets for 18 ring frames) and not 2 nos. of spinning drafting system as mentioned in the above paragraph and further through letter dated August 10, 2011 the company has with drawn the claim of expenditure to the tune of Rs. 75,61,806 which was pertaining to machinery other than compact spinning system and not admitted to be for replacement. I further solemnly state that this affidavit is filed in terms of rule 10 of the Income-tax Appellate Tribunal Rules, 1963 in relation to the appeal filed before the hon'ble Income-tax Appellate Tribunal in I.T.A. No. 1847/Chennai/2011 for the assessment year 2007-08. I solemnly affirm that the statements contained in the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icture of the whole operation in respect of which the expenditure has been incurred. (b) After referring to Viscount cave test of enduring nature, it proceeded to hold that "this test as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC) it would be misleading to suppose that in all cases, securing a benefit for the business would be prima facie, capital expenditure so long as the benefit is not so transitory as to have no endurance at all. There may be cases where expenditure even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and a test of enduring benefit may breakdown". (c) The test of enduring benefit is therefore not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. (d) What is material to consider is the nature of advantage in a com mercial sense. (e) It is only where the advantage is in the capital field that the expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at any particular stage in this fast changing area of medical science. (d) The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holds an out lay such as this as capital. (e) The improvisation in the process and technology in some areas of enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. (f) What was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day-to-day business of the assessee's established enterprise. (g) The financial outlay under the agreement was for the better con duct and improvement of the existing business and should therefore be held to be revenue expenditure. (h) The "once for all payment test is also inconclusive. What is relevant is the purpose of outlay and its intended object and effect, considered in a common sense way having regard to the business realities. In a given case, the test of enduring benefit might break down". (i) It relied on the earlier decision in the Empire Jute Co. Ltd. v. CIT [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e deciding the issue, the Tribunal has held as under: "8. We considered the issue in detail. The hon'ble Supreme Court in the case of CIT v. Saravana Spinning Mills P. Ltd. [2007] 293 ITR 201 (SC), has considered the tests necessary to qualify an expenditure as current repairs. The court held that to decide the applicability of current repairs under section 31(i), the test was not whether the expenditure was revenue or capital in nature, but whether the expenditure was current repairs. The basic test was to find out whether expenditure was incurred to 'preserve and maintain' an already existing asset and the expenditure must not be to bring a new asset into existence or to obtain new advantage. The court further held that in the case of a textile mill each machine including the ring frame was an independent and separate machine capable of independent and specific function and, therefore, the expenditure incurred for replacement thereof would not come within the meaning of current repairs. The hon'ble Supreme Court in the case of CIT v. Sri Mangayarkarasi Mills P. Ltd. [2009] 315 ITR 114 (SC), has held that in the case of textile machinery repair of a machine can at best amount to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought in any new advantage to the assessee, better not to speak about any enduring benefit. By replacing the old worn out mechanical yarn clearers with electronic yarn clearers, the assessee-company has just preserved and maintained its existing status of manufacture. The so called improvement in the quality pointed out by the lower authorities is only an incidental consequence of better cleaning when compared to the old and worn out mechanical device. The replacement has not increased the volume of production of the assessee-company. Strictly speaking, the yarn clearers do not directly take part in deciding the quantum of production. The yarn clearers make the yarn compatible for further treatment. Therefore, yarn clearer is a servicing system within the manufacturing operation carried out by the assessee-company. Therefore, it comes under the category of current repairs, as if a fused bulb is replaced by a new electric bulb. The existing situation is protected and no new benefit is created. 11. Therefore, we find that the decisions rendered by the hon'ble Supreme Court in the case of CIT v. Saravana Spinning Mills P. Ltd. [2007] 293 ITR 201 (SC) and in the case of CIT v. Sr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held the cost of "dobbies" which is one of the parts of a loom, as not a revenue expenditure allowable under section 31 or under section 37. His revisional order under section 263 was reversed by the Tribunal. Accordingly, we allow this claim of the assessee by setting aside the finding of the lower authorities. In so far as the second issue regarding captive consumption is concerned, it is, admittedly, covered by the decision of the hon'ble Madras High Court rendered in the case of CIT v. Thiagarajar Mills Ltd. in Tax Case (Appeal) Nos. 68 to 70 of 2010, in favour of the assessee. Paragraphs 8 to 11 of the decision are reproduced herein below : "8. The contention that only whatever power generated from the sale to an outsider or the Electricity Board and the profit or gain derived by such sale alone can be taken as profit or gains derived by the assessee as mentioned in section 80-IA(1) of the Income-tax Act, has been rejected by the Tribunal in the order impugned. In our considered view, the Tribunal was well justified in having rejected such a stand of the appellant. Having referred to section 80-IA(1) of the Income-tax Act, we are also convinced that what are all to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed principal of law that the court while interpreting the provision will have to see the object of the enactment and its provisions. Hence, we are of the opinion that the interpretation sought to be made by the Revenue would in fact frustrate the very purpose for which the benefit is provided in the said provision and therefore, the same cannot be countenanced. 11. In this context, we find that a decision of the hon'ble Supreme Court in CIT v. Tanfac Industries Ltd. S. L. P. (C) No. 18537 of 2009 reported in [2009] 319 ITR (St.) 8 (SC), fully support the stand of the assessee. That was also a case where while applying section 80-IA of the Income-tax Act, the hon'ble Supreme Court took the view that the value of steel used for captive consumption by the assessee was entitled to be deducted under section 80-IA of the Act." This Tribunal has also decided similar issue in favour of the assessee in the following cases : Sl. No. I.T.A.No. Name of the assessee Date or order 1. 850/Mds/2011 Sri Velayudhaswamy Spinning Mills P. Ltd. v. Deputy CIT [2011] 12 ITR (Trib) 353 (Chennai) 13-07-2011 2. 569/Mds ..... X X X X Extracts X X X X X X X X Extracts X X X X
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