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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGHAND SHRI MANOJ KUMAR AGGARWAL
आदेश /O R D E R PER MAHAVIR SINGH, VP:
This appeal by the Revenue is arising out of the order of Commissioner of Income Tax (Appeals)-1, Chennai in Appeal No.226/16-17, vide order dated 12.10.2018. The assessment was framed by the ACIT, Corporate Circle -2, Coimbatore for the relevant assessment year 2013-14 vide order dated 28.12.2016
2 u/s.143(3) r.w.s. 92CA(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’).
The first issue in this appeal of Revenue is as regards to order of CIT(A) disallowing the claim of expenditure incurred on account of replacement of Elite Compact System of spinning mill claimed by the assessee as revenue expenditure and treated by AO as capital.
Brief facts are that during the financial year 2012-13 relevant to assessment year 2013-14, the assessee claimed replacement expenses of Rs.1,65,28,800/- on account of purchasing of Elite Compact System and claimed the same as revenue expenditure. The AO relying on the Supreme Court judgment in the case of CIT vs. Sri Mangayarkarasi Mills (P.) Ltd., [2009] 315 ITR 114, noted that the compact spinning system introduced by the assessee in manufacturing process of yarn is state of art technology which is added to the existing machinery and this system has given advantage of enduring nature with the introduction of new technology and hence, the same is capital in nature. The AO after capitalizing the same allowed depreciation at 7.5% and therefore disallowed balance amount of Rs.1,52,89,140/-. Aggrieved assessee preferred appeal before the CIT(A).
3 4. The CIT(A) relying on the decision of co-ordinate Bench of this Tribunal in the case of Veda Spinning Mills (P) Ltd., in order dated 30.08.2013 allowed the claim of assessee. The CIT(A) observed in para 6.3 as under:- “6.3 The appellant has also incurred expenditure on compact drafting system. This has not resulted in increase in production capacity. Introduction of new technology is to improve the quality of the product to obtain better marketability and hence cannot be held that a fresh new venture has come into existence. The machinery of a textile mill was deductible as revenue expenditure. The ITAT decisions cited above have clearly spelt out that the expenditure incurred in acquiring Compact Drafting System is a revenue expenditure. Hence I hold that amount of Rs.1,52,89,140/- incurred for acquiring Elite Compact Drafting System is a revenue expenditure.”
Aggrieved, now Revenue is in appeal before the Tribunal.
We have heard rival contentions and gone through facts and circumstances of the case. We noted that the assessee has brought out evidences that the addition of machinery has only improved the quality of product and there is no increase in production capacity. It was stated that this Elite Compact System is not a machinery by itself but only an attachment to the existing machinery. In spinning mill or production of yarn, this Elite Compact System cannot function independently. It was brought to our notice that it functions only when it is fixed with the spindles which is very important part of spinning mill. The purpose of this 4 product for the assessee was for giving high quality yarn and not the capacity increase. We noted that this expenditure incurred by the assessee to preserve and maintain the existing asset and no new asset has been brought into existence. We noted that exactly identical system i.e., Elite Compact System has been considered by this Tribunal in the case of M/s. Prabhu Spinning Mills (P) Ltd., in order dated 20.01.2012, wherein has held as under:- “11. After cogitating the rival stands in the light of the obtaining evidence/facts/circumstances of the case, we have found that during the year the assessee-company had installed a new technology called ‘Compact Spinning System’. To understand the exact nature of this expenditure we have to examine the process involved in this case. The yarn from the stage of Simplex is sent to Drafting before spinning. The drafting system is situated in the ring frames. The conventional drafting system has been replaced with the latest, state-of-the-art gadget called ‘Compact Spinning’. After examining the relevant details, we have found that this is a single piece gadget which is fixed to each Spindle. It is not a ‘machinery’ by itself but only an ‘attachment to the machine’ (like manual analog wall clock is fixed with battery operated system). It has been claimed as revenue expenditure. The old drafting systems have become scrap on replacement. The ld. A.R has taken us through a set of colour photographs to illustrate the nature and working of this 'Compact Spinning System'. It is seen from the records [paper book page 5] that the assessee had purchased 33 number of ring frames and 18 ring frames fitted with gadgets. The company has purchased 18 number of sets, as one set is required for one ring frame. Thus, total number of gadgets for 18 ring frames comes to 20,736 and the rate per gadget so purchased comes to Rs. 4,079/-. We have seen the commercial invoices enclosed in the paper book and found the submission of the ld. A.R to be correct.We have found that during the year the