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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: HON’BLE SHRI MAHAVIR SINGH & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
सुनवाईकीतारीख/ : 06-12-2022 Date of Hearing घोषणाकीतारीख / : 04-01-2023 Date of Pronouncement आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member):
1. Aforesaid appeal by assessee for Assessment Year (AY) 2003-04 arises out of the order of learned Commissioner of Income Tax (Appeals)-7, Chennai [CIT(A)] dated 09-03-2020 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 23-01-2006. The grounds taken by the assessee read as under: -
The order of the Commissioner of Income Tax (Appeals) is contrary to law, facts and in the circumstances of the case.
The Commissioner of Income-tax (Appeals) erred in confirming the replacement of HF Reactor Kiln as capital expenditure amounting to Rs.2,51,72,226/- as against the claim of appellant as revenue expenditure. 2.1 The Commissioner of Income tax (Appeals) ought to have appreciated that the appellant has replaced H.F. Reactor Kiln which is to be kept always in efficient condition for successful performance of high precision H.F Reactor, the entire process is a single integrated process and the H.F. Reactor is only part of this whole system. 2.2 The Commissioner of Income tax (Appeals) ought to have appreciated that the replacement of machinery is not an enduring in nature and there is no change in capacity after replacement of existing machinery. Hence should be allowed as revenue expenditure. As evident, the sole issue that arises for our consideration is to determine whether the expenditure incurred by the assessee would constitute capital expenditure or revenue expenditure for the assessee. 2. The Registry has noted delay of 83 days in the appeal, the condonation of which has been sought by Ld. AR. Considering the fact that the time available to file the appeal fall within lockdown situation arising out of Covid-19 pandemic, we condone the delay and admit the appeal for adjudication on merits. Having heard rival submissions and after due consideration of case records, the appeal is disposed-off as under. 3. This is second round of appeal since the matter, in first round, was remitted back by the Tribunal vide /Mds/2009 dated 18-02- 2011 to the file of Ld. CIT(A) as under: - “6. We have perused the orders and heard the rival contentions. The case of Ramaraju Surgical Cotton Mills (supra), was considered by the Hon'ble Apex Court again in the case of CIT v. Sri Mangayarkarasi Mills P. Ltd. (2009) 315 ITR 114 (SC) and after referring to the decision of Ramaraju Surgical Cotton Mills (supra) as well as that of CIT v. Saravana Spinning Mills (P) Ltd. 293 ITR 201 (SC), remitted the matter back to the jurisdictional High Court for considering whether the claim of the assessee could be allowed based on the principles laid down in the above mentioned decisions. In the case of CIT v. Indira Cotton Mills (TCA 559 of 2004 dated 15.12.2009), Hon'ble jurisdictional High Court had remitted the question of allowance on replacement back to the CIT(Appeals) for taking decision based on the Hon'ble Apex Court in the decisions mentioned supra. Here also the crucial question is whether the repairs stated to be carried out by the assessee and considered by the A.O. as replacement of machinery, would lead to increase in production capacity or could only be considered as revenue outgo. This has to be examined in the light of principles laid down by Hon'ble Apex Court in the various decisions mentioned supra. Therefore, in accordance with the directions given by the jurisdictional High Court in Indira Cotton Mills (supra), we are of the opinion that the matter needs to be revisited by the CIT(Appeals). We, therefore, set aside the order of the CIT(Appeals) and remit the matter back to him for consideration afresh in the light of various decisions mentioned supra.
