The question as
to whether the expenditure incurred on replacement of machinery is
revenue or capital expenditure, particularly in the nature of
replacements of parts, thus rests on the nature of expenditure incurred,
vis-a-vis the benefit that the assessee derives. The ratio deductible
from the decisions referred to above are:
(i)
To decide the applicability of Section 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 is to find out
whether expenditure is incurred to “preserve and maintain” an already
existing asset and the expenditure must not be to bring a new asset into
existence or to obtain a new advantage vide [2007] 293 ITR 201 (SC)
(Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.)
(ii)
Under Section 31(i), the deduction admissible is only for
current repairs. Therefore, thequestion as to whether the expenditure
incurred by the assessee conceptually is revenue or capital in nature is
not relevant for deciding the question whether such expenditure comes
within the etymological meaning of the
expression “current repairs”. In other words, even if the expenditure
is revenue in nature, it may not fall in the connotation of “current
repairs” [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs.
Saravana Spinning Mills P. Ltd.)
(iii)
A new asset or new/different advantage cannot amount to `current
repairs’. – 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P.
Limited)
(iv)
Repair implies existence of a part of the machine which has
malfunctioned, thereby requiring repair to that machinery, plant etc.
Replacement cannot be a current repair, for, “replacement” and “current
repair” do not go hand in hand . If one is to hold otherwise, it would
only make Section 31(i) wholly redundant and absurd. Thus, replacement
expenditure cannot be said to be `current repairs’ vide [2007] 293 ITR
201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning
Mills P. Ltd.) and 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills
P. Limited)
(v)
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. – 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P.
Limited);
(vi) 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, bringing
into existence a new asset or an enduring benefit for the assessee
amounts to capital expenditure vide Lakshmiji Sugar Mills (P) Co. v. CIT
(AIR 1972 SC 159) referred in 2009-TIOL-86-SC-II (CIT Vs. Sri
Mangayarkarasi Mills P. Limited).
(vii)
Therefore, whether an expenditure is revenue or capital in nature would
depend on the facts of each case. – [2007] 293 ITR 201 (SC)
(Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.)
HIGH COURT OF JUDICATURE AT MADRAS
Dated : 24.07.2013
Tax Case (Appeal) Nos.140 to 143 of 2013
489 to 491 of 2012 and 319 of 2013
and connected MPs
Tax Case (Appeal).No.140/2013:-
M/s.Super Spinning Mills Ltd.
-vs-
The Assistant Commissioner of Income-tax
Coram
The Honourable Mrs.Justice CHITRA
VENKATARAMAN
The Honourable Ms.Justice K.B.K.VASUKI
Prayer in Tax
Case (Appeal).No.140/2013:- Tax Case Appeal filed under Section 260A of
theIncome Tax Act, 1961 against the order of the Income Tax Appellate
Tribunal, Chennai ‘C’ Bench dated 07th February 2013 in
ITA.No.04/Mds/2013 for the assessment year 2005-06.
COMMON JUDGMENT
(The Judgment of the Court was made by CHITRA VENKATARAMAN, J.)
The assessee is one and the same in all the present Tax Case
(Appeals). The assessee raised the following common
substantial question of law seeking admission of the present Tax Case Appeals:
” Whether in the facts and circumstances of the case, the Income
Tax Appellate Tribunal is right in law, in disallowing the claim of
expenditure on replacement of machinery as revenue expenditure ?”
After issuing notice to the respondent in the Tax Case (Appeals), we decided to take the Tax Cases for final hearing.
2. It is seen from the documents placed
before this Court that in respect of the assessment year 1994-95, the
Revenue preferred an appeal before this Court in T.C(A).No.1074 of 2010,
wherein, the same issue was raised, which reads as follows:-
“1. Whether the replacement of machinery parts will amount to revenue expenditure or not ?
2. Whether brining into existence of a new asset or obtaining a new
advantage would amount to revenue expenditure or not ?”
