Madras High Court
Commissioner Of Income Tax vs The Ramco Cements Ltd on 22 January, 2025
Author: Anita Sumanth
Bench: Anita Sumanth
2025:MHC:580
T.C.(A).No.1100 of 2007
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 22.01.2025
CORAM:
THE HONOURABLE DR.JUSTICE ANITA SUMANTH
and
THE HONOURABLE MR.JUSTICE G. ARUL MURUGAN
T.C.(A).No.1100 of 2007
Commissioner of Income Tax
Madurai. .. Appellant
vs
The Ramco Cements Ltd.,
Formerly known as Madras Cements Ltd
‘Ramamandiram’
Rajapalayam-626 117.
Virudhunagar District. .. Respondent
(Cause title amended vide Court order dated 12.7.22
made in CMP.No.7536/19 in TC.No.1100/07)
Prayer : Appeal filed under Section 260A of the Income-Tax Act, 1961
against the order of the Income-Tax Appellate Tribunal Madras 'C' Bench,
dated 26.12.2002 in ITA No.872/M/2000 for Assessment Year 1996-97.
For Appellant : Mr.J.Narayanaswamy
Senior Standing Counsel
For Respondent : Mr.P.J. Rishikesh
JUDGMENT
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(Delivered by Dr.ANITA SUMANTH.,J)
This appeal relates to assessment year 1996-97 and has been
admitted on 18.09.2007 on the following substantial questions of law:
‘1.Whether in the facts and circumstances of the case,
the Tribunal was right in holding that the expenditure
incurred on replacement of old machinery by new
machinery would amount to revenue expenditure?
2.Whether in the facts and circumstances of the case,
the Tribunal was right in holding that the assessing officer
cannot give any finding on the eligibility to benefit of
Sec.35(i)(iv), while the matter has been referred to and is
pending before the competent authority?
3.Whether in the facts and circumstances of the case,
the Tribunal was right in allowing 100% depreciation to fly
ash silo treating it as a pollution control equipment?
4.Whether in the facts and circumstances of the case,
the Tribunal was right in treating the amount adjusted by
IFCI from the new loan sanctioned by it towards interest
payable on earlier loans as interest actually paid by the
assessee within the time stipulated under Section 43AB?
5.Whether in the facts and circumstances of the case,
the Tribunal was right in holding that excise duty, customs
duty, windmill power receipts etc. do not form part of the
total turnover for the purpose of calculating the benefit
u/s.80HHC?
6.Whether in the facts and circumstances of the case,
the Tribunal was right in granting full depreciation on the
dumpers even though there was no evidence adduced that
they had used it for more than 180 days, or even received
the same in their site prior to 180 days?’
2. We have heard Mr.Narayanaswamy, learned Senior Standing
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Counsel appearing for the Income Tax Department/appellant and
Mr.P.J.Rishikesh, learned counsel appearing for the assessee/respondent.
Question of law No.1:.Whether in the facts and circumstances of the
case, the Tribunal was right in holding that the expenditure incurred on
replacement of old machinery by new machinery would amount to
revenue expenditure?
3. The first question relates to the allowance of expenditure under
section 37 of the Income tax Act 1961 (Act) incurred on replacement of
old machinery by new machinery. In the year in question, the assessee
had made a claim in terms of Section 37 of the Act, of a sum of
Rs.1,02,59,853/- towards expenditure on Belt Bucket Elevator (BBE).
While completing the assessment, the assessing authority observes that the
BBE was used for feeding the kiln and for operation of the cement mill.
4. The claim came to be negatived on the ground that it was capital
in nature and also for the reason that the machinery had itself not been
commissioned. However, depreciation was granted at 25% on the ground
that the machineries were put to use for more than 180 days which finding
runs counter to the observation that the machinery has not yet been
commissioned. The authority also notes that the expenditure had been
capitalized in the accounts.
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5. He makes a distinction between a claim for current repairs under
Section 31 and for allowance of expenditure under section 37. Since the
replacement of a manual system by a mechanized system cannot be
understood as ‘repairs’ (See Lurcott V.Wakley Wheeler1), such
replacement of such a system can only be on capital account as the benefit
obtained by the assessee was substantial and enduring.
6. In the case on hand, the matter travelled in first appeal to the
Commissioner of Income Tax (Appeals), (CIT(A)) who upheld the order
of assessment following the decision of the appellate authority for the
previous years. A second appeal was filed by the assessee before the
Income Tax Appellate Tribunal (Tribunal), and the Members of the
Tribunal took it upon themselves to inspect the mill.
7. At this juncture, an objection is raised by Mr.Narayanaswamy to
the procedure followed by the Tribunal. According to him, the members
of the Tribunal ought not to have undertaken the exercise of inspection the
mill, as they can hardly be construed to be experts in the field of cement
production and technology.
