High Court Of Madras
CIT vs. Madras Cement Ltd.
Sections 31(i), 37(1), 43(1)
Asst. Year 1986-87
R. Jayasimha Babu & A.K. Rajan, JJ.
Tax Case No. 668 of 1995
18th October, 2001
Counsel Appeared : Mrs. Chitra Venkataraman, for the Revenue : R. Krishna Murthy for P.P.S. Janardhana Raja, for the Assessee
JUDGMENT
R. JAYASIMHA BABU, J. :
The principal question requiring our consideration in this reference which concerns the asst. yr. 1986-87 in respect of a cement company which carries on business of manufacturing cement, is as to whether the sum of Rs. 5,31,55,319 invested by it in installing a new cement mill known as “Combidan Cement Mill” during the year 1985, which mill was technologically superior to the four cement mills which it had installed in the years 1961 and 1963 and which four old mills were subsequently sold for Rs. 8,40,024, Rs. 8,75,223, Rs. 11,00,000 and Rs. 20,00,000, respectively, in the years 1987-88 can be regarded as an amount spent on “repairs” and claimed as a deduction under s. 31(i) of the IT Act, 1961, hereinafter referred to as “the Act”.
2. Sec. 31(i) of the Act reads thus : “31. In respect of repairs and insurance of machinery, plant or furniture used for the purposes of the business or profession, the following deductions shall be allowed— (i) the amount paid on account of current repairs thereto ;”
3. The claim for deduction made under the head “Repairs”, was made by the assessee despite the fact that it had, in its own books of account, treated this investment as “investment on capital equipment” and the amount had been capitalised in its accounts. The AO rejected the claim made, after noting, inter alia, that the new Combidan Mill was installed for obtaining consistent strength in cement and that as claimed by the chairman in the company’s annual report for 1985 that :”There has been perceptible improvement in quality with the Combidan cement and the market reaction is very favourable and concluded that, by installing this new mill based on new technology, the assessee has obtained not only an advantage of enduring nature but also a power packed machinery which does the same quantity of work that was done by all the four mills put together.”He also noted that the assessee having capitalised the expenditure in its accounts, it had even credited the necessary quantum of investment allowance reserve in the balance-sheet. He also noticed that the various financial institutions had financed the new mill and had done so only by treating the mill as a capital asset of the company. That view of the AO was upheld by the CIT to whom the assessee had carried the matter in appeal. On further appeal to the Tribunal, the Tribunal agreed with the assessee that the expenditure incurred by the assessee was allowable under s. 31(i) of the Act, the Tribunal having held that the cement plant is an integrated process industry and the replacement of a part, though a substantial part and a part which involved investment of the magnitude over rupees five crores, made no difference to the assessee’s claim, and that it would still amount to repair as the capacity of the cement plant as a whole had not been increased. The Tribunal also took the view that the fact that the newly installed mill was in improvement over the old mill with regard to quality of the finished product obtained and the manifold improvement is efficiency in its running made no difference.
4. The term “repair” has not been defined in the IT Act. Though s. 31(i) refers to “repair”, it restricts the deduction allowable under that section to the amount paid on account of current repairs. The Supreme Court in the case of Ballimal Naval Kishore vs. CIT (1997) 138 CTR (SC) 284 : (1997) 224 ITR 414 (SC) : TC S16.1762 approved the test formulated by Chagla C. J. in the case of New Shor-rock Spinning & Manufacturing Co. Ltd. vs. CIT (1956) 30 ITR 338 (Bom) : TC 15R.289 as to when the expenditure can be said to have been incurred on current repairs. It was observed in that case that: “The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of ‘repairs’ because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure. If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which the legislature has permitted under s. 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure’.” That case before the Bombay High Court had arisen under the provisions of the Indian IT Act, 1922, which contained a provision which was pari materia with s. 31(i) of the IT Act, 1961.
5. In the case of CIT vs. Mahalakshmi Textiles Mills Ltd. (1967) 66 ITR 710 (SC) : TC 15R.289, the Supreme Court upheld the claim of the assessee before it that the introduction of a system known as “Casablanca conversion system” in its spinning plant which involved replacement of certain roller stands and fluted rollers fitted with rubber aprons to the spinning machinery, removal of the ring-frames from certain existing parts, introduction, inter alia, of ball-bearing jockey-pulleys for converting the original band-drivers to tape drivers and other additions and alternations in the drafting mechanism by incurring an expenditure of Rs. 93,215 was an expenditure incurred on current repairs to the existing machinery.
6. Mr. R. Krishnamurthy, learned senior counsel appearing for the assessee, submitted that despite the magnitude of the expenditure and the nature, the complexity and size of the new mill that had been installed, and despite the fact that this mill was installed to perform the tasks that were being performed by four mills all of which were sold, that expenditure laid out on acquiring and installing this new mill was still required to be regarded as expenditure on “repairs” as such expenditure was necessary to maintain the cement plant as a whole as a continuing profit earning apparatus. Counsel also submitted that the expenditure incurred has to be seen in the context of the nature of the process involved in the manufacture of cement which commences from the crushed lime stones and additives passing through the raw mill and kiln feed after which clinker is obtained and then subjecting the clinker along with gypsum and flyash, to grinding the same in the cement mill, after which cement is obtained. It was also submitted that the cement mill comes at the end of this process and that the value added to the cement by the cement mill is only Rs. 43 out of the total value of Rs. 1,341 per metric tonne of cement.
