2011 (6) TMI 339 - HC - Income Tax

Appeal Dismissed: Capital vs. Revenue Expenditure Decision

The High Court dismissed the appeal for the assessment year 1994-95, holding the expenditure as capital in nature. For the assessment years 2005-06 and ... Repairs and reconditioning of Fent Gear Machine expenses - revenue capital nature - The amount or time involved in the repairs is not a relevant factor while deciding whether the repairs qualify as current repairs - The mere fact that the repairs result in an improvement is not enough to take the repairs out of the category of current repairs - The old principle invoking the test of improvement has to be applied with discernment in the present age when the march of technology and the unending fabrication of new materials and products make even current repairs, primarily, so called yield improvement in varying degrees - Similar expenses were allowed by the ITAT as revenue in nature and all these orders were accepted by the Department. However, it is only in respect of 2005-06 and 2006-07 present appeals are filed. From the aforesaid facts it is to be opinioed that not only the expenditure incurred on repairs is on account of current repairs for which deduction would be admissible under Section 31(1) it is not capital expenditure but revenue expenditure incurred for business purposes which will qualify as deduction under Section 37. Therefore, the expenditure incurred by the assessee on repairs of machinery in the present years under appeal is a revenue expenditure allowable for deduction to the assessee. Issues Involved:1. Nature of expenditure incurred on repairs and reconditioning of machinery: revenue or capital.2. Allowability of the expenditure under Section 31 and/or Section 37(1) of the Income Tax Act.Detailed Analysis:1. Nature of Expenditure: Revenue or CapitalAssessment Year 1994-95:The assessee claimed an expenditure of Rs. 83,79,134/- as revenue expenditure for repairs and reconditioning of a Fent Gear Machine, arguing it was 'current repairs.' The machine, purchased in 1981, broke down in 1991 and was repaired by HMT Limited. The Assessing Officer (AO) treated this expenditure as capital in nature, citing the substantial amount and the replacement of various spare parts, and allowed depreciation at 12.5%.The CIT(A) reversed the AO's decision, influenced by factors such as the mandate to restore the machine to its original performance, the largeness of the quantum not being a relevant parameter, and the repairs being carried out by a government concern, HMT Limited. The CIT(A) held that the expenditure was of revenue nature as it did not increase the machine's capacity beyond its original specifications.The ITAT, however, reversed the CIT(A)'s order, agreeing with the Revenue that the machinery had outlived its utility, and the repairs resulted in a benefit of enduring nature, thus treating the expenditure as capital.Supreme Court Precedents:The ITAT relied on the Supreme Court judgment in Empire Jute Co. Ltd. vs. CIT, which stated that not every advantage of enduring nature is capital expenditure; the nature of the advantage in a commercial sense is crucial. However, the ITAT concluded that the repairs imparted a new life to the old, unfit machinery, thus providing a benefit of enduring nature in the capital field.High Court's Analysis:The High Court examined whether the expenditure constituted 'current repairs' under Section 31 or capital expenditure. It referred to the Supreme Court judgments in Saravana Spinning Mills Pvt. Ltd. and Sri Mangayarkarsai Mills Pvt. Ltd., which clarified that 'current repairs' are meant to preserve and maintain an existing asset, not bring a new asset into existence. The High Court concluded that the expenditure in question was capital in nature, as it resulted in a benefit of enduring nature, making an old, unfit machine functional again.2. Allowability under Section 31 and/or Section 37(1) of the ActAssessment Year 1994-95:The High Court held that the expenditure did not qualify as 'current repairs' under Section 31, as it was capital in nature. Consequently, it also did not qualify as revenue expenditure under Section 37(1), as it resulted in an enduring benefit.Assessment Years 2005-06 and 2006-07:For these years, the expenditure claimed as 'current repairs' was treated as capital by the AO but reversed by the CIT(A) and upheld by the ITAT. The ITAT distinguished these years from 1994-95, noting that the expenditure was on multiple machines and included various repair activities like dismantling, cleaning, replacing worn-out parts, and overhauling.High Court's Analysis:The High Court noted that similar expenditures had been allowed as revenue in previous years (1995-96 to 2004-05) and accepted by the Department. It concluded that the expenditure for these years was on account of 'current repairs' and thus revenue in nature, qualifying for deduction under Section 31(1) and Section 37 of the Act. The appeals for these years were dismissed, affirming the ITAT's decision.Conclusion:The High Court dismissed the appeal for the assessment year 1994-95, holding the expenditure as capital in nature. For the assessment years 2005-06 and 2006-07, the appeals were dismissed, affirming the expenditure as revenue in nature and allowable under Sections 31 and 37 of the Act.