{"id":250095,"date":"2006-02-08T00:00:00","date_gmt":"2006-02-07T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-ms-l-s-mills-ltd-on-8-february-2006"},"modified":"2015-05-03T10:42:52","modified_gmt":"2015-05-03T05:12:52","slug":"commissioner-of-income-tax-vs-ms-l-s-mills-ltd-on-8-february-2006","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-ms-l-s-mills-ltd-on-8-february-2006","title":{"rendered":"Commissioner Of Income Tax vs M\/S.L.S.Mills Ltd on 8 February, 2006"},"content":{"rendered":"<div class=\"docsource_main\">Madras High Court<\/div>\n<div class=\"doc_title\">Commissioner Of Income Tax vs M\/S.L.S.Mills Ltd on 8 February, 2006<\/div>\n<pre id=\"pre_1\">       \n\n  \n\n  \n\n \n \n IN THE HIGH COURT OF JUDICATURE AT MADRAS           \n\nDATED: 08\/02\/2006  \n\nCORAM   \n\nTHE HON'BLE MR.JUSTICE P.D.DINAKARAN         \nAND  \nTHE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA           \n\nTax Case (A) No.58 of 2006 \nand Tax Case (A) Nos.,59,96 &amp; 97 of 2006 \nand T.C.M.P.Nos.46 &amp; 82 of 2006  \n\nCommissioner of Income Tax  \nMadurai                                         ...Appellant in all            the cases\n\n-Vs-\n\nM\/s.L.S.Mills Ltd.,\nMadurai Road, \nTheni                                           ...     Respondent in\n                                                        all the appeals.\n\n\n        Prayer:   Appeals filed under <a href=\"\/doc\/789969\/\" id=\"a_1\">Section 260-A<\/a> of the Income Tax Act 1961\nagainst the orders of the Income Tax Appellate Tribunal Madras 'C' Bench dated\n23.6.2005 and 26.4.2005 in I.T.A.Nos.  433, 434, 190, 220,\/ Mds\/2001  for  the\nassessment years 1993-94, 95-96, 1996-97 and 1995-96 respectively. \n\n!For Appellant          :       Mr.Narayanaswamy\n\n^For Respondent         :               ---\n\n:O R D E R \n<\/pre>\n<p id=\"p_1\">(Order of the Court was made by P.D.DINAKARAN, J.)<br \/>\n        Heard.  The above appeals are preferred under  <a href=\"\/doc\/789969\/\" id=\"a_1\">Section  260-A<\/a>  of  the<br \/>\nIncome  Tax  Act  1961 against the orders of the Income Tax Appellate Tribunal<br \/>\nMadras Bench &#8220;C&#8221; dated 23.6.2005 and 26.4.2005 in I.T.A.Nos.  4 33, 434,  190,<br \/>\n220,\/Mds\/2001.\n<\/p>\n<p id=\"p_1\">        2.  The facts in brief are :    The  assessee  company  is  a  private<br \/>\nlimited company  engaged  in  the  manufacture  and  sale  of  yarn.   For the<br \/>\nassessment years 1993-94, 1995-96, 1996-97 and 1995-96, the assessing officer,<br \/>\ndisallowed the claim  of  the  assessee  in  respect  of  replacement  of  old<br \/>\nmachinery  by  new  one  on  the  ground  that the same cannot be treated as a<br \/>\nrevenue expenditure; treated the MODVAT credit relating to the replacement  of<br \/>\nmachinery  as  capital;  recalculated  the  benefit  under  Section  80 HHC by<br \/>\nincluding the excise duty and  sales  tax  to  the  total  turnover  and  also<br \/>\ndisallowed the  excess  remuneration  paid  to the director.  Aggrieved by the<br \/>\nsaid order,  the  assessee  filed  appeals  before  the  CIT(Appeals).     The<br \/>\nCommissioner of Income Tax(appeals), allowed the above issues in favour of the<br \/>\nassessee.   Aggrieved by the same, the Revenue filed appeals before the Income<br \/>\nTax Appellate Tribunal.  The Appellate Tribunal dismissed the appeals filed by<br \/>\nthe Revenue.\n<\/p>\n<p id=\"p_2\">        3.  Aggrieved by the said order of the appellate Tribunal, the Revenue<br \/>\nhas filed T.C.Nos.58 &amp;  59  of  2006  by  raising  the  following  substantial<br \/>\nquestions of law:-\n<\/p>\n<p id=\"p_3\">1.  