Decided on February 20,1992



P.K. Ammini, Judicial Member - (1.) THE former appeal is by the assessee while the latter two appeals are by the revenue. THE assessment years involved are 1982-83 and 1983-84. THE accounting periods of the assessee ended on 30-9-1981 and 30-9-1982 respectively. THE assessee is assessed in the status of an Association of Persons.
(2.) First we take up the assessee's appeal relating to the assessment year 1983-84. The only grievance in the appeal by the assessee is against the finding of the CIT (A) that expenditure claimed as repair and replacement charges under the head 'Machinery Maintenance' in the Profit and Loss Account were of capital and not of revenue in nature as claimed by the assessee. While completing the assessment, the Income-tax Officer disallowed the claim of the assessee for deduction of expenditure in respect of- JUDGEMENT_8456_TLIT0_19920.htm Since the ITO did not allow the claim of the assessee, the assessee went in appeal to the CIT (Appeals), who agreed with the finding of the Income-tax Officer except in respect of Pumps and Diesel Engine. Hence, the assessee is in further appeal before us. We have heard the parties on this point. It was contended before us on behalf of the assessee that the items in respect of which the expenditure was claimed for the repairs and replacement are all integral part of the sugar plant without which it cannot be worked. The assessee also brought the Engineer who has got the standing of 23 years and explained the working of the sugar plant. According to him, it is a composite machinery and he is a shift Engineer in the sugar factory and looking after the production. A sketch of the machinery is also produced before us. He has explained that the sugar canes are put into the kicker. It is levelled and cut into pieces and crushed by the rollers, then passes on the juice retainer tank from where it is pumped to juice heater. Lime and SO2 are added in another tank from where it is pumped into Flash tank after passing through a temperature of 100�C. Then it is clarified into mud and filtered and then goes to syrup sulphitation tank. After passing through different temperatures, vapour is passed into the condenser. Then the syrup is allowed to pass through sulphited syrup tank and molasses into the storage tank. Then it is converted into crystal form while passing through the crystalliser. Finally the sugar crystal is taken out and molasses are let into storage tank. From the sketch furnished by the assessee in respect of the machinery used for the manufacture of sugar, it is apparent that each machinery though doing distinct functions is only an integral part of the whole plant and they do not have independent existence. In other words, the several machineries form an integral part of the sugar plant. Further, the manufacturing operation itself is a continuous process in the case of sugar mills and the final product, the sugar crystal and byproduct, molasses, emerge only at the final stage. There is no scope for taking out the products in between. Therefore, we hold that the repairs and replacements done by the assessee are but only repairs and replacements of parts of an integrated machinery. By such repairs and replacements no advantage of an enduring nature had come into existence. The profit apparatus of the assessee was only maintained by doing such repairs and replacements. In this view of the matter, we hold that repairs and replacements of machines are of revenue in nature. Merely because some of the machineries have been replaced by machines of new technologies the ITO as well as the first appellate authority have held that the expenditure is of a capital nature. We are not impressed by the line of approach. The very purpose of the repairs is to keep the machines in working condition. In the context of a sugar company, the entire plant comprises of several smaller machines. It is a known fact that technology has developed over the years. It is idle to expect that the replacement must be by the same brand or by the same technology. For this position, we can place reliance on two decisions, namely, CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 (SC) and Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 : 43 Taxman 312 (SC). In Mahalakshmi Textile Mills Ltd.'s case (supra) it was held that "the Tribunal had evidence before it from which it could be concluded that by introducing the 'Casablanca conversion system' the assessee made current repairs to the machinery and plant and the sum of Rs. 93,215 was allowable as an expenditure incurred for current repairs under Section 10(2)(v) of the Act". In Alembic Chemical Works Co. Ltd.'s case (supra), the Supreme Court held as follows : The idea of 'once for all' payment and 'enduring benefit' are not to be treated as something akin to statutory conditions; nor are the notions of 'capital' or 'revenue' a judicial fetish. What is capital expenditure and what is revenue are not eternal varieties but must needs be flexible so as to respond to the changing economic realities of business. The expression 'asset or advantage of an enduring nature was evolved to emphasise the element of a sufficient degree of durability appropriate to the context. There is also no single definitive criterion which, by itself, is determinative whether a particular outlay is capital or revenue. The 'once for all' payment test is also inconclusive. What is relevant is the purpose of the outlay and its intended object and effect, considered in a common-sense way having regard to the business realities. In a given case, the test of 'enduring benefit' might break down. The facts of the present case will fall within the ratio laid down in the reported decisions. In the light of the above two decisions, the view taken by the first appellate authority cannot be accepted. Accordingly, we set aside the order of the CIT (A) and allow the assessee's appeal on this issue.
(3.) NOW, we shall take up the appeals by the revenue. The common ground taken in these appeals is against deletion of disallowance of bonus. For the assessment year 1982-83 the assessee debited its account with an amount of Rs. 9,68,183 comprising of Rs. 3,19,844 towards bonus and ex gratia payment of Rs. 6,48,339. The ITO restricted the claim to 20% of the wages and salary of the workers and employees of the assessee. In the assessment year 1983-84 the assessee paid bonus of Rs. 3,57,882 and ex gratia payment of Rs. 7,16,761. The ITO restricted the claim of the assessee to 20%. On appeal, the claim was allowed by the CIT(A) as a business expenditure under Section 37. Hence, the revenue is aggrieved.;

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