Direct Taxes

The Commissioner of Income Tax, vs. M/s Saravana Spinning Mills Pvt. Ltd. [293 ITR 201, (SC)]

1. During the previous years relevant to the assessment years 1993-94 and 1994-95, the assessee, a textile mill engaged in the manufacture of yarn, spent certain amounts for the replacement of ring frames, which had worn out. It claimed deduction of the amounts spent for replacement under section 31(i) of the Income-tax Act, 1961, as current repairs. The assessee was successful in his contention before the High Court, which held that the process of converting fibre to yarn was one continuous interlinked process; that the ring frames could not work independently, but it could work only as a part of spinning unit, and that the expenditure was deductible under section 31(i).

2. The Supreme Court reversed the judgement of the High Court and allowed the appeal of the revenue observing as under:

"The expression "current repairs" denotes repairs which are attended to when the need for them arises from the viewpoint of a businessman. The word "repair" involves renewal. However, the words used in section 31(i) are "current repairs". The object behind section 31(i) is to preserve and maintain the asset and not to bring in a new asset. In our view, section 31(i) limits the scope of allowability of expenditure as deduction in respect of repairs made to machinery, plant or furniture by restricting it to the concept of "current repairs". All repairs are not current repairs. Section 37(1) allows claims for expenditure which are not of capital nature.

"The basic test to find out as to what would constitute current repairs is that the expenditure must have been incurred to "preserve and maintain" an already existing asset, and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage.

"In our view, the Ring Frame by itself constituted an independent machine with an independent function, which was replaced by a new Ring Frame giving enduring advantage to the assessee and, therefore, the expenditure incurred in that regard cannot come within the expression "current repairs". In our view, replacement of three Ring Frames constituted substitution of an old asset by a new asset and, therefore, the expenditure incurred did not constitute current repairs."

2. In case of revision under section 263 of the Income-tax, the period of limitation begins from original assessment and not from the date of reassessment in which the item was not dealt with

Commissioner of Income Tax, vs. Alagendran Finance Ltd., [293 ITR 1, (SC)]

1. Respondent was a company incorporated under the Indian Companies Act, 1956. It filed its returns for assessment under the Act for the assessment years 1994-95, 1995-96 and 1996-97 on 23-11-1994, 27-11-1995 and 26-11-1997 respectively. Assessment for the year 1994-95 was completed on 27-2-1997 and those of the Assessment Years 1995-96 and 1996-97 were completed on 12-5-1997 and 30-3-1998 respectively. In the said orders of assessment, the assessee’s return under the Head ‘Lease Equalization Fund’ was accepted.

2. Although the assessee’s return in respect of lease equalization was not the subject matter of the reassessment proceedings, the Commissioner of Income Tax purported to invoke his revisional jurisdiction in terms of section 263 of the Act. The matter was taken to the High Court by the revenue.

3. The High Court held that the impugned orders passed u/s. 263 were barred by limitation. The revenue took the matter in appeal to the Supreme Court. While dismissing the appeal of the assessee, the Supreme Court observed as under:

"A bare perusal of the order passed by the Commissioner of Income Tax would clearly demonstrate that only that part of order of assessment which related to lease equalization fund was found to be prejudicial to the interest of the Revenue. The proceedings for reassessment have nothing to do with the said head of income. Doctrine of merger, therefore, would not apply in a case of this nature.

"Furthermore, Explanation (c) appended to sub-section (1) of section 263 of the Act is clear and unambiguous as in terms thereof doctrine of merger applies only in respect of such items which were the subject matter of appeal and not which were not.

"There may not be any doubt or dispute that once an order of assessment is reopened, the previous underassessment will be held to be set aside and the whole proceedings would start afresh but the same would not mean that even when the subject matter of reassessment is distinct and different, the entire proceeding of assessment would be deemed to have been reopened.

"We, therefore, are clearly of the opinion that keeping in view the facts and circumstances of this case and, in particular, having regard to the fact that the Commissioner of Income Tax exercising its revisional jurisdiction reopened the order of assessment only in relation to lease equalization fund which being not the subject of the reassessment proceedings, the period of limitation provided for under sub-section (2) of section 263 of the Act would begin to run from the date of the order of assessment and not from the order of reassessment. The revisional jurisdiction having, thus, been invoked by the Commissioner of Income Tax beyond the period of limitation, it was wholly without jurisdiction rendering the entire proceeding a nullity."

3. Under Section 194(1) of the Income-tax Act, 1961 relating to Deduction of Tax at Source on payment of interest such deduction of tax shall be made at the time of credit of such interest to party’s account

Commissioner of Income-tax and Another vs. Century Building Industries Pvt. Ltd. [293 ITR 194 (SC)]

1. Director of the assessee-company took loans in their individual capacities from creditors in the name of the company. The loan amounts were by cheques in the name of the assessee-company and were deposited in the bank account of the company and transferred to the accounts of the directors on the same day by cheques. When the directors repaid the loan amounts or interest thereon the payments were also routed through the assessee-company. The directors issued cheques in favour of the assessee and the assessee in turn issued cheques to the creditors/lenders. The books of account of the assessee-company did not reflect the loans borrowed.

2. No deduction of tax at source was made under section 194A on repayments with interest. The Assessing Officer passed an order under section 201(1A) imposing interest on the assessee-company for not deducting tax at source. But the Appellate Tribunal accepted the claim of the company that the borrowings and repayments were routed, that the borrowings were taken by the directors and not the company, and the company was merely disbursing the repayments of the loans along with interest and, therefore, it was not liable to deduct tax at source. The High Court affirmed the decision of the Tribunal.

3. After discussing the scheme of deduction of tax at source, the Supreme Court allowed the appeal of the revenue and observed as under :

"The material expression in section 194A(1) of the Act is "at the time of credit of such income to the account of the payee". When interest is debited to "Interest Account" the debit is for a specific amount calculated with reference to the liability of the deductor to a particular creditor in accordance with the terms and conditions of the loan. Therefore, whenever interest is credited to the account of the payee the payer has to deduct the TDS. The crux of the matter is that the debit is for a specific amount calculated with reference to the deductor’s liability to a particular creditor in accordance with the terms and conditions of the loan. In the present case, the lender had advanced the loan to the assessee-company. Debit was made by the assessee-company to the "Interest Account" for a specific amount calculated with reference to the deductor’s liability to a creditor. There is no resolution of the assessee-company placed before the A.O. whereby the company has agreed to act as a medium for routing the borrowings and repayments. In the circumstances it cannot be said that the assessee-company was incharge of disbursing the repayments made by directors in their individual capacities."