1. Expenditure on machinery conversion system — Claim for allowance under Income-tax Act — Dispute over whether expenditure constitutes installation of new machinery or current repairs. (Para 1 , 2 )
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1967 Supreme(SC) 209
SUPREME COURT OF INDIA
J.C. SHAH, S.M. SIKRI AND V. RAMASWAMI, JJ.
The Commissioner of Income-tax, Madras, Appellant
Versus
The Mahalakshmi Textile Mills Ltd., Respondent.
Civil Appeal No. 784 of 1966,
D/- 5-5-1967.
Advocates Appeared
Mr. D. Narsaraju, Senior Advocate (Mr. R. N. Sachthey, Advocate, with him), for Appellant; M/s. R. Gopalakrishnan and N. Srinivasan, Advocates, for Respondent.
Advocates:
D.NARASARAJU, N.SRINIVASAN, R.GOPAL KRISHNAN, R.N.SACH
D.NARASARAJU, N.SRINIVASAN, R.GOPAL KRISHNAN, R.N.SACH
The Appellate Tribunal, under Section 33(4) of the Indian Income-tax Act, 1922, has the jurisdiction to grant relief to an assessee on grounds not previously raised before departmental authorities, as its powers are not restricted to the specific pleas raised by the assessee.
Headnote:(A) Indian Income-tax Act, 1922 - Section 10(2)(v) and Section 33(4) - Expenditure on replacement of machinery parts - Whether expenditure incurred for introducing a conversion system in a spinning plant constitutes current repairs - If the expenditure is found to be of revenue nature due to wear and tear and replacement of parts with modified versions, it is allowable as current repairs. (Para 3-A)
(B) Appellate Tribunal - Jurisdiction - Scope of powers under Section 33(4) - Whether the Tribunal can allow a plea not raised before the departmental authorities - Tribunal is competent to pass such orders as it thinks fit and is not restricted to the determination of questions raised before the departmental authorities - All questions of law or fact relating to the assessment may be raised before the Tribunal - The right of the assessee to relief is not restricted to the specific plea raised. (Paras 4, 5, 6)
Facts of the case:
An assessee incurred expenditure for the introduction of a conversion system in its spinning plant, involving the replacement of certain roller stands, fluted rollers, and other alterations. The claim was initially made as a development rebate for installation of new machinery, which was disallowed. However, the Appellate Tribunal, after inspection and study, held that the expenditure was for current repairs to existing machinery due to wear and tear and thus allowable under Section 10(2)(v) of the Act.
Findings of Court:
The court upheld the finding that the expenditure was for current repairs as it involved the replacement of moving parts due to wear and tear with modified versions. It further held that the Appellate Tribunal had the jurisdiction to grant relief on a ground not previously raised before the departmental authorities.
Issues: (1) Whether the Appellate Tribunal had jurisdiction to decide on an allowable item of expenditure under Section 10(2)(v) of the Act when such a plea was not raised before the departmental authorities. (2) Whether the expenditure incurred for the conversion system was allowable as current repairs under Section 10(2)(v) of the Act.
Ratio Decidendi: Under Section 33(4) of the Indian Income-tax Act, 1922, the Appellate Tribunal is empowered to pass orders as it thinks fit and is not limited to the questions raised before the departmental authorities. If the facts justify relief on a different ground than the one pleaded, the Tribunal is duty-bound to grant such relief to ensure the correct assessment of taxable income.
Result: Appeal dismissed.
