Commissioner of Income TaxChennai v. M/s.Rane (Madras) Ltd.61, Valachery Road,Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED: 22.06.2007CORAMTHE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJAT.C.(A).Nos.857 and 858 of 2007Commissioner of Income TaxChennai...Appellant inboth T.Cs.Vs.M/s.Rane (Madras) Ltd.61, Valachery Road,Chennai...Respondent inboth T.Cs. Appeals under Section 260A of the Income Tax Act, 1961 againstthe order of the Income Tax Appellate Tribunal, Madras 'B' Benchdated 20.1.2006 in ITA Nos.409/Mds/2000 and 631/Mds/2001 for theassessment years 1996-97 and 1997-98 against the order of theCommissioner of Income Tax Appeal IX, Chennai dated 23.12.99 inITA.No.39/99-00 for the assessment year 1996-97 and against theorder of the Commissioner of Income Tax (Appeals) IX, Chennai dated30.1.2001 in ITA.No.97/2000-2001 for the assessment year 1997-98respectively against the order of the Joint Commissioner of IncomeTax, Special Range II, Chennai dated 12.3.99 and 20.3.2000, inPAN/GIR.Nos.11-R and AAA CR 4215 M/11-R respectively.For Appellant:Mrs.Pushya SitaramanSr. Standing Counsel for IT-----J U D G M E N T(Delivered by P.D.DINAKARAN, J.)The above tax case appeals are directed against the order ofthe Income-tax Appellate Tribunal in ITA Nos.409/Mds/2000 and631/Mds/2001 dated 20.1.2006. https://hcservices.ecourts.gov.in/hcservices/

2. The Revenue is the appellant. The relevant assessmentyears are 1996-97 and 1997-98. The assessee is engaged in theproduction of recirculating ball type steering gears in the unitssituated at Velachery and Mysore. During the assessment year 1996-97, the assessee started a new industry at Pondicherry formanufacture of Rack and Pinion Steering Gears and incurred anexpenditure of Rs.2,08,00,000/- during the assessment year 1996-97and Rs.9,48,405/- during the assessment year 1997-98, for thefollowing:-1.Interest on Exim Bank Loan2.Various Raw material consumed3.Stores consumed4.Tools consumed5.Travel Expenses (for foreign & Domestictravel of Employees on training & otherofficial purposes)6.Salaries & Wages7.Printing & Stationery8.Computer Stationery9.Freight inward10.Freight outward11.Power & Fuel12.Insurance13.Repairs & Maintenance14.Central Overheads – Madras Plant15.Other various Miscellaneous expenses.The assessee claimed the entire expenditure as revenue expenditure.But, the assessing officer, by his assessment orders dated 12.3.99and 20.3.2000 for the assessment years 1996-97 and 1997-98respectively, treated these expenses as capital in nature holdingthat the Pondicherry unit is entirely a new unit. On appeals by theassessee, the Commissioner of Income-tax (Appeals), by his ordersdated 23.12.99 and 30.1.2001 for the respective assessment years,held these expenses as revenue in nature and thus, allowed theassessee's appeals. On appeals at the instance of the Revenue, theTribunal, by its common order dated 20.1.2006, confirmed the ordersof the Commissioner of Income-tax (Appeals). Hence, the Revenuehas filed the present tax case appeals raising the followingsubstantial questions of law for the assessment years 1996-97 and1997-98 :-"(i) Whether in the facts and circumstances of the case,the Appellate Tribunal was right in holding that theexpenditure incurred by the assessee in setting up a newfactory at Pondicherry is revenue in nature on the groundthat it is only an extension of the existing business https://hcservices.ecourts.gov.in/hcservices/ (ii)Whether the Tribunal was right in holding that thenew unit was an extension of the existing business of theassessee, when the products manufactured therein arecompletely different ? "3. Further, during the assessment year 1997-98, the expensesincurred by the assessee to the tune of Rs.1,92,48,704/- withrespect to the reconditioning of internal thread grinding andexternal thread grinding machines at UK was disallowed by theassessing officer on the ground that it will have an enduringbenefit to the