CIT vs Metal Powder Company Ltd.

The Revenue has preferred the appeals as against the order of the Tribunal relating to assessment year 1994-95. The above tax case (appeals)

was admitted on the following substantial questions of law:

(i) Whether in the facts and circumstances of the case, the Tribunal was right in holding that conversion charges and sundry safes does not form

part of the turnover, for the purpose of calculation of deduction u/s 80HHC?

(ii) Whether in the facts and circumstances of the case, the Tribunal was right in allowing a deduction of the amounts spent on replacement of

independent machinery as revenue expenditure ?

(iii) Whether in the facts and circumstances of the case, the Tribunal was right in holding that the profit margin of goods captively consumed is to he

excluded for the purpose of deduction u/s 80HH?

(iv) Whether in the facts and circumstances of the case, the Tribunal was right in allowing depreciation on the windmills when the actual

commissioning of the windmill took place only after the end of the relevant accounting period ?

Although notice was served on the respondent, there is no appearance in person or through the counsel. As such, after hearing learned standing

counsel for the Revenue and on going through the records, present order is passed.

The assessee herein is engaged in the manufacture of metal powder. In the return filed by the assessee for the assessment year 1994-95, the AO

disallowed the claim on replacement expenditure of machinery and held that expenditure is capital in nature. Apart from this, the assessing authority

also disallowed the claim of depreciation on wind mills on the ground that the actual commissioning of the windmill took place only after the

relevant accounting period. Yet another issue considered by the assessing authority related to exclusion of profit margin of goods captively

consumed for the purpose of deduction u/s 80HH and conversion charges and sundry sales as forming part of the turnover for the purpose of

calculation of deduction u/s 80HHC. In the appeal preferred against the order of the assessing authority, the first appellate authority pointed out

that as far as the claim on expenditure on replacement of machinery is concerned, one of the items related to oxygen analyser which was necessary

to maintain oxygen in the ball mill. Since the whole machinery was not performing well, new machines were installed. They being independent item

of machinery, the CIT(A) held that the addition of sum of Rs. 7,32,277 was in order and disallowed the claim on the expenditure incurred on the

purchase of new machinery. Thus, the CIT(A) took the view that replacement had brought about enduring benefit by the installation of new

machines, the expenditure was capital in nature.

As far as the expenditure incurred on replacement of SS Shell and SS 304 Shell is concerned, the ITO pointed out that the assessee got this

fabricated and packed with refractories, bricks etc. The CIT(A) held that the assessee had replaced the machines purchased from outside parties

and they being independent machinery, they could not be regarded as revenue expenditure. Thus, a sum of Rs. 11,04,654 plus Rs. 5,52,750 was

confirmed. As regards the other machineries, the CIT(A) however agreed with the assessee that they were revenue expenditure. As regards the

disallowance of claim in depreciation of wind mill, the Electricity Board certified that the wind mills were put on use on 31-3-1994, thus the

GIT(A) agreed with the assessee and directed to grant the depreciation on wind mill as per law.