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This appeal by the revenue against the order dated 17.10.2014 passed by the CIT(A)-XII, Kolkata for assessment year 2007-08. M/s Phoenix Conveyor India Pvt. Ltd. 1
The only issue is to be decided is as to whether the CIT(A) is justified in treating the expenditure incurred for replacement of Banbury Motors and Hot Platens as revenue expenditure, in the facts and circumstances of the case.
Heard both the parties and perused the material available on record. The assessee is a company and in the business of manufacturing and sale of rubber conveyor belts and trading of fan and vee belts. During the assessment year under consideration the assessee incurred an expenditure of Rs. 1,87,13,630/- on purchase of banbury motors and vulcanization hot platens of Rs. 98,81,462/- & 88,32,158/- respectively. It was explained Banbury Rotors was filted in the banbury Mixor Machine as a replacement and vulcanization hot platens in another machine as replacement and contended the said purchases should be treated under the head current repairs. The Assessing Officer observed by this replacement the assessee has obtained a definite advantage to its business and the said advantage is clearly of enduring in nature. The Assessing Officer denied the claim of deduction and added above said amount to the total income by treating as capital expenditure as against the claim of revenue expenditure.
The CIT(A) accepted the submissions made on behalf of the assessee that the above said parts are not the independently M/s Phoenix Conveyor India Pvt. Ltd. 2 functioning parts and which are used in the machine and as such cannot be considered as new machine. The CIT(A) further held there is no capacity expansion and by replacing these parts and the capacity of the machine is restored. Further he held the above the said two parts are integral part of machine used for production. The relevance portion which is reproduced hereunder:
I have carefully considered the submission put forth on behalf of the appellant along with the supporting documents/details furnished & the judgements of the cases relied upon, perused the facts of the case including the observation of the AO in the assessment order and other materials brought on record. It is found that the appellant has replaced Banbury Rotors amounting to Rs. 98,81,462/- which was fitted into Banbury Mixer Machine and Hot Platens amounting to Rs. 88,32,158/- which was fitted into other machine used for vulcanizing conveyor belt. It is explained that these mentioned parts are not the independently functioning parts only which are used in the machine but these mentioned parts are used with others parts and thus it cannot be considered to be new machine as such. It is also explained that by replacing such parts, the capacity of the machine is restored and it is not the case where there is capacity expansion due to use of such parts. When there is no capacity expansion, it cannot be said that there is enduring benefit which is capital in nature. These two mentioned parts namely Banbury Rotors and Hot Platens ore integral part of machine used for the production. It is explained that such parts cannot function independently. It is well settled principle that when an integral part of the machine is replaced it would come within the connotation of current repairs. The said principle has also been held in similar case of CIT vs Midas Rubber (P.) Ltd. [2013] (33 taxmann.com 335 (Cochin - Trib.) by Hon'ble ITAT Cochin which has also been upheld by Hon'ble Kerala High Court. It is observed that the Hon'ble ITA T decided the issue in favour of the assessee following the principles laid down in the judgement of the Apex Court in the case of Saravana Spg.Mills (P) Ltd.(2007) 2931TR 201/163 Taxman 201. The relevant portion of the order of the ITAT is as under:
7. In view of the above observations of the apex court it is obvious that when an integral part of the machine is replaced it would come within the connotation of "current repairs". The apex court has also given the example of replacing compressor in the air-conditioning machine and picture tube in the television set. Replacing compressor in the air-condition machine and picture tube in the television set would come within the connotation of "current repairs" under section 31 (i) of the Act.
