Court allows replacement cost of dies and moulds, R&D deductions, captive power profits relief, and fixes UPS depreciation at 60%; denies full depreciation on temporary parking shed structure.
In a significant ruling dated 15th October 2026, the Madras High Court (Division Bench comprising Dr. Anita Sumanth and K. Rajasekar, JJ.) delivered its judgment in the Tax Case (Appeal) No. 351 of 2015, involving the Commissioner of Income Tax, Chennai, as appellant and TVS Motor Company Ltd., Chennai, as respondent. The case dealt with multiple contentious issues relating to the assessment year 2007-08 concerning income tax deductions, depreciation claims, and classification of expenses.
The Commissioner of Income Tax challenged several deductions and depreciation claims made by TVS Motor Company Ltd., but the Court found that most issues were covered by the precedent decisions in the assessee's own earlier cases and other authoritative judgments, thereby resolving them largely in favor of the taxpayer.
Key issues and findings are summarized as follows:
1. Replacement of Dies and Moulds as Revenue Expenditure
The Court held that dies and moulds attached to machinery are parts of the machinery and not independent assets. Since worn-out dies and moulds prevent machinery from producing goods to prescribed specifications, the expenditure incurred on their replacement qualifies as revenue expenditure under Section 31 of the Income Tax Act, 1961. The Tribunal's allowance of Rs. 26.9 crores on this count was upheld.
2. Deduction under Section 35(1)(iv) - Scientific Research Expenditure
The Court affirmed the Tribunal's allowance of a deduction of Rs. 347.55 crores under Section 35(1)(iv) for capital expenditure on scientific research, relying on previous decisions including that in Commissioner of Income Tax vs. Rane Break Linings Ltd.
3. Weighted Deduction under Section 35(2AB) for R&D Work-in-Progress
The Court upheld the allowance of Rs. 55.77 crores as weighted deduction on research and development expenditure, including work-in-progress, citing the assessee's earlier accepted claims and consistent judicial precedents.
4. Deduction under Section 80-IA for Captive Power Profits
The Court allowed the deduction on notional profits derived from captive power generation at the Mysore factory. This ruling was based on earlier decisions and a Supreme Court judgment in CIT vs. TANFAC Industries Ltd., along with Central Board of Direct Taxes (CBDT) circulars.
5. Agency Commission Paid to Foreign Agents
The disallowance of Rs. 17.74 crores as agency commission paid to foreign agents was deleted. The Court reasoned that since identical claims in earlier years were allowed and the facts or law had not changed, the commission was deductible. This was in line with the Tribunal's earlier orders in the assessee's favor.
6. Depreciation on UPS and Voltage Stabilizer
The Court clarified that UPS and voltage stabilizers, designed to provide uninterrupted power supply to computer systems, are integral parts of the computer system and not independent assets. Hence, the depreciation rate should be fixed at 60%, rather than the lower rate allowed by the Revenue or the 100% claimed by the assessee.
7. Depreciation on Temporary Construction (Parking Shed)
Contrary to the assessee's claim for 100% depreciation on a temporary parking shed structure, the Court restored the Assessing Authority's order allowing only 10% depreciation. This was based on the applicable precedent in the assessee's own case.
In conclusion, the Madras High Court disposed of the appeal by answering the major questions (replacement expenditure, R&D deductions, captive power profits, foreign agent commission) in favor of TVS Motor Company Ltd. The rate of depreciation on UPS and voltage stabilizers was fixed at 60%, while the claim for 100% depreciation on temporary parking shed was rejected, favoring the Revenue.
This judgment provides clarity and reaffirmation of established legal principles on income tax claims related to manufacturing expenses, scientific research, captive power units, and asset depreciation. It underscores the importance of consistent application of precedent and proper classification of assets and expenditures for tax purposes.
Bottom Line:
Income Tax - Replacement of dies and moulds forming part of machinery is allowable as revenue expenditure under Section 31 - Deduction under Sections 35(1)(iv), 35(2AB), Section 80-IA on captive power profits, and agency commission to foreign agents allowed following earlier binding precedents - Depreciation on UPS and Voltage Stabilizer allowable at 60% as integral part of computer system - Depreciation on temporary construction such as parking shed not allowable at 100% and restricted to rate applicable as per earlier precedent.
Statutory provision(s):
Income Tax Act, 1961 Sections 31, 35(1)(iv), 35(2AB), 80-IA, 9(1)(vii), 40(a)(i)
Commissioner of Income Tax v. TVS Motor Company Ltd., (Madras)(DB) : Law Finder Doc Id # 3011037
