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TMI Blog2013 (11) TMI 618X X X X Extracts X X X X X X X X Extracts X X X X ..... als before the appellate authority were preferred against three separate orders passed by Assessing Officer (for short 'AO') dated 10.2.89, 27.9.89 and 21.3.95 for the assessment years 1986-87, 1987-88 and 1992-93 respectively. All the three appeals were admitted to consider the substantial questions of law, framed in the memorandum of appeals. 3. In ITA 67/07, the following substantial questions of law, arise for our consideration: "A-1.Whether the Tribunal was right in holding that a sum of Rs.3,22,484/- as repair expenses, claimed by the assessee for removal of machinery to make way for short mix plant installation, is allowable as a revenue expenditure and that no depreciation can be allowed contrary to the judgment of the Apex Court reported in 49 ITR 160. A-2 Whether the Tribunal was correct in holding that the deduction of Rs.42,00,536/- u/s.80HH and the deduction of Rs.52,50,669/- u/s.80I of the Act is allowable despite the new industrial undertaking not meeting the conditions stipulated u/s 80HH and 80I of the Act? A-3. Whether the Tribunal was correct in holding that provision for bad and doubtful debts are in principle allowable deduction? A- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctory of the respondent-Company with which we are concerned in these appeals, situate in the State of Gujarat, at Amalner. There doesn't appear to be any dispute that Amalner is a backward area. Returns were filed by the respondent-assessee, from which these proceedings arise, before the AO at Mumbai. Against the order of AO, appeals were preferred by the assessee before the Appellate Authority at Mumbai. Feeling aggrieved and dissatisfied by the order of the appellate authority, the respondent-assessee filed appeals before the Tribunal at Mumbai. Thereafter, it appears, the registered office of the respondent-assessee at Mumbai was shifted to Bangalore and therefore, the appeals which were filed before the Tribunal at Mumbai were transferred to the Tribunal at Bangalore. 8. The respondent-assessee had filed returns under Section 139 of the Income Tax Act (for short IT Act) for the assessment years 1986-87, 1987-88 and 1992-93, from which these appeals arise. We would like to deal with every appeal independently one after another. ITA No.133/2007 9. First, we would consider ITA 133/07 which is arising from the returns filed by the respondent-assessee for the year 1992-93. Substa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the payments amounted to charity. Accordingly he upheld the disallowance."15.2 Before us, the learned AR submitted that the appellant's factory is situated in a backward area and the expenditure incurred is incidental to the carrying on of business in backward area. The learned AR drew our attention to the decision of the Hon'ble Madras High Court in CIT Vs Madras Refineries Ltd. (266 ITR 170) The observations made in paragraph 15.3, to the extent it is necessary read thus:"............... ................ Though similar expenditure has been disallowed in the past, the benefit of the above High Court was not available earlier. No contrary decision has been cited. Following the above High Court decision, we have no hesitation in allowing the expenditure incurred on community development." 13. We have perused the impugned order as well as the orders of the first appellate authority and of the AO and so also the other materials placed before the Court. The respondent-assessee did not place any materials to show what was the exact nature of expenditure, incurred for community development, to be allowed under Section 37(1) of the Act. The only basis on which the expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usion either that the alleged payment is not real or it is not incurred by the assessee or in the character of a trader or it is not laid out wholly and exclusively for the purposes of the business of the assessee and to disallow it. Having regard to what has been laid down by the Supreme Court, learned counsel for the parties have fairly stated that the expenditure over a charity in any case would not stand to the test of commercial expediency. 16. It is in this backdrop, we have perused the orders passed by the AOs in this appeal and in ITA Nos.67/07 and 68/07. Though in the present appeal (ITA No.133/07) there is no whisper regarding the exact nature of the expenditure incurred for community development by the assessee, the AO in ITA No.68/08 has made reference to the nature of expenditure incurred under this head by the respondent-assessee. From the order of AO in ITA 68/07, it appears that the contributions were made to various religious functions, charitable institutions, social clubs and certain acts of charity such as donating a borewell to the Municipality, etc. The respondent-assessee has not placed any other materials on record in support of their claim of expenditure o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugar Works Ltd., vs. Commissioner of Income Tax (1963) 49 ITR 160 (SC). The appellate authority confirmed the findings recorded by the AO on the substantial questions of law, while the Tribunal reversed