3. Under order dated 10.01.2011, this Court remanded the matter back to
the Commissioner of Income Tax (Appeals) to reconsider the issue as to
whether the replacement of machinery parts brings into existence a new
asset or a new advantage, so as to hold the
expenditure as revenue or not by following the decision of this Court
in Tax Case (Appeal) No.261 of 2010 dated 22.06.2010, wherein, this
Court followed the decision in T.C.Nos.1290 and 1291 of 2009 and 1216 to
1221 of 2009 and the decision of the Apex Court in S.L.P.Nos.413 and
414 of 2009 andCivil Appeal No.7297
of 2009. Thus, a reading of the order of this Court shows that based
on the decisions on similar issues rendered by the Apex Court and that
of this Court, this Court remanded the matters therein back to the
Commissioner of Income Tax (Appeals) for fresh investigation of the
facts and thus the Revenue’s case in TC(A).No.1074 of 2010 was also
remitted back to the Commissioner of Income Tax (Appeals). Thereupon,
the Commissioner of Income Tax (Appeals) passed the order dismissing the
appeal, holding that the assessee had not submitted the efficiency of
the machinery replaced nor had given
details about the new machinery. The aggrieved assessee preferred
appeals before the Tribunal, which dismissed the appeals.
4. The assessment years under consideration are 2003-04 and 2005-06 to
2008-09. Before going into the questions raised, few facts need to be
seen. The assessee herein is engaged in the business of manufacture and
trading in cotton yarn and
allied products. In the course of the previous year relevant to the
respective assessment years, the assessee incurred expenditure in
respect of replacement of certain textile machinery. The machinery
which had gone for replacement are different in respect of each of the
assessment
years involved in the respective Tax Cases. For the purpose of
considering the question raised, for the reasons given below, it is not
necessary for us to go into the details of
the machinery replaced. It is suffice to say that the assessee claimed
expenditure therein as revenue expenditure/ current repairs. However,
the Assessing Officer held that the replacement could not be considered
to be current repairs.
5. It is a matter of record that the question as to whether such
replacement could be current repairs/capital in nature came up for
consideration in series of decisions before this Court, which, however,
went on appeal
before the Apex Court. The question as to the nature of the claim on
expenditure incurred on the replacement of machinery, came up for
consideration before this Court in the decision reported in [2005] 275
ITR 403 (CIT Vs. Janakiram Mills Ltd.). There the assessee claimed the
expenditure on the replacement on ring frames as current repair, while
the Revenue treated it as a capital expenditure. On appeal, the
Commissioner of Income Tax (Appeals) held the expenditure as revenue
expenditure, that replacement of ring frames constituted an integral
part of the production system in
a textile machinery. The view of the Commissioner of Income
Tax(Appeals) was affirmed by the Tribunal. On appeal, in the decision
cited above, this Court held that the expenditure was deductible under
Section 31(i) of the Income Tax Act. On appeal against the judgment of
this Court, the
Supreme Court considered the question in the decisions reported in
(2007) 293 ITR 201 (SC) (CIT Vs. Saravana Spinning Mills P.Limited) and
(2007) 294 ITR 328 (SC) (CIT Vs. Ramaraju Surgical Cotton Mills) as to
(a) Whether the expenditure incurred on modernisation and replacement
came with the constitution of the words “current repairs” in Section
31(i) and (b) Whether replacement of an old machinery by a new machinery
constituted an advantage of an enduring nature and hence, capital in
nature.