Set-aside proceedings before Ld. CIT(A) 4.1 Pursuant to the same, Ld. CIT(A) has passed impugned order again confirming the stand of Ld. AO against which the assessee is in further appeal before us. 4.2 From the facts, it emerges that the assessee is engaged in manufacturing of fluorine-based chemicals. The assessee incurred expenditure on repairs and renovation of worn-out reactors and claimed the same to be revenue expenditure. It transpired that the assessee replaced its old reactor with new reactor costing Rs.3 Crores. The capacity of old reactor and new reactor is stated to be the same. During set aside proceedings, the assessee relied on various judicial pronouncement in support of the claim. The assessee’s submissions were subjected to remand proceedings before Ld. AO. 4.3 The Ld. AO submitted that a new machinery viz. H.F. Reactor was installed and the cost thereof was capitalized by the assessee in the books of account and therefore, there was acquisition of asset with enduring benefit. Accordingly, it was not to be allowed as revenue expenditure but depreciation of 25% would be allowable to the assessee. 4.4 In the technical write-up, the assessee submitted that in normal course, the reactor would run for at least 10 to 15 years. The original 1985 and was replaced in 2003. The old reactor has served a life of more than 18 years but installed capacity has not changed. However, negating the same, Ld. AO proposed that the said expenditure would be capital expenditure. 4.5 The Ld. CIT(A) noted the ratio of decision of Hon’ble Apex Court in CIT vs Saravana Spinning Mills (P) Ltd. (293 ITR 201); CIT vs. Sri Mangayakarasi Mills Pvt. Ltd. (315 ITR 114) as well as the decision in CIT vs. Ramaraju Surgical Cotton Mills (294 ITR 328). After considering the submissions of the assessee, Ld. CIT(A) drew certain conclusions and adjudicated the issue as under: - From the reading of the above judgements, it is clear that the Hon'ble Apex Court has held the following principles: i. Entire plant cannot be treated as single machinery. ii. Each machine in a plant has to be treated independently as such and not as mere part of an entire composite machinery of the plant. iii. Expenditure incurred to preserve and maintain an already existing asset is to be treated as revenue. iv. Expenditure incurred to replace the old asset with a new asset is to be treated as capital in nature. Accounting practices are the indicative of the nature of expenditure v. incurred by the assessee. VI. The above principles laid down by the Hon'ble Apex Court have been duly considered and applied in the appellant's case as per the directions of the Hon'ble ITAT and accordingly the adjudication is as follows: The appellant is engaged in the business of manufacture of Hydrofluoric Acid. There were three reactors being used by the appellant for its manufacturing process. The pre-reactor where the first stage of reaction was carried out and thereafter the production from the first reactor was pushed into the H.F. Reactor and H.F. gas produced therefrom was thereafter purified and such purified gas fed in the ALF3 reactor of producing the fluorine products. Thus, it is clear that H.F. Reactor is one of the machineries of the appellant in the entire manufacturing process of fluorine-based chemicals. It is noticed from the details submitted during the course of appellate proceedings that the appellant has not carried out any renovation or repairs to the exiting H.F. Reactor but replaced the existing H.F. Reactor as such with the new reactor. When the new reactor is installed in place of old one, expenditure incurred towards such new reactor cannot be termed as repairs or renovation to the existing machinery. It is noted from the details submitted by the appellant that new reactor was installed in place of old reactor which was installed in 1985 originally and it 10 to 15 years. Further it is evident from the audited financial statements of the appellant company that subsequent to instaIlation of new HF Reactor there is an increase in the production or Anhydrous Hydrofluoric Acid with substantial decrease in the consumption of electricity and furnace oil. Thus, the installation of new H.F. Reactor has enduring benefit and advantage to the appellant company. Therefore, the expenditure of Rs.2,51,72,226/- incurred by appellant was towards bringing in to existence a new asset and not towards keeping the existing asset in good condition. Hence, I am of the considered view that the AO is right in disallowing the sum of Rs.2,51,72,226/- claimed by the appellant as revenue expenditure. Thus, the ground of the appellant is dismissed. The Ld. CIT(A) thus held that the installation of HF Reactor brought enduring benefit and therefore, the expenditure was nothing but capital expenditure. Aggrieved aforesaid, the assessee is in further appeal before us. Our findings and Adjudication 5. From the fact, it emerges that the assessee is engaged in manufacturing of fluorine-based chemicals. The process of manufacturing could be split into two operations i.e., (i) Hydrogen Fluoride (HF) gas is produced with Anhydrite as by-product; (ii) Process of HF gas condensation (liquefaction) and purification (by distillation). In the first stage, certain processes are carried on where fluorspar and HF gas is drawn. In the second stage, HF gas is put to certain other processes from where final product is produced. The HF reactor under consideration is used at first state of process. Flurospar and Sulphuric Acid is reacted in the pre-reactor stage where approx. 50% of the reaction is completed. The partly reacted mixture is pushed into the HF reactor where the balance reaction takes place. HF reactor is a hollow and cylindrical shell in the shape of rotary kiln and supported by gear box, roller station and towers. After the processing in HF reactor, HF gas is produced which passes through second stage of production. Thus, HF reactor is part of continuous process plant and machinery. The assessee has replaced this HF reactor. The original reactor had been fixed in 1985 and its life usually spans over 10 to 15 years. The old rector has served life of more than 18 years. The need for replacement arises due to the fact that the reactor thickness is corroded and old reactor could not be used by doing the repair work as the corrosion level would be high at several places. Thus, it could be seen that the assessee has replaced HF reactor completely which constitute a part of continuous process plant and machinery. The HF Reactor is separate part of machinery in itself and separate identifiable part of the machinery. The same would have life span of over 10 to 15 years. Considering the same, the assessee has capitalized the same in his books of accounts.
