Commissioner of Income-tax Vs. Sree Bhagavathi Textiles Ltd. - Court Judgment

Excerpt:
- - ) of 1984 for the assessment years 1975-76 and 1980-81. the tribunal found that the expenditure incurred by the assessee was on renovating and replacing old and worn out machinery and was revenue in nature and that in view of the fiercely competitive nature of the business, the need for modernisation of the machinery was imperative for the business to run smoothly and efficiently. the tribunal found that the need for modernisation of the machinery was imperative for the business to run smoothly and effectively. kerala agro industries corporation [1990]183itr197(ker) ,this court held that the bonus paid to an employee in a factory or other establishment to which the provisions of the payment of bonus act, 1965, do not apply can be claimed as a deduction under section 36(1)(ii) of the income-tax act, 1961, only if the conditions required under that provision are satisfied. all the three conditions enumerated in clauses (a) to (c) of the second proviso to section 36(1)(ii) must be satisfied in order that the payment which is not required by the bonus act is regarded as reasonable so as to warrant the deduction under section 36(1)(ii). 9. the order of the tribunal reveals that the specific aspect as to whether the bonus paid by the assessee may stand the test specified in section 36(1)(ii) of the income-tax act read along with the proviso has not been adjudicated by the tribunal.varghese kalliath, j. 1. these references are at the instance of the revenue. the assessments in question relate to the years 1979-80 and 1980-81. the common questions referred for the assessment years 1979-80 and 1980-81 are these :'common question for the assessment years 1979-80 and 1980-81 : whether, on the facts and in the circumstances of the case, the expenditure of rs. 3,51,852 and rs. 6,87,014 incurred by the assessee in the assessment years 1979-80 and 1980-81, respectively, in connection with the modernisation of the factory is allowable as revenue expenditure for the assessment year 1980-81 only : whether, on the facts and in the circumstances of the case, the tribunal is justified in holding that the assessee is entitled to claim deduction towards bonus paid in excess of the statutory bonus ?' 2. the assessee had a spinning mill. the assessee claimed deduction as revenue expenditure of rs. 3,51, 852 and rs. 6,87,014, respectively, for the assessment years 1979-80 and 1980-81. the income-tax officer rejected the claim holding that the expenditure is in the nature of capital expenditure. of course, he has said that the expenditure incurred by the company is on major repairs, renovations and installation of new machinery during the accounting years.3. on appeal, the commissioner of income-tax (appeals) found that there was replacement of spindles in six frames for the assessment year 1979-80 and eight frames for the assessment year 1980-81 at the time when the assessee had 30 frames in its factory and there was also replacement in the assessment year 1980-81 of aluminium pulleys of 23 frames. having regard to the ratio of the decision of the supreme court in cit v. mahalakshmi textiles ltd. : [1967]66itr710(sc) , the claim would be admissible as a revenue deduction. the commissioner of income-tax (appeals) also relied on his decision in the cases of madras spinners ltd. and vanaja textiles. the department went in appeal. the tribunal found that it has considered similar expenditure as revenue expenditure in other cases. the tribunal also referred to and relied on its own decision in the case of madras spinners ltd. dated september 17, 1985, in i. t. a. no. 247/ (coch.) of 1984 and i. t. a. no. 250/(coch.) of 1984 for the assessment years 1975-76 and 1980-81. the tribunal found that the expenditure incurred by the assessee was on renovating and replacing old and worn out machinery and was revenue in nature and that in view of the fiercely competitive nature of the business, the need for modernisation of the machinery was imperative for the business to run smoothly and efficiently.4. we shall consider first question no. 1. it is clear from the statement of facts and from the order of the tribunal that the expenditure incurred by the assessee was on renovating and replacing the old and worn out parts of the machinery. the tribunal found that the need for modernisation of the machinery was imperative for the business to run smoothly and effectively. as we said earlier, the tribunal relied on its own decision in the case of madras spinners ltd. madras spinners' case is the subject-matter of income-tax reference no. 168 of 1986. (cit v. madras spinners ltd. : [1994]207itr35(ker) ). in this income-tax reference, at the