8. He refers to the decision in the case of C.I.T., Delhi vs
1 All ER Rep 41
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M/s.Bharti Cellular Ltd2 that, according to him, supports the contention
that if at all one were to undertake such exercise, it is best left to the
experts in that field. This decision relates to deduction of tax at source by
that assessee in the context of interconnect charges/access/port charges to
BSNL.
9. The matter was highly technical in nature, and adjudication of the
tax dispute called analysis or the nature of services rendered by the payee.
It is in that context that the Supreme Court had directed the CBDT to issue
directions to all officers that, in matters requiring an understanding of
technology, the Department need not proceed solely on the basis of the
records available with officers but can avail the assistance of technical
experts.
10. They note that with the emergence of our country as part of
BRICS and with the surge in technological advancement, one must take
benefit of the available technology including human resources. Their
directions are as follows:
Before concluding, we are directing CBDT to issue
directions to all its officers, that in such cases, the
Department need not proceed only by the contracts placed
before the officers. With the emergence of our country as
2 330 ITR 239
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one of the BRIC countries and with the technological
advancement matters such as present one will keep on
recurring and hence time has come when Department
should examine technical experts so that the matters could
be disposed of expeditiously and further it would enable the
Appellate Forums, including this Court, to decide legal
issues based on the factual foundation. We do not know the
constraints of the Department but time has come when the
Department should understand that when the case involves
revenue running into crores, technical evidence would help
the Tribunals and Courts to decide matters expeditiously
based on factual foundation. The learned Attorney General,
who is present in Court, has assured us that our directions
to CBDT would be carried out at the earliest.
11. We do not find that the above directions militate against the
procedure followed by the Tribunal. The inspection undertaken has
enabled the Tribunal to understand the layout and segments of the factory,
the manner in which the processes are carried out and the contribution of
those processes to the ultimate output.
12.While undoubtedly, matters to be decided by the technical
experts are best left to those entities/persons, discretion is always available
with an authority to decide whether external assistance is required. In the
present matter the decision of the members to inspect the mill is judicious
and not, in any way, perverse, or an excess of jurisdiction. We are hence
not persuaded to accept the submissions of Mr.Narayanaswamy on this
score.
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13. On merits, he would submit that the conclusion of the Tribunal
reversing the order of the first appellate authority and assessment and
allowing the claim of the assessee, was incorrect. In doing so, the Tribunal
has referred to a slew of decisions as follows:
i) CIT v. Mahalakshmi Textile Mills Ltd.3
ii) CIT vs. Mahalakshmi Textiles Mills Ltd.4
iii) CIT vs. Salem Co-op. Spinning Mills Ltd.5
iv) CIT vs. Co-op. Sugars Ltd.6
v) CIT vs. Narsimha Textile (P) Ltd.7
vi) CIT vs. Sri Hari Mills Ltd.8
vii) CIT vs. Haridas Bhagath & Co. (P) Ltd.9
viii)CIT vs. Andavar Calendering Mills Ltd.10
ix) CIT vs. Ooty Deeprakash11
x) CIT vs. Rex Talkies12
xi) CIT vs. Madras Auto Services (P) Ltd.13
xii) Alembic Chemicals Works Co. Ltd. vs. CIT14
xiii)CIT vs. Jagatjit Indus. Ltd.15
xiv) CIT vs. Hindustan Times Ltd.16
xv) CIT vs. Steel Complex Ltd.17
xvi) CIT vs. Asher Textiles Ltd.18
14. The Tribunal has noted the position that what was replaced was
3 56 ITR 256 (Mds.)
4 66 ITR 710 (SC)
5 148 ITR 176
6 225 ITR 343 (Ker.)
7 238 ITR 351 (Mds.)
8 237 ITR 188 (Mds.)
9 240 ITR 169 (Mds.)
10 210 ITR 815 (Mds.)
11 237 ITR 892 (Mds.)
12 148 ITR 560 (Ker.)
13 233 ITR 468 (SC.)
14 177 ITR 377 (SC)
15 241 ITR 556 (Del.)
16 241 ITR 509 (Del.)
17 238 ITR 1054 (Ker.)
18 240 ITR 483 (Mds.)
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a pneumatic conveying system. The system that replaced the old system
ie., the BBE, is pollution free and reduces the consumption of electricity.
To be noted, these finding emanate from the material available on record
before the authorities in support of the position that the shift from
pneumatic conveyer to BBE, was for power conservation and elimination
of pollution.
15. Mr.Narayanaswamy has cited the following cases:
i) Commissioner of Income Tax vs. Sri Mangayarkarasi Mills
(P) Ltd.19
ii) Commissioner of Income Tax vs. Sarangpur Cotton Mfg. Co.