assessee-company has installed new technology gadgets called 'Compact Spinning System'. The yarn from 5 the stage of Simplex is sent through the Drafting for spinning by ring frames. The Drafting system is situated in the ring frames. The conventional drafting system is replaced with the latest, state of the art gadget called ‘Compact Spinning’. This is a single piece gadget and this is fixed to each spindles. Each gadgets cost Rs. 4,100/- each because the assessee has purchased 37,296 such gadgets in 37 sets[batches] for Rs. 15.39 crores. Thus, it is not a machinery by itself but only an attachment to the existing machine. We have understood that this gadget cannot function independently. It functions only and only if it is fixed in the spindles. Each ring frame comes with conventional drafting gadget as we have understood from the pictograph and photographs produced by the ld. A.R. Therefore, in order to produce high quality of yarn, the conventional type is replaced with the latest, hi-tech gadget. It was brought to our notice and it was found for a fact that all the ring frames have not been replaced with the latest gadget. Only certain number of ring frames are fitted with this new gadget and the remaining continued to manufacture earlier quality of yarn catering to the requirement of lower strata of the society. Out of 50 ring frames, only 37 ring frames are fitted with this gadget and the remaining are running with conventional gadget. This fact was also found to be undeniable and to be correct. It was also found to be a fact that the old drafting systems simply become scrap on replacement and cannot be used again as such. We are convinced that the yarn normally contains ‘hairy’ substance like bristles on the side of the thread and when this yearn is sent through the 'Compact Spinning System', these hairy substances are removed and yarn gets a shining. Manufacturing premium quality of yarn which fetches higher price in the market and attracts high income group customers. We have also understood the need for installing these compact spinning systems because these are used in manufacture of T shirts and the manufacturers of T Shirts need such premium brand products. This change was necessitated to compete in the market and this step of the assessee cannot be taken as a surprise but has to be treated as taken in business exigency. When a question regarding life of these gadgets was put to the ld. A.R, he stated that each gadget itself consist of many small parts and each part is assembled together to have one single gadget so, they are subject to heavy wear and tear due to continuous running. It was brought to our notice with certitude that these gadgets require constant replacement almost after four years at the maximum”.
6 5.1 As noted above, the Co-ordinate Bench of this Tribunal after discussing identical facts came to the conclusion that the expenditure incurred by assessee on introduction of Compact Spinning System is revenue in nature and thus allowable. Respectfully following the above case law, we also hold that the expenditure incurred by the assessee in purchase ‘Elite Compact System’ amounting to Rs.1,65,28,800/- as revenue in nature and allowable. We find no infirmity in the order of CIT(A) and hence, the order of CIT(A) is confirmed on this issue.
The next issue in this appeal of Revenue is as regards to the order of CIT(A) deleting the disallowance of deduction claimed by the assessee being contribution of Employees’ Provident Fund and ESI u/s.36(1)(va) & 43B of the Act.
We have heard rival contentions on this issue and noted that the details of payment of ESI & PF contribution disallowed by AO are available in the assessment order which are within the due date of filing of return of income u/s.139(1) of the Act, which is as under:-
7 Sl.No. Due date Actual date of payment Amount (Rs.) 1 21.05.2012 22.05.2012 36698 2 21.07.2012 24.07.2012 33072 3 21.08.2012 24.04.2013 31081 4 20.05.2012 24.05.2013 154903 5 20.06.2012 24.07.2012 20454 21.02.2013 22.02.2013 74141 Total 350349 The Revenue has admitted this fact but the AO disallowed the same by holding that the payments made within the due date of the respective Act is allowable otherwise disallowable. Hence, he disallowed the sum of Rs.3,50,349/-. Aggrieved, assessee preferred appeal before CIT(A), who deleted the disallowance by relying on the decision of Hon’ble High Court of Madras in the case of CIT vs. Industrial Security and Intelligence Industries India Pvt. Ltd., in TCA Nos. 585 & 586 of 2015, order dated 24.07.2015. Aggrieved, Revenue came in appeal before the Tribunal.
After hearing both the sides and perusing records it is noticed that the payment of ESI & PF contribution of employees is well within the due date of filing of return of income by the assessee u/s.139(1) of the Act. Once, this is the position, the issue is squarely covered by the decision of Hon’ble High Court of Madras in the case of Industrial Security and Intelligence Industries India
8 (Pvt) Ltd., supra. In view of the decision of Hon’ble Madras High Court, we confirm the order of CIT(A) deleting the disallowance. This issue of Revenue’s appeal is dismissed.
In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the court on 15th February, 2022 at Chennai.