IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 08/02/2006
CORAM
THE HON'BLE MR.JUSTICE P.D.DINAKARAN
AND
THE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA
Tax Case (A) No.58 of 2006
and Tax Case (A) Nos.,59,96 & 97 of 2006
and T.C.M.P.Nos.46 & 82 of 2006
Commissioner of Income Tax
Madurai ...Appellant in all the cases
-Vs-
M/s.L.S.Mills Ltd.,
Madurai Road,
Theni ... Respondent in
all the appeals.
Prayer: Appeals filed under Section 260-A of the Income Tax Act 1961
against the orders of the Income Tax Appellate Tribunal Madras 'C' Bench dated
23.6.2005 and 26.4.2005 in I.T.A.Nos. 433, 434, 190, 220,/ Mds/2001 for the
assessment years 1993-94, 95-96, 1996-97 and 1995-96 respectively.
!For Appellant : Mr.Narayanaswamy
^For Respondent : ---
:O R D E R
(Order of the Court was made by P.D.DINAKARAN, J.)
Heard. The above appeals are preferred under Section 260-A of the
Income Tax Act 1961 against the orders of the Income Tax Appellate Tribunal
Madras Bench “C” dated 23.6.2005 and 26.4.2005 in I.T.A.Nos. 4 33, 434, 190,
220,/Mds/2001.
2. The facts in brief are : The assessee company is a private
limited company engaged in the manufacture and sale of yarn. For the
assessment years 1993-94, 1995-96, 1996-97 and 1995-96, the assessing officer,
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; treated the MODVAT credit relating to the replacement of
machinery as capital; recalculated the benefit under Section 80 HHC by
including the excise duty and sales tax to the total turnover and also
disallowed the excess remuneration paid to the director. Aggrieved by the
said order, the assessee filed appeals before the CIT(Appeals). The
Commissioner of Income Tax(appeals), allowed the above issues in favour of the
assessee. Aggrieved by the same, the Revenue filed appeals before the Income
Tax Appellate Tribunal. The Appellate Tribunal dismissed the appeals filed by
the Revenue.
3. Aggrieved by the said order of the appellate Tribunal, the Revenue
has filed T.C.Nos.58 & 59 of 2006 by raising the following substantial
questions of law:-
1. Whether in the facts and circumstances of the case, the Tribunal was right
in law in holding that the expenditure incurred by the assessee during the
accounting year on the replacement of machinery was deductible as current
repairs/revenue expenditure?
2. Whether on the facts and in the circumstances of the cae, the appellate
Tribunal was right in law in holding that addition made on account of MODVAT
credit relating to the machinery is a revenue expenditure.
3. Whether in the facts and circumstances of the case, the Tribunal was right
in holding that sales tax and excise duty does not form part of the turnover,
for the purpose of calculation of deduction u/s.80 HHC?
4. Whether on the facts and in the circumstances of the case, the Appellate
Tribunal was right in law in holding that the excess remuneration paid to the
Directors is allowable as a deduction?
and filed T.C.Nos.96 and 97 by raising the following substantial question of
law:
“Whether on the facts and in the circumstances of the case, the Appellate
Tribunal was right in law in holding that the excess remuneration paid to the
Directors is allowable as a deduction?”
4. It is fairly conceded by the learned counsel appearing for the
Revenue that the issue involved in question No.1 in T.C.Nos.58 and 59 of 2006
is covered by the decision of this Court rendered in COMMISSIONER OF INCOME
TAX VS. JANAKIRAM MILLS LTD. (275 ITR 403), the issue involved in question
No.2 is covered by the decision of the Supreme Court in COMMISSIONER OF INCOME
TAX VS. INDO NIPPON CHEMICALS CO. LTD.(261 ITR 275) and the third question
is covered by the decision of this Court rendered in the COMMISSIONER OF
INCOME TAX VS. WHEELS INDIA LTD. (275 ITR 319).
5.1. With regard to the first question, 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 v. JANAKIRAM MILLS LTD. (2005) (275 ITR 403),
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 question in T.C.Nos.58 and 59 of 2006 is answered
against the Revenue.
6.1. With respect to the second question in T.C.Nos.58 and 59 of 200
6 viz., the addition made on account of MODVAT credit relating to the
machinery is a revenue expenditure, admittedly, the MODVAT credit relates to
replacement of machineries. Since the cost of replacement was allowed as
revenue expenditure, addition made on account of MODVAT credit relating to the
machinery is a revenue expenditure.