it for the following reasons recorded in paragraph 19.3 of the order: "We have perused this case. The case is applicable to the facts of the case. In the instant case, there is no enduring benefit which is derived by the appellant by mere re-location of the machinery within the same premises. The learned AR stated that the re-location is only to accommodate new machinery and it is just an adjustment within the available space. Therefore, we hold that the expenses on such re-location are revenue expenditure and accordingly direct the AO to allow a deduction in respect of the same." 20. Learned counsel for the revenue placed reliance upon the very same judgment of the Supreme Court in Sitalpur's case (supra) to contend that the expenditure for removal of machinery to make way for short mix plant installation cannot be allowed under Section 37(1) of the Act. The Supreme Court, in this case, while considering the question whether the expenditure of Rs. 3,19,766 incurred b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed the claim of the assessee and held the said expenditure to be of a capital nature. That view was ultimately upheld by the Supreme Court in this case. It would be relevant to reproduce paragraphs 25 to 28 for better understanding of the view taken by the Supreme Court : "25. Moving on to the issue of "current repairs" under section 31 of the Act, the decision of this Court in CIT v. Saravana Spinning Mills (P) Ltd. is again relevant. This court has laid down that in order to determine whether a particular expenditure amounts to "current repairs" the test is whether the expenditure is incurred to "preserve and maintain" an already existing asset and not to bring a new asset into existence or to obtain a new advantage. For "current repair" determination, whether expenditure is revenue or capital is not the proper test (SCC p.305, para 12) It is our opinion that the entire textile mill machinery cannot be regarded as a single asset, replacement of parts of which can be considered to be for mere purpose of "preserving or maintaining" this asset. All machines put together constitute the production process and each separate machine is an independent entity. Replacement o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure incurred for installation of the new plant would not amount a revenue expenditure and that will have to be treated as capital expenditure. The question before us is not raised in respect of the expenditure incurred for installation of the short mix plant but the expenditure incurred for removal of existing machinery to make way for installation thereof. The arrangement, i.e. shifting of old machinery to make way for installation of new machinery, may give the assessee an enduring benefit of better and more efficient production over a period of time. Thus, the expenditure incurred for removal of the existing machinery only to make way for installation of new machinery, therefore, in our opinion, cannot be allowed under Section 37(1) of the Act. In other words, the expenditure incurred for removal of old machinery for installation of new machinery within the same premises, in our opinion, would not amount to revenue expenditure such as repair of existing machinery. It is not in dispute that the existing machinery which was removed to make way for the short mix plant installation was again reinstalled. Having regard to the admitted facts, in our opinion, the view taken by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rected the same, whether the assessee can claim benefit of 80HH in the next assessment year and whether such machineries can be considered as new machineries. 17. By reading of para 5 of the order it is clear that the Tribunal has not given details about the new plant and machineries installed during the relevant assessment year. On the contrary it has accepted that the plant and machineries purchased were erected in the earlier year of assessment. If such plant and machineries were erected earlier to the present assessment year, those machineries cannot be considered as new machineries in order to claim deduction under Section 80HH & 80 I. If really the assessee was interested to claim depreciation under Section 80HH & 80I it should have made out claim during assessment year when new plants and machineries purchased during relevant assessment year. When the assessee had purchased the new machineries in the earlier assessment year and has installed the same, such unit cannot be treated as new unit for the present assessment year. According to us when new plant and machineries are erected during such relevant assessment year, such unit can be considered as newly establ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for seeking deduction of such huge amounts before the AO by producing/adducing materials/evidence in support thereof. For the relevant years, they did not either place any materials or adduce any evidence before the authorities below nor did they ask for any such opportunity at any point of time till the present appeals were argued before this Court for final disposal. 