Legal Category Hierarchy
Table of Contents
2. Whether expenditure on conversion system is allowable as development rebate for new machinery or as current repairs under Section 10(2)(v) of the Income-tax Act. (Para 2 , 3 )
3. Replacing worn-out parts with modified versions constitutes current repairs; Tribunal has jurisdiction to grant relief on grounds not previously raised before departmental authorities. (Para 4 , 5 , 6 )
4. Appellate Tribunal is competent to grant relief on any ground relating to the assessment, regardless of whether the plea was raised before departmental authorities. (Para 4 , 5 , 6 )
5. Appeal dismissed; High Court decision affirming the Tribunal's jurisdiction and the allowance of expenditure as current repairs upheld. (Para 7 , 8 )
6. Does the Appellate Tribunal have jurisdiction to decide on a plea not raised before the departmental authorities?
Yes. Under Section 33(4) of the Indian Income-tax Act, 1922, the Tribunal can pass orders as it thinks fit and is not restricted to questions raised before departmental authorities. It is duty-bound to grant relief if justified on any ground relating to the assessment. (Para 4 , 5 , 6 )
7. When does the replacement of machinery parts with modified versions constitute current repairs?
When moving parts are replaced due to wear and tear and the replacement involves fitting improved or modified versions of those parts rather than installing entirely new machinery or plant, the expenditure is of a revenue nature and constitutes current repairs. (Para 3 )
8. Is the Tribunal bound by the specific legal characterization of an expenditure provided by the assessee?
No. The Tribunal is not bound by the assessee's original contention. It must investigate the true nature of the expenditure to determine if it is a permissible allowance under any head of the Act to correctly adjust tax liability. (Para 5 , 6 )
Judgement
SHAH, J. :- The respondent - hereinafter called "the assessee" - carries on the business of manufacture and sale of cotton yarn. In the previous year relevant to the assessment year 1956-57, the assessee spent Rs. 93,215 for introduction of "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 certain existing parts, introduction, inter alia, of ball-bearing jockey-pulleys for converting the original band-drivers to tape-drivers and other additions and alterations in the drafting mechanism.
2. The Income-tax Officer disallowed the claim of the assessee for Rs. 93, 215 because it was not admissible as "development rebate" since the introduction of Casablanca conversion system did not involve installation of "new machinery". The Appellate Assistant Commissioner agreed with the Income-tax Officer. In appeal to the Appellate Tribunal besides submitting the claim that expenditure was allowable as development rebate, the assessee urged that the amount laid out for introducing the Casablanca conversion system was in any event expenditure allowable under Section 10 (2) (v) of the Indian Income-tax Act. The Tribunal inspected the spinning factory of the assessee and studied the working of the machinery with the Casablanca conversion system in the process of spinning yarn. They also considered the literature published by the manufacturers of Casablanca conversion system and the relevant notification issued by the Ministry of Commerce, Government of India, defining the import policy, and held that as a result of "the stress and strain of production over a long period there was need for change in the plant and that the assessee had replaced old parts by introducing the Casablanca conversion system. In the view of the Tribunal the expenditure incurred for introducing the Casablanca conversion system though not admissible as development rebate, was admissible as an allowance under Section 10 (2) (v) of the Indian Income-tax Act.
3. The Tribunal then referred the following two questions to the- High Court of Judicature at Madras:
"(1) whether on the facts and in the circumstances of the case, the Tribunal had jurisdiction to decide whether the sum of Rs. 93,215 constituted an allowable item of expenditure under Section l0 (2) (v) of the Act ?
(2) whether on the facts and in the circumstances of the case, the sum of Rupees 93, 215 or any portion thereof is allowable as an expenditure incurred for current repairs under Section l0 (2) (v) of the Act?"
The High Court accepted the finding recorded by the Tribunal that by the introduction of the Casablanca conversion system no new machinery or plant was installed, but the introduction of the system amounted "to fitting of improved versions of certain minor parts" and expenditure in that behalf was of revenue nature. The High Court also held that the Tribunal had jurisdiction to permit the assessee to raise a new contention which was not raised before the Departmental authorities. The Commissioner has appealed to this Court, with special leave.
3-A. 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. The High Court observed that certain moving parts of the machinery had because of "wear and tear" to be periodically replaced and when it was found that the old type of replacement parts were not available in the market the assessee introduced the Casablanca conversion system, but thereby there was merely replacement of certain parts which were a modified version of the older parts. Counsel for the Commissioner has not challenged these findings and the answer to the second question recorded in the affirmative by the High Court must be accepted.
4. By the first question the jurisdiction of the Tribunal to al