6.2. The Supreme Court in the decision second cited supra viz.,
COMMISSIONER OF INCOME TAX VS. JANAKIRAM MILLS LTD. (275 ITR 403), held that
merely because the MODVAT credit was an irreversible credit available to
manufacturers upon purchase of duty-paid raw materials, that would not amount
to income which was liable to be taxed under the Act; income was not generated
to the extent of the MODVAT credit on unconsumed raw material.
6.3. Hence, second question in T.C.Nos.58 & 59 of 2006 is answered
against the Revenue.
7.1. With respect to the third question in T.C.Nos.58 & 59 of 2006
viz., whether the excise duty and sales tax should be excluded from the total
turnover for the purpose of deduction under Section 80HHC, the Tribunal,
following the decision rendered by this Court in The Commissioner of Income
Tax vs. Madras Motors Ltd. (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.
7.2. This Court in the decision third cited supra in the COMMISSIONER
OF INCOME TAX VS. WHEELS INDIA LTD. (275 ITR 319), 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 under Section 80HHC.
7.3. Hence, question No.3 in T.C.Nos.58 & 59 of 2006 is answered
against the Revenue.
8.1. As far as the fourth question in T.C.Nos.58 and 59 of 2006 and
the only question in T.C.Nos.96 and 97 of 2006 viz., the excess remuneration
paid to the directors is allowable as a deduction is concerned, the assessing
officer disallowed a sum of Rs.16,29,000/- being the excessive remuneration
paid to the Directors. The details of the payment of remuneration to the
Directors are as under:
Shri L.S.Manivannan Rs.6,08,250 Shri L.S.Prabhakaran Rs.6,08,250 Smt.Shanthi Manivannan Rs.6,08,250 Smt.usha Devi Rs.6,08,250
the Assessing Officer restricted the claim of payment of remuneration to the
first two Directors at Rs.25,000/- per month and payment to the two lady
Directors at Rs.8,500/- per month. Accordingly excess claim was disallowed as
under:-
Name of the Remuneration Allowable Disallowance
Director
Shri L.S.Manivannan Rs.6,08,250 300000 308250
Shri L.S.Prabhakaran Rs.6,08,250 300000 308250
Smt.Shanthi Manivannan Rs.6,08,250 102000 506250
Smt.usha Devi Rs.6,08,250 102000 506250
the assessing officer disallowed a sum of Rs.16,29,000/- out of the total
payment of remuneration to the Directors. Aggrieved by that order, the
assessee filed appeals to the Commissioner of Income Tax ( Appeals), who,
after looking into the issues, has come to the conclusion that the salary paid
to the lady Directors was excessive dictated by non-business consideration.
Accordingly, he had given directions that monthly salary of Rs.15,000/- would
be a reasonable proposition in view of the services that would have been
totally rendered and directed the assessing officer to allow the claim of
payment of salary to the first two directors and to restrict the payment of
salary to lady Directors at Rs.15,000/- per month. Accordingly, the appellant
got relief of Rs.7,72,500/-.
8.2. Aggrieved by the said order, the Revenue filed appeals to the
Income Tax Appellate Tribunal, which, considering the factual situation,
allowed the claim of the assessee and dismissed the Revenue appeal.
8.3. It could be seen that both the authorities below had
concurrently given finding that these Directors have rendered services.
Hence, disallowance made by the assessing officer towards the remuneration
payable to the Directors is not fair. That apart, the learned standing
counsel appearing for the Revenue, did not place any material to show that the
remuneration was excessive. When there is a factual finding that the
remuneration paid by the assessee to its Directors is reasonable, we find no
error or infirmity in the order of the Appellate Tribunal.
8.4. Hence, question No.4 in T.C.Nos.58 & 59 of 2006 and the only
question in T.C.Nos.96 & 97 of 2006 is answered against the Revenue.
9. In view of the foregoing conclusion, we do not find any error in
the orders 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.Ps. are dismissed.
msk
To
1.The Assistant Registrar,Income Tax
Appellate Tribunal, Madras Bench “C”.
2.The Secretary, Central Board of
Direct Taxes, New Delhi.
3.The Commissioner of Income Tax
(Appeals) V, 121, Mahatma Gandhi
Road, Chennai-600 034.
4.The Deputy Commissioner of Income-tax,
Spl. Range II, Madurai