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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 ..... f machinery to make way for short mix plant installation as revenue expenditure – Held that:- Expenditure in not a revenue expenditure – In the present case, case the machinery was only shifted within the same premises of the factory to make way for short mix plant installation. It is clear from the facts that shifting of the machinery was for installation of a new short mix plant. The expenditure incurred for installation of the new plant would not amount a revenue expenditure and that will have to be treated as capital expenditure. 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, cannot be allowed under Section 37(1) of the Act – Decided in favor of Revenue. Deduction under Sections 80HHC and 80I of the IT Act – Held that:- No details were given about the new plant and machineries installed during the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Held that:- Expenditure incurred by the assessee for atheistic purpose or for having better working environment cannot be treated as capital expenditure – Decided against the Revenue. Depreciation on goodwill u/s 32(1) of the Income tax act – Held that:- Having regard to the intent of the legislature, 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 is not legally sustainable – Decided in favor of Revenue. - ITA.No.133/2007 - - - Dated:- 23-8-2013 - Dilip B Bhosale And B Manohar, JJ. For the Appellant : Sri K V Aravind, Adv For the Respondent : Sri Rajesh Chander Kumar, Adv, Smt S R Anuradha, Adv JUDGEMENT:- PER : Dilip B Bhosale J These appeals are directed against the common order dated 16.6.2006 rendered by the Income Tax Appellate Tribunal (for sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pex Court in 49 ITR 160? A-6. Whether the Tribunal was correct in holding that the deduction of Rs.29,94,000/- u/s.80HH and a deduction of Rs.67,24,000/- 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-7. Whether the Tribunal was correct in holding that an amount of goodwill can be allocated to the various fixed assets held by the assessee for the purpose of claiming depreciation? A-8. Whether the Tribunal was correct in holding that the donations made to Khandesh Education Society do not attract the provisions of Section 40A(9) of the Act? 5. In ITA 133/07, the following two substantial questions of law arise for our consideration: A-9. Whether the Tribunal was correct in holding that the stock transfers made to the new industrial undertaking at Amalnar for manufacture of fatty acid and glycerin plant should be taken at market price and not at the cost price of transfer for the purpose of computation of deduction u/s.80HH and 80I of the Act? A-10. Whether the Tribunal was correct in holding that excise duty and sales tax should not be included in the total turnover for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies state that the question of law A10 has also been covered by the judgment of the Supreme Court in Commissioner of Income Tax vs. Lakshmi Machine Works (2007) 290 ITR 667 and it is answered against the revenue. In view thereof, we answer question-A10 in terms of the judgment of the Supreme Court in favour of the assessee and against the revenue. 11. That takes us to consider question of law-A11, which is common in all these appeals. The AO disallowed the claim of respondent-assessee, treating a sum of Rs. 14,396/- for the assessment year 1986-87, Rs. 1,32,315/- for the assessment year 1987-88 and Rs. 68,570/- for the assessment year 1992-93 as an expenditure under Section 37(1) of the I.T. Act. The respondent-assessee claims that this expenditure was incurred by them for community development in a backward area at Amalner where their factory situate. The AO disallowed the expenditure on the ground that those were in the nature of charity and not connected with the business. Similar was the view taken by the appellate authority, dismissing the appeal insofar as this question is concerned. 12. The Tribunal, in the appeal filed by the respondent-assessee reversed the findings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ession of care and concern for the society at large and the people of the locality in which the business is located in particular. He submitted that the respondent-assessee being a good corporate citizen, in order to bring goodwill of the local citizen and so also to maintain good relations with the regulatory agencies and the society at large and thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill incurred the aforesaid expenditure. In support of his contention, he also pressed into service the test of commercial expediency. He submitted that in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the assessee s business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the revenue. In support of this contention, he placed reliance upon the judgment of the Supreme Court in Commissioner of Income-Tax, Bombay vs. Walchand and Co. Private Ltd., (1967) vol. LXV ITR 381, Eastern Investments Ltd., vs. Commissioner of Income-Tax, West Bengal (ITR Vol.XX 1951 page 1) and J.K.Woolen Manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . It is not the case of assessee that the expenditure incurred by them is covered by Sections 30 to 36 of the Act, and even if that was so the question of allowing the expenditure under Section 37(1) of the Act would not arise. 