In the above factual background, we find that the decision of Hon’ble Supreme Court in the case of CIT vs Saravana Spinning Mills (P) Ltd. (293 ITR 201) deal with a case of textile mill. In that case different output flew from different Segments of production. The Hon’ble Court, defining the meaning of ‘current repairs’ as used in Sec.31(i), held as under: - 11…….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. However, even section 37(1) excludes those items of expenditure which expressly falls in sections 30 to 36. The effect is to delimit the scope of allowability of deductions for repairs to the extent provided for in sections 30 to 36. To decide the applicability of section 31(i) the test is not whether the expenditure is revenue or capital in nature, which test has been wrongly applied by the High Court, but whether the expenditure is "current repairs". 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 fact, in the present case, in the balance sheet the assessee, viz., M/s. Saravana Spinning Mills has indicated the above expense as an item incurred for purchase of a New Asset. In our view, the High Court had erred in placing reliance on the report of SITRA in coming to the conclusion that the textile mill is a plant under section 31(i). As stated above, each machine in a segment has an independent role to play in the mill and the output of each division is different from the other "Repair" implies the existence of a part of the machine which has malfunction. If the argument of the assessee herein before us is to be accepted it would result in absurdity and it would make the provisions of section 31(i) completely redundant. According to Shri R. Venkataraman, learned senior counsel for the assessee, the textile plant consists of about 25 machines. One of such machines is the Ring Frame. If the argument of the assessee is to be accepted, it would mean that periodically one machine out of 25 would be replaced, and on that basis, from time to time, each of these 25 machines in the textile plant would be entitled to claim allowance under section 31(i). In our view, the Assessing Officer was right in holding that each machine including the Ring Frame was an independent and separate machine capable of independent and specific function and, therefore, the expenditure incurred for replacement of the new machine would not come within the meaning of the words "current repairs". In the present case, it is not the case of the assessee that a part of the machine (out of 25 machines) needed repairs. The entire machine had been replaced. Therefore, the expenditure incurred by the assessee did not fall within the meaning of "current repairs" in section 31(i).
This Court in the case of Ballimal Naval Kishore v. CIT [1997] 2 SCC 449 approved the test formulated by Chagla, C.J. in the case of New Shorrock Spg. & Mfg. Co. Ltd. v. CIT [1956] 30 ITR 338 (Bom.) as to when the expenditure can be said to have been incurred on current repairs. In that case it was observed as follows : "The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of ‘repairs’ because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure. It the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which the Legislature has permitted under section 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure." (p. 343) In the said judgment, it has been further observed by Chagla, C.J. that the definition of the word "repair" does not create much difficulty, but the difficulty is created by the word "current" which qualifies the expression "repair". This adjective, namely, "current" is put in by the Legislature. It indicates that the Legislature did not intend that the assessee should be permitted to claim allowance for all kinds of repairs, even though conceptually the expenditure may be revenue expenditure. The Legislature intended to stress that under section 31(i) the permissible deduction admissible is only for current repairs, therefore, the question as to whether the expenditure incurred by the assessee conceptually is revenue or capital in nature is not relevant for deciding the question as to whether such an expenditure comes within the etymological meaning of the expression "current repairs". In other words, even if the expenditure is revenue, it may not fall in the connotation of "current repairs" in section 31(i). The test formulated above applies to cases where the assessee claims allowance under section 31(i). In the present case, the High Court has lost sight of the test to be applied for an expenditure to fall under section 31(i) as "current repairs". It has embarked on the test which was not applicable, viz., whether the expenditure is revenue or capital in nature. The above test was not relevant during the assessment years in question as the explanation to section 31(i) was inserted later on. In our view, applying the test laid down by Chagla, C.J. in the case of New Shorrock Spg. & Mfg. Co. Ltd. (supra) the assessee’s were not entitled to claim allowance under section 31(i) for current repairs. In our view, the Ring Frame by itself constituted an independent machine with an independent function, which was re-placed 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.
