Commissioner of Inccome Tax vs. Agricultural Market Committee

OD-5 ITA/95/2011 IA No.GA/1/2011 (Old No.GA/354/2011) IN THE HIGH COURT AT CALCUTTA Special Jurisdiction (Income Tax) ORIGINAL SIDE COMMISSIONER OF INCOME TAX, KOLKATA-1, KOLKATA -Versus- M/S. JINDAL INDIA LIMITED BEFORE : THE HON’BLE JUSTICE T.S. SIVAGNANAM And THE HON’BLE JUSTICE HIRANMAY BHATTACHARYYA Date : 16th March, 2023 Appearance : Mr. Smarajit Roychowdhury, Adv. ...for the appellant. Mr. J. P. Khaitan, Sr. Adv. Mr. Sanjoy Bhowmick, Adv. Ms. Swapna Das, Adv. ...for the respondent. The Court : This appeal filed by the revenue under Section 260A of the Income Tax Act, 1961 (the ‘Act’ for brevity) is directed against the order dated 30th November, 2010 passed by the Income Tax Appellate Tribunal, “A” Bench, Kolkata (the Tribunal) in ITA No.368 & 369/Kol/2010 years 2005- 06 and 2006-07. The revenue has raised the following substantial questions of law for consideration:

2 (i) Whether the learned Tribunal below committed substantial error of law in allowing excess claim of expenses amounting to Rs.1,35,48,466/- for the assessment year 2005- 06 and Rs.1,18,50,085/- for the assessment year 2006-07 relating to purchase of steel rolls by treating the same as revenue expenditure ? (ii) Whether the learned Tribunal below committed substantial error of law in deleting the addition of Rs.5,24,80,600/- for the assessment year 2005-06 and Rs.18,32,288/- for assessment year 2006-07 as ‘deemed dividend’ by misinterpreting the provisions contained in Section 2(18)(b)(B)(c) and Section 2(22)(e) of the Income Tax Act ? We have heard Mr. Smarajit Roychowdhury, learned standing counsel appearing for the appellant/revenue and Mr. J. P. Khaitan, learner Senior Counsel assisted by Mr. Sanjoy Bhowmick and Ms. Swapna Das, learned Advocates for the respondent/assessee. It is not in dispute that the tax effect for the assessment year 2006-07 is below the threshold limit of Rs.1 crore. Therefore, the revenue cannot pursue the appeal and the above questions of law which have been admitted for consideration are being decided for the assessment year 2005-06 alone.

3 The first issue is whether the Tribunal was right in affirming the order passed by the Commissioner of Income Tax (Appeals) (CIT(A) treating the purchase of steel rolls for the re-rolling mills by treating the same as revenue expenditure. The Tribunal had followed the decision of the Chandigarh Bench of the Tribunal in the case of Commissioner of Income Tax vs. Malhotra Industrial Corporation and this order of the Tribunal was affirmed by the High Court of Punjab and Harayana in its decision reported in (2002) 254 ITR 635. The facts of the case are identical to that of the facts of the case before us wherein the assessee was also a steel rolling mill. The assessee’s contention was that the rolls are to be replaced frequently and the expenditure incurred should be revenue expenditure and cannot be treated as capital expenditure. On facts, it was found that the assessee’s business requires frequent placement of rolls and the expenditure incurred thereon would certainly fall in the nature of current repairs as the same does not result in creating of capital assets or benefit of enduring nature. The Tribunal also noted the Harmonised Commodity Description & Coding System which classifies that parts covered under the heading rolls and other parts are rolls of rolling mills. Therefore, rolls are parts of rolling mill. The issue was whether the mere fact that the appendix prescribed the rate of depreciation of rolls prior to