Ltd.20
iii) Indore Municipal Corporation vs. Commissioner of Income
Tax21
iv) North Karnataka Expressway Ltd. vs. The Commissioner of
Income Tax-1022
v) Moradabad Toll Road Co. Ltd. vs. Assistant Commissioner
of Income Tax23
vi) Commissioner of Income Tax-10 v. West Gujarat
Expressway Ltd.24
16. Of the above, he refers solely to the judgment in the case of Sri
Mangayarkarasi Mills Limited25, particularly paragraph 14 onwards. He
argues that the BBE was a capital asset, pointing out that there is nothing
19 (2009) 315 ITR 0114 (SC)
20 (2017) 393 ITR 0108 (SC)
21 (2001) 247 ITR 0803 (SC)
22 (2015) 372 ITR 145 (Bombay)
23 (2014) 369 ITR 403 (Delhi)
24 (2017) 390 ITR 398 (Bombay)
25 Foot Note Supra (19)
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on record to support the submissions that the new asset saved power and
reduced pollution.
17. Per contra, Mr.Rishikesh relies on the findings of the Tribunal
and on the following decisions:
i) L.H. Sugar Factory & Oil Mills (P.) Ltd. v. Commissioner of
Income-tax26
ii) Commissioner of Income-tax v. Associated Cement
Companies Ltd.27
iii) Commissioner of Income-tax v. P.J.Chemicals Ltd.28
iv) Commissioner of Income-tax v. Bongaigaon Refinery &
Petro Chemicals Ltd.29
v) Tuticorin Alkali Chemicals & Fertilizers Ltd. v.
Commissioner of Income-tax30
vi) Commissioner of Income-tax v. Madras Auto Service (P.)
Ltd.31
vii) Commissioner of Income-tax v. Coats Viyella India Ltd.32
viii)Commissioner of Income-tax, Madurai v. Saravana Spg.
Mills (P.) Ltd.33
ix) Taparia Tools Ltd. v. Joint Commissioner of Income-tax,
Nasik34
x) Hatsun Agro Products Ltd. v. Joint Commissioner of
Income-tax35
xi) Joint Commissioner of Income Tax v. Hatsun Agro Products
Ltd.36
26 (1980) 4 Taxman 5 (SC)
27 (1988) 38 Taxman 110A (SC)
28 (1994) 76 Taxman 611 (SC)
29 (1997) 91 Taxman 124 (Gauhati)
30 (1997) 93 Taxman 502 (SC)
31 (1998) 99 Taxman 575 (SC)
32 (2002) 124 Taxman 797 (Madras)
33 (2007) 163 Taxman 201 (SC)
34 (2015) 55 taxmann.com 361 (SC)
35 (2018) 99 taxmann.com 220 (Madras)
36 (2020) 114 taxmann.com 172 (SC)
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xii) Commissioner of Income-tax v. Sudharshan Chemicals
Industries Ltd.37
xiii)Commissioner of Income-tax v. Catapharma (India) (P.)
Ltd.38
18. Of the above, he refers to the judgement of the Supreme Court
in Saravana Spinning Mills (P) Limited39 and of this Court in Hatsun Agro
Products Ltd40. On first principles, he submits that there has been no
enduring benefit that has been brought about by replacement of the
pneumatic system by BBE. The submissions in relation to power
efficiency and pollution efficiency are clearly part of the record and there
are findings in the order of the lower authorities to show that this view was
canvassed by the assessee before the lower authorities with all supporting
material.
19. We have heard both learned counsel and taken note of the cases
cited by them. The claim of expenditure in regard to replacement of
machinery has been a burning issue in the State of Tamil Nadu. Claims
were made either under Section 31 relating to ‘current repairs’ or in terms
of Section 37 of the Act being a claim of expenditure.
37 (2000) 112 Taxman 511 (Bombay)
38 (2007) 162 Taxman 455 (SC)
39 Foot Note Supra (33)
40 Foot Note Supra (36)
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20. In Saravana Spinning Mills (P) Limited41 and Sri
Mangayarkarasi Mills Limited42, the Supreme Court considered claims
under Section 31 of the Act. The Bench adumbrates the components of a
mill and the processes involved therein, stating at paragraph 10, as
follows:
10. From the above facts, it is clear that Blow Room,
Carding, Combing, Drawing, Roving, Spinning and Winding
are different Departments/Divisions in a textile mill. In each
Department/Division there are several machines. Each of
the above Departments/Divisions perform different functions
and the functioning of each Department/Division produces a
different Output which is carried forward to the next
Department/Division having different machines therein. For
example, in the Blow Room there are different beaters
(machines) which open the raw- cotton and remove the dirt
therefrom. That cotton is forwarded to the Carding
Department in which there are Carding Machines equipped
with Autolevelers which produces Silver which is then
carried forward to the Combing Department. It is important
to note that each Department has different items of
machines, for example, in the Blow Room we have machines
called as Beaters. Similarly, in the Carding Department we
have Carding Machines with Autolevelers. If the Autoleveler
fails, the Carding Machine becomes non-functional. If an
Autoleveler is to be repaired then that repair would come
within the connotation of the word "current repairs" because
it is a part of the Carding Machine. Even if in a given case,
replacement of an Autoleveler could come within the
connotation of the word "current repairs" if the old part is
not available in the market. It is a "current repair" because
the Carding Machine remains as an asset without any
41 Foot Note Supra (33)
42 Foot Note Supra (19)
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change even after repair or replacement of the autoleveler.
