The Commissioner of Income Tax vs Loyal Textile Mills Ltd.

P.D. Dinakaran, J.—Heard. The above appeals are preferred u/s 260-A of the Income Tax Act 1961 against the common order of the

Income Tax Appellate Tribunal Madras Bench ""C"" dated 8.2.2005 in I.T.A.No.2704/Mds/96 & 51/Mds/97.

The facts in brief are : The assessee company is a textile mill, engaged in the manufacture of cotton yarn. For the assessment year 1993-94, the

assessing officer, by an order dated 28.3.1996, disallowed the claim of the assessee in respect of replacement of old machinery by new one on the

ground that the same cannot be treated as a revenue expenditure; recalculated the benefit u/s 80HHC by including the excise duty and sales tax to

the total turnover; disallowed the claim of the deduction pertaining to loss on revaluation of the tools which is in the nature of capital asset; and also

treated the compensation received from the insurance as a revenue receipt. Aggrieved by the said order, the assessee filed appeals before the

CIT(Appeals). The Commissioner of Income Tax(appeals), by an order dated 30.10.1996, partly allowed and partly dismissed the appeal.

Aggrieved by the same, the Revenue filed an appeal before the Income Tax Appellate Tribunal. The Appellate Tribunal dismissed the appeals filed

by the Revenue.

Aggrieved by the said order of the appellate Tribunal, the Revenue has filed the above appeals by raising the following substantial questions of

law:-

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

machinery as revenue expenditure?

Whether in the facts and circumstances of the case, replacement of independent complete machinery can be treated as revenue expenditure?

Whether in the facts and circumstances of the case, the Tribunal was right in holding that excise duty and sales tax does not form part of the

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

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the insurance compensation received by the assessee is

to be treated as a revenue receipt?

It is fairly conceded by the learned counsel appearing for the Revenue that the issues involved in the questions 1 and 2 raised in the above two

appeals are covered by the decision of this Court rendered in The Commissioner of Income Tax Vs. Janakiram Mills Ltd., , third question is

covered by the decision of this Court rendered in The Commissioner of Income Tax, Tamilnadu-I, Madras Vs. Wheels India Limited, and the

fourth question is covered by the decision of the Supreme Court in The Commissioner of Income Tax, Andhra Pradesh, Hyderabad Vs. Sirpur

Paper Mills Ltd., Hyderabad, .

5.1. The first and second questions viz., whether the replacement of machinery is capital or revenue and the replacement of independent complete

machinery can be treated as revenue expenditure can be dealt with together. The replacement of machinery is capital or revenue is not determined

by the treatment given in the books of account or in the balance sheet. The claim has to be determined only by the provisions of the act and not by

the accounting practice of the assessee. In the instant case, the Commissioner and the Appellate Tribunal, finding that replacement of machinery is

a revenue expenditure, held that the claim of the assessee cannot be disallowed as the said replaced machinery did not bring about any asset or any

distinct advantage to the assessee and no structural change was also brought in.

5.2. This Court, in the decision first cited supra in The Commissioner of Income Tax Vs. Janakiram Mills Ltd., , held that all plant and machinery

put together amount to a complete spinning mill which is capable of manufacturing yarn and hence, each replaced machine could not be considered

as an independent one and no intermediate marketable product was produced.

5.3. Hence, first and second questions are answered against the Revenue.

6.1. With respect to the third question viz., whether the excise duty and sales tax should be excluded from the total turnover for the purpose of

deduction u/s 80HHC, the Tribunal, following the decision rendered by this Court in (2002) 257 ITR 60 confirmed the order of the Commissioner

of Income Tax(Appeals) in directing the Assessing Officer to exclude the excise duty and sales tax from the total turnover.

6.2. This Court in the decision second cited supra in The Commissioner of Income Tax, Tamilnadu-I, Madras Vs. Wheels India Limited, held that

it is highly impossible to accept the contention that the term ''turnover'' would include the excise duty and sales tax components which are all

indirect taxes and which the assessee has to collect and pay over to the Government and such statutory dues will not have any element of profit of

business and therefore, the Sales tax and excise duty are not to be included in the total turnover while computing the deduction u/s 80HHC.

6.3. Hence, question No.3 is answered against the Revenue.

7.1. As far as the fourth question is concerned, the assessee received a sum of Rs.17.79 lakhs as compensation from the Oriental Insurance

Coporation in connection with the machinery damaged in a fire and claimed that it should be treated as a capital receipt. The assessing officer

turned down the claim of the assessee and treated the same as a Revenue receipt.

7.2. On appeal, the Commissioner of Income Tax (Appeals), deleted the addition by following the Supreme Court decision in The Commissioner

of Income Tax, Andhra Pradesh, Hyderabad Vs. Sirpur Paper Mills Ltd., Hyderabad, , wherein the Supreme Court held that the balance amount

of compensation left after incurring the expenditure has to be treated as capital receipt in the hands of the assessee. The Appellate Tribunal upheld

the decision of the Commissioner of Income Tax (Appeals).

7.3. The learned counsel appearing for the Revenue contended that the assessee has received a sum of Rs.17.79 lakhs as compensation from the

Insurance Company for the damage of the machinery, which was said to have been damaged during the fire accident and hence, the compensation

amount should be assessed as a Revenue receipt.

7.4. The Appellate Tribunal, on the facts of the case, found that the assessee received Rs.17,79,919/- as compensation by waiving the insurance

contract for reinstatement of the machinery and the assessee installed a manually operated machine in the place of automatic operated machine.

The Supreme Court in The Commissioner of Income Tax, Andhra Pradesh, Hyderabad Vs. Sirpur Paper Mills Ltd., Hyderabad, held that the

balance amount of compensation left after incurring the expenditure was a capital receipt. Recently, following the above said Apex Court decision,

the Calcutta High Court in Commissioner of Income Tax Vs. Kanoria Chemicals and Industries Ltd., has held that the Tribunal was correct in

holding that the insurance amount received by the assessee which was in excess of the cost of fully damaged machinery was not liable for tax.

7.5 In the present case, the Appellate Tribunal upheld the order of the Commissioner of Income Tax (Appeals) that the balance amount of

Rs.17,79,919/- was to be treated as capital receipt. We therefore, hold that the order of the Appellate Tribunal does not warrant any interference.

7.6. It is seen that the question of law has not been happily framed and hence, we reframe the same as under:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the insurance compensation received by the assessee is to

be treated as a capital receipt?

7.7. Hence, answering the question in affirmative and holding that the insurance compensation received by the assessee has to be treated as capital

receipt, the fourth question as reframed is answered against the Revenue.

In view of the above, we do not find any error in the order of the Tribunal and no question of law much less a substantial question of law arises

for consideration of this Court. Hence, the appeals are dismissed. Consequently, connected T.C.M.P. is dismissed.