6. In the
decision reported in (2007) 293 ITR 201 (SC) (CIT Vs. Saravana Spinning
Mills P.Limited), the Apex Court considered the meaning of the phrase
“current
repairs”. Reversing the decision of this Court, the Apex Court held
that one of the basic tests to find out whether the expenditure was
current repairs or not, was to see as to whether the expenditure was
incurred to “preserve and maintain” an already existing asset. The
expenditure must not be one to bring a new asset into existence or to
obtain new advantage; the replacement of ring frames constituted
substitution of an old asset by a new asset and therefore, the
expenditure incurred by the assessee did not fall within the meaning of
“current repairs” under Section 31(i) of the Income Tax Act, 1961
(hereinafter called as the “Act”). The Supreme Court observed “… 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”. … old type
of replacement parts were not available in the market and, therefore,
the expenditure came within the expression “current repairs.” …
Holding that Section 37 is a residuary Section, the Supreme Court
observed: “Therefore, whether an expenditure is revenue or capital in
nature would depend on the facts of each case. “ Thus, the Supreme
Court held that even if the expenditure is revenue in nature, it may not
fall within the connotation of “current repairs”. Thus, the Supreme
Court reversed the decision of this Court and held that the expenditure
in question was not “current repairs” and hence, could not be allowed
under Section 31(i) of the Act. The Apex Court accepted the case of the
Revenue that the assessee was not entitled to deduction under Section
31(i) of the Act. It however pointed out to the decision reported in
(1967) 3
SCR 957 (CIT Vs. Mahalakshmi Textile Mills Ltd.) that when old parts
were not available in the market or where the old parts had worked 50 or
60 years, replacement in such cases of exception fall within the
expression “current repairs”. The Apex Court, however, expressed no
opinion on the applicability of Section 37(1) of the Act. This came to
be considered separately in other batch of cases reported in (2007) 294
ITR 328 (SC) (CIT Vs. Ramaraju Surgical Cotton Mills).
7. In the case of CIT Vs. Ramaraju Surgical Cotton Mills reported in
(2007) 294 ITR 328 (SC), in the appeal taken by the Commissioner of
Income-Tax, the Supreme Court considered the case
where the assessee claimed the expenditure under Section 37 of the Act.
The assessee contended that the expenditure incurred on replacement of
assets without increase in the production capacity was revenue in
nature. Pointing out that such question was not raised before the
Commissioner, the Supreme Court pointed out that to decide the question
as to whether the expenditure is revenue or capital, number of aspects
are required to be considered therein; in the absence of any details
regarding the production capacity even after replacement, the matter
needed to be remitted back to the Commissioner of Income Tax (Appeals).
The Apex Court pointed out that since there was confusion regarding the
applicability between the tests to be applied in respect of Section 31
of the Act and the test to be applied in the case of Section 37 of the
Act, the matter deserved to be remanded back to the Commissioner of
Income Tax (Appeals) to decide the matter
uninfluenced by any observations made in the orders of the Court.
Thus, in the case of CIT Vs. Ramaraju Surgical Cotton Mills (SC)
reported in (2007) 294 ITR 328 (SC), the Apex Court, after referring to
the decision reported in (2007) 293 ITR 201(SC) in the case of CIT Vs.
Saravana Spinning Mills (P) Ltd., held that Section 31 of the Act and
Section 37 of the Act, operated on different spheres and the tests
applicable to Section 31 of the Act could not be read into Section 37 of
the Act. Thus, the matters were restored to the files of the Assessing
Officer for fresh hearing.
8. Apart from these two decisions, there is yet another decision of the
Apex Court in the
case of CIT Vs. Sri Mangayarkarasi Mills P. Limited reported in
2009-TIOL-86-SC-II. There the assessee incurred expenditure on
replacement of machines. The assessee claimed the expenditure as
allowable under Section 37 of the Act. While the Assessing Officer
disallowed the expenditure on the ground that each machine in a spinning
mill was independent of each other and they were not integrally
connected; hence, he treated the expenditure as capital in nature, the
Appellate Authority allowed the appeal filed by the assessee. On
further appeal by the Revenue before the Income Tax Appellate Tribunal,
it followed the decision of this Court and upheld the order of the
Commissioner of Income Tax (Appeals) and dismissed the appeal. On
further appeal before this Court, this Court agreed with the assessee
and rejected the Revenue’s Appeal. This Court held that the expenditure
on replacement of machinery was revenue in nature. In so
holding, it followed the decision reported in [2005] 275 ITR 403 (CIT
Vs. Janakiram Mills Ltd.), which was subsequently reversed by the Apex
Court. It further referred to the decision reported in (2007) 293 ITR
201 (SC) (CIT Vs. Saravana Spinning Mills P.Limited) and pointed out:
“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. … 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.” The Supreme Court considered the question as to whether
the expenditure amounted to revenue expenditure or current repairs. The
Supreme Court pointed out that each machine in a spinning mill should
be treated independently as such and not as a mere part of an entire
composite machinery of the spinning mill. It can, at best, be
considered part of an integrated manufacturing process employed in a
textile mill. Referring to its decision reported in (2007) 293 ITR 201
(SC) (CIT Vs. Saravana Spinning Mills P.Limited), it held that the
expenditure could not be treated as current repairs under Section 31(i).