28. Even from perusal of the orders passed by the AOs and the Appellate Authorities in both the appeals, we do not find that any case is made out by the respondent-assessee for seeking deductions. The Tribunal reversed the orders passed by the AOs and the appellate authorities solely on the basis of the orders passed by the Appellate Tribunal dated 15.6.2006 and 28.4.2003, which were set aside by this Court in ITA 128/07. In view thereof, the order passed by the Tribunal, in our opinion, is legally unsustainable. Thus, the questions of law A-2 and A-6 in the present appeal and in ITA No.68/2007, respectively, are answered in favour of the revenue and against the assessee. 29. Question of law-A3 as framed in this appeal needs to be reframed. As a matter of fact, the question of law-A3 framed in the appeal does not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cing any material/evidence on record. He also invited our attention to the observations made by the Tribunal in para-14.1 to contend that the Assessing Officer never made any reference to filing of a suit for recovery. Filing of suit, according to Sri K V Aravind, learned counsel appearing for the Revenue, was not the requirement under the said provision and it was necessary to only establish that any debt or part thereof had become bad debt. Since this burden was not discharged, the order passed by the Tribunal is wrong. 32. We have perused the order passed by the Tribunal, in the light of the observations made by the two Authorities below. Whether the assessee could establish before the Assessing Officer that the debt of Rs.28,166/- in the previous year had become bad is a matter of appreciation. It appears that the debt had become bad and they had written-off in the books of account. It is not in dispute that the books of account for the relevant year were placed before the Assessing Officer. Thus, it is clear that the Tribunal allowed to write off Rs.28,166/- as bad debt for the previous year on the basis of materials placed on record. The findings recorded by the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds/donation given by the assessee. It is also not in dispute that apart from giving donation to the Society, the assessee has no connection with the Society. There doesn't appear to be any dispute that Amalner, where the assessee's factory premises situate, is a backward area. Having regard to the facts of the present case and having considered the provisions contained in Sub-section(9) of Section 40A of the Act, we have no manner of doubt that the donation given by the assessee would not be a donation/contribution contemplated by sub-section (9) of Section 40A of the Act. It cannot be stated that the assessee gave donation or contributed for setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act or other institution. In our opinion, the donation given by the asseesee for the purpose, as reflected in the forgoing paragraph, was wholly and exclusively for the welfare of its employees and also for carrying on business of the assessee more efficiently by having contended labour force. In any case, the donation is not covered under Section 40A(9) of the Act. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y held by the Tribunal that the expenditure incurred by the assessee for atheistic purpose or for having better working environment cannot be treated as capital expenditure. We find no reasons to interfere with the finding of the Tribunal on the question of law and hence we answer this question of law in favour of the assessee and against the revenue. 36. That takes us to the last question-A7. The AO and the AA, on this question of law, held against the assessee. The Tribunal, however, for the reasons recorded in paragraph 10.2 reversed the findings. For considering this question of law, it would be necessary to look into the relevant provisions of the Act. Section 32 of the Act deals with depreciation. For our purpose, the following portion of Section 32 is relevant, which reads thus: "Depreciation 32. (1) In respect of depreciation of - (i) buildings, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words, she submitted that the actual cost for the assessee was the total cost consisting of the cost paid for good will and therefore, the Tribunal has rightly spread over the amount of Rs.25,000/- paid for goodwill on other assets acquired and allowed depreciation thereon. We are unable to accede to the submission advanced by learned counsel for the assessee. Having regard to the intent of the legislature, as observed earlier, goodwill was not covered for depreciation under Section 32 of the Act. The definition of actual cost under Section 43(1) of the Act cannot be read to cover goodwill as an asset for which the assessee had to pay and which can be termed as actual cost of the assets to the assessee. The Tribunal apportioned the cost of goodwill to various other assets acquired by the assessee thereby increasing the cost of other assets and allowing depreciation thereon, which, in our opinion, is not legally sustainable. In the circumstances, we set aside the findings recorded by the Tribunal on this question of law and answer the same in favour of the revenue and against the assessee.
In the result, the appeals are partly allowed and disposed of in terms of this order. X X X X Extracts X X X X X X X X Extracts X X X X
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