M/s. Bharat Gears Limited vs. Commissioner of Income-Tax, Central I

A.K. SIKRI, J.

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assessee a benefit of enduring nature and therefore, the amount was not allowable as current repairs. He, thus, treated the expenditure as capital in nature and allowed depreciation @ 12.5%. According to him, it was evident not only from the quantum of expenditure, which was huge, while reconditioning the machine various spare parts were replaced. The assessee challenged the order of the Assessing Officer and the matter was re-examined by CIT(A) in appeal who held otherwise. He was of the view that expenditure was of revenue nature. While giving this finding the CIT(A) was influenced by the following factors:- “(a) The repairs have been carried out by a purchase memo where the mandate regarding the capacity of the machine is recorded and it is mentioned that machine shall be complete in all respects as per the machine catalogue. Thus, the mandate was to bring the efficiency of the machine at best to the level of original performance.

(b) The AO has been guided for making the disallowance on account of the largeness of the quantum.

(c) The repairs have been carried out by HMT Limited, which a Government concern.”

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advantage of enduring nature acquired by the assessee that brings the cases within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consist merely in facilitating the assessee‟s trading operations or enabling the management and conduct of the assessee‟s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.”

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iv. It only restores the functional efficiency by removing the defect. v. It does not increase the capacity of production. It only prevents the loss. vi. It is not an independent unit and cannot be compared with ring frames of a textile mill. It only performed the functions of machining of gears produced in the preceding line of manufacture by performing earlier functions. vii. Quantum of repairs is not the relevant criterion determinative of the nature of expenditure as to whether it is current repairs or not. viii. Enduring benefit is no longer a criterion. After current repairs, machine becomes usable for or number of years. That does not mean that the expenditure on current repairs is in the capital field. ix. Replacement of worn out parts in the process of current repairs is not the replacement of the plant and machinery itself. 9. An alternative submission was also made that when a machine which is put to continuous use for decades is to be replaced, even the expenditure incurred on the replacement of the said machine is to be 2011:DHC:3209-DB

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treated as expenditure on account of current repairs in view of the aforesaid judgment of the Supreme Court in Sri Mangayarkarsai Mills Pvt. Ltd. (supra) and CIT v. Saravana Spinning Mills Pvt. Ltd., [2007] 293 ITR 201 (SC). 10. Mrs. Prem Lata Bansal, learned senior counsel appearing for the Revenue, countered the aforesaid submissions adopting the reasons given by the Tribunal and also relying upon the same judgments which are referred to by the learned counsel for the appellant. 11. We have considered the respective submissions. The nature of repairs which were carried in the instant case has already been stated above. It would be useful to refer to the legal position to find an answer as to whether such repairs, in the given case, would constitute as current repairs and thus, revenue in nature or it should be treated as capital expenditure. Any expenditure incurred by an assessee can qualify for deduction under Section 37 of the Income-Tax Act (hereinafter referred to as the „Act‟) only if it is incurred wholly and exclusively for the purposes of his business. However, at the same time, fulfillment of this requirement would not be enough to qualify for deduction. It is also to be shown that the expenditure in question is revenue in nature as distinguished from capital expenditure. Over a period of time, through case laws, courts have delineated certain yardsticks to find out whether 2011:DHC:3209-DB

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the expenditure would be of a revenue nature or of a capital nature. It has now become an accepted principle that if an amount is spent for the purpose of bringing into existence a new asset or obtaining a new advantage, then such expenditure would be capital in nature. Another yardstick, which is adopted is to find out whether the expenditure is incurred for obtaining an advantage of enduring benefit. If it is so, then the expenditure should normally be treated as capital in nature. However, at the same time it is not every advantage of enduring nature acquired by an assessee that would bring the case within the fold of capital expenditure. In Empire Jute Co. Ltd. v. Commissioner of Income-Tax, [1980] 124 ITR 1, the Supreme Court formulated the following principles on this aspect:- “(i) It is not a universally true proposition that what may be a capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer.

(ii) There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application 2011:DHC:3209-DB

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of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.

(iii) What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency.” (emphasis supplied)

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“[Explanation.-For the removal of doubts, it is hereby declared that the amount paid on account of current repairs shall not include any expenditure in the nature of capital expenditure.]”