The expenditure incurred for reaping long-term and enduring benefits by
replacing the independent machine could only be a capital expenditure.
Thus, the Apex Court restored the Assessing Officer’s order and held
that the expenditure was capital in nature.
The decision in the case of CIT Vs. Sri Mangayarkarasi Mills P. Limited
reported in 2009-TIOL-86-SC-II, thus rested on the facts of its case.
9. The question as to whether the expenditure incurred on replacement
of machinery is revenue or capital expenditure, particularly in the
nature of replacements of parts, thus rests on the nature of expenditure
incurred, vis-a-vis the benefit that the assessee derives. The ratio
deductible from the decisions referred to above are:
(i)
To decide the applicability of Section 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 is to find out
whether expenditure is incurred to “preserve and maintain” an already
existing asset and the expenditure must not be to bring a new asset into
existence or to obtain a new advantage vide [2007] 293 ITR 201 (SC)
(Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.)
(ii)
Under Section 31(i), the 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 whether such expenditure comes within the
etymological meaning of the expression “current repairs”. In other
words, even if the expenditure is revenue in nature, it may not fall in
the connotation of “current repairs” [2007] 293 ITR 201 (SC)
(Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.)
(iii)
A new asset or new/different advantage cannot amount to `current
repairs’. – 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P.
Limited)
(iv) Repair
implies existence of a part of the machine which has malfunctioned,
thereby requiring repair to that machinery, plant etc. Replacement
cannot be a current repair, for, “replacement” and “current repair” do
not go hand in hand . If one is to hold otherwise, it would only make
Section 31(i) wholly redundant and absurd. Thus, replacement
expenditure cannot be said to be `current repairs’ vide [2007] 293 ITR
201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P.
Ltd.) and 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P.
Limited)
(v) 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. – 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P.
Limited);
(vi) 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, bringing into existence a new asset or an enduring
benefit for the assessee amounts to capital expenditure vide Lakshmiji
Sugar Mills (P) Co. v. CIT (AIR 1972 SC 159) referred in
2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited).
(vii)
Therefore, whether an expenditure is revenue or capital in nature would
depend on the facts of each case. – [2007] 293 ITR 201 (SC)
(Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.)
10. In the case of Empire Jute Co. Ltd Vs. Commissioner of Income Tax
reported in (1980) 124 ITR 1 (SC), the Apex Court referred to the
decision in the case of John Smith and Son Vs. Moore reported in (1921)
12 TC 266, 296 (HL) that for an expenditure to become a business
expenditure, there
must be an outlay of a business “in order to carry it on and to earn a
profit out of this expense as an expense of carrying it on”. The Apex
Court further cautioned that when considering the question on the claim
of the expenditure being revenue or capital, it must be viewed in the
larger context of business necessity or expediency. The Apex Court
further pointed out to the concept of an advantage of enduring benefit
and further explained the question on capital or revenue expenditure in
the following words:-
” 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 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.”
11. Having thus held so, the Apex Court further pointed out that where
an expenditure is incurred primarily and essentially for the purpose of
business of an assessee without any addition or augmentation in the
profit-making structure to the better utilisation of the assessee, the
claim would be in the nature of revenue expenditure. The Apex Court
pointed out that even if the expenditure is producing a larger quantity
of goods and earning more income, nevertheless, the nature of
expenditure would be revenue in character. This judgment of the Apex
Court in the case of Empire Jute Co. Limited Vs. CIT reported in (1980)
124 ITR 1 (SC) has to be seen
in the background of the decision of the Apex Court in the case of CIT,
Madras Vs. Mahalakshmi Textile Mills Limited reported in (1967) 66 ITR
710 (SC).