Whether in the facts and circumstances of the case, the Tribunal was right<br \/>\nin  law  in  holding  that the expenditure incurred by the assessee during the<br \/>\naccounting year on the replacement of  machinery  was  deductible  as  current<br \/>\nrepairs\/revenue expenditure?\n<\/p>\n<p id=\"p_4\">2.   Whether  on  the facts and in the circumstances of the cae, the appellate<br \/>\nTribunal was right in law in holding that addition made on account  of  MODVAT<br \/>\ncredit relating to the machinery is a revenue expenditure.\n<\/p>\n<p id=\"p_5\">3.  Whether in the facts and circumstances of the case, the Tribunal was right<br \/>\nin  holding that sales tax and excise duty does not form part of the turnover,<br \/>\nfor the purpose of calculation of deduction u\/s.80 HHC?\n<\/p>\n<p id=\"p_6\">4.  Whether on the facts and in the circumstances of the case,  the  Appellate<br \/>\nTribunal  was right in law in holding that the excess remuneration paid to the<br \/>\nDirectors is allowable as a deduction?\n<\/p>\n<p id=\"p_7\">and filed T.C.Nos.96 and 97 by raising the following substantial  question  of<br \/>\nlaw:\n<\/p>\n<p id=\"p_8\">&#8220;Whether  on  the  facts  and  in the circumstances of the case, the Appellate<br \/>\nTribunal was right in law in holding that the excess remuneration paid to  the<br \/>\nDirectors is allowable as a deduction?&#8221;\n<\/p>\n<p id=\"p_9\">        4.   It  is  fairly  conceded by the learned counsel appearing for the<br \/>\nRevenue that the issue involved in question No.1 in T.C.Nos.58 and 59 of  2006<br \/>\nis  covered  by  the decision of this Court rendered in COMMISSIONER OF INCOME<br \/>\nTAX VS.  JANAKIRAM MILLS LTD.  (275 ITR 403), the issue involved  in  question<br \/>\nNo.2 is covered by the decision of the Supreme Court in COMMISSIONER OF INCOME<br \/>\nTAX VS.   INDO  NIPPON CHEMICALS CO.  LTD.(261 ITR 275) and the third question<br \/>\nis covered by the decision of this  Court  rendered  in  the  COMMISSIONER  OF<br \/>\nINCOME TAX VS.  WHEELS INDIA LTD.  (275 ITR 319).\n<\/p>\n<p id=\"p_10\">        5.1.   With regard to the first question, the replacement of machinery<br \/>\nis capital or revenue is not determined by the treatment given in the books of<br \/>\naccount or in the balance sheet.  The claim has to be determined only  by  the<br \/>\nprovisions of  the act and not by the accounting practice of the assessee.  In<br \/>\nthe instant case, the Commissioner and the Appellate  Tribunal,  finding  that<br \/>\nreplacement  of machinery is a revenue expenditure, held that the claim of the<br \/>\nassessee cannot be disallowed as the said replaced  machinery  did  not  bring<br \/>\nabout  any  asset  or any distinct advantage to the assessee and no structural<br \/>\nchange was also brought in.\n<\/p>\n<p id=\"p_11\">        5.2.   This  Court,  in  the  decision  first  cited  supra   in   the<br \/>\n<a href=\"\/doc\/163871\/\" id=\"a_2\">COMMISSIONER OF INCOME-TAX  v.    JANAKIRAM  MILLS LTD<\/a>.  (2005) (275 ITR 403),<br \/>\nheld that all plant and machinery put together amount to a  complete  spinning<br \/>\nmill  which  is capable of manufacturing yarn and hence, each replaced machine<br \/>\ncould not be considered as an independent one and no  intermediate  marketable<br \/>\nproduct was produced.\n<\/p>\n<p id=\"p_12\">        5.3.   Hence,  first question in T.C.Nos.58 and 59 of 2006 is answered<br \/>\nagainst the Revenue.\n<\/p>\n<p id=\"p_13\">        6.1.  With respect to the second question in T.C.Nos.58 and 59 of  200<br \/>\n6  viz.,  the  addition  made  on  account  of  MODVAT  credit relating to the<br \/>\nmachinery is a revenue expenditure, admittedly, the MODVAT credit  relates  to<br \/>\nreplacement of  machineries.    