7. The case of the assessee has been presented attractively. However, as was emphasised by Chagla C.J., in the test formulated by him as to what would constitute “current repairs” the expenditure must have been incurred to “preserve and maintain” an already existing asset, and the object of the expenditure must not be to bring a new asset into existence or for obtaining a new advantage. On the facts of this case the assessee cannot be said to have satisfied this test. The term “asset” in this context cannot, as sought to be done by the assessee, be equated to the whole of the production facilities commencing from the lime-stone, received from the limestone mill, till the clearance of the finished manufactured cement from its factory premises. Although the entire business itself is also capable, in a broad manner, of being regarded as an asset, the assets of a manufacturing company are normally classified into land, buildings, plant and machinery, work-in-progress, raw materials and finished products in stock, investments, bank balances, etc. Depreciation can be claimed under the Act only with reference to the assets listed in the depreciation Table in Appendix I to the IT Rules, 1962, and cannot be claimed with reference to the industrial undertaking as a whole.
8. It is difficult to accept that for the purpose of determining the allowability of expenditure under the head “Repairs” the entire productive apparatus of a manufacturing company be treated as one single asset and wholesale .replacement of complete identifiable and distinct parts be regarded as a “repair” effected to the production facility as a whole. No businessman, even as the assessee in its books and its lenders, would regard the wholesale replacement of four cement mills, by a single sophisticated modern mill as amounting to mere “repair”. While judging a claim for deduction under the IT Act the scope of the term “repair” cannot be stretched beyond all recognition. “Repair” implies the existence of a thing which has malfunctioned and can be set right by effecting repairs which may involve replacement of some parts, thereby making the thing as efficient as it was before or as close to it as possible. After repair the thing to which repair was carried out continues to be available for use. Replacement is different from repair. Replacement implies the removal or discarding of the thing that was in use, by a different or new thing capable of performing the same function with the same, lesser or greater efficiency. The replacement of a section in a series of machines which are interconnected, in a segment of the production process which together form an integrated whole may, in some circumstances, be regarded as amounting to repair when without such replacement that unit in that segment will not function. That logic cannot be extended to the entire manufacturing facility from the stage of raw material to the delivery of the final finished product. The Combidan cement mill which the assessee had installed and which replaced four old cement mills, was a new cement mill, installed at a different location, was technologically superior, was far more efficient than the four mills together and was capable of delivering a recognizably superior product. The acquisition and installation of that mill, cannot by any stretch of imagination be regarded as “repair” to the four cement mills which were discarded and subsequently sold.
9. The decisions relied upon by learned counsel for the assessee were rendered in the context of facts which the Court was called upon to consider, and the observations made in those judgments cannot provide us with much assistance in deciding the question that has been raised before us, none of the cases relied upon being in anyway comparable to the case before us.
10. Learned counsel for the assessee referred us to the decision of this and other High Courts to which we will presently advert, besides relying on the decisions of the apex Court which have already been referred to. In the case of CIT vs. Mahalakshmi Textile Mills Ltd. (1965) 56 ITR 256 (Mad) : TC 15R.200, a decision of this Court reported in it was, as set out in the headnote, held that, one should consider the productive unit as a whole and not pick out parts therein which are new, where parts of a composite piece of machinery were being renewed while deciding as to whether the expenditure was for repair or not. It was also observed therein that because a large sum was involved, it could not lead to the conclusion that the expenditure was for reconstruction. The nature of the expenditure, it was stated, must be viewed as a whole, in order to see whether the repairs effected only restored the machinery to its original condition or whether by reason of the repairs any additional advantage or features which improved its income-earning capacity were introduced. Those observations were made in the background of the facts found by the Court that the replacement was merely to a part of a larger item of machinery. We have already referred to the decision of the Supreme Court which dismissed the appeal against that judgment. The decision was upheld on the ground that what had been done by the assessee therein was only to replace parts of a larger integrated unit and that there was no wholesale replacement of a part or the whole of the entire plant.
11. In CIT vs. Sri Rama Sugar Mills Ltd. (1952) 21 ITR 191 (Mad) : TC 16R.1068, the learned Judges who constituted the Division Bench of this Court disagreed on the question as to what constituted “repair”. It was held by one of the Judges therein that renewal is a repair if it is only restoration by renewal or replacement of subsidiary parts of a whole, and that if the reconstruction is of the entirety or of substantially the whole of the subject-matter, it is not a repair but a reconstruction. The Court therein upheld the decision of the Tribunal that the installation of a boiler, to replace one of the three boilers which had deteriorated in its efficiency, all the boilers together being necessary for the manufacture of sugar, amounted to repair, in the light of the view taken by the member of the Bench who concurred with the reasoning of the Tribunal.