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test was not the same as the test for revenue expenditure but different therefrom. The Court took note of its earlier judgment in Balliml Naval Kishore and another v. Commissioner of Income-Tax, (1997) 2 SCC 449 = 224 ITR 414 wherein the test formulated by Chagla, C.J., in the case of New Shorrock Spinning and Manufacturing Co. Ltd., [1956] 30 ITR 338 (Bom.) was approved. The Bombay High Court in the said judgment had laid down the following test:- “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.

If 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.”

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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).”

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obtained an enduring benefit and the expenditure incurred constituted capital expenditure and not “current repairs”. This decision of the Assessing Officer was reversed by the CIT(A) which view was upheld by the ITAT as well as the High Court. However, the Supreme Court set aside the order of the High Court and restored the opinion of the Assessing Officer holding that the expenditure constituted capital expenditure and not “current repairs”. After discussing the test which is to be laid down (which we have already extracted above), the Supreme Court applied the same on the aforesaid facts in the following manner:- “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 Spinning and Manufacturing Co. Ltd., [1956] 30 ITR 338 (Bom.) the assessees 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 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.”

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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 Mills case [1967] 3 SCR 957 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 came within the expression "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 Mills [1967] 3 SCR 957 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.”

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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 Mills (supra) case clearly mentions that replacement of a derelict ring frame by a new one does not amount to `current repairs'. Further in Ballimal Naval Kishore (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 Mills (supra) case. 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 Mills (supra) case mentions two exceptions in which replacement could amount to current repairs, namely: "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."

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1995-96 it had claimed an amount of Rs.61,28,150/- being the expenditure incurred on replacement of machinery, as revenue expenditure. According to the assessee, this expenditure was merely explained on replacement of spare parts in the spinning mill system and therefore, amounted to revenue expenditure deductible under Section 37 of the Act or „current repairs‟ deductible under Section 31 of the Act. The assessee‟s contention was negatived in the light of the principle stated in Saravana Spinning Mills (P) Ltd. (supra) in the following manner:- “In the instant case, the assessee has not claimed any of the above stated exceptions. The Saravana Mills (supra) case 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 Mills (supra) case 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 Mills (supra) case. 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 Mills (supra) case holds that expenditure is deductible under Section 37 only if it (a) is not deductible under Sections 30-36, (b) is of a revenue 2011:DHC:3209-DB

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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 [1997] 2 SCC 20 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.”

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which purchase order dated 20th June, 1992 was placed with HMT Limited. Total reconditioning and overhauling of the machinery was undertaken. The machinery had, thus, outlived its utility and huge expenditure was incurred by replacing many vital parts in order to make the same functional. Expenditure was of such a nature that it brought into existence altogether new machinery. In any case, the expenditure was for the purpose of securing a benefit of enduring nature. Even if technically new asset had not come into existence or the capacity of the overhauled machine after reconditioning was not enhanced, fact remains that after prolonged use this machinery was lying idle in a broken down condition, totally unfit for production. Therefore, by subsequent reconditioning carried out had resulted in imparting useful life to and hitherto old and unfit machinery, thus, resulting in a benefit of enduring nature. This benefit of enduring nature would be very much in capital field. In so far as the alternate submission of the assessee is concerned, that also does not cut any ice. 21. Learned senior counsel appearing for the assessee had tried to bring the case within the exception enumerated by the Supreme Court in Saravana Spinning Mills Pvt. Ltd. (supra) by arguing that replacement of plant and machinery which was put to continuous 2011:DHC:3209-DB

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use for decades can be treated as „current repairs‟. However, as noted above, this exception is stipulated in Saravana Mills‟s case (supra) in the following manner:- “where the old parts are not available in the market (as is seen in the case of CIT v. Mahalakshmi Textile Mills Ltd. AIR 1968 SC 101) or where the old parts have worked for 50-60 years”