Since  the  cost of replacement was allowed as<br \/>\nrevenue expenditure, addition made on account of MODVAT credit relating to the<br \/>\nmachinery is a revenue expenditure.\n<\/p>\n<p id=\"p_14\">        6.2.  The Supreme Court in  the  decision  second  cited  supra  viz.,<br \/>\nCOMMISSIONER OF INCOME TAX VS.  JANAKIRAM MILLS LTD.  (275 ITR 403), held that<br \/>\nmerely  because  the  MODVAT  credit  was  an irreversible credit available to<br \/>\nmanufacturers upon purchase of duty-paid raw materials, that would not  amount<br \/>\nto income which was liable to be taxed under the Act; income was not generated<br \/>\nto the extent of the MODVAT credit on unconsumed raw material.\n<\/p>\n<p id=\"p_15\">        6.3.   Hence,  second  question in T.C.Nos.58 &amp; 59 of 2006 is answered<br \/>\nagainst the Revenue.\n<\/p>\n<p id=\"p_16\">        7.1.  With respect to the third question in T.C.Nos.58 &amp;  59  of  2006<br \/>\nviz.,  whether the excise duty and sales tax should be excluded from the total<br \/>\nturnover for the purpose of  deduction  under  <a href=\"\/doc\/30524\/\" id=\"a_3\">Section  80HHC<\/a>,  the  Tribunal,<br \/>\nfollowing  the  decision  rendered by this Court in <a href=\"\/doc\/822473\/\" id=\"a_4\">The Commissioner of Income<br \/>\nTax vs.  Madras Motors  Ltd<\/a>.    (257  ITR  60)  confirmed  the  order  of  the<br \/>\nCommissioner  of  Income  Tax(Appeals)  in  directing the Assessing Officer to<br \/>\nexclude the excise duty and sales tax from the total turnover.\n<\/p>\n<p id=\"p_17\">        7.2.  This Court in the decision third cited supra in the COMMISSIONER<br \/>\nOF INCOME TAX VS.  WHEELS INDIA LTD.  (275 ITR 319), held that  it  is  highly<br \/>\nimpossible to accept the contention that the term &#8216;turnover&#8217; would include the<br \/>\nexcise  duty  and  sales tax components which are all indirect taxes and which<br \/>\nthe assessee has to collect and pay over to the Government and such  statutory<br \/>\ndues  will not have any element of profit of business and therefore, the Sales<br \/>\ntax and excise duty are not  to  be  included  in  the  total  turnover  while<br \/>\ncomputing the deduction under <a href=\"\/doc\/30524\/\" id=\"a_5\">Section 80HHC<\/a>.\n<\/p>\n<p id=\"p_18\">        7.3.   Hence,  question  No.3  in  T.C.Nos.58 &amp; 59 of 2006 is answered<br \/>\nagainst the Revenue.\n<\/p>\n<p id=\"p_19\">        8.1.  As far as the fourth question in T.C.Nos.58 and 59 of  2006  and<br \/>\nthe  only  question in T.C.Nos.96 and 97 of 2006 viz., the excess remuneration<br \/>\npaid to the directors is allowable as a deduction is concerned, the  assessing<br \/>\nofficer  disallowed  a  sum of Rs.16,29,000\/- being the excessive remuneration<br \/>\npaid to the Directors.  The details of the  payment  of  remuneration  to  the<br \/>\nDirectors are as under:\n<\/p>\n<pre id=\"pre_1\">Shri L.S.Manivannan                     Rs.6,08,250\nShri L.S.Prabhakaran                    Rs.6,08,250\nSmt.Shanthi Manivannan                  Rs.6,08,250\nSmt.usha Devi                           Rs.6,08,250\n\n<\/pre>\n<p id=\"p_20\">the  Assessing  Officer restricted the claim of payment of remuneration to the<br \/>\nfirst two Directors at Rs.25,000\/- per month  and  payment  to  the  two  lady<br \/>\nDirectors at Rs.8,500\/- per month.  Accordingly excess claim was disallowed as<br \/>\nunder:-\n<\/p>\n<p id=\"p_21\">Name of the     Remuneration Allowable Disallowance<br \/>\nDirector<br \/>\nShri L.S.Manivannan     Rs.6,08,250 300000 308250<br \/>\nShri L.S.Prabhakaran Rs.6,08,250 300000 308250<br \/>\nSmt.Shanthi Manivannan Rs.6,08,250 102000 506250<br \/>\nSmt.usha Devi           Rs.6,08,250 102000 506250<\/p>\n<p>the  assessing  officer  disallowed  a  sum of Rs.16,29,000\/- out of the total<br \/>\npayment of remuneration to the  Directors.    