assessee and accordingly, treated the same ascapital expenditure. The Commissioner of Income-tax (Appeals), byhis order dated 30.1.2001, allowed the appeal filed by the assesseeholding the same as revenue expenditure, which was confirmed by theTribunal by the impugned common order dated 20.1.2006. Aggrievedby the same, the Revenue has raised another substantial question oflaw, which reads as follows:-" (iii) Whether in the facts and circumstances of thecase, the Tribunal was right in allowing a deduction ofthe amounts spent on reconditioning of machinery, whichgave an enduring benefit to the assessee as revenueexpenditure ?"4. Heard Mrs.Pushya Sitaraman, learned senior standingcounsel appearing for the Revenue.5.1. With respect to questions (i) and (ii), the learnedsenior standing counsel has not disputed the settled proposition oflaw as held by the Delhi High Court in Additional Commissioner ofIncome-tax v. Rewari Electric Supply & Industries [(1982) 138I.T.R. 473], by the Bombay High Court in Additional Commissionerof Income-tax v. Aniline Dyestuffs & Pharmaceuticals (P) Ltd.[(1982) 138 I.T.R. 843]and by this Court in South India Viscos Ltd.v. Commissioner of Income-tax [(1998) 229 I.T.R. 203], whereunderit is held that the interest paid on monies borrowed for purchaseof machinery is allowable as business expenditure. Similarly,there is no dispute as to the proposition of law that the intereston borrowed capital regardless of the fact whether new unit hadgone into production or not is a revenue expenditure as held by theMadhya Pradesh High Court in Commissioner of Income-tax v. BilaiIron & Steel Ltd. [(1998) 234 I.T.R. 667]. 5.2. Therefore, the only crucial issue is whether theindustry started by the assessee at Pondicherry for manufacture ofRack and Pinion Steering Gears is an extension of existing units atVelachery and Mysore engaged in the production of recirculatingball type steering gears. A reference to the factual aspect of https://hcservices.ecourts.gov.in/hcservices/ the case is relevant to decide whether the industry started atPondicherry for manufacture of Rack and Pinion Steering Gears is anextension of the existing units at Madras and Mysore or is totallya new unit by itself.5.3. Both the appellate authorities below have concurrentlyfound that while the existing units at Velachery and Mysore areengaged in recirculating ball type steering gears, in the newindustry at Pondicherry, the assessee proposed to manufacture rackand pinion steering gears. It is not in dispute that in both theunits, viz., existing units at Velachery and Mysore and new unit atPondicherry, the assessee manufactures the steering gears, while atVelachery and Mysore, it manufactures ball type steering gears andat Pondicherry, rack and pinion steering gears. Except the changein the manufacturing process and mechanism of steering gears, theultimate production at all the places remains the same, viz.steering gears. If that be so, such a change in the manufacturingprocess and in the mechanism, is nothing but based on newtechnology brought in and the introduction of such a new technologywould not be a ground to construe that the steering gearsmanufactured at Pondicherry are totally a new production by theassessee. It is for that reason, both the Commissioner and theTribunal had rightly come to the conclusion that the industry setup by the assessee at Pondicherry is not a new industry, as thesame does not manufacture any new products. 