instance of the revenue, the questions referred are almost identical. we heard the case along with a batch of cases relating to vanaja textiles and madras spinners ltd. in the batch of cases, the assessment relating to vanaja textiles, we have considered in a little depth the question involved in this case also and found that the expenditure incurred in those cases for carrying on the business in the line of modern trends is not an expenditure in the nature of capital expenditure, but only revenue expenditure. we do not want to repeat what we have said in the income-tax references relating to the assessment of vanaja textiles.5. counsel for the department and for the assesses did not put forward special circumstances or arguments to depart from the view we have taken in regard to the same question which we have considered in the case of vanaja textiles (income-tax references nos. 105 and 106 of 1989). from the order of the commissioner of income-tax (appeals), it is seen that what has been done for modernisation for the assessment years in question was only replacement of a number of small parts particularly aluminium spindles of ring frames used in the textile mill of the assessee. all spindles were replaced in six frames for the assessment year 1979-80 and eight frames for the assessment year 1980-81. at that time, the assessee had a total of 30 frames in its factory. further, it is said that in addition to this main work of replacement, certain other parts were also changed for the assessment year 1979-80. for the assessment year 1980-81, yet another major change was the replacement of aluminium pulleys of 23 frames. the nature of expenditure incurred in these two cases which is the subject-matter of the question of law referred is in no way different from the nature of expenditure incurred in the cases we have decided of the assessee in income-tax references nos. 105 and 106 of 1989, etc.6. we are of the opinion that we are fully justified in relying on the decisions we have rendered in income-tax references nos. 105 and 106 of 1989, etc., holding that the expenditure incurred in these two cases is not in the nature of capital expenditure but only revenue expenditure. we are appending a copy of our judgment in income-tax references nos. 105 and 106 of 1989, etc., along with this judgment. in the result, we answer the first question in the affirmative, in favour of the assessee and against the revenue.7. the second question that has to be considered relates to the claim of deduction towards bonus paid in excess of the statutory bonus. on similar facts, we have decided a similar question of bonus in income-tax references nos. 84 of 1986 and 87 of 1986. counsel on both sides agreed that in the light of the decision in cit v. kerala agro industries corporation : [1990]183itr197(ker) , we should decline to answer the question.8. in cit v. kerala agro industries corporation : [1990]183itr197(ker) , this court held that the bonus paid to an employee in a factory or other establishment to which the provisions of the payment of bonus act, 1965, do not apply can be claimed as a deduction under section 36(1)(ii) of the income-tax act, 1961, only if the conditions required under that provision are satisfied. the conditions are : (i) the amount of bonus should be reasonable with reference to the pay of the employee and the conditionsof his service ; (ii) the profits of the business or profession for the previous year in question ; and (iii) the general practice in similar business or profession. all the three conditions enumerated in clauses (a) to (c) of the second proviso to section 36(1)(ii) must be satisfied in order that the payment which is not required by the bonus act is regarded as reasonable so as to warrant the deduction under section 36(1)(ii).9. the order of the tribunal reveals that the specific aspect as to whether the bonus paid by the assessee may stand the test specified in section 36(1)(ii) of the income-tax act read along with the proviso has not been adjudicated by the tribunal. in these circumstances, we decline to answer the question. we direct the tribunal to consider the matter afresh in the light of the decisions in cit v. kerala agro industries corporation : [1990]183itr197(ker) , cit v. p. alikunju, m.a. nazir, cashew industries : [1987]166itr611(ker) and income-tax reference no. 185 of 1985 (cit v. p. bala-krishna piliai, international cashew traders : [1990]182itr449(ker) ) and income-tax reference no. 399 of 1985 (cit v. kumar industries : [1990]183itr156(ker) ).10. references are disposed of as above.11. a copy of this judgment under the seal of this court and the signature of the registrar shall be forwarded to the income-tax appellate tribunal, cochin bench.