Case Law Details

Case Name : CIT Vs Modi Rubber Ltd. (Delhi High Court)
Appeal Number : Income Tax (Appeal) no. 259 of 2014
Date of Judgement/Order : 04/08/2015
Related Assessment Year :
Courts : All High Courts (4166) Delhi High Court (1288)

Brief of the Case

Delhi High Court held In the case of CIT vs. Modi Rubber Ltd. that in present case, it is clear that the two Banbury mixers have been described by the Assessee itself as equipment used for mixing natural rubber, synthetic rubber, carbon black, chemicals and other raw materials and that it is the most important part for tyre manufacturing plant. It has described the Banbury F 370 equipment as a “major equipment and is used for mixing the rubber and chemical on regular basis and needs to be kept in perfect condition to ensure uninterrupted production and quality parameters. The invoices produced by the Assessee do not support its plea that the expenditure was incurred only on replacement the body of the mixers.

Facts of the Case

The assessee filed its return of income on 31st October 2001 declaring a loss of Rs. 40,11,55,746. The assessment was completed by the AO under Section 143 (3) on 26th March 2004 at an income of Rs. 28,49,40,760 after adjusting all brought forward losses and depreciation. In response to the rectification application filed by the Assessee, the income assessed was revised at Rs. 27,77,93,470.

Contention of the Assessee

 The ld counsel of the assessee submitted that imported part was only the body of the Banbury mixer and not the mixer itself. Since the body of the Banbury mixer had got worn out it required to be replaced. According to him, the expenditure was incurred only on replacing the body of the mixer.

Held by CIT (A)

 The CIT (A) held that the AO appeared to have been influenced by the heavy amount of expenditure. Moreover, the expenditure on identical items incurred in the earlier years were allowed as revenue expenditure. No distinguishing feature was pointed out by the AO as regards the AY under consideration. The CIT (A) accordingly deleted the disallowance by holding that the expenditure incurred on the Banbury internal mixer G.K. 225N and reduction gear box would fall within the meaning of repairs and maintenance only.

Further CIT (A) held that the AO had not recorded any finding as to how the Banbury mixture and gear boxes could function independently and how the other plant and machinery were expected to run without the support of the aforesaid components.

Held by ITAT

 ITAT agreed with the CIT (A) and held that the cost of importing the Banbury internal mixer GK 225N and reduction gear box respectively would fall within the meaning of expenditure on ‘current repairs and maintenance’ and entitled to deduction as such.

Held by High Court

 The Court is unable to accept the submission of the assessee that only body of the mixture has been imported. Both the invoice dated 15th September 1999 and the corresponding bill of entry, copies of which have been placed on record, describe the equipment imported as one heavy duty internal mixer G.K. 255N. There is no indication whatsoever that what have been imported is only the body and not the entire mixer. There was sufficient opportunity to the Assessee to produce before the AO in the remand proceedings, sufficient documentation to substantiate its plea that what was imported was only the body of the mixer. The Assessee however, failed to do so.

In the case of CIT v. Saravana Spg. Mills (P) Limited (2007) 293 ITR 201 the Supreme Court while dealing with the issue whether a ring frame in a textile mill was an independent and separate machine, held that each machine in a textile mill may be part of the integrated process of manufacture of yarn and integrally connected to the other machines in the mill for production of the final product. However, such interconnection did not take away the independent identity and distinct function of each machine. Accordingly, it was held that each machine in a textile mill was required to be considered independently. As regards the question whether a particular item of expenditure amounted to expenses towards „current repairs‟ the Supreme Court explained that the question to be asked was “whether the expenditure is incurred to „preserve and maintain‟ an already existing asset and not to bring a new asset into existence or to obtain a new advantage. For current repairs determination, whether expenditure is revenue or capital is not the proper test.” It was held that the replacement of a ring by a new one did not amount to current repairs.

The issue was re-visited by the Supreme Court in Commissioner in Income Tax v. Sri Mangayarkarasi Mills (P) Ltd. (2009) 315 ITR 114 (SC). There the question was whether the expenditure incurred by the Assessee, which was engaged in the manufacture and sale of cotton yarn, on replacement of machinery was the revenue expenditure. On the facts of the case, and applying the tests enunciated in CIT v. Saravana Spg. Mills (P) Limited 2007) 293 ITR 201 , the claim of the Assessee was negatived.

In present case, it is clear that the two Banbury mixers have been described by the Assessee itself as equipment used for mixing natural rubber, synthetic rubber, carbon black, chemicals and other raw materials and that it “is the most important part for tyre manufacturing plant”. It has described the Banbury F 370 equipment as a “major equipment and is used for mixing the rubber and chemical on regular basis and needs to be kept in perfect condition to ensure uninterrupted production and quality parameters.” The invoices produced by the Assessee do not support its plea that the expenditure was incurred only on replacement the body of the mixers.

The Assessee had sufficient opportunities to demonstrate before the AO that the expenditure incurred by it was not of a capital nature. The Assessee was unable to succeed in that effort. The only documents produced by it to show that the Banbury mixers imported were vital to the tyre manufacturing plant and were of enduring benefit to it. The expenditure incurred in that behalf was rightly held by the AO, in terms of the tests laid down by the Supreme Court in Saravana Spg. Mills (P) Ltd. (2007) 293 ITR 201 and Sri Mangayarkarasi Mills (P) Ltd. (2009) 315 ITR 114 to be of a capital nature.

However the expenditure on the reduction gear box for the 3 coil calendar stands on a different footing. From the invoice produced by the Assessee, it is clear that the said imported item was part of the 3 roll calendar. Therefore, the Court concurs with the decisions of the CIT (A) and ITAT holding it to be revenue expenditure and deleting the disallowance of the AO.

The third and final issue projected by the Revenue pertains to deletion of the notional interest of Rs. 24 lakhs which was sought to be added by the AO on the ground that an interest free loan of Rs. 2 crores was given by the Assessee to its sister concern, Modi Stone Limited. In this regard it is seen that the ITAT noted that the sum of Rs. 2 crores was advanced to Modi Stone Limited on account of commercial expediency as the said company was declared sick by the BIFR by its order dated 15th April 1998. No interest was accrued on the above amount. From a perusal of the financial statements for the year ended 30th September 1997 it was seen that the Assessee was having mixed pool of funds comprising owned funds and loan funds. It was held that in such a situation where the one to one nexus between the borrowed funds and the loan advanced to Modi Stone Limited was unable to be established, the loan to Modi Stone had to be held as having come out of its own funds. Consequently, the order of AO and CIT (A) was set aside.

Accordingly, appeal disposed of.

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