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 in 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
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 "Pasteurization Plant" we
have three chambers and Ducts. In the first milk 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 Milk,
the end product is the pasteurized milk. In the Heat chamber
there is the heater. In the Cooling Chamber we have cooling
plant which has a concept similar to air-condition plant.
Such a process is one integrated process. Therefore, the
Tribunal and the High Court erred in holding that the
manufacturing process in the textile mill is one continuous
integrated process.
21. A distinction is made between the processes in a spinning mill
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vis a vis and those in a steel industry or air conditioning plant for the
reason that, in a spinning mill, each Department deploys different items of
machineries and hence the replacement of machines in a particular
department would come within the connotation of the term ‘current
repairs’.
22. We are in this case concerned with a cement manufacturing
plant and the claim is not under Section 31 but under Section 37 of the
Act. In Saravana Spinning Mills43, this distinction has been noted at
paragraphs 14 and 15 to following effect:
14. Some of the decisions cited on behalf of the assessees are
not being discussed by us as they deal with cases falling
under Section 37. That section is a residuary section.
Under Section 37, a particular item of expenditure may be
deductible if the expenditure does not fall within Sections
30 to 36; that it should have been incurred in the accounting
year; that it should be in respect of a business carried on by
the assessee; that it should not be on personal account of the
assessee; that it should not be in the nature of capital
expenditure and that it should be spent wholly and
exclusively for business. Whether expenditure is 'revenue' or
'capital in nature' would depend upon several factors,
namely, nature of the expenditure, nature of the business
activity etc. For example, construction of the building for
self-use may be capital in nature whereas in the hands of the
builder a building constitutes his stock-in-trade and,
therefore, on the sale of the building the expenditure has to
be revenue. Therefore, the builder would be entitled to deduct
such expenditure from the sale proceeds/gross income.
43 Foot Note Supra(33)
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Therefore, whether an expenditure is revenue or capital in
nature would depend on the facts of each case. We do not
wish to express any opinion on the applicability of Section
37(1) in the present case. There were certain civil appeals
wrongly tagged with the present batch which will be decided
separately by us as they concern with Section 37(1). Hence
we do not wish to express any opinion on applicability
of Section 37(1).
15. Before concluding, one aspect needs to be discussed. It
was submitted on behalf of the assessees, in the present case,
that although the assessees had claimed deduction
under Section 31(i), they should be permitted to claim
deduction under Section 37(1) as on facts it has been held by
CIT(A), Tribunal and the High Court that the expenditure
was revenue in nature. We find no merit in this contention. As
stated above, even if the expenditure incurred is revenue in
nature, still it may not fall in the connotation of the words
"current repairs" under Section 31(i) which test has not kept
in mind. As held by Chagla C.J. in the case of New Shorrock
Spinning and Manufacturing Co. (supra) all repairs do not
attract Section 31(i) even though the expenditure is revenue
in nature. Therefore, the basic test, which had not been
applied, in the present case, by CIT(A), Tribunal and the
High Court, is whether the expenditure came within the
expression "current repairs". Instead all the three authorities
proceeded on the footing that since the expenditure was
revenue it constituted "current repairs". It is for this reason
that we have interfered with the concurrent findings given by
CIT(A), Tribunal and the High Court.
23. A claim under Section 37 in regard to replacement of machinery
has been looked into by a subsequent judgment of the Supreme Court in
CIT V. Sri Mangayarkarasi Mills Limited44. At paragraph 14 of that
44 Foot Note Supra (19)
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decision, and referring to the earlier decision in Saravana Spinning Mills45
the Bench states as follows:
14. The first issue that needs to be resolved is whether
each machine in a textile mill is an independent item or
merely a part of a complete spinning mill, which only
together are capable of manufacture, and there is no
intermediate marketable product produced. In our view, this
issue has been satisfactorily answered by the recent decision
of this Court in CIT v. Saravana Spinning Mills (P)
Ltd. ((2007) 7 SCC 298). In that case this Court has held
unambiguously that "each machine in a segment of a textile
mill has an independent role to play in the mill and the
output of each division is different from the other." Dealing
with a ring frame in a textile mill, this Court has held that it
is an "independent and separate" machine. Further, it is
accepted that each machine in a textile mill is part of the
integrated process of manufacture of yarn and is integrally
connected to the other machines in the mill for production of
the final product. However, this interconnection does not
take away the independent identity and distinct function of
each machine. Thus, each machine in a textile mill should be
treated independently as such and not as a mere part of an
entire composite machinery of the spinning mill. As stated
above, it can at best be considered part of an integrated
manufacture process employed in a textile mill.