18. In our opinion, the expenditure towards the religious funds, charitable institutions, social clubs or for charity do not stand to the test of commercial expediency. In any case, the expenditure under these heads cannot be stated to be exclusively for the purposes of business of the respondent-assessee and to allow it. That apart, the respondent-assessee has failed to place any material, in support of their case so as to claim the aforementioned expenditure under this head as contemplated by Section 37(1) of the Act as being commercial expediency. In the circumstances, we answer the question in favour of the revenue and against the asseessee. The order of the Tribunal is accordingly set aside to this extent. ITA No. 67/2007 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred in earning any profit but only for putting its factory, that is, its capital, in better shape so that it might produce larger profits, when worked. It really went towards effecting a permanent improvement in the profit-making machinery, that is, in the capital assets. It was, therefore, a capital expenditure and not a revenue expenditure. (emphasis supplied) 21. From bare perusal of the observations made by the Supreme Court in the aforementioned paragraph, it is clear that in the facts of that case, the Supreme Court has held that the expenditure was a capital expenditure and not a revenue expenditure. In that case, the factory was shifted from one place to another for which the entire machinery and the plant was required to be shifted and the expenditure was not incurred for the purpose of carrying on the concern but it was incurred in setting up the concern with a greater advantage for the trade than it had in its previous set up. 22. In Commissioner of Income Tax vs. Sri Mangayarkarasi Mills Private Limited (2011) 11 SCC 656, the Supreme Court was considering the question whether expenditure incurred on replacement of machinery in a textile mill amounts to revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cannot amount to current repairs , which has been subsequently approved in the Saravana Mills case. For these reasons, the expenditure made by the assessee cannot be allowed as a deduction under section 31 of the Act. 27. The judgment of this Court in the Saravana Mills case mentions two exceptions in which replacement could amount to current repairs, namely: (SCC p. 299) * Where old parts are not available in the market (as seen in CIT v. Mahalakshmi Textile Mills Ltd. or * Where old parts have worked for 50-60 years. In the instant case, the assessee has not claimed any of the above stated exceptions. 28. Saravana Mills case also restricts the scope of current repairs to repairs made to machinery, plant and/or furniture. In this case, replacement of machine can at best amount to a repair made to the process of manufacture of yarn. Further, this court has also observed in Saravana Mills (supra) case that if replacement was held to be current repair in such cases, section 31(i) will be completely redundant and absurdity will creep in because repair implies existence of a part of the machine which has malfunctioned, which is impossible in the case of such replacement. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O. The Tribunal, however, reversed the findings recorded by the authorities below based on the order of the Tribunal in M.P.No.238/Mum/03 and ITA No.7849/Bom/1989 dated 15.6.2006 and 28.4.2003 respectively, passed in case of the very same respondent-assessee for the assessment year 1985-86. It is against that order, the revenue has filed the present appeal. 24. Learned counsel appearing for the revenue placed heavy reliance upon the judgment of this Court dated 7.4.2010 in ITA No.128/2007 whereby the orders dated 15.6.2006 and 28.4.2003 in M.P.No.238/Mum/03 and ITA No.7849/Bom/1989 came to be set aside. The respondent-assessee had claimed deduction under Sections 80HH and 80I of the IT Act for the assessment years 1986-87 and 1987-88 on similar ground namely that it had established a new factory for manufacturing industrial vanaspathi. The AO and so also the appellate authority held that the assessee did not establish any new industrial unit and had only improved the existing vanaspathi unit by adding new machineries. The Division Bench of this Court, while dealing with the similar challenge in ITA No.128/2007 for the assessment year 1985-86 in paragraphs-11 and 17 has observed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the assessment years 1986-87 and 1987-88. He submitted that it was open for the respondent-assessee to bring such material on record so as to satisfy the conditions laid out under Section 80HH for the assessment years 1986-87, 1987-88 and having failed to do so, it is not open for them to seek deduction under these provisions. 