12. The decision in the case of CIT, Madras Vs. Mahalakshmi Textile
Mills Limited reported in (1967) 66 ITR 710 (SC) is related to the
assessee introducing “Casablanca conversion system” in its spinning
plant. This involves replacement of certain roller stands and fluted
rollers fitted with rubber aprons to the spinning machinery, removal of
ring frames from certain existing parts, introduction of ball-bearing
jockey-pulleys for converting the original band-drivers to tape- drivers
and other additions and
alterations in the drafting mechanism. Confirming the judgment of this
Court, the Supreme Court pointed out that with the introduction of the
Casablanca conversion system, there was no installation of new machinery
or plant, but it amounted, in substance, to “current repairs” to the
existing machinery.
13. The judgment of the Supreme Court in the case of CIT, Madras Vs.
Mahalakshmi Textile Mills Limited reported in (1967) 66 ITR 710 (SC)
read along with the decision the Madras High Court pointed out that
there was no change in the method of spinning and that the parts that
were replaced, performed precisely the same function as old parts and
when it was found that
the original old type of replacement parts were not available in the
market, necessarily the company had to replace it with the new system;
in that context, the Supreme Court affirmed the judgment of this Court
that it was “current repairs” to the machinery and plant.
14. Keeping the decisions referred to above, one can detect that in
considering the claim of the assessee, the decision must be guided by
business prudency of the necessity or expediency which compel the
assessee to carry on such repairs/replacement and if this repair
ultimately has gone in for bettering its business profits in the nature
of increasing its profits, as held by the Supreme Court in the
case of CIT Vs Ramaraju Surgicial Cotton Mills reported in (2007) 294
ITR 328 (SC) through increase in the production capacity, then the
outlay, not being just to carry on the business to earn profit out of
its existence, but to enlarge its profit-earning capacity, the
expenditure may fall for consideration under the head of “capital
expenditure”. But, whether the expenditure in question has no such
ingredient of increasing its production capacity, expenditure would
necessarily fall under the head of “revenue expenditure”.
15. With the law declared by the Apex Court in the background, when we
look at the order of Commissioner of Income Tax (Appeals) as well as
that of the Income Tax Appellate Tribunal, one may note herein summary
of case law alone and admittedly, there is no discussion on the facts as
to the impact of such expenditure on the profit-earning capacity or
mechanism of the assessee. Learned Senior counsel appearing for the
assessee placed before us the expenditure incurred on the various items
which had gone in for replacement and also the date of installation of
such machinery and its impact on the production capacity.
16. Even though the assessee has furnished list of items chart, the
data which are available before us were not available before any of the
Appellate Authorities for coming to the right conclusion
herein. Thus, with no details available as stated in the case of CIT
Vs.Ramaraju Surgical Cotton Mills reported in (2007) 294 ITR 328 (SC),
the decision of the Tribunal cannot be held as based on any material
data necessary for considering the claim one way or the other. Hence,
the proper course herein is to set aside the order of the Income Tax
Appellate Tribunal and remit the matter back to the Commissioner of
Income Tax (Appeals) for de novo consideration.
17. Keeping in view the law declared by the Apex Court in the case of
CIT Vs. Ramaraju Surgical Cotton Mills’ case reported in (2007) 294 ITR
328 (SC) and in the case of CIT Vs. Sri Mangayarkarasi Mills P.
Limited reported in 2009-TIOL-86-SC-II, the Commissioner of Income Tax
(Appeals) shall grant an opportunity to the assessee to state its case
in a proper perspective and decide on the issue as to whether the
expenditure, in effect, could be treated as “revenue expenditure”.
18. We direct the Commissioner of Income Tax (Appeals) to pass a
detailed order on the impact of the replaced material as well as the
functioning of the machinery after hearing the assessee in detail, whom,
we hope, would extend all cooperation before the Commissioner of Income
Tax (Appeals) and furnish the materials for arriving at a proper
conclusion.
19. The Tax Case (Appeals) stand disposed of on the above terms. No costs. Consequently, connected MP is closed.
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