24. The Supreme Court, in Saravana Spinning Mills (P) Limited46
and Sri Mangayarkarasi Mills Limited47, has noted the scheme of
operation of a spinning mill as well as the distinction between the nature of
45 Foot Note Supra (33)
46 Foot Note Supra (33)
47 Foot Note Supra (19)
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claims, in terms of Section 31 and Section 37.
25. The position was clarified further in a subsequent judgement of
the Supreme Court which is on point, in CIT V. Ramaraju Surgical Cotton
Mills48, and turns on a claim under Section 37 of the Act by an assessee
similarly placed with the present assessee, barring the differences between
the nature of products manufactured. The Supreme Court observes that
there are number of tests that are required to be looked into while deciding
whether an item of expenditure is revenue or capital. One such parameter
is whether the replacement of that asset had resulted in an increase in
production capacity. This is a universal parameter, applicable both in the
context of a textile mill and cement production plant.
26. In the event that the replacement had resulted in the production
capacity being status quo, evidently, the replacement would be revenue in
nature and in an event where the production capacity had stood enhanced,
the inference was that the expenditure was capital in nature.
27. In Ramaraju Surgical Cotton Mills49 the comparative details of
production capacity were unavailable on record. The matter was hence
remitted to the Commissioner of Income Tax (Appeals) for denovo
48 294 ITR 328
49 Foot Note Supra (48)
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consideration, including specifically on the point relating to production
capacity, and the assessee was given liberty to place the necessary details
before the authority.
28. We are given to understand that several appeals touching on the
same question have been remitted to the first appellate authority by this
Court and Mr.Narayanaswamy confirms that the Department has accepted
the position that increase or otherwise in production capacity would be an
important and critical parameter to determine whether the expenditure
incurred on replacement of machinery is revenue or capital.
29. The Department, he says, has accepted the claim under Section
37 as allowable, in circumstances where the assessee has been able to
demonstrate that the production capacity has remained static, both pre and
post replacement of machinery.
30. In view of this admitted position, we propose to decide this
issue, based on the factual position that the production capacity has not
increased. In fact, the Departmental Representative accede to the fact that
the production capacity has not been enhanced, but only states that that is
not the sole relevant parameter (See internal page 6 of Tribunal's order,
paragraph 7).
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31. In addition, and to satisfy ourselves of this aspect, we had
sought the requisite comparative production details for the relevant period,
and the same have been produced under compilation dated 21.01.2025,
copies of which have been supplied to the revenue as well. The details are
as follows:
Place of Factory Unit of Installed Capacity (Maximum production Capacity)
Measurement Assessment Assessment Assessment
Year 1995-96 Year 1996-97 Year 1997-98
Ramasamy Raja Tons 7,50,000 7,50,000 7,50,000
Nagar, Tamil
Nadu
Jayanthipuram, Tons 11,00,000 11,00,000 11,00,000
Andhra Pradesh
TOTAL CAPACITY 18,50,000 18,50,000 18,50,000
32. The tabulation is supported by extracts from the Annual
Reports for the relevant financial years (Schedule M). Schedule M
establishes categorically that there is no increase in the production
capacity either in RR Nagar factory or in Jayanthipuram factory which
remain constant at 7,50,000 and 11,00,000 tonnes per annum respectively
both pre and post the year of replacement. In the RR Nagar factory in
fact, the actual production for the year ending 1996-97 is in excess of the
installed capacity. This is attributable, according to the learned assessee
counsel on instructions, to improved technology and better production
efficiency.
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33.In light of the above position and seeing as the installed capacity
has remained constant over the years in question without there being any
increase thereof, we are of the considered view that the expenditure
incurred would be revenue in nature.
34. The first substantial question of law is answered in favour of the
assessee and against the revenue.
Question of law No.2:Whether in the facts and circumstances of the
case, the Tribunal was right in holding that the assessing officer cannot
give any finding on the eligibility to benefit of Sec.35(i)(iv), while the
matter has been referred to and is pending before the competent
authority?