5.4. Once there is no difficulty to reach a conclusion thatthe product remains one and the same, viz., steering gears, we donot hesitate to hold that the industry set up at Pondicherry isnothing but an extension of the existing industries at Velacherryand Mysore and the deduction claimed by the assessee with regard tothe expenditure incurred in connection with the new unit atPondicherry, even though it is independent, because of theinterconnection of management, financial, administrative andproduction aspects, such expenditure has to be construed as revenuein nature and therefore, deductible, vide the decisions ofKarnataka High Court in Commissioner of Income-tax v. IndianTelephone Industries Ltd. [(1989) 175 I.T.R. 215] and inCommissioner of Income-tax v. Hindustan Machine Tools Ltd. [(1989)175 I.T.R. 212]; as well as the decision of the Delhi High Court inAdditional Commissioner of Income-tax v. Rewari Electric Supply &Industries [(1982) 138 I.T.R. 473]; Bombay High Court in AdditionalCommissioner of Income-tax v. Aniline Dyestuffs & Pharmaceuticals(P) Ltd. [(1982) 138 I.T.R. 843]; this Court in South India ViscosLtd. v. Commissioner of Income-tax [(1998) 229 I.T.R. 203] andthe decision of Madhya Pradesh High Court in Commissioner ofIncome-tax v. Bilai Iron & Steel Ltd. [(1998) 234 I.T.R. 667],referred supra. https://hcservices.ecourts.gov.in/hcservices/

5.5. In view of the above, we do not see any substantialquestion of law that arises for our consideration with regard tothe issue raised in questions (i) and (ii).6.1. With regard to the third question, viz., whether theamounts spent on reconditioning of machinery is a revenueexpenditure, it is well settled that if any replacement orreconditioning of machinery is made with a view to maintain theexisting asset, the expenditure incurred on such replacement orreconditioning has to be treated as revenue expenditure.6.2. The Andhra Pradesh High Court in Commissioner of Income-tax v. Nizam Sugar Factory Ltd. [(1979) 116 I.T.R. 0706], heldthat if the replacement of spare parts and reconditioning ofgenerator is with a view to preserve and maintain the existingasset and if no new asset is created in the process of suchreplacement, the expenditure incurred on such replacementconstitutes revenue expenditure, as the amounts spent onreplacement of spare parts cannot be said to have created anyadvantage of enduring nature to the assessee.6.3. Further, in Commissioner of Incme-tax v. Kalyanji Mavjiand Co. [(1980) 122 I.T.R. 49], where the assessee incurredexpenditure in renovating the building, reconditioning themachinery, etc. and claimed the same as revenue expenditure, whichwas disallowed by the department and the Tribunal and on areference to the Calcutta High Court, it was held as revenueexpenditure, the Apex Court affirmed the view of the Calcutta HighCourt and held that no new asset was brought into existence nor wasan advantage for the enduring benefit of the business and thus, theexpenditure was revenue in character.6.4. The Bombay High Court in Commissioner of Income-tax v.Chowgule and Co. Pvt. Ltd. [(1995) 214 I.T.R. 523], held that ifthe existing units and the new unit, even though independent, areinterlacing and interconnected with the management, financial,administrative and production aspects, the reconditioning of theexisting machineries is nothing but a replacement by new parts andtherefore, the expenditure incurred in that regard has to betreated as a revenue expenditure, as the same is intended forputting the machineries in a working condition and did not resultin emergence of a new asset.6.5. Accordingly, we also do not see any question of law forconsideration of the same by this Court with regard to the issueraised in question (iii). https://hcservices.ecourts.gov.in/hcservices/ In such circumstances, we find no error or illegality in theorder of the Tribunal. Accordingly, finding no substantialquestion of law arises for our consideration, the tax case appealsstand dismissed.sraSd/Asst.Registrar/true copy/Sub Asst.RegistrarTo1.The Assistant Registrar,Income Tax Appellate TribunalSastri Bhavan, Rajaji Salai,Bench "B", Chennai.2.The Commissioner of Income Tax (Appeals IX), 121, Mahatma Gandhi Road, Chennai 34.3.The Joint Commissioner of Income-tax, Special Range-II, Chennai.34.4.The Commissioner of Income Tax, Chennai.+ 1 cc to Ms. Pushya Sitaraman, Advocate SR No. 37300GG(CO)SR/17.7.2007TC(A)Nos.857 and 858 of 2007