Case Note & Summary
The appeal was filed by the Commissioner of Income Tax, Madurai, against the order of the Income Tax Appellate Tribunal, Madras 'C' Bench, dated 26.12.2002 in ITA No.872/M/2000 for Assessment Year 1996-97. The respondent-assessee, The Ramco Cements Ltd. (formerly Madras Cements Ltd.), is a cement manufacturing company. The appeal was admitted on six substantial questions of law. The first question related to whether expenditure on replacement of old machinery by new machinery is revenue expenditure under Section 37 of the Income Tax Act, 1961. The assessee had claimed Rs.1,02,59,853/- for replacement of a Belt Bucket Elevator (BBE). The Assessing Officer disallowed it as capital expenditure, but the Tribunal allowed it as revenue expenditure. The High Court held that replacement of an entire machinery constitutes capital expenditure, as it brings a new asset into existence, and set aside the Tribunal's order on this issue. The second question concerned the Assessing Officer's jurisdiction to decide eligibility for Section 35(i)(iv) benefit when the matter was pending before the competent authority. The High Court upheld the Tribunal's view that the Assessing Officer cannot give any finding on eligibility. The third question was whether a fly ash silo qualifies as pollution control equipment for 100% depreciation. The High Court upheld the Tribunal's decision, noting that the silo is used to prevent pollution and falls under Appendix I to the Income Tax Rules. The fourth question involved whether an amount adjusted by IFCI from a new loan towards interest on earlier loans constitutes interest actually paid under Section 43AB. The High Court reversed the Tribunal's decision, holding that mere book adjustment does not amount to actual payment. The fifth question was whether excise duty, customs duty, and windmill power receipts form part of total turnover for Section 80HHC deduction. The High Court upheld the Tribunal's exclusion, following the Supreme Court's decision in CIT v. Lakshmi Machine Works. The sixth question was whether full depreciation on dumpers is allowable without evidence of use for more than 180 days. The High Court set aside the Tribunal's order and remanded the issue to the Assessing Officer for verification. The appeal was partly allowed.
Headnote
A) Income Tax - Revenue Expenditure vs Capital Expenditure - Section 37 of Income Tax Act, 1961 - Replacement of old machinery by new machinery - The assessee claimed expenditure on replacement of Belt Bucket Elevator as revenue expenditure under Section 37. The Assessing Officer disallowed it as capital expenditure. The Tribunal allowed it as revenue expenditure. The High Court held that replacement of an entire machinery constitutes capital expenditure, not revenue expenditure, as it brings a new asset into existence. The Tribunal's order was set aside on this issue. (Paras 3-6) B) Income Tax - Section 35(i)(iv) - Competent Authority - Jurisdiction of Assessing Officer - The Assessing Officer cannot give any finding on eligibility for benefit under Section 35(i)(iv) while the matter is pending before the competent authority. The Tribunal's view was upheld. (Para 7) C) Income Tax - Depreciation - Pollution Control Equipment - Fly Ash Silo - The assessee claimed 100% depreciation on fly ash silo treating it as pollution control equipment. The Tribunal allowed it. The High Court upheld, noting that fly ash silo is used to prevent pollution and qualifies as pollution control equipment under Appendix I to the Income Tax Rules. (Paras 8-9) D) Income Tax - Section 43AB - Interest Actually Paid - IFCI Adjustment - The assessee claimed deduction for interest paid to IFCI where IFCI adjusted interest on earlier loans from a new loan sanctioned. The Tribunal allowed it as interest actually paid. The High Court reversed, holding that mere book adjustment does not constitute actual payment; actual payment requires outflow of funds. (Paras 10-12) E) Income Tax - Section 80HHC - Total Turnover - Exclusion of Excise Duty, Customs Duty, Windmill Power Receipts - The Tribunal held that excise duty, customs duty, and windmill power receipts do not form part of total turnover for computing deduction under Section 80HHC. The High Court upheld, following the Supreme Court's decision in CIT v. Lakshmi Machine Works. (Paras 13-14) F) Income Tax - Depreciation - Dumpers - Use for 180 Days - The assessee claimed full depreciation on dumpers without evidence of use for more than 180 days. The Tribunal allowed full depreciation. The High Court set aside, remanding the issue to the Assessing Officer to verify the actual period of use. (Paras 15-16)
Issue of Consideration
Whether the Tribunal was correct in holding that expenditure on replacement of old machinery by new machinery is revenue expenditure; whether the Assessing Officer can decide eligibility for Section 35(i)(iv) benefit when matter is pending before competent authority; whether fly ash silo qualifies as pollution control equipment for 100% depreciation; whether amount adjusted by IFCI from new loan towards interest on earlier loans is interest actually paid under Section 43AB; whether excise duty, customs duty, windmill power receipts form part of total turnover for Section 80HHC; whether full depreciation on dumpers is allowable without evidence of use for more than 180 days
Final Decision
The appeal is partly allowed. Question No.1 is answered in favor of the Revenue, holding that expenditure on replacement of old machinery by new machinery is capital expenditure. Question No.2 is answered in favor of the assessee, upholding the Tribunal's view that the Assessing Officer cannot decide eligibility for Section 35(i)(iv) benefit when matter is pending before competent authority. Question No.3 is answered in favor of the assessee, upholding that fly ash silo qualifies as pollution control equipment. Question No.4 is answered in favor of the Revenue, holding that IFCI adjustment does not constitute actual payment under Section 43AB. Question No.5 is answered in favor of the assessee, upholding that excise duty, customs duty, windmill power receipts do not form part of total turnover for Section 80HHC. Question No.6 is answered in favor of the Revenue, setting aside the Tribunal's order and remanding the issue to the Assessing Officer to verify the period of use of dumpers.
Law Points
- Expenditure on replacement of old machinery by new machinery is capital expenditure
- not revenue expenditure
- Assessing Officer cannot decide eligibility for Section 35(i)(iv) benefit when matter is pending before competent authority
- Fly ash silo qualifies as pollution control equipment for 100% depreciation
- Amount adjusted by IFCI from new loan towards interest on earlier loans is not interest actually paid under Section 43AB
- Excise duty
- customs duty
- windmill power receipts do not form part of total turnover for Section 80HHC
- Full depreciation on dumpers requires evidence of use for more than 180 days
