Commissioner of Income Tax vs The Madurantakam Co. op. Sugar Mills Ltd.

K. Raviraja Pandian, J.—By formulating the following two questions of law, the revenue is on appeal against the order of the Income Tax

Appellate Tribunal, Madras ''B'' Bench, dated 14.02.2003 in ITA. No. 1426(Mds)/93, 1267(Mds)/91 and 2203(Mds)/91. The relevant

assessment year is 1990-91, 1988-89 and 1989-90.

Whether in the facts and circumstances of the case, the tribunal was right in holding that the assessee engaged in the manufacture is eligible for

the benefit of Section 80(P)(2)(a) in respect of interest received from members?

Whether in the facts and circumstances of the case, the Tribunal was right in allowing the replacement of independent machinery as revenue

expenditure, when the machinery was erected after demolishing the old unit?

The facts as culled out from the statement of facts in the memorandum of grounds of appeal are as follows:

The assessee is a co-operative society running a sugar factory. For the Assessment years 1988-89, the assessee claimed expenditure including

replacement of complete centrifugal machine unit, ECT crane unit and cane carrier including erection charges as maintenance expenditure. For the

assessment years 1988-89, 1989-90 and 1990-91 the assessee claimed the benefit of Section 80(P)(2) on interest earned from its members on

advances/credit facilities. The assessing Officer disallowed the above claims.

Aggrieved by the order of the Assessing Officer, the assessee filed appeals before the Commissioner of Income Tax (Appeals), who upheld the

Assessing Officer''s orders on both the issues. The assessee filed a second appeal before the Income Tax Appellate Tribunal. The Tribunal held

that the interest earned from members of the assessee co-operative society on advances/credit facilities provided to them would be eligible for

deduction u/s 80(P)(2)(a)(i). The Tribunal further held that where the earlier centrifugal machine unit was demolished and a new unit installed in its

place, and the ECT crane was brought in as a substitute of earlier manual machines, it is clearly a case of replacement, and accordingly allowed the

appeal. The correctness of the said order is now questioned by the revenue in these appeals by formulating the above questions of law.

We have heard the argument of the Counsel for the revenue and perused the material.

In respect of the first question, similar issue has been dealt with by this Court in the case of COMMISSIONER OF Income Tax Vs.

PONDICHERRY CO-OPERATIVE HOUSING SOCIETY LTD., . The decision of this Court has been taken to the Supreme Court in a batch

of appeals. The Supreme Court in the case of Commissioner of Income Tax, Madras Vs. Ponni Sugars and Chemicals Ltd., has observed as

follows:

With regard to the question whether the assessee was entitled to exemption u/s 80P(2)(a)(i) of the Income Tax Act, 1961, in respect of interest

received from the members of the society, we find that none of the authorities below, including the High Court, have examined the memorandum of

association filed by Salem Co-operative Sugar Mills Ltd., Madurantakam Co.operative Sugar Mills Ltd., Ambur Co-operative Sugar Mills Ltd.,

Dharmapuri District Co-operative Sugar Mills Ltd., Vellore Co-operative Sugar Mills Ltd., Attur Agricultural Producers Co-operative Society

Ltd., and Modern Engineers Constructions Co-operative Society Ltd. u/s 80P(1), deduction in respect of income of co-operative societies is

provided for. u/s 80P(1), where the gross total income of a Co-operative society includes any income referred to in Sub-section (2) then the sums

specified in Sub-section (2) shall be deducted from the gross total income to arrive at the total income of the assessee society. In order to earn

exemption u/s 80P(2) a co.operative society must prove that it had engaged itself in carrying on any of the several businesses referred to in Sub-

section (2). In that connection, it is important to note that under Sub-section (2), in the context of co-operative society, Parliament has stipulated

that the society must be engaged in carrying on the business of banking or providing credit facilities to its members. Therefore, in each case, the

Tribunal was required to examine the memorandum of association, the articles of association, the return of income filed with the department, the

status of business indicated in such returns etc. This exercise had not been undertaken at all.

By observing so, after setting aside the Judgment of this Court, the Supreme Court remitted the matter back to the Tribunal for de nova

consideration in accordance with the observations made by the Supreme Court, in order to grant exemption u/s 80P(2)(a)(i).

In the case on hand also, these details are not available Hence, for the purpose of deciding the question of law referred to above, we are of the

opinion that the exercise indicated by the Supreme Court has to be done by the Tribunal. Hence the order of the Tribunal in respect of that

question of law is hereby set aside. The matter is remitted back to the Tribunal for re-consideration as per the direction of the Supreme Court in

the case of Ponni Sugars reported in 306 ITR 392.

In respect of the second question of law, the Tribunal has reproduced the finding recorded by the Commissioner of Income Tax (Appeals) to

the effect that the earlier centrifugal machine unit was demolished and in its place a new unit was installed. It is clearly a case of replacement. ECT

crane unit and crane carrier unit apparently were brought in in substitution of earlier manual or other primitive method of movement of goods or

manufacturing process. What the Crane does is to lift sugar from one place and move it to other place. But there is no evidence as to whether in

such process any increase in the production capacity.

In the decision of the Supreme Court in the case of Commissioner of Income Tax v. Ramaraju Surgical Cotton Mills reported in 294 ITR 328,

the Judgment of this Court in Commissioner of Income Tax (Appeals) v. Janakiram Mills Limited reported in 275 ITR 430 was considered by the

Supreme Court with reference to the contention of the assessee that replacement of assets without increasing the production capacity would

amount to revenue expenditure. The Supreme Court remanded the matter by observing that there are a number of tests which are required to be

considered while deciding whether the expenditure was revenue or capital in nature. In the absence of the requisite details regarding the production

capacity remaining constant even after replacement, the matter could not be decided on merits and require to be remitted back to the

Commissioner (Appeals) for consideration of that particular issue with reference to the production capacity. Hence, for the purpose of finding out

whether there is any increase in the manufacturing capacity, the matter was remitted back to the Commissioner of Appeals. In this case also no

such finding was recorded in the orders of authorities below.

Following that, in this case also, as the materials are not available, the order of the Tribunal to that extent is also set aside and the matter is

remitted back to the Commissioner of Appeals to decide the issue as directed by the Supreme Court in the case of Commissioner of Income Tax

v. Ramaraju Surgical Cotton Mills reported in 294 ITR 328. The appeals are disposed of accordingly. No costs.