35. This very issue has come up for consideration in T.C.Nos.2632
and 2633 of 2006 and by order dated 09.12.2024, we have decided the
question adverse to the assessee following an order of the Tribunal dated
26.12.2002 for AY 1996-97 that has not been agitated by the assessee but
accepted. Hence, and in the interests of consistency, this substantial
question of law is answered in favour of the revenue and against the
assessee.
Question of Law No.3: Whether in the facts and circumstances of the
case, the Tribunal was right in allowing 100% depreciation to fly ash silo
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treating it as a pollution control equipment?
36. The assessee had claimed 100% depreciation on a ‘Fly Ash
handling system’. The depreciation claimed was a sum of Rs.2,78,90,013/-
and the relevant Entry in the depreciation table in Appendix I of the
Income Tax Rules,1962 in terms of Section 2(iv)(e) of the Act reading as
follows:
III. MACHINERY AND PLANT
2………..
(iv) Air pollution control equipments, being—. . . .
‘(e) Ash handling system and evacuation system’.
37. The assessing authority was of the view that the above Entry
required an eligible assessee to both ‘handle’ fly ash, meaning to contain
it, as well as to evacuate it in a proper fashion. In the assessee's case, fly
ash is an input for the manufacture of cement. The fly ash was being stored
in large silos or storage tanks and was being channelised from those tanks
into the processes of cement manufacturing.
38. Thus, according to the officer, the assessee was merely storing
the fly ash and there was no compliance with the condition relating to
evacuation. Being of this view, he rejected the claim for depreciation. In
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appeal, the CIT(A) agreed with the assessing authority, being of the view
that the system cannot be treated as an air pollution control equipment in
terms of the relevant Entry.
39. The Tribunal reversed the above findings noting that the silos
that were used to contain fly ash, achieved the purpose of both reducing
air pollution as well as ‘evacuation’ as it channelised the fly ash into the
manufacturing process. The Tribunal disagreed with the findings of the
lower authorities that the condition relating to ‘evacuation’ would be
satisfied only by the disposal of the fly ash outside the premises of the
assessee.
40. Mr.Narayanaswamy would defend the orders of the assessing
authority and CIT(A) pointing out that the intention behind the full grant of
depreciation at 100% was to ensure the removal of the fly ash from the
premises. He would point out that had it been the intention of the Statute
to merely provide for the use of fly ash, the entry would not have contain
the term 'evacuation'. According to him, the dominant object of the entry
was the evacuation of fly ash outside the premises and not the mere
storage of fly ash, which is the activity engaged in by the assessee.
41. Per contra, learned counsel for the assessee would support the
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order of the Tribunal pointing out that the findings had been rendered by
the Tribunal only after examination of the factory premises. The findings
of the Tribunal have been rendered after an inspection of the factory,
where the silos had been seen and the Members taken note of the fact that
the containment of the fly ash had been achieved.
42. Having heard both learned counsel, we are of the considered
view that the assessee must succeed. It is true that the entry in question
reads 'Ash handling system and evacuation system'. The grant of 100%
depreciation is thus for a process that must both contain and evacuate fly
ash that pollutes the air. It is nobody's case that the silos installed in the
factory do not achieve the purpose of handling/containing the pollutant.
43. The main objection taken by the authorities is that the fly ash
has not been disposed outside the premises but has only been used in
production. We do not see the merit in this objection as we are of the view
that the condition concerning ‘evacuation’ would stand fulfilled by any
measure of ensuring that the fly ash has been effectively used.
44. The mode and manner of disposal is irrelevant so far as it is
efficient and achieves the object of removal from the atmosphere.
Needless to say, the use of fly ash in the manufacturing process has
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effectively rid the premises of the pollutant, and in a gainful manner. We
wonder what could be a better mode of evacuation. We hence agree with
the conclusions of the Tribunal that the method followed by the Assessee
for containment and use of fly ash effectively achieves the twin objects of
both handling/containing the fly ash as well as evacuates it from the
premises by channelising it into the production process.
45. For that matter, any effective methodology/machinery that is
followed/installed by an assessee to contain the dispersion of fly ash
would satisfy the object and intendment of this requirement. The Assessee
is entitled for the grant of 100% depreciation in this regard. This
substantial question of law is answered in favour of the assessee and
against the revenue.
Question No.4: Whether in the facts and circumstances of the case, the
Tribunal was right in treating the amount adjusted by IFCI from the new
loan sanctioned by it towards interest payable on earlier loans as interest
actually paid by the assessee within the time stipulated under Section
43AB?
46. The assessee had made a provision for a sum of
Rs.3,50,02,516/- towards payment of interest to IFCI and claimed the
same as deduction under Section 43B of the Act on the ground that the
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payment had been made prior to the due date.
47. The issue was taken up for verification by the assessing officer,
who noted from the financials that the outstanding amount had, in fact, not
been paid to IFCI as claimed. He, hence, proposed to disallow the interest
on the ground that Section 43B requires actual payment as a pre-condition
for allowance of deduction which condition was not satisfied in the present
case.