On behalf of the assessee, reliance was placed on the judgment of this Court in the case of CIT v. Mahalakshmi Textile Mills Ltd. [1967] 3 SCR 957. In that case, the assessee carried on the business of manufacture and sale of cotton yarn. In the previous year relevant to assessment year 1956-57, the assessee spent Rs. 93,000 approx. for introduction of "Casablanca Conversion System" in its plant. The ITO disallowed the claim of the assessee. The Appellate Authority agreed with the ITO. Before the Tribunal, the assessee contended that the amount expended for introducing Casablanca Conversion System was current expenditure under section 10(2)(v ) of the Indian Income-tax Act, 1922 [Section 31(i) of the 1961 Act]. The Tribunal inspected the spinning factory of the assessee. It studied the working of the machinery with the Casablanca Conversion System. It also studied the literature published by the manufacturer of Casablanca Conversion System. After a detailed study, the Tribunal held that on account of the stress and strain of production over a long period there was a need for change and that the assessee had replaced old parts by introducing the said System. Accordingly, the Tribunal treated the expenditure incurred for introducing the Casablanca Conversion System as allowance under section 10(2)(v) of the Indian Income-tax Act, 1922. The High Court accepted the findings recorded by the Tribunal saying 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 version and the expenditure in that behalf was of revenue nature. The High Court observed that certain parts of the machinery had worn-out, they needed replacement, and when it was found that the old type of replacement parts were not available in the market, the assessee had to introduce the Casablanca Conversion System. This finding was accepted by this Court in the above judgment. In our view, the said judgment has no application with the facts of the present case. At the outset, we may state that replacement generally may not fall under the expression "current repairs" but, in certain cases, where the old parts were not available in the market or where the old parts had worked for 50 to 60 years, replacement can, in such cases of exception, fall within the expression "current repairs". In Mahalakshmi Textile Mill Ltd.’s case (supra) the finding recorded by the Tribunal and the High Court was that old type of replacement parts were not available in the market and, therefore, the expenditure "current repairs". That is not the case before us, hence, the said judgment has no application to the facts of the present case. Moreover, the judgment of this Court in Mahalakshmi Textile Mill Ltd.’s case (supra) has not defined the word "asset" to mean the entire production system in the textile mill. In the said judgment, it is nowhere stated that the entire textile mill is one single asset and that it represents one single integrated process.
14. Some of the decisions cited on behalf of the assessee’s are not being discussed by us as they deal with cases falling under section 37. That section is a residuary section. Under section 37, a particular item of expenditure may be deductible if the expenditure does not fall within sections 30 to 36; that it should have been incurred in the accounting year; that it should be in respect of a business carried on by the assessee; that it should not be on personal account of the assessee; that it should not be in the nature of capital expenditure and that it should be spent wholly and exclusively for business. Whether expenditure is ‘revenue’ or ‘capital in nature’ would depend upon several factors, namely, nature of the expenditure, nature of the business activity etc. For example, construction of the building for self-use may be capital in nature whereas in the hands of the builder a building constitutes his stock- in-trade and, therefore, on the sale of the building the expenditure has to be revenue. Therefore, the builder would be entitled to deduct such expenditure from the sale proceeds/gross income. Therefore, whether an expenditure is revenue or capital in nature would depend on the facts of each case. We do not wish to express any opinion on the applicability of section 37(1) in the present case. There were certain civil appeals wrongly tagged with the present batch which will be decided separately by us as they concern with section 37(1). Hence we do not wish to express any opinion on applicability of section 37(1).