In this case also chamber assembly is one of the integral part of the intermix machine like compressor in the air-conditioner or picture tube in the television set. Therefore, replacing of chamber assembly in the intermix chamber is only for the purpose of maintaining the intermix chamber in a working condition. Therefore, the expenditure incurred by the taxpayer for replacing the chamber assembly would come within the meaning of "current repairs". "
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It is also seen that the jurisdictional High Court in the Case of CIT Vs. Tea Estate (P) Ltd. [19921 198 ITR 535 (Col) held that where a replacement is made of a physically, commercially and functionally inseparable part of an entire asset, the expense incurred in relation to such transaction must be treated as an admissible revenue expenditure. In light of the above discussion & findings, after perusing the facts of the case and respectfully following the decision of the Hon'ble ITAT t Cochin in the identical case of CIT Vs. Midas Rubber (P.) Ltd.(supra), relied upon & which has been upheld by the Hon'ble Kerala High Court and the decision of the Hon'ble Calcutta High Court (supra), I am of the considered view that expenditure for replacement of Banbury Motors amounting to Rs. 98,81,462/- and hot patens amounting to Rs. 88,32,158/- being replacement of the integral parts of the machine is in nature of current repairs and is allowable as revenue expenditure: The A.O. is thus directed to delete the addition made in total amounting to Rs.1 ,87,13,630/- in the assessment order . Thus, the sub ground nos. 2 (a), 2(b) & 2( c) of appeal are allowed. Since, ground nos. 2 (a) to 2(c) of the appeal are allowed, ground no.2(d) of the appeal is not adjudicated upon.”
Before us, the ld. AR drew our attention to the page nos. 65 and 66 and submits the rotors were purchased on account of repair of bunbury chamber which is a part of a machine known as bunbury mixture used in the manufacturing process and there was no addition or expansion of the profit making apparatus. The ld. AR placed reliance on the decision of Hon’ble Supreme Court in the case of Saravana Spg. Mills (P) Ltd. reported in [2007] 293 ITR 201 and decision of Hon’ble High Court of Kerala in the case of Middas Rubber (P) Ltd. reported in [2014] 43 taxmann.com 112 (Ker) and argued that it is an allowable deduction. For ready reference the relevant portion at pages 65 and 67 supporting the submission of the ld. AR is reproduced herein below:
“b) Serial no. II With reference to the subject query we would request your kindself to consider the submissions made hereinafter on perusal of which and the documents enclosed hereto in Annexure-II, your kindself will no doubt appreciate that respective expenditures have been incurred by the assessee towards current repairs and is accordingly allowable as deduction while computing its total income for the year under assessment. i) FARREL LTD. (Rs. 9,881,462.00) Copy of the bill raised of the party is enclosed in Annexure-II ITA No. 59/Kol/2015
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Your kindself will note that the present expenditure incurred on purchase of rotors is on account of repairing of Banbury Chamber which is a part of a machine known as Bunbary Mixer used in the manufacturing process of the assessee. A Banbury Mixer comprises of the following components – 1) Banbury Chamber 2) Ram (floating weight) 3) Wing rotors ( 2 nos) 4) Motor 5) Gear box 6) Control Panel 7) Hydraulic lines 8) Other accessories.
The machine is used for mixing of rubber compound in a closed chamber by the shearing and tearing action of the two wing rotors running in opposite direction inside the banbury chamber, in a controlled speed. The raw rubber and other chemicals are fed into the Banbury chamber from weigh feeder. Carbon black and oil is drawn automatically from the storage bin through a weigh feeder. All the ingredients are intimately mixed inside the Banbury chamber through the tearing and shearing of rubber by the two rotors and application of floating weight on the mix through the ram. The process being exothermic, water is passed through the rotor to control the temperature. At the end of the mixing cycle, the mix is dumped in the form of a lump on the dump mill below. The dump mills (two nos) further mixes the compound and passes it through a cooling and batching machine to a stacker. The rubber sheets are then stacked in the form of continuous sheet for further processing. It comes in to full contact of the input materials of rubber and various chemicals. The Banbury Chamber is used for first mixing of Raw Rubber and it is used continuously. Hence, this part of the machine being subject to continuous wear and tear needs regular repairing and maintenance to keep the Banbury Mixer in a running condition. A photograph of the machine is enclosed for reference of your kindself in Annexure - IIA.
