K.P.R.SPINNING MILLS (P) LTD.,CHENNAI vs. ITO, COIMBATORE

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)

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.