4 30th September, 1991 as 100% and thereafter at 50%, so it to be assumed that the expenditure should be treated as capital expenditure. This aspect was also considered in the case of Malhotra Industrial Corporation taking note of the decision of the High Court of Karnataka in the case of Mysore Spun Concrete Pipe Pvt. Ltd. reported in (1992) 194 ITR 159. That apart, the decision of the Hon’ble Supreme Court in the case of Commissioner of Income Tax vs. Sarvana Spinning Mills P. Ltd. reported in (2007) 293 ITR 201(SC) will be a clear answer to the issue under consideration. The Hon’ble Supreme Court in the said decision held as follows: “To give an example, a compressor is an important part of an air-condition machine. Repair of the compressor will come in the connotation of the word “current repairs” in Section 31(i) of the said Act because the assessee does not replace the air-condition machine. At the highest, he replaces a part of the air- condition machine. So is the case of the picture tube in a television set, when the picture tube is replaced the television set is not replaced, therefore, such repairs alone can come within the connotation of the word “current repairs” in Section 31(i) of the said Act as it stood at the material time. They are effected to preserve and maintain the asset viz., air- conditioner or carding machine. Lastly, it cannot be said that the textile mill constitutes a plant as it is one continuous process of manufacture beginning from blow room to the winding section. As stated above, different outputs flow from different segments of

5 production like blow room, carding, combing, roving, winding etc. In the case of a textile mill there is no process whereby raw material is fed on one end and the finished product comes out at the other end without intervention in between. For example, in the case of continuous casting machine in the steel industry we have one continuous integrated process under which scrap (raw material) is put in and what comes out is steel or iron or aluminium. Another example, in the case of a “pasteurization plant” we have three chambers and ducts. In the first mils is collected, in the second it is heated and in the third it is cooled. Duct carries hot and cold water. The raw material is raw mils, the end product is the pasteurized milk. In the heat chamber there is the heater. In the cooling chamber we have a cooling plant which has a concept similar to air-condition plant. * * * * * * * * * An allowance is granted by clause (i) of Section 31 in respect of amount expenditure on current repairs to machinery, plant or furniture used for the purposes of business, irrespective of whether the assessee is the owner of the assets or has only used them. The expression “current repairs” denotes repairs which are attended to when the need for them arises from the viewpoint of a businessman. The word “repair” involves renewal. However, the words used in Section 31(i) are “current repairs”. The object behind Section 31(i) is to preserve and maintain the asset and not to bring in a new asset. In our view, section 31(i) limits the scope of allowability of expenditure as deduction in respect of repairs made to machinery,

6 plant or furniture by restricting it to the concept of “current repairs”. All repairs are not current repairs. Section 37(1) allows claims for expenditure which are not of capital nature. However, even section 37(1) excludes those items of expenditure which expressly fall in sections 30 to 36. The effect is to delimit the scope of allowability of deductions for repairs to the extent provided for in sections 30 to 36. To decide the applicability of section 31(i) the test has been wrongly applied by the High Court, but whether the expenditure is “current repairs”. The basic test to find out as to what would constitute current repairs is that the expenditure must have been incurred to “preserved and maintain” an already existing asset, and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage.” If the law laid down in the above decision is applied to the case, it has to be necessarily held that the expenses incurred for replacement of the steel rolling machine are revenue expenditure and thus the Tribunal was fully justified in dismissing the revenue’s appeal. Thus, we find no ground to interfere with the order of the Tribunal. With regard to the first issue, the Tribunal has considered the entire factual aspect which was in depth dealt with by the CIT(A() and the revenue could not controvert the factual position as was brought on record by the CIT(A). Furthermore, it is seen that the finding of the CIT(A) remained

7 uncontroverted before the Tribunal and also the fact that the findings were based on documents which were placed for consideration even before the Assessing Officer. Thus, we find that the conclusion arrived at by the Tribunal on the second issue does not call for interference. In the result, the appeal filed by the revenue (ITAT/95/2011) for the assessment year 2005-06 is dismissed and the substantial questions of law are answered against the revenue. The appeal so far as the assessment year 2006-07 is concerned, is also dismissed on the ground of low tax effect. Consequently, the connected application (IA No.GA/1/2011) also stands dismissed. (T.S. SIVAGNANAM, J.) (HIRANMAY BHATTACHARYYA, J.) As./S.Das