15. Before concluding, one aspect needs to be discussed. It was submitted on behalf of the assessee’s, in the present case, that although the assessee’s had claimed deduction under section 31(i), they should be permitted to claim deduction under section 37(1) as on facts it has been held by CIT(A), Tribunal and the High Court that the expenditure was revenue in nature. We find no merit in this contention. As stated above, even if the expenditure incurred is revenue in nature, still it may not fall in the connotation of the words "current repairs" under section 31(i) which test has not kept in mind. As held by Chagla, C.J. in the case of New Shorrock Spg. & Mfg. Co. Ltd. (supra) all repairs do not attract section 31(i) even though the expenditure is revenue in nature. Therefore, the basic test, which had not been applied, in the present case, by CIT(A). Tribunal and the High Court, is whether the expenditure came within the expression "current repairs". Instead all the three authorities proceeded on the footing that since the expenditure was revenue it constituted "current repairs". It is for this reason that we have interfered with the concurrent findings given by CIT(A), Tribunal and the High Court.
16. For the afore-stated reasons, we find merit in the above batch of civil appeals filed by the Department. Accordingly, we hold in this batch of civil appeals that the assessee’s were not entitled to claim allowance under section 31(i) of the Income- tax Act as it stood at the relevant time. Accordingly, the civil appeals stand allowed with no order as to costs.
The Hon’ble Court held that the expression used in Sec.31(i) is ‘current repairs’. The object behind the provisions of Section 31(i) is to preserve and maintain the asset and not to bring in to existence a new asset. The provisions of Sec.31(i) limit 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. To decide the applicability of Sec. 31(i) the test is not whether the expenditure is revenue or capital in nature, but whether the expenditure is "current repairs". 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 this case, the assessee itself indicated the expenses as an item incurred for purchase of a New Asset. Each machine in a segment has an independent role to play and the output of each division is different from the other. Further ‘repairs’ implies the existence of a part of the machine which has malfunctioned. Since each machine was an independent and separate machine capable of independent and specific function, the expenditure incurred for replacement of the new machine would not come within the meaning of the words "current repairs". The Hon’ble Court further noted the ratio of other decisions and held that ‘repairs’ and ‘current repairs’ were distinct and the legislatures only intended to provide deduction only for current repairs. In other words, even if the expenditure is revenue, it may not fall in the connotation of "current repairs" in section 31(i). The test whether the expenditure is capital or revenue would not be relevant. Therefore, since the ring frames 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 "current repairs" rather it constituted substitution of an old asset by a new asset and, therefore, the expenditure incurred did not constitute current repairs. The decision of CIT v. Mahalakshmi Textile Mills Ltd. (supra) was held to be not applicable. It was further held that Sec.37 was a residuary section and would apply only when the expenditure does not fall within the ambit of Sections 30 to 36.
This decision has subsequently been followed by Hon’ble Court in CIT vs. Sri Mangayakarasi Mills Pvt. Ltd. (315 ITR 114) wherein it was held as under: - 13. We have heard and considered all these contentions of the learned counsel for the parties and also perused the materials on record and also examined the impugned order passed by the High Court.
The first issue that needs to be resolved is whether each machine in a textile mill is an independent item or merely a part of a complete spinning mill, which only together are capable of manufacture, and there is no intermediate marketable product produced. In our view, this issue has been satisfactorily answered by the recent decision of this Court in CIT v. Saravana Spg. Mills (P.) Ltd. [2007] 293 ITR 201. In that case this Court has held unambiguously that "each machine in a segment of a textile mill has an independent role to play in the mill and the output of each division is different from the other." Dealing with a ring frame in a textile mill, this Court has held that it is an "independent and separate" machine. Further, it is accepted that each machine in a textile mill is part of the integrated process of manufacture of yarn and is integrally connected to the other machines in the mill for production of the final product. However, this interconnection does not take away the independent identity and distinct function of each machine. Thus, each machine in a textile mill should be treated independently as such and not as a mere part of an entire composite machinery of the spinning mill. As stated above, it can at best be considered part of an integrated manufacture process employed in a textile mill.
