Judgment:
1. This is an appeal by the Department against the order of the CIT(A), dt. 19th Aug., 1997 pertaining to asst. yr. 1994-95.
2. Brief facts leading to this appeal are that the assessee is a private limited company incorporated under the Companies Act. In Sechedule X of P&L a/c, the assessee had debited a sum of Rs. 85.11 lakhs as expenses under the head miscellaneous expenses. As per the details filed, an amount of Rs. 34,27,00,000, which included share expenses of Rs. 5,38,027 relating to share issue expenses were debited under different heads as under :(i) Misc. expenses as discussed above 1,80,705(ii) In legal and professional expenses :Bhilwara Spin FCD issue legal discussion 15,000(b) Financial consultancy to Dogra &and appraisal fee to SBBJ 1,00,000(d) Various stock brokers stockshare expenses 61,000 3,57,322 ---------- ----------- 3. The AO found that these expenses were incurred in connection with the issue of share capital which are essentially of capital nature and not allowable as revenue expenditure as have been claimed by the assessee. In the first appeal, the learned CIT(A), however, allowed Rs. 3,57,322 out of total share expenses of Rs. 5,38,027 by holding that expenditure to that extent was not connected with fresh issue of shares.
4. The case of the Revenue before us is that any expenditure incurred towards raising the capital of the company by issue of share capital is not allowable as revenue expenditure. Reliance has been placed on the decisions of the Hon'ble Rajasthan High Court in the case of CIT v.Aditya Mills Ltd. (1990) 181 ITR 195 (Raj), the decision of the Hon'ble Supreme Court in the case of Brooke Bond India Ltd. v. CIT . It has been submitted in the light of Brooke Bond India's case (supra) that the Hon'ble apex Court has placed reliance on its own decision in the case of the Punjab State Industrial Development Corporation Ltd. v. CIT and other decisions of various High Courts and thereby held that expenditure incurred by a company in connection with issue of shares with a view to increase its share capital, is directly related to the expansion of the capital base of the company and is essentially of capital expenditure, even though it may incidentally help in the business of the company as well as in the profit-making of the company. On the other hand, the learned Authorised Representative, Shri Amit Kothari has vehemently argued that the decisions of the Hon'ble Supreme Court and that of other Hon'ble High Court including the Hon'ble jurisdictional High Court are a authority on subject where such expenses are made by the object of enhancement of capital base of the company but where the object of such enhancement of capital was to have more working funds for the assessee to carry on its business and to earn more profit, the ratio is not applicable. While making the above submissions, the learned Authorised Representative invited our attention to the decision of the Hon'ble apex Court in Brooke Bond India's case (supra) where the Hon'ble Judges have observed that the increase in the capital was to meet the need of working fund of the assessee-company was not indicated by the Tribunal in its statement of facts and that is why in that distinguishable nature of facts, the Hon'ble Courts had rendered the above decision. In the light of the above observation, it has been submitted that in case the expenses are made to have more working funds to carry its business the same is a revenue expenditure. In addition to that, the learned Authorised Representative has also invited our attention to page No. 75 of his 3rd paper book, which depicts bifurcation of expenses relating to publishing issue and expenses relating to issue of debenture and working capital loan. The learned Authorised Representative has also placed reliance on the findings of the learned CIT(A) that an expenditure of Rs. 3,57,322 relates to the working capital and is not connected to share issue expenditure and is, therefore, allowable as revenue expenditure.
5. We have carefully considered the rival submissions, in the light of the available evidence on record. From the assessment order, the learned CIT(A)'s order and page No. 75 of the paper book of the assessee as well as from written submission, we have come to the conclusion that in the light of the above mentioned clear-cut legal position on the subject, a sum of Rs. 1,00,000 which is mentioned at Sl. No. 9 being the expenses of Rs. 1,00,000 paid to the SBBJ being project appraisal fees can only be taken as a revenue expenditure out of all the expenses shown in the column relating to expenses incurred on FDIs and working capital loan, in addition to expenses in column No.4 towards expenses relating to issue of public issue amounting to Rs. 1,07,300. All other expenses are related to share capital issue and cannot be allowed as revenue expenditure. We have seen the nature of all these expenses, which are placed in the paper book from 1 to 18.
