LAVINO KAPUR COPTTONS P.LTD,MUMBAI vs. DCIT 3(2), MUMBAI

In this appeal, although assessee has raised multiple Grounds of appeal, but at the time of hearing, the grievance of the assessee has been confined to Grounds of appeal Nos.1(a) & 1(b) and other

Briefly put, the relevant facts are that the appellant is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the manufacturing and sale of absorbent cotton and cotton products thereof. In the course of assessment proceedings, Assessing Officer noted that the assessee company had debited huge expense under the head ‘repairs and maintenance’ and, therefore, show caused the assessee to explain the nature of such expenses. In Para-7.2 of the assessment order, the Assessing Officer has detailed such expenditure, which amounts to Rs.48,02,931/-. In response, assessee company made detailed submissions for each of the items of expenditure and pointed out that the entire expenditure was revenue in nature which was debited under the head ‘stores and spares account’ and that there was no new machinery acquired but expenses were incurred in relation to replacement of various parts of existing machineries. Such detailed submission has been reproduced by the Assessing Officer at Para-7.3 of the order. However, Assessing Officer was not satisfied with the explanation, as according to him, the expenditure related to replacement of parts of machinery, which would give benefit of enduring nature to the assessee and, therefore, it was capital in nature. In the context of some of the expenditure namely, relating to conveyor belt, turn table, etc., the Assessing Officer also (Assessment Year : 2010-11) observed that the assessee did not furnish the frequency at which such replacements are done. According to the Assessing Officer, useful life of such items was more than a year and, therefore, it gave an enduring benefit to the assessee and accordingly, justified treatment of such expenditure as capital in nature. The aforesaid action of the Assessing Officer was unsuccessfully carried in appeal before CIT(Appeals) who has concurred with the Assessing Officer. In fact, the CIT(Appeals) held that following the judgment of the Hon’ble Delhi High Court in the case of Delhi Cloth & General Mills Co. Ltd. vs. Addl. CIT, 160 ITR 857(Del), even expenditure incurred for replacement of capital items has to be treated as capital in nature. Not being satisfied with the order of the CIT(Appeals), assessee is in further appeal before us.

Before us, Ld. Representative for the assessee has taken us through the write-up on each item of expenditure, which is similar to that noted by the Assessing Officer in para 7.3 of the assessment order. Our reference has also been invited to the Paper Book, wherein is placed the invoices in respect of the impugned expenditure and it was sought to be made out that impugned items debited to ‘stores and spares account’ were essentially for replacement of various parts of existing machinery and no new machinery was acquired. It was also pointed out that the total cost of plant and machinery installed at the factory premises was to the tune of Rs.102.58 crores and expense in question is too meagre to say that any new asset/machinery has been acquired. It was also pointed out that the impugned expenditure was incurred merely to preserve and maintain an already existing asset and not to bring into existence any new asset and such expenditure is to be (Assessment Year : 2010-11) viewed as revenue expenditure having regard to the following decisions:-

On the other hand, the Ld. Departmental Representative for the Revenue has primarily reiterated the stand of the Assessing Officer which we have already not in earlier paras and is not being repeated for the sake of brevity.

We have carefully considered the rival submissions. Admittedly, the controversy as to whether a particular expenditure is revenue in nature or capital in natures, is required to be addressed having regard to the facts and circumstances of each case. It is also well understood that there is a plethora of judgments on this subject, but a pertinent principle which stands established is that there is no singular test available to determine whether a particular expenditure is revenue or capital in nature, but each case would have to be decided on basis of the relevant fact-situation in a commercial sense. The Hon’ble Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT, 124 ITR 1(SC) held that there may be cases where expenditure, even if incurred for obtaining advantage of an enduring nature may nonetheless be revenue in nature and the test of enduring benefit may break-down. According to the Hon’ble Supreme Court, what is essential is to consider the nature of the advantage in a commercial sense and it is only in (Assessment Year : 2010-11) cases where the advantage is in the capital field that such an expenditure is to be viewed as capital in nature. Therefore, the plea of the Assessing Officer that the impugned expenditure results in an advantage of enduring nature, by itself is not determinative of the controversy. Quite clearly, in the instant case, none of the expenses have resulted in acquisition of an item of plant/or machinery per-se. The expenses are relatable to replacement of worn-out parts of the machinery, which are undisputedly required to be replaced on account of wear and tear. The assertions made by the assessee in relation to each of the expenditure, which have been reproduced by the Assessing Officer in para 7.3 of the assessment order, itself show that the expenditure has been incurred for ensuring running of an otherwise larger machinery and it is not a case where expenditure has been incurred to acquire any independent machinery or plant. Therefore, in our view, the stand of the Assessing Officer, which has been approved by CIT(Appeals) is misdirected and is dehors the purport of the impugned expenditure. Even the reliance placed by the CIT(Appeals) on the judgment of the Hon'ble Delhi High Court in the case of Delhi Cloth and General Mills Company Ltd.(supra) is quite misplaced because in the case before Hon'ble Delhi High Court, the expenditure which was held to be capital in nature related to purchase of furniture and racks, which are independent items of use. In contrast, the fact-position in the instant case relates to expenditure incurred on purchase of parts of an overall machinery, which are required to be replaced on account of wear and tear and are not capable of being used independently. Therefore, the judgment of Hon'ble Delhi High Court in the case of (Assessment Year : 2010-11) Delhi Cloth and General Mills Company Ltd.(supra) does not help the case of the Revenue in the present situation.