2007 (8) TMI 16 - SC - Income Tax

Wholesale machine replacement in an integrated textile plant not deductible as current repairs under section 31(i)

COMMISSIONER OF INCOME-TAX Versus SARAVANA SPINNING MILLS P. LTD.

The SC held that expenditures for wholesale replacement or modernization of entire machines in an integrated textile plant did not qualify as 'current ... Extent and scope of section 31(i) - Current Repairs - claimed deduction on account of 'modernisation and replacement expenses' - Whether the expenditure incurred by the assessee for modernisation and replacement came within the connotation of the words 'current repairs' in section 31(i) - Tribunal, took different segments of a textile mill are integrated parts of a continuous process and the expenditure incurred on replacement of the machines in any segment of the plant should be treated as revenue expenditure - HELD THAT:- In the present case, in the balance-sheet the assessee, viz., M/s. Saravana Spinning Mills has indicated the above expense as an item incurred for purchase of a new asset. In our view, the High Court had erred in placing reliance on the report of SITRA in coming to the conclusion that the textile mill is a plant under section 31(i) As stated above, each machine in a segment has an independent role to play in the mill and the output of each division is different from the other 'repair' implies the existence of a part of the machine which has malfunction. If the argument of the assessee herein before us is to be accepted it would result in absurdity and it would make the provisions of section 31 (i) completely redundant According to Shn R Venkataraman, learned senior counsel for the assessee the textile plant consists of about 25 machines One of such machines is the ring frame. If the argument of the assessee is to be accepted, it would mean that periodically one machine out of 25 would be replaced, and on that basis, from time to time, each of these 25 machines in the textile plant would be entitled to claim allowance under section 31(i) In our view, the Assessing Officer was right in holding that each machine including the ring frame was an independent and separate machine capable of independent and specific function and, therefore, the expenditure incurred for replacement of the new machine would not come within the meaning of the words 'current repairs'. It is not the case of the asses- see that a part of the machine (out of 25 machines) needed repairs. The entire machine had been replaced. Therefore, the expenditure incurred by the assessee did not fall within the meaning of 'current repairs' in section 31(i). As stated, even if the expenditure incurred is revenue in nature, still it may not fall in the connotation of the words 'current repairs' under section 31(i) which test has not kept in mind. As held by Chagla C. J. in the case of New Shorrock Spinning and Manufacturing Co. Ltd. [1956 (2) TMI 54 - BOMBAY HIGH COURT] all repairs do not attract section 31(i) even though the expenditure is revenue in nature. Therefore, the basic test, which had not been applied, in the present case, by the Commissioner of Income-tax (Appeals), the Tribunal and the High Court, is whether the expenditure came within the expression 'current repairs'. Instead all the three authorities proceeded on the footing that since the expenditure was revenue it constituted current repairs'. It is for this reason that we have interfered with the concurrent findings given by the Commissioner of Income-tax (Appeals), the Tribunal and the High Court. Accordingly, we hold in this batch of civil appeals that the assessees were not entitled to claim allowance under section 31(i) of the Income-tax Act as it stood at the relevant time. Issues Involved:1. Interpretation and scope of Section 31(i) of the Income-tax Act, 1961.2. Determination of whether the expenditure on modernization and replacement qualifies as 'current repairs' under Section 31(i).3. Analysis of whether the entire textile mill constitutes a single plant or individual machines.4. Applicability of Section 37(1) for claiming deduction if Section 31(i) is not applicable.Issue-wise Detailed Analysis:1. Interpretation and Scope of Section 31(i) of the Income-tax Act, 1961:The core issue revolves around the interpretation of Section 31(i) of the Income-tax Act, 1961, which allows deductions for 'current repairs' to machinery, plant, or furniture used for business purposes. The relevant text of Section 31(i) is: 'the amount paid on account of current repairs thereto.' The court emphasized that the term 'current repairs' is intended to preserve and maintain an existing asset rather than to bring a new asset into existence.2. Determination of Whether the Expenditure on Modernization and Replacement Qualifies as 'Current Repairs' Under Section 31(i):The assessee, a textile mill, claimed deductions for modernization and replacement expenses as 'current repairs' under Section 31(i). The Assessing Officer disallowed these claims, categorizing the expenses as capital expenditures since the replacement of old machines with new ones provided an enduring benefit. The Commissioner of Income-tax (Appeals) and the Tribunal initially allowed the claims, considering the replacements as part of a continuous process in the textile mill. However, the Supreme Court held that the expenditure did not qualify as 'current repairs' because it involved replacing entire machines rather than repairing parts of existing machines. The court stated, 'the basic test to find out as to what would constitute current repairs is that the expenditure must have been incurred to 'preserve and maintain' an already existing asset.'3. Analysis of Whether the Entire Textile Mill Constitutes a Single Plant or Individual Machines:The High Court had previously treated the entire textile mill as a single plant, relying on the South India Textile Research Association (SITRA) report, which suggested that the textile manufacturing process was a continuous interlinked process. However, the Supreme Court disagreed, stating that different segments of the textile mill (e.g., blow room, carding, combing) perform distinct functions and produce different outputs. The court clarified that each machine within these segments is independent and capable of specific functions. Therefore, replacing an entire machine does not constitute 'current repairs.' The judgment noted, 'the Tribunal and the High Court erred in holding that the manufacturing process in the textile mill is one continuous integrated process.'4. Applicability of Section 37(1) for Claiming Deduction if Section 31(i) is Not Applicable:The court addressed the argument that even if the expenditure did not qualify under Section 31(i), it should be deductible under Section 37(1) as revenue expenditure. The court rejected this contention, emphasizing that Section 37(1) is a residuary section applicable only when expenditures do not fall within Sections 30 to 36. The court stated, 'even if the expenditure incurred is revenue in nature, still it may not fall in the connotation of the words 'current repairs' under section 31(i).' Therefore, the expenditure could not be claimed under Section 37(1) either.Conclusion:The Supreme Court allowed the civil appeals filed by the Department, holding that the assessees were not entitled to claim deductions under Section 31(i) for the modernization and replacement expenses. The court emphasized that the expenditures did not qualify as 'current repairs' as they involved replacing entire machines, thereby bringing new assets into existence. The judgment underscored the importance of preserving and maintaining existing assets for expenditures to qualify as 'current repairs' under Section 31(i).