48. The stand of the assessee was that it had applied for an
additional loan from IFCI which had been sanctioned and hence the
interest payments could be taken as adjusted against the fresh disbursals of
the loans. However, since it had been unable to establish before the
assessing authority that the fresh loan had, in fact, been paid over to it, the
assessing authority invoked the proviso to Section 43B and disallowed the
amount in terms of the following discussion:
‘The proviso to S.43B stipulates two conditions for
allowing the claim:
i) The amount is actually paid by the assessee
on or before the due date.
ii) And the evidence of such payment is furnished
by the assessee along with the return.
According to the Assessee it has met both the above
conditions. The liability to pay interest was extinguished by
adjusting the interest payable towards disbursed of fresh
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loan and the letter of the IFCI acceding to the request of the
Company furnished along with the return of Income
amounted to furnishing of evidence of payment.
The issue revolves around the scope of the expression
“actually paid”. According to the Assessee the
extinguishment of liability would amount to actual payment.
The Assesses’s argument is not accepted for the reason that
the adjustment of interest payable cannot be equated with the
expression “actually paid”. The S.43B also requires the
assesssee to furnish evidence of payment along with the
return. This implies actual out go of money from the assessee
to the financial institution. In this case, there is only
adjustment of the interest payable. As allowance is based
only on actual payment and not on the basis of adjustment
the claim is disallowed. If the intention of the legislative was
to include adjustments of the type claimed by the assesse the
term actually paid would not have been used.
In view of the above, the claim is not accepted.’
49. The CIT(A) sustains the disallowance, as against which the
assessee filed an appeal before the Tribunal. The Tribunal has reversed
the orders of the lower authorities returning a finding that the claim was in
order, since the amount had actually been paid by the assessee.
50. We are unable to glean any support for the above conclusion by
the Tribunal from the records. In fact, the findings of the assessing
authority are contrary insofar as the assessee was specifically asked to
provide materials in support of the submission that the loan had been
disbursed, which it had been unable to do. We too sought such a
clarification from the assessee requiring it to produce some material, either
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by way of bank statement or letter of corroboration from the bank to no
avail.
51. In such circumstances, we are of the considered view that the
findings of the Tribunal that the amount had actually been paid by the
assessee is sans any material to support the same. The provisions of
Section 43B, insofar as they relate to the condition of actual payment, call
for a strict satisfaction and the failure of the assessee to have produced any
material in this regard is fatal to its case.
52. This substantial question of law is answered in favour of the
revenue and against the assessee.
Question No.5:Whether in the facts and circumstances of the case, the
Tribunal was right in holding that excise duty, customs duty, windmill
power receipts etc. do not form part of the total turnover for the purpose
of calculating the benefit u/s.80HHC?
53. Both learned counsel would accede to the position that this issue
is to be answered in favour of the assessee by virtue of the judgment of the
Bombay High Court in CIT V. Sudharshan Chemicals Industries
Limited50. The relevant portion of the judgment reads as follows:
6. We find merit in the contentions of the assessee.
Under Section 80HHC, the Legislature intends that the
50 245 ITR 769
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profits from exports should not be taxed. For this purpose, a
formula has been introduced whereby if the business is of
composite nature then the proportionate profit relatable to
the export business is to be found out by multiplying the
profits of a business by the export turnover and dividing the
product by the total turnover. This formula finds place
in Section 80HHC(3) as it stood at the relevant time. Under
Clause (b) of the Explanation to Section 80HHC, export
turnover is defined to mean sale proceeds received in India
by the assessee in foreign exchange. Under the said
definition, export turnover is defined to mean the sale
proceeds of any goods which are exported out of India but
which will not include freight or insurance. Clause (ba)
defines total turnover to exclude freight or insurance. This
Clause (ba) explains the turnover in a negative manner so as
to exclude freight or insurance. Therefore, a combined
reading of the' above two clauses shows that they include
anything which has nexus with the sale proceeds.
Correspondingly, they show that they exclude everything
which has no nexus with the sale proceeds. Further, the
meaning of export turnover in Clause (b) of the Explanation
to Section 80HHC, therefore, clearly shows that export
turnover did not include excise duty and sales tax. The export
turnover is the numerator in the above formula whereas the
total turnover is the denominator. The above formula has
been prescribed to arrive at the profits from exports. In the
circumstances, the above two items, namely, sales tax and
excise duty, cannot form part of the total turnover. In fact, if
the denominator was to include the above two items and if
the numerator excluded the above two items then the formula
would become unworkable. In the circumstances, we are of
the view that in order to ascertain the export profits, the
above two items cannot be introduced to inflate the total
turnover artificially in order to reduce the benefit which an
assessee is entitled to. Ultimately, the object of Section
80HHC is required to be kept in mind in order to encourage
exports. The Legislature has applied the above formula in
order to find out the profits derived from the exports. In this
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connection, Section 80HHC(1) may also be noticed.
