High Court Of Madras
CIT vs. L.S. Mills Ltd.
Sections 4, 37(1), 80HHC
Asst. Years 1993-94, 1995-96, 1996-97
P.D. Dinakaran & P.P.S. Janarthana Raja, JJ.
Tax Case (Appeal) Nos. 58, 59, 96 & 97 of 2006 and TCMP Nos. 46 & 82 of 2006
8th February, 2006
Counsel Appeared : Narayanaswamy, for the Appellant
ORDER
P.D. Dinakaran, J. :
Heard. The above appeals are preferred under s. 260A of the IT Act, 1961 against the orders of the Tribunal Madras Bench “C” dt. 23rd June, 2005 and 26th April, 2005 in ITA Nos. 433, 434, 190 and 220/Mad/2001. The facts in brief are : The assessee-company is a private limited company engaged in the manufacture and sale of yarn. For the asst. yrs. 1993-94, 1995-96, 1996-97 and 1995-96 (sic), the AO, 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 s. 80HHC 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(A). The CIT(A), allowed the above issues in favour of the assessee. Aggrieved by the same, the Revenue filed appeals before the Tribunal. The Tribunal dismissed the appeals filed by the Revenue. Aggrieved by the said order of the Tribunal, the Revenue has filed Tax Case Nos. 58 and 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 ?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that addition made on account of MODVAT credit relating to the machinery is a revenue expenditure (sic).
Whether, in the facts and circumstances of the case, the Tribunal was right in holding that sales-tax and excise duty do not form part of the turnover, for the purpose of calculation of deduction under s. 80HHC ?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the excess remuneration paid to the directors is allowable as a deduction ?”
And filed Tax Case Nos. 96 and 97 by raising the following substantial question of law : “Whether, on the facts and in the circumstances of the case, the 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 Tax Case Nos. 58 and 59 of 2006 is covered by the decision of this Court rendered in CIT vs. Janakiram Mills Ltd. (2005) 196 CTR (Mad) 551 : (2005) 275 ITR 403 (Mad), the issue involved in question No. 2 is covered by the decision of the Supreme Court in CIT vs. Indo-Nippon Chemicals Co. Ltd. (2003) 182 CTR (SC) 291 : (2003) 261 ITR 275 (SC) and the third question is covered by the decision of this Court rendered in CIT vs. Wheels India Ltd. (2005) 197 CTR (Mad) 284 : (2005) 275 ITR 319 (Mad).
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 CIT(A) and the 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 CIT vs. Janakiram Mills Ltd. (supra), 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 Tax Case Nos. 58 and 59 of 2006 is answered against the Revenue.
6.1 With respect to the second question in Tax Case Nos. 58 and 59 of 2006 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 (sic).
6.2 The Supreme Court in the decision second cited supra viz., CIT vs. Janakiram Mills Ltd. [sic– CIT vs. Indo-Nippon Chemicals Co. (Ltd)] (supra), 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 Tax Case Nos. 58 and 59 of 2006 is answered against the Revenue.
7.1 With respect to the third question in Tax Case Nos. 58 and 59 of 2006 viz., whether the excise duty and sales-tax should be excluded from the total turnover for the purpose of deduction under s. 80HHC, the Tribunal, following the decision rendered by this Court in CIT vs. Madras Motors Ltd. (2002) 174 CTR (Mad) 221 : (2002) 257 ITR 60 (Mad) confirmed the order of the CIT(A) in directing the AO to exclude the excise duty and sales-tax from the total turnover.
7.2 This Court in the decision third cited supra in CIT vs. Wheels India Ltd. (supra), 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 s. 80HHC.
7.3 Hence, question No. 3 in Tax Case Nos. 58 and 59 of 2006 is answered against the Revenue.
8. As far as the fourth question in Tax Case Nos. 58 and 59 of 2006 and the only question in Tax Case Nos. 96 and 97 of 2006 viz., the excess remuneration paid to the directors is allowable as a deduction is concerned, the AO 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 : The AO 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 director Remuneration Allowable Disallowance Shri L.S. Manivannan Rs. 6,08,250 3,00,000 3,08,250 Shri L.S. Prabhakaran Rs. 6,08,250 3,00,000 3,08,250 Smt. Shanthi Manivannan Rs. 6,08,250 1,02,000 5,06,250 Smt. Usha Devi Rs. 6,08,250 1,02,000 5,06,250 The AO 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 CIT(A), 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 AO 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 Tribunal, which, considering the factual situation, allowed the claim of the assessee and dismissed the Revenue’s 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 AO 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 Tribunal.
8.4 Hence, question No. 4 in Tax Case Nos. 58 and 59 of 2006 and the only question in Tax Case Nos. 96 and 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 TCMPs are dismissed.
[Citation : 284 ITR 100]
