High Court · 2007

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED: 14.11.2007 CORAMTHE HON'BLE MR.JUSTICE K.RAVIRAJA PANDIANANDTHE HON'BLE MRS.JUSTICE CHITRA VENKATARAMANTax Case (Appeal) No.1391 OF 2007The Commissioner of Income Tax, Madurai.Appellant v.M/s.Sree Kaderi Ambal Mills Ltd.,Super B-3 Industrial Estate,Madurai 625 007.Respondent Appeal preferred under Section 260A of the Income-tax Act, 1961against the order of the Income-tax Appellate Tribunal, D Bench,Chennai dated 08.06.2007 made in I.T.A. No.1364/Mds/2001 for theassessment year 1997-98 as against the Commissioner of Income Tax(Appeals) I, Madurai dated 9.8.2001 made in P.A.NO.49-001-CN 0065 inI.T.A.No.103/2000-2001 for the assessment year 1997-1998 and asagainst the Joint Commissioner of Income Tax, Spl. Range II, Maduraiorder dated 24.3.2000 made in P.A.No.49-001-CN-0065 for theassessment year 1997-1998.For Appellant : Mr.J.Naresh Kumar Standing Counsel for ITJUDGMENT (Judgment of the Court was delivered by K.RAVIRAJA PANDIAN, J.)The appeal is filed by the revenue against the order of theIncome-tax Appellate Tribunal 'D' Bench, Chennai dated 08.06.2007made in I.T.A. No.1364/Mds/2004 for the assessment year 1997-98. https://hcservices.ecourts.gov.in/hcservices/

2. The material facts, as culled out from the statement offacts appended to the memorandum of grounds, are as follows :The assessee filed its return of income for the assessment year1997-98 returning an income of Rs.50,67,310/-. The assessee, interalia, claimed the commission paid for opening of the letter ofcredit for the purpose of import of machinery to the tune ofRs.1,30,922/- as revenue expenditure. The assessing officer treatedthe purchase of machinery as capital expenditure and accordinglytreated the commission paid for opening of letter of credit ascapital expenditure and brought the same to tax. Aggrieved by theorder of the assessing officer, the assessee filed an appeal beforethe Commissioner of Income Tax (Appeals). The Commissioner ofIncome Tax (Appeals) held that the replacement of machinery hasalready been held as revenue expenditure and accordingly the LCcommission paid on such purchase of machinery should only be treatedas revenue expenditure and thus decided the issue in favour of theassessee. 3. Aggrieved by the order of the Commissioner of Income Tax(Appeals), the Revenue took up the matter before the Income TaxAppellate Tribunal. The Tribunal, by its consolidated order dated23.06.2005 made in I.T.A. No.467/Mds/00, I.T.A. No.1364/Mds/2001 andI.T.A. No.106/Mds/2002, held that the issue of replacement ofmachinery is a revenue expenditure, however, did not adjudicate theissue as to the commission paid for opening of letter of credit.Therefore, the revenue filed a miscellaneous petition before theIncome Tax Appellate Tribunal in M.P. No.201/Mds/2001. TheTribunal, by its order dated 11.07.2007, recalled the earlier orderdated 23.06.2005 in respect of ITA No.1364/Mds/2001 to consider theissue and by the impugned order dated 08.06.2007 held that even ifthe expenditure on account of claim of commission is held to be inthe nature of capital expenditure, the same has to be allowed asrevenue expenditure on account of replacement of machinery, in viewof the decision of this Court in the case of CIT v. Janakiram MillsLtd., (2005) 275 ITR 403 and confirmed the order of the Commissionerof Income Tax (Appeals). The correctness of the said order is putin issue before this Court by framing the following substantialquestion of law :“Whether on the facts and in circumstances of thecase, the Tribunal was right in allowing the L.C.commission as revenue expenditure, when the same is beingpaid towards purchase of the machineries, which has beencapitalized?” 4. We heard the learned counsel on either side and perused thematerials available on record. https://hcservices.ecourts.gov.in/hcservices/

5. The Tribunal primarily based on the decision of this Courtin CIT v. Janakiram Mills Ltd., (2005) 275 ITR 403 has held thatthe commission paid to the Banks for opening of letter of credit isrevenue expenditure. 6. The Supreme Court in the case of CIT v. Ramaraju SurgicalCotton Mills, (2007) 294 ITR 328 set aside the decision of theMadras High Court in the case of CIT v. Janakiram Mills Ltd.,(2005) 275 ITR 403 without expressing any opinion on merits as towhether the expenditure incurred in replacement of the assetswithout increasing the production capacity would amount to revenueexpenditure, on the ground that there was no material available onrecord to support the contention that the replacement of asset waswithout increasing the production capacity or expenditure forreplacing the old machinery by new machinery, which constitutes anadvantage of enduring nature and therefore the expenditure wascapital in nature. The Supreme Court in the case of CIT v.Saravana Spinning Mills P. Ltd., (2007) 293 ITR 201 held that undersection 31(i) of the Income Tax Act, 1961, the deduction admissiblewas only for the current repairs. The question as to whether theexpenditure incurred by the assessee conceptually is a revenue orcapital in nature was not relevant for deciding the question whetherthe expenditure comes within the etymological meaning of theexpression 'current repairs', and the Supreme Court held that if theexpenditure was revenue in nature, it cannot fall within theconnotation of 'current repairs'. Hence, none of the cases referredby the lower authorities advances the case of either of the parties.7. Here, in this case, for the purpose of importation ofmachinery for replacing the old worn out machinery, the assessee haspaid commission to the bankers for opening of letter of credit. Themachinery so imported might be for replacing the old machinery whichwas found to be defective, but that would not be germane to decidethe issue in the appeal. Letter of credit has been opened forsecured performance of the contract for payment of saleconsideration of the machinery. As and when the machinery isimported or cleared, letter of credit issued by the banks would benegotiated by the seller and realise the sale consideration throughthe Bank. In order to perform this service of opening a letter ofcredit, the banker charged certain amount by way of commission andthat has been paid. The payment so made as commission for openingof the letter of credit cannot be regarded as sale price of themachinery, so as to treat it as a capital expenditure, as it has norelation to the capital or capital goods of the assessee and itcould be regarded only as a revenue expenditure. Though the reasonstated by the Tribunal was somewhat different, the ultimateconclusion that the commission paid for the opening of the letter ofcredit could be regarded as revenue expenditure is correct. We do https://hcservices.ecourts.gov.in/hcservices/ not find any ground to interfere with the conclusion arrived at bythe Tribunal. The appeal is dismissed. No costs. Sd/-Asst. Registrar./true copy/Sub Asst. Registrar.krr/mfTo1. The Assistant RegistrarIncome Tax Appellate Tribunal,Bench C, Rajaji Bhavan, III Floor, Besant Nagar, Chennai-90.2. The Income Tax Appellate TribunalBench D, Chennai.3. The Commissioner of Income Tax (Appeals)IMadurai- 625 002.4. The Joint Commissioner of Income Tax,Special Range II, Madurai.1 cc to Mrs. Pushya Sitaraman, Advocate, Sr. 67928T.C. (A) No.1391 of 2007ASM (CO)kk 7/1