12. In CIT vs. Co-operative Sugars Ltd. (1999) 235 ITR 343 (Ker), the High Court at Kerala upheld the claim of the assessee before it, a manufacturer of sugar, that the sum of Rs. 27,49,029 which had been paid on items like high velocity juice heater, sugar grader, centrifugal machinery, juice sulphiter, vacuum filter drum, pumps and meters were allowable under the head “Machinery maintenance”. The Court held in that case that though sugarcane which is processed through each equipment may undergo some change, the end product of the sugar mill would be available only after the entire process was complete and after the completion of the processing through all the machinery on which the expenditure was incurred by the assessee. It was held by the Court, inter alia, that as the sugar plant continued to exist even after the replacement of some of the items of machinery, it could not be said that any new asset of enduring nature had come into existence.
13. With respect, we are unable to concur with the views so expressed by the Court in that case. The proposition laid down therein is far too broad and in our view, cannot be supported by the language found in s. 31(i) of the Act. As observed by us earlier, the asset with reference to which repair can be effected is not the entire manufacturing facilities from raw material to finished product.
14. Counsel also relied upon the judgment of this Court in the case of CIT vs. Sree Narasimha Textiles (P) Ltd. (1999) 238 ITR 351 (Mad), to which one of us was a party. The Court therein upheld the claim of the assessee that replacement of a motor, without which the spinning mill could not be run, was an expenditure of revenue nature and not a capital expenditure. In that case, the test formulated by Chagla C.J., was set out and that test was found to have been met as it was found that the continued utilisation of the looms and spindles was possible only with the aid of the motor and replacing the worn out motors was merely an expenditure of revenue nature in that context.
15. Another decision to which one of us was a party, CIT vs. Sri Hari Mills Pvt. Ltd. (1999) 237 ITR 188 (Mad), was also referred to by counsel. It was held therein that the expenditure on replacement of worn out parts of the machinery could not be treated as capital expenditure as such expenditure was incurred for the purpose of continuing the business without breakdown and not for starting a new business. It was also observed in that case that : “The machinery was not replaced wholly nor were new machines added.”
16. Learned counsel for the Revenue placed reliance, and rightly so, on the decision of the apex Court in the case of Ballimal Naval Kishore vs. CIT (1997) 224 ITR 414. In that case the assessee therein had incurred considerable expenditure on new machinery, new furniture, sanitary fittings, replacing electric wiring and had renovated the theatre by extensive repairs to the walls, to the hall, to the flooring and roofing, to doors and windows and to the stage sides. In the background of those facts, the Court held that : “. . . if we look at the facts of this case, it will be evident that what the assessee did was not mere repairs but a total renovation of the theatre. New machinery, new furniture, new sanitary fittings and new electrical wiring were installed besides extensively repairing the structure of the building. By no stretch of imagination, can it be said that the said repairs qualify as ‘current repairs’ within the meaning of s. 10(2)(v).”
17. In this case, admittedly, what the assessee has done is to discontinue the use of four old mills which had been installed about 10 to 15 years earlier, and had installed at a different location a new cement mill which was technologically more advanced, was more energy efficient and which could make a qualitatively superior product. What was done by the assessee was not to repair the cement mill that it had already installed. The existing mill was completely discarded. A new mill was established at a different location. The assessee’s claim that the installation of the new Combidan cement mill was a “repair” to the whole of the cement factory itself, is not a claim which falls within the scope of s. 31(i) of the Act. The new mill was by itself an integrated mill and this new mill was meant to be used at the stage where the clinker had been obtained from the lime stone. It is only after the clinker was subjected to milling that the final marketable product, namely, cement was to be obtained. Such a new cement mill is incapable of being regarded as constituting repair to all the earlier stages involved in the manufacture of cement. We therefore answer the question as to “whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure of Rs. 5,31,55,319 incurred by the assessee during the accounting year in installing and commissioning a new cement mill by the name ‘Combidan mills’, in pursuance of a modernisation programme whereby four existing cement mills which were considered outdated by the assessee and were replaced by this new mill, was an amount paid on ‘current repairs’ and was allowable under s. 31 of the Act,” in favour of the Revenue and against the assessee. Two other questions have also been referred to us. As regards the question, “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the subsidy received should not be reduced from the cost of assets for the purpose of allowing depreciation ?” the answer must be, and is given in favour of the assessee having regard to the law laid down by the Supreme Court in the case of CIT vs. P.J. Chemicals Ltd. (1994) 121 CTR (SC) 201 : (1994) 210
ITR 830 (SC) : TC 29R.367. The other question referred as to “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the guarantee commission paid by the assessee is a revenue expenditure ?”, this question also has to be and is answered in favour of the assessee in the light of the decision of the Supreme Court in the case of CIT vs. Sivakami Mills Ltd. (1998) 144 CTR (SC) 172 : (1997) 227 ITR 465 (SC) : TC S17.1844, wherein the Court held that such expenditure is revenue expenditure.
[Citation : 255 ITR 243]