Your kindself will thus appreciate that the impugned expenditure has been incurred towards routine repairs & maintenance and was there no addition to or expansion of the profit- making apparatus of the assessee. The expenditure is therefore allowable as deduction while computing the total income of the assessee for the year under consideration. ii) Henkel GmbH & Co Kg ( Rs. 8,832,158.00)
Copy of the invoice is enclosed in Annexure - III.
Your kindself will note that the expenditure has been incurred towards repairs of Vulcanizing Press. This machine is used in the manufacturing process of the assessee for vulcanizing the conveyor belt through application of hydraulic pressure and temperature for a particular period of time to convert it from a soft plastic mass to a hard elastic mass. Vulcanizing Press consists of the undernoted components- 1) Bolster 2) Steel Platens (top and bottom) 3) Cylinders 4) Hydraulic lines 5) Hydraulic motors 6) Equalizer 7) Base frame ITA No. 59/Kol/2015
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8) Edge bars 9) Control panel 10) Water lines( hot and cold) 11) Stretching and clamping unit 12) Other accessories The green (unvulcanized) conveyor belt is drawn into the press which consists of two hot platens up and bottom) fitted to the bolster of the press. The platens are heated up with hot water. The bottom platen with the belt (along with the bolster) is slowly moved upwards and pressed against the top platen through hydraulic motors. The belt is kept under a specified temperature and pressure for a predetermined period of time to get it vulcanized. At the end of the cycle time, the vulcanized belt comes out of the press and the next charge is pressed. The Plates wear out in course of time due to prolonged use as it comes into contact with rubber compound and chemicals. Hence, the hot Platens are required to be repaired regularly as otherwise the assessee would not be able to manufacture its products namely, Conveyor Belts. The present expenditure is towards procurement of the said hot platens/ plates. A photograph of the platens is enclosed for reference of your kindself in Annexure - IIIA. Your kindself will thus appreciate that the impugned expenditure has been incurred towards routine repairs & maintenance and was there no addition to or expansion of the profit- making apparatus of the assessee. The expenditure is therefore allowable as deduction while computing the total income of the assessee for the year under consideration.”
6. On perusal of the decision of Hon’ble Kerala High Court in the case of Middas Rubber Pvt. Ltd. which arose from the order of Cochin Benches, ITAT wherein the Co-ordinate Bench held in its order at para no. 5 that the rotors inside mixing chamber of internal mixer rotate in opposite direction and mix the ingredients into rubber compound and held the chamber assembly cannot perform any independent and separate function. Further replacing the chamber assembly in the intermix chamber is only for the purpose of maintaining the intermix chamber in a working condition and the said expenditure incurred for replacing the chamber would come within the meaning of current repairs. The view rendered by Cochin Benches, ITAT was affirmed by the Hon’ble High court of Kerala by its order dated 06.10.2013. It is noted that Cochin Benches, ITAT came to such conclusion by placing ITA No. 59/Kol/2015
M/s Phoenix Conveyor India Pvt. Ltd. 6 reliance on the decision of Hon’ble Supreme Court in the case of Saravana Spinning Mills Pvt. Ltd. Supra . In the present case, we find that the CIT(A) deleted the addition made by the Assessing Officer by holding that the expenditure incurred for purchase of Banbury Rotors and hot platens are of revenue expenditure by placing reliance in the case of Middas Rubber Pvt. Ltd. and the decision of Hon’ble Supreme Court in the case of Saravana Spinning Mills Pvt. Ltd. supra . We hold that expenditure incurred by the assessee for purchase of Banbury Rotors and hot platens is in the nature of revenue expenditure entitled for claiming deduction. Therefore, we find no infirmity in the order of CIT(A) and sole ground raised by the revenue is dismissed.
In the result, the appeal of the revenue is dismissed.
Order pronounced in the open Court on 23-01-2019.