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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI [CAMP @ COIMBATORE]
Before: SHRI N.R.S. GANESAN & SHRI ABRAHAM P. GEORGE
PER N.R.S. GANESAN, JUDICIAL MEMBER:
This appeal of the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-1, Coimbatore dated 10.03.2016 and pertains to the assessment year 2005 – 06.
Shri S. Sridhar, the Ld. counsel for the assessee submitted that the only issue arises for consideration is disallowance of ₹2,30,93,720/- on account of replacement of machineries and parts of the machineries. According to the Ld. counsel, the assessee has a spinning mill. In the course of its business activity, the assessee has replaced blow room machinery, draw frame, speed frame and compressor. According to the Ld. counsel, these are all parts of the machinery installed in the spinning mill and it cannot do any independent function in the spinning mill. The production capacity of the spinning mill after replacement remains the same. The spindular capacity does not increase. Referring to the order of the assessment, the Ld. counsel submitted that the Assessing Officer found that the machines replaced are latest model machines available in the market and there would be a functional production capacity atleast 25 to 30% more than the old machinery. According to the Ld. counsel, due to replacement of the new machineries, the spinning mill functions efficiently. The efficiency of the machinery in functioning does not result in increase in production capacity. According to the Ld. counsel, unless the number of spindles are increased, the production capacity does not in any way be increased. Therefore the CIT (Appeals) is not justified in confirming the order of the Assessing Officer. According to the Ld. counsel, the assessee has to necessarily maintain the entire part of the spinning mill for the purpose of maintaining the production. Installed capacity of the spinning mill would always be measured in terms of spindleage. When there was no increase in the installed capacity due to replacement of the machinery, the Madras High Court in the case of Karthikeya Spinning & Weaving Mills Ltd., 265 ITR 285, found that the expenditure cannot be termed as capital in nature. Referring to the judgment of the Apex court in Saravana Spinning Mills P. Ltd (2007), 293 ITR 201, the Ld. counsel submitted that the judgment of the Apex Court in Saravana Spinning Mills is squarely applicable to the facts of this case. According to the Ld. counsel, the assessee claims the expenditure as current repair for the purpose of maintaining the spinning mill as such in a working condition. If it could not be allowed as current repair, definitely it should be allowed as revenue expenditure under Section 37 of the Act, since the expenditure was admittedly incurred in the process of earning of the profit. Therefore the CIT (Appeals) is not justified in confirming the disallowance made by the Assessing Officer.
On the contrary, Shri Shiva Srinivas, the Ld. Departmental Representative submitted that the replacement of machinery creates a new asset of enduring in nature. Therefore, the expenditure incurred by the assessee has to be capitalized and at the best the assessee may claim depreciation as per the provisions of law. Referring to the judgment of the Apex court in CIT v. Saravana Spinning Mills (2007)
293 ITR 201, the Ld. D.R., submitted that the machinery / machine in the segment has to be considered as independent machinery since the same plays independent role. Therefore, replacement of machinery in the textile mill cannot be construed as mere replacement of part of the machinery. According to the Ld. D.R., what was replaced by the assessee is independent machinery in the textile mill.
Therefore, the assessee has brought into existence of new capital asset with enduring benefit. Therefore, there is a commercial advantage for the assessee which is definitely in the capital field.
Therefore, the Assessing Officer has rightly disallowed the claim of the assessee. Referring to the judgment of the Apex court in CIT v Ramaraju Surgical Cotton Mills (2007) 294 ITR 328, the Ld. D.R., submitted that there are two issues arose for consideration before the Apex court. First one is whether there was any increase in the production capacity after replacement of the machinery or the production capacity remains constant even after replacement. The second one whether the test applied to determine the allowability of claim under Section 31 of the Act as current repair can be applied. Subsequently, the Apex court in the case of Sri Mangayarkarasi Mills P. Ltd., (2009) 315 ITR 114 found that the machine in a segment of textile mill has an independent role to play and output of each division is different from one another. Dealing with ring frame in the textile mill, the Apex court found that the ring frame in a textile mill is independent machinery. Therefore, the CIT (Appeals) found that the Assessing Officer has rightly disallowed the claim of the assessee.
We have considered the rival submissions on either side and perused the material available on record. The assessee admittedly incurred an expenditure of ₹2,30,93,720/- in replacement of blow room machinery, carding machinery, draw frame, speed frame and compressor. The Apex court while considering the case of the spinning mill in Saravana Spinning Mills (supra) found that the machineries in a segment of textile mill has an independent role to play. Therefore, it has to be construed as independent machinery. The question arises for consideration is when there was a replacement of certain machinery in the textile mill, can we say that there was a enduring benefit to the assessee especially when the production activity remains as such. As rightly submitted by the Ld. counsel for the assessee, the production capacity of the spinning mill would always depending upon the number of spindles installed in the spinning mill. In the case before us, no spindles were replaced. What was replaced is only blow room machinery, carding machine, draw frame, speed frame and compressor. Therefore, we can safely conclude that there was increase in production capacity of the spinning mill after the replacement of the above machinery.
Next contention of the Ld. D.R., is that after replacement the assessee brought into existence the new asset which has an enduring benefit of better and more efficient production over a period of time.
No doubt, replacement of any machinery would have more efficiency in its activity. The question arises for consideration is whether the efficiency due to replacement of certain machinery would result in increasing of production capacity. This Tribunal is of the considered opinion that merely because certain machineries were replaced, it could not automatically result in increase in production capacity. It has to be demonstrated that due to change of machinery or replacement of machinery, the production capacity in fact actually increased. Merely because there was efficiency in running the machinery, this Tribunal is of the considered opinion that alone cannot be a reason to disallow the claim of the assessee. Unless and until, the assessee replaces the machinery, it may not be able to run the spinning mill at all. Maintenance of machinery in the course of manufacturing activity is one of the requirements, if the assessee intends to continue in the business. Therefore, this Tribunal is of the considered opinion that unless and until the production capacity was increased, the expenditure incurred by the assessee has to be allowed as current repair. A similar view was taken by the Madras High Court in M/s. Precot Meridian Ltd., (Tax case) Appeal Nos. 140 to 143 of 2013 dated 24.07.2013. In view of the above, we are unable to uphold the orders of the lower authorities. Therefore, the orders of the lower authorities are set aside and the addition made by the Assessing Officer to the extent of ₹2,30,93,720/- is deleted.
In the result, the appeal of the assessee stands allowed. 6.
Order pronounced on 14th February, 2017 at Chennai.