AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2003 (10) TMI 19
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt assets which related to the closed business of fast food division/unit of the assessee-company as such not used during the previous year? (3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in deleting the addition of Rs. 2,77,887 being made treating the expenditure incurred in purchase of new transformer as capital expenditure even when the old transformer still exists in the block of asset and is not sold, discarded or demolished or destroyed?" Question No. 1 dwells on the claim of the assessee-respondent for deduction of amount of bottling fee payable under the Rajasthan Excise Act, 1950, and the relevant rules framed thereunder, liability for which was incurred during the accounting period relevant to the assessment year 1992-93, the claim was made on the basis of accounts maintained on the mercantile system. During the course of the hearing, it transpired that the claim of deduction on account of liability incurred for paying bottling fee during the accounting period relevant to the assessment year 1992-93, which is a subject-matter of this appeal, has been sought to be denied on the ground that it being a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of bottling fees, amounts to tax, duty, cess or fees within the meaning of section 43B of the Income-tax Act, 1961, so as to attract the said provisions while considering allowability of deduction of such expenses?" In D. B. Income-tax Appeal No. 8 of 2002-CIT v. Udaipur Distillery Company Ltd. (No. 1) [2004] 268 ITR 305 (Raj), the respondent-assessee in this case also, in which the same issues were raised in respect of the assessment year 1988-89, this court vide its judgment dated September 3, 2003, has answered question No. 1 holding that furnishing of a bank guarantee cannot be treated equivalent to actual payment. Therefore, if the bottling fee is to be considered as "fee" in its technical sense, the requirement of section 43B is not fulfilled. However, on the newly framed question this court has decided that looking to the nature of charges and provision of levy of taxation scheme under article 265 and the provisions of the Rajasthan Excise Act, 1950, and after considering a number of decisions of the hon'ble Supreme Court, bottling fee is not a fee in its technical sense as part of taxation, but is a consideration for parting with exclusive privilege of the State to de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he research and development division and such claim to deduction cannot be disallowed merely because part of the assessee's business ceased to operate during the relevant period when the assets were being used for the remaining business of manufacture and sale of alcohols. Coming to the third question, the assessee has claimed deduction of Rs. 2,77,867 as revenue expenditure for replacing the old transformer by a new transformer as an essential part of the plant and machinery already installed. The said claim of the assessee was disallowed by the Assessing Officer by treating it to be an expenditure of capital nature on two grounds, firstly, that this was purchased by a single bill and secondly, there was no replacement of the transformer as part of the existing plant because the old transformer is still lying in the block of assets of the assessee. With the aforesaid observations, the Assessing Officer has allowed depreciation for six months as the asset was acquired in the second half of the previous year relevant to the assessment year in question. In further appeal, the Commissioner of Income-tax (Appeals) was of the opinion that the transformer is an addition of new a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....till with the assessee as part of the block of assets held by the assessee, it cannot be treated as a replacement of old machinery. That must be a new machinery itself. This contention is wholly fallacious. Whenever any part of the existing plant and machinery is worn out or becomes unusable or degenerates or notwithstanding, even if it can be used it may increase the cost factor, replacement of the same has been considered by consensus of judicial opinion to be part of existing plant and machinery and it has been treated as revenue expenditure laid out in the ordinary course of business and not acquiring a new asset in the block of assets so as to be termed as capital expenditure. The Supreme Court in CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 approved the decision of the Madras High Court. In the aforesaid case, the assessee which was carrying on the business of manufacture and sale of cotton yarn, spent Rs. 93,215 for introduction of the "Casablanca conversion system" in its spinning plant. Substantially, this involved replacement of certain roller stands and fluted rollers fitted with rubber aprons to the spinning machinery, removal of ring frames from cer....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the Tribunal and allowed deduction of the expenditure to be of revenue nature. Notwithstanding, the assessee had not originally claimed it as a revenue expenditure. (The judgment of the Madras High Court is reported in CIT v. Mahalakshmi Textile Mills Ltd. [1965] 56 ITR 256). Significantly, the Madras High Court observed that whether a new asset is brought into existence or a new advantage is derived, is a question of fact. The Supreme Court affirmed the judgment of the High Court. The court said that in rejecting a contention raised by the assessee, grant of relief to him on another ground is justified. It would be open to the departmental authorities and the Tribunal, and indeed they would be under a duty, to grant that relief. The right of the assessee to relief is not restricted to the plea raised by him. The replacement of old parts necessitated on account of wear and tear for efficient running of the existing plant and machinery is a revenue expenditure. It must be noticed that in the case before the Supreme Court notwithstanding the fact that introduction of the Casablanca conversion system resulted in the change in the existing system of spinning plant altogether,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n purchased. The Allahabad High Court considered this question about the replacement of the transformer in the case of CIT v. Kanodia Cold Storage [1975] 100 ITR 155. It held that replacement of worn out parts does not by itself bring in a new asset. In considering the nature of an expenditure one should consider the productive unit as a whole and not pick out parts therein which are new. If the productive unit to the assessee remains the same but a part of it which has become unsuitable for its use is replaced by something which makes it possible for the existing plant to function efficiently, the cost incurred on such replacement would be revenue expenditure. In that case, the assessee had made a payment of Rs. 14,742 to an electric supply undertaking towards cost of transformer and service line for replacing the existing line to enable it to have higher electric power for its cold storage business and claimed its deduction as a revenue expenditure. The court said that: "Where the productive unit set up by the assessee remains the same, but a part of it which has become unsuitable for its use is replaced by something which makes it possible for the existing set up to functi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sting plant had become obsolete or in appropriate in relation to the exploitation of the new subcultures of the high yielding strains of penicillin supplied by Meiji and that the mere introduction of new biosynthetic source required the erection and commissioning of a totally new and different type of plant and machinery ....the mere improvement in or updating of the fermentation process would not necessarily be inconsistent with the relevance and continuing utility of the existing infrastructure, machinery and plant of the assessee, therefore, held to be revenue expenditure." The court had approved the test that where acquisition of know-how which results in efficient running of the existing plant, and does not alter the basic nature of the product manufactured by existing machinery notwithstanding the fact that, acquisition of such know-how was in consideration of once for all payment, it did not result in capital expenditure as by this transaction no new asset comes into existence, but it was for more efficient and more productive running of the existing business, and therefore, it was in the nature of revenue expenditure necessary for conduct and improvement of the existing ....