Aggrieved  by  that  order,  the<br \/>\nassessee  filed  appeals  to  the  Commissioner of Income Tax ( Appeals), who,<br \/>\nafter looking into the issues, has come to the conclusion that the salary paid<br \/>\nto the lady Directors was excessive dictated  by  non-business  consideration.<br \/>\nAccordingly,  he had given directions that monthly salary of Rs.15,000\/- would<br \/>\nbe a reasonable proposition in view of  the  services  that  would  have  been<br \/>\ntotally  rendered  and  directed  the  assessing officer to allow the claim of<br \/>\npayment of salary to the first two directors and to restrict  the  payment  of<br \/>\nsalary to lady Directors at Rs.15,000\/- per month.  Accordingly, the appellant<br \/>\ngot relief of Rs.7,72,500\/-.\n<\/p>\n<p id=\"p_22\">        8.2.   Aggrieved  by  the said order, the Revenue filed appeals to the<br \/>\nIncome Tax Appellate  Tribunal,  which,  considering  the  factual  situation,<br \/>\nallowed the claim of the assessee and dismissed the Revenue appeal.\n<\/p>\n<p id=\"p_23\">        8.3.    It   could  be  seen  that  both  the  authorities  below  had<br \/>\nconcurrently given  finding  that  these  Directors  have  rendered  services.<br \/>\nHence,  disallowance  made  by  the assessing officer towards the remuneration<br \/>\npayable to the Directors is not  fair.    That  apart,  the  learned  standing<br \/>\ncounsel appearing for the Revenue, did not place any material to show that the<\/p>\n<p>remuneration was  excessive.    When  there  is  a  factual  finding  that the<br \/>\nremuneration paid by the assessee to its Directors is reasonable, we  find  no<br \/>\nerror or infirmity in the order of the Appellate Tribunal.\n<\/p>\n<p id=\"p_24\">        8.4.   Hence,  question  No.4  in T.C.Nos.58 &amp; 59 of 2006 and the only<br \/>\nquestion in T.C.Nos.96 &amp; 97 of 2006 is answered against the Revenue.\n<\/p>\n<p id=\"p_25\">        9.  In view of the foregoing conclusion, we do not find any  error  in<br \/>\nthe  orders  of  the  Tribunal  and no question of law much less a substantial<br \/>\nquestion of law arises for consideration of this Court.   Hence,  the  appeals<br \/>\nare dismissed.  Consequently, connected T.C.M.Ps.  are dismissed.\n<\/p>\n<p id=\"p_26\">msk <\/p>\n<p>To\n<\/p>\n<p id=\"p_27\">1.The Assistant Registrar,Income Tax<br \/>\nAppellate Tribunal, Madras Bench &#8220;C&#8221;.\n<\/p>\n<p id=\"p_28\">2.The Secretary, Central Board of<br \/>\nDirect Taxes, New Delhi.\n<\/p>\n<p id=\"p_29\">3.The Commissioner of Income Tax<br \/>\n(Appeals) V, 121, Mahatma Gandhi<br \/>\nRoad, Chennai-600 034.\n<\/p>\n<p id=\"p_30\">4.The Deputy Commissioner of Income-tax,<br \/>\nSpl.  Range II, Madurai<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Madras High Court Commissioner Of Income Tax vs M\/S.L.S.Mills Ltd on 8 February, 2006 IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 08\/02\/2006 CORAM THE HON&#8217;BLE MR.JUSTICE P.D.DINAKARAN AND THE HON&#8217;BLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (A) No.58 of 2006 and Tax Case (A) Nos.,59,96 &amp; 97 of 2006 and T.C.M.P.Nos.46 &amp; 82 of [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[8,13],"tags":[],"class_list":["post-250095","post","type-post","status-publish","format-standard","hentry","category-high-court","category-madras-high-court"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Commissioner Of Income Tax vs M\/S.L.S.Mills Ltd on 8 February, 2006 - Free Judgements of Supreme Court &amp; 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