1993 (10) TMI 62 - HC - Income Tax

Court allows modernization expenditure as revenue; defers bonus deduction issue for further examination.

The High Court ruled in favor of the textile manufacturing company, allowing the expenditure on modernizing machinery as revenue expenditure. The court ... Bonus Issues involved: 1. Whether the expenditure on modernizing machinery is a revenue expenditureRs.2. Whether the bonus paid by the assessee is deductible under section 36(1)(ii) of the Income-tax ActRs.Modernizing Machinery Expenditure: The case involved a textile manufacturing company claiming expenditure of Rs. 9,69,563 on modernizing its machinery. Initially, the Income-tax Officer considered the expenditure as capital in nature, disallowing the claim. However, the Commissioner of Income-tax (Appeals) disagreed, allowing the claim as revenue expenditure. The Appellate Tribunal concurred, stating that the expenditure for renovating and replacing old machinery was of a revenue nature. The Tribunal emphasized the need for modernization in a competitive business environment, allowing the expenditure as revenue. The High Court referred to previous cases and held that the expenditure was for the improvement of existing business operations, making it revenue expenditure. The court cited relevant cases such as Empire Jute Co. Ltd. v. CIT and CIT v. Associated Cement Companies Ltd. to support its decision.Bonus Deduction: Regarding the bonus issue, the Tribunal ruled that the customary bonus paid by the assessee was not covered by section 36(1)(ii) of the Income-tax Act but fell under section 37. The High Court referred to a previous case, CIT v. Kerala Agro Industries Corporation, which outlined conditions for claiming bonus as a deduction under section 36(1)(ii). However, the Tribunal did not address whether the bonus paid met the conditions specified in the Act. Consequently, the High Court directed the Tribunal to reexamine the matter in light of relevant decisions, declining to answer the question until further review.In conclusion, the High Court held in favor of the assessee regarding the expenditure on modernizing machinery, deeming it as revenue expenditure. However, the issue of bonus deduction was deferred for further examination by the Tribunal in accordance with the provisions of the Income-tax Act.