Under Section 80HHC(1), it is, inter alia, provided that
where an assessee is engaged in the business of exports of
any goods, there shall be allowed in computing the total
income of the assessee, a deduction of the profits derived by
the assessee from the export of such goods. In other words,
in computing the total income of such an assessee, profits
derived by the assessee from the exports are deductible. The
above expression, namely, "profits derived from exports"
also finds place in Section 80HHC(3)(a). It says that where
the export is of goods, the profits derived from such export
shall be the amount which bears to the profits of the
business, the same proportion as the export turnover in
respect of such goods bears to the total turnover of the
business. In fact, the earlier section 80HHC(3) consisted of
two parts, namely, whether the assessee carried on a
business as 100 per cent. exporter and secondly whether the
assessee carried on a composite business. In the latter case,
it was provided that the profits derived from exports shall be
the amount which bears to the profits of the business as
computed under the head "Profits and gains of business", the
same proportion as the export turnover to the total turnover.
The emphasis is on the words "profits derived from the
exports". Therefore, weightage must be given to such profits.
Such profits cannot be reduced artificially by including
statutory levies in the denominator, namely, total turnover.
Therefore, the turnover should be restricted to such receipts
which have an element of profit in it. It is only the actual sale
price which is relevant. Anything charged by the assessee by
way of excise duty and sales tax cannot be taken into account
as they do not have any element of profit. Even according to
the accounting principles, such levies do not form part of the
profit and loss account. In fact, they are shown as liability in
the balance-sheet. In the circumstances, the above two items
cannot be included in the total turnover. We prefer this
interpretation as it advances the object sought to be achieved
by the Legislature. Lastly, we are of the view that sales tax
and excise duties are levied under the separate enactments
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which have different objects. We are concerned with Section
80HHC which is a separate code by itself. Hence, the
general definition of the word turnover or the case law
dealing with the said definition under the Sales Tax
Act which is a State levy, cannot be imported into Section
80HHC of the Income-tax Act. Hence, we do not find any
merit in these appeals.
54. Hence, this question of law is answered in favour of the assessee
and against the revenue.
Question No.6:Whether in the facts and circumstances of the case, the
Tribunal was right in granting full depreciation on the dumpers even
though there was no evidence adduced that they had used it for more
than 180 days, or even received the same in their site prior to 180 days?’
55. The assessee had claimed depreciation of 25% on dumpers
purchased from Bharath Earth Movers Limited (BEML), Bangalore. The
assessing authority had noted that both the dumpers had been dispatched
from BEML only on 29th of September, 1995 as established by the gate
passes produced.
56. Having regard to the distance that the dumpers had to travel to
reach from Bangalore to reach the assessee's factory at Jayanthipuram, the
claim of the assessee for full depreciation was rejected and depreciation
was granted for part of the year at 12.5%. The order of the assessing
authority was confirmed by the CIT(A) as well. In second appeal, the
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Tribunal reversed the orders of the lower authorities giving the benefit of
doubt to the assessee.
57. A categoric finding of fact is rendered by the Assessing Officer
as well as the first appellate authority to the effect that no evidence has
been produced by the assessee before the authorities to establish that the
dumpers had been received in its premises and put to use prior to
01.10.1995. This could very easily been done either by showing gate pass
at the time of receipt of vehicles or any other documentation to indicate
receipt and use of the same prior to 01.10.1995.
58. Since the assessee has admittedly not done so, we are of the
view that the Tribunal ought not to have reversed the orders of the lower
authorities. The Tribunal proceeds on the concept of passive user which is
not applicable to the fact and circumstances of the present case. The
benefit of depreciation to a passive user would require the user to establish
that it was in possession of the asset but was unable to use the asset for a
certain period on account of factors beyond its control.
59. In the present case, even the assessee being in possession of the
asset prior to 01.10.1995 is in doubt and has not been established. Hence,
we reverse the order of the Tribunal on this account and answer this
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substantial question of law in favour of the revenue and against the
assessee.
60. In fine, substantial questions 1,3 and 5 are answered in favour of
the assessee and substantial questions 2,4,6 are answered in favour of the
revenue.
61. This Tax Case (Appeal) stands disposed in terms of this order.
No costs.
[A.S.M., J] [G.A.M., J]
sl 22.01.2025
Index:Yes
Speaking order
Neutral Citation:Yes
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DR. ANITA SUMANTH,J.
and
G. ARUL MURUGAN.,J
sl
22.01.2025
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