Moving on to the issue of 'current-repairs,' under section 31 of the Act, the decision of this Court in Saravana Spg. Mills (P.) Ltd.'s case (supra) is again relevant. This Court has laid down that in order to determine whether a particular expenditure amounts to 'current repairs' the test is "whether the expenditure is incurred to 'preserve and maintain' an already existing asset and not to bring a new asset into existence or to obtain a new advantage. For 'current repairs' determination, whether expenditure is revenue or capital is not the proper test." It is our opinion that the entire textile mill machinery cannot be regarded as a single asset, replacement of parts of which can be considered to be for mere purpose of 'preserving or maintaining' this asset. All machines put together constitute the production process and each separate machine is an independent entity. Replacement of such an old machine with a new one would constitute the bringing into existence of a new asset in place of the old one and not repair of the old and existing machine. Also, a new asset in a textile mill is not only for temporary use. Rather it gives the purchaser an enduring benefit of better and more efficient production over a period of time. Thus, replacement of assets as in the instant case cannot amount to 'current repairs'. The decision in Saravana Spg. Mills (P.) Ltd.'s case (supra) clearly mentions that replacement of a derelict ring frame by a new one does not amount to 'current repairs'. Further in Ballimal Naval Kishore's case (supra) this Court has held that a new asset or new/different advantage cannot amount to 'current repairs', which has been subsequently approved in the Saravana Spg. Mills (P.) Ltd.'s case (supra). For these reasons, the expenditure made by the assessee cannot be allowed as a deduction under section 31 of the Act. The judgment of this Court in the Saravana Spg. Mills (P.) Ltd.'s case (supra) mentions two exceptions in which replacement could amount to current repairs, namely: "u Where old parts are not available in the market (as seen in the case of CIT v. Mahalakshmi Textile Mills Ltd. (AIR 1968 SC 101), or Where old parts have worked for 50-60 years." In the instant case, the assessee has not claimed any of the above stated exceptions. The Saravana Spg. Mills (P.) Ltd.'s case (supra) also restricts the scope of 'current repairs' to repairs made to machinery, plant and/or furniture. In this case, replacement of machine can at best amount to a repair made to the process of manufacture of yarn. Further this Court has also observed in Saravana Spg. Mills (P.) Ltd.'s case (supra) that if replacement was held to be 'current repair' in such cases, section 31(i) will be completely redundant and absurdity will creep in because repair implies existence of a part of the machine which has malfunctioned, which is impossible in the case of such replacement. Thus, this replacement expenditure cannot be said to be 'current repairs' after the decision in the Saravana Spg. Mills (P.) Ltd.'s case (supra).
Given that section 31 of the Act is not applicable to the said expenditure of the assessee, the next issue is whether it can be considered 'revenue expenditure' of the nature envisaged under section 37 of the Act. The Saravana Spg. Mills (P.) Ltd.'s case (supra) holds that expenditure is deductible under section 37 only if it (a) is not deductible under sections 30-36, (b) is of a revenue nature, (c) is incurred during the current accounting year and (d) is incurred wholly and exclusively for the purpose of the business. We are satisfied that the assessees' expenditure satisfies requirements (a), (c) and (d) as stated above. The dispute is with respect to the nature of expenditure, that is, whether it is revenue or capital in nature.
We are of the opinion that the expenditure of the assessee in this case is capital in nature and there is sufficient judicial precedent to support this view in the case of Travancore Cochin Chemicals Ltd. v. CIT [1977] 106 ITR 900 this Court held that expenditure is of a capital nature when it amounts to an enduring advantage for the business and repair is different from bringing a new asset for the business. Further, in Lakshmiji Sugar Mills (P.) Co. v. CIT AIR 1972 SC 159 it has been held by this Court that bringing into existence a new asset or an enduring benefit for the assessee amounts to capital expenditure. We have already explained why replacement, in this case, amounts to bringing into existence a new asset and also an enduring benefit for the assessee. It is clear then that expenditure of the assessee here is not of a revenue nature and thus, cannot be claimed as a deduction under section 37 of the Act.
As far as reliance on the High Court decision in Janakiram Mills Ltd.'s case (supra) is concerned, the Saravana Spg. Mills (P.) Ltd.'s case (supra) has clearly set Madras High Court by its finding on the scope of 'current repairs' under section 31 of the Act. In CIT v. Ramaraju Surgical Cotton Mills [2007] 294 ITR 328, where this Court decided on the validity of the Madras High Court judgment in Janakiram Mills (supra), this Court clarified that this High Court judgment has been set aside in the Saravana Spg. Mills (P.) Ltd.'s case (supra) mainly on the ground that section 31 and section 37 of the Act, operate in different spheres and the tests applicable to section 31 cannot be read into section 37 of the Act. Further, even in the Ramaraju Surgical Cotton Mills' case (supra) where this Court distinguished the Saravana Spg. Mills (P.) Ltd.'s case (supra) on the ground that that appeal was with respect to deduction only under section 37 of the Act unlike the Saravana Spg. Mills (P.) Ltd.'s case (supra), this court set aside the High Court judgment in Janakiram Mills Ltd.'s case (supra) and remitted the matter to the Commissioner (Appeals) to dispose of the matter in accordance with law. In the light of the observations made herein above, it is thus clear that the High Court decision in Janakiram Mills Ltd.'s case (supra) is not good law on which reliance may be placed.