All the other expenses are clearly connected with the issue capital shares, in one form or the other. Each and every item of such expenses was referred and discussed in the open Court at the time of argument.
The finding of the learned CIT(A) is set aside to that extent.
Therefore, this ground of appeal is partly allowed.
6. The next ground of appeal has been taken by the Department against the deletion of addition of Rs. 1,53,50,532 being claim of 100 per cent depreciation on machinery. The assessee had claimed depreciation/deduction @ 100 per cent on certain parts of the plant and machinery which are claimed to be in the nature of repairs and renovation expenditure. As against this, the AO treated the same as capital expenditure and after allowing depreciation @ 25 per cent made disallowance of Rs. 1,37,09,546. Similarly, the expenditure claimed in respect of certain repairs and expenditure which were incurred in the later half year, were treated as capital expenditure and after allowing depreciation for half year, the disallowance of Rs. 16,40,986 was made.
Thus, the total addition of Rs. 1,53,50,532 was made. The AO was of the opinion that the details of machinery and plant purchased by the assessee which consisted of draw frame, compressor fan blades, star yarn evenneors tester by holding this as was an addition to the plant and machinery. The alternate claim of the assessee that each machinery item so purchased was below Rs. 5,000 and each item (was not) accepted by the AO on the reasoning that such parts of machinery did not function independently but was a part of system of whole machinery. On appeal, the learned CIT(A) categorically held that this expenditure is allowable @ 100 per cent depreciation. The learned CIT(A) has given two reasons for the same, one that since each and every item of purchase was admittedly below Rs. 5,000 in cost, therefore, 100 per cent depreciation on each and every item was allowable as per law. Secondly, the claim is still available even if this machinery or items are considered as parts of plant and machinery under repairs/replacement.
7. We have heard the rival submissions and perused the evidence on record.
8. Before us, it was demonstrated by referring to the pictographs of various processes involved in the factory of assessee-company and it was submitted by learned Authorised Representative that all plant and machinery put together amount to a single unit and no new assets are created in the process of replacement of worn out machines. Reliance has been placed by the learned Authorised Representative on the decision of the Hon'ble Madras High Court in the case of CIT v. Janaki Ram Mills Ltd. and Ors. On the contrary, the learned Departmental Representative while opening the case of the Revenue could not break the ice by any plausible arguments against the finding of the learned CIT(A) but simply placed reliance on the assessment order.
9. Having considered rival submissions in the light of available evidence on record and treading through the relevant provisions and precedents, we are of the opinion that the claim of the assessee of 100 per cent depreciation has to be allowed in this case because the impugned addition incurred in replacement of cards/blow room machinery/combing machinery of textile mills is a revenue expenditure because all plant and machinery put together amount to a single unit.
We are convinced that these items/units cannot work independently, but can work only as a part of the spinning unit. The decision relied on by learned Authorised Representative of the Hon'ble Madras High Court (supra) is based on exactly identical facts as that of the case under consideration. In that case also the expenditure was incurred on almost identical parts/machinery. Therefore, the decision taken in the case of Madras High Court is applicable to the facts of this case being on all fours. The Hon'ble Court has held in such like circumstances that the concept of "current repairs", "modernisation" and "expenditure laid out of expended wholly and exclusively for the purpose of business" have to be interpreted following the principle of updating construction taking note of the business needs and commercial expediency especially in a competitive business environment created by the globlization and not by applying old concepts of what is capital and what is revenue. The Hon'ble Court has also observed that Sections 31 and 37 do exist even after the introduction of block of assets concepts and have not become otiose or redundant. Therefore, we are of the considered opinion that the claim of 100 per cent depreciation on these items is allowable to the assessee-company because such expenditure is definitely an expenditure of revenue nature as the same is required for the running of machinery and plant which when put together amounted to a single unit.
10. The other reason taken by the learned CIT(A) for allowing depreciation that each and every item or part was admittedly below Rs. 5,000 in cost separately is not a valid reasoning because as held by us each and every part or units so explained cannot be taken as a complete and independent system of machinery, to be eligible for such a deduction because these are only a part of a bigger and integrated system. Therefore, on this reasoning the depreciation cannot be allowed.