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situation prevails here as well. We, thus, answer the questions in favour of the Revenue and thereby dismiss this appeal. ITA Nos.1600/2010 and 1670/2010 23. These appeals relate to assessment years 2005-06 and 2006-07. Here again expenditure claimed on account of „current repairs‟ was claimed as revenue in nature. Though the Assessing Officer treated the expenditure on repairs of plant and machinery as capital in nature, the CIT(A) held otherwise and view of CIT(A) has been upheld by the ITAT. 24. We may point out that the expenditure incurred in these years to the tune of Rs.39,18,342/- and 36,18,112/- was not on account of reconditioning of a particular machine as was the case in the assessment year 1994-95 dealt with above. Another distinguishing feature, which is material, is that expenditure was not incurred on one particular machine as happened in the assessment year 1994-95. In these years the assessee had incurred the expenditure on repairs of a number of machines and the aforesaid amounts were paid to various agencies from time to time. The expenditure consisted of the following:- (i) Dismantling, cleaning and inspection of various parts. 2011:DHC:3209-DB

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(ii) Repair and replacement of worn out parts (iii) Geometrical alignments of machines (iv) Painting of machines (v) Overhauling and repair of power transmission unit. (vi) Replacement of electronic panel. 25. It is also pertinent to mention that deduction in respect of similar nature of expenditure were claimed by the assessee from 1995-96 onward. In respect of assessment year 1995-96, the Assessing Officer had disallowed following the order in respect of 1994-95. However, deduction was allowed by the CIT(A), which was upheld by the ITAT. The expenditure qua 1994-95 was distinguished in the following manner by the ITAT while passing the orders in respect of the assessment year 1994-95:- “We find that the facts in the present years are distinguishable from the facts that were before the Tribunal in the assessment year 1994-95. In that year the assessee repaired the machinery which were completely broken down and lying unutilized since the year ending on 31/03/1992. The same were renewed in the assessment year 1994-95 relevant to the year ending on 31/03/1994. In these circumstances, the Tribunal held that the machine had become unfit for production and by subsequent reconditioning carried out resulted in imparting useful life to an old and unfit machine. Thus, resulting in a benefit of enduring nature. In the years under appeal, we find that no material has been brought on record by the Revenue to show that even in a single case that the machines were broken down and lying idle from an earlier period, which were put to repairs during the years under consideration. The Ld. counsel for the 2011:DHC:3209-DB

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assessee submitted that the accuracy of the machinery had gone down and, therefore, the machine required repair. Thus, the decision of the assessment year 1994- 95 cannot be applied to the present years under appeal. In the above facts and circumstances of the case we are of the considered opinion that current repairs denotes repairs which are attended to when the need for them arises from the businessman‟s viewpoint and which are not allowed to fall into arrears or to be accumulated. The amount or time involved in the repairs is not a relevant factor while deciding whether the repairs qualify as current repairs. The expression “repairs” presupposes certain injury or partial destruction. Repair is restoration for renewal or replacement of subsidiary parts wholly or partly. Ordinarily, the insertion in a machine of new parts for old and worn out parts in the nature of current repairs or revenue expenditure, even if the old parts are required to be replaced after a long time. The mere fact that the repairs result in an improvement is not enough to take the repairs out of the category of current repairs. The old principle invoking the test of improvement has to be applied with discernment in the present age when the march of technology and the unending fabrication of new materials and products make even current repairs, primarily, so called yield improvement in varying degrees. Therefore, we are of the view that the expenditure incurred by the assessee on repairs of machinery in the present years under appeal is a revenue expenditure allowable for deduction to the assessee. We, therefore, in view of the facts of the case in each of the assessment year under consideration, confirm the orders of the CIT(A) and dismiss the ground of appeal of the Revenue for each of the five assessment years under consideration.”

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expenses were allowed by the ITAT as revenue in nature and all these orders were accepted by the Department. However, it is only in respect of 2005-06 and 2006-07 present appeals are filed. From the aforesaid facts we are of the opinion that not only the expenditure incurred on repairs is on account of current repairs for which deduction would be admissible under Section 31(1) of the Act, it is not capital expenditure but revenue expenditure incurred for business purposes which will qualify as deduction under Section 37 of the Act as well. Therefore, no substantial question of law arises and these appeals are accordingly dismissed.

(A.K. SIKRI) JUDGE

(M.L. MEHTA) JUDGE JUNE 03, 2011 HP. 2011:DHC:3209-DB