Consideration of the definition of 'assets' and 'block of assets' and the concept of depreciation under the Act is not required to be decided upon whether the expenditure incurred by the assessee is a deductible expenditure or not. Hence we are not inclined to discuss the same.
It is clear on record that the assessee has sought to treat the said expenditure differently for the purposes of computing its profit and for the purpose of payment of Income-tax. The said expenditure has been treated as an addition to the existing assets in the former and as revenue expenditure in the latter. Though accounting practices may not be the best guide in determining the nature of expenditure, in this case they are indicative of what the assessee itself thought of the expenditure it made on replacement of machinery and that the claim for deduction under the Act was made merely to diminish the tax burden, and not under the belief that it was actually revenue expenditure.
For the reasons aforesaid, we set aside the impugned judgment of the High Court, thereby restoring the judgment of the Assessing Officer disallowing the claim of deduction of the respondent.
The appeal is accordingly allowed. There will be no order as to costs.
The Hon’ble Court concluded that each machine in a textile mill is part of the integrated process of manufacture of yarn and is integrally connected to the other machines in the mill for production of the final product. However, this interconnection does not take away the independent identity and distinct function of each machine. Thus, each machine in a textile mill should be treated independently as such and not as a mere part of an entire composite machinery of the spinning mill. It could at best be considered part of an integrated manufacture process employed in a textile mill. The replacement expenditure could not be said to be 'current repairs'. Further, the expenditure could not be considered as revenue expenditure u/s 37 since the same provides for deduction of revenue expenditure as against ‘current repairs;’ used in Sec.31(i). The Hon’ble court also considered various other decisions and chose to follow the ratio of Sarvana Spinning Mills P. Ltd. (supra). Regarding treatment in the books, it was observed that the assessee has sought to treat the said expenditure differently for the purposes of computing its profit and for the purpose of payment of Income-tax. The said expenditure has been treated as an addition to the existing assets in the former and as revenue expenditure in the latter. Though accounting practices may not be the best guide in determining the nature of expenditure, in this case they are indicative of what the assessee itself thought of the expenditure it made on replacement of machinery and that the claim for deduction under the Act was made merely to diminish the tax burden, and not under the belief that it was actually revenue expenditure. Accordingly, the stand of revenue was upheld.
Applying the ratio of above decisions to the noted factual matrix in preceding para-5, the inevitable conclusion that could be reached is that the replacement / substitution of HF Reactor was to be considered as capital expenditure which would be eligible for depreciation only. The replacement so made by the assessee could not be considered as ‘current repairs’ u/s 31(i) since it is the case of substitution of distinct plant and machinery. The said expenditure could also not be allowed under residuary provisions of Sec. 37(1) since the assessee’s claim fall under specific provisions of Sec. 31(i). Therefore, we confirm the stand of Ld. CIT(A), in this regard.
The Ld. AR has referred to the decision of Tribunal in ACIT vs. Neyveli Lignite Corporation Ltd. (ITA Nos.219/Mds/2009 & ors. dated 18.07.2012) as affirmed by Hon’ble High Court of Madras in CIT vs. Nevveli Lignite Corporation Ltd. Upon study, we find that the facts are distinguishable in that case. As noted by Tribunal in para-15 of the order, the assessee therein replaced components of a boilers and not the entire boiler. These parts were not capable of functioning independently and the expenditure was incurred to preserve and maintain an existing boiler. The same is not the case here since in the present case, the assessee has replaced entire HF Reactor. Therefore, this case law provides no assistance to the case of the assessee.
In the result, the appeal stands dismissed.
Order pronounced on 04th January, 2023.