26. On the other hand, learned counsel appearing for the respondent-assessee submitted that the judgment of this Court in ITA No.128/07 would not come in their way in claiming deduction for the assessment years 1986-87 and 1987-88. She invited our attention to paragraphs-11 and 17 to contend that the question that was under consideration before the Division Bench whether the assessee had established a new industrial unit in the assessment year i.e., 1985-86, was answered against the assessee. She submitted that merely because claim of assessee in respect of a new unit for manufacturing industrial vanaspathi was rejected for the assessment year 1985-86, cannot be the ground to reject their claim for the subsequent years i.e., 1986-87 and 1987-88. The authorities below have failed to consider the case of the assessee independently for the assessment years 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of the parties, who were obliged to pay less than Rs.1,000/-. The Assessing Officer also observed that the assessee could not establish that the outstanding amounts had rendered as bad and doubtful debts. In the circumstances, he disallowed the deduction to the extent of Rs.28,166/- only. The order of the Assessing Officer was confirmed by the Tribunal in appeal under Section 253 of the Act. However, having considered its order in respect of the assessee for the assessment year 1990-91 to 1997-98, the Tribunal allowed the deduction of Rs.28,166/. 31. Learned counsel appearing for the Revenue invited our attention to Clause (vii) in Section 36(1) of the Act, as it stood in the year 1986-87 and submitted that no efforts were made by the assessee of whatsoever nature to establish that the debt to the extent of Rs.28,166/- had rendered bad. Clause (vii) of sub-Section 1 of Section 36 of the Act was amended in 1987 w.e.f 1.4.1989. It would be relevant to reproduce Clause (vii) in sub-Section (1) of Section 36 of the Act as it stood before the amendment, which reads thus: (vii) subject to the provisions of Section (2), the amount of any debt or part thereof, which is es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded by the authorities below on this question holding that the donation was made by the assessee to the Khandesh Education Society as a welfare measure for the assesse s employees in the factory at Amalner. 34. We have perused sub-section(9) of Section 40A of the Act, which states that no deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the 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 for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause(iv) or clause(iva) or clause (v) of sub-section(1) of section 36, or as required by or under any other law for the time being in force. In the light of this provision, we have examined the facts of the present case. It has come on record that the donation to Khandesh Education Society made by the respondent-assessee was for providing financial assistance to the society for setting up a technical wing in its school at Amalner where the respondents-assessee have its factory premises. Such donati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and against the revenue. ITA No. 68/2007 35. In this appeal, the first question of law A5 will have to be reframed in view of the fact that learned counsel appearing for the revenue confined challenge to the amount of Rs.21,485/- only spent on purchase of paintings. Thus, the question of law A5 is reframed as under: Whether the Tribunal was correct in holding that a sum of Rs. 21,485/- spent on purchase of paintings is a revenue expenditure and no depreciation is allowable over the same in view of the judgment of the Apex Court in case.? The AO and the Appellate Authority did not allow the expenditure of Rs.21,485/- spent on purchase of paintings as contemplated by Section 37(1) of the Act. The Tribunal, however, held that paintings/works of art improve atheistic and working environment and it enables to carry on business with more efficiency. The Tribunal, thus held that the expenditure for purchasing the paintings is allowable revenue expenditure. The revenue relied upon the judgment of the Supreme Court in Sitalpur (supra) to contend that the expenditure towards painting cannot be treated as revenue expenditure. We have already considered the judgment of the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use 2 of sub-section(1) of Section 32 of the Act does not refer to goodwill, the Supreme Court in Commissioner of Income Tax vs. SMIFFS securities Limited in 348 ITR 302 (SC) held that goodwill is also an asset within the meaning of Section 32 of the Act, it being an intangible asset and therefore depreciation on goodwill is allowable under the said section. This provision was not available for the assessment year 1987-88. The legislature amended the provisions of Section 32(1) in 1997 and brought in force, by introducing clause (ii) allowing depreciation on intangible assets. This amendment itself, in our opinion, shows that it was not intended for the period prior to the amendment of 1997 and allow depreciation on goodwill. In view thereof, it cannot be stated that depreciation on goodwill was allowable prior to 1997 amendment. 37. Learned counsel appearing for the assessee invited our attention to Section 43 of the Act wherein the expression on actual cost is defined. The actual cost as defined therein means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or author ..... X X X X Extracts X X X X X X X X Extracts X X X X
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