The Commissioner of Income Tax vs Rane Brake Linings Ltd.

K. Raviraja Pandian, J.—The revenue on appeal against the order of the Income Tax Appellate Tribunal MADRAS ''B'' Bench, Chennai

dated 29.08.2006 passed in ITA.No.1666/mds/1999 by formulating four questions of law. The first question of law is as follows:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that Sales Tax collection does not form part of the turnover,

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

Since the first question of law has already been covered by the decision of the Supreme Court against the revenue in the case of Commissioner

of Income Tax, Coimbatore Vs. Lakshmi Machine Works, wherein it has been held as follows:

Section 80HHC of the Income Tax Act, 1961, is a beneficial Section : it was intended to provide incentive to promote exports. The intention was

to exempt profits relatable to exports. Just as commission received by the assessee is relatable to exports and yet it cannot form part of ''turnover''

for the purposes of Section 80HHC, excise duty and sales tax also cannot form part of ''turnover''. Just as interest, commission, etc., do not

emanate from the ''turnover'' so also excise duty and sales tax do not emanate from such turnover. Since excise duty and sales tax did not involve

any such turnover such taxes had to be excluded. Commission, interest, rent, etc., do yield profits, but they do not partake of the character of

turnover and therefore they are not includible in the ''total turnover''. If so, excise duty and sales tax also cannot form part of the ''total turnover'' u/s

80HHC(3).

this Court admitted the appeals on 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 n 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 deciding the issue without going into the concept of Block of asset?.

It is submitted across the bar by the Counsel appearing on either side that the above questions of law, are also covered by the decision of the

Supreme Court in the case of Commissioner of Income Tax Vs. Ramaraju Surgical Cotton Mills, , wherein the Judgment of this Court in India

Cine Agencies Vs. Deputy Commissioner of Income Tax, 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. In this case also, there is no material available as to the increase or otherwise of the production capacity in

replacement of the machineries. Without the factual details, the questions of law cannot be decided. Hence this case also require to be remitted

back to the Commissioner of Appeals as done by the Supreme Court in the aforesaid decision.

Hence, in respect of these questions of law, the order of the Tribunal is set aside and the matter is remitted back to the Commissioner of

Appeals to redo the exercise as directed by the Supreme Court in the case of Commissioner of Income Tax v. Ramaraju Surgical Cotton Mills

reported in 294 ITR 328. With the above observations, the appeals are disposed of. No costs.