2017 (2) TMI 1447 - AT - Income Tax

Tribunal allows appeal on machinery replacement expenditure disallowance, emphasizing maintenance vs. capitalization.

The Tribunal allowed the appeal of the assessee, setting aside the disallowance of expenditure on machinery replacement in a spinning mill. It held that ... Disallowance on account of replacement of machineries and parts of the machineries - current repairs - HELD THAT:- Assessee admittedly incurred an expenditure in replacement of blow room machinery, carding machinery, draw frame, speed frame and compressor. The Apex court while considering the case of the spinning mill in Saravana Spinning Mills [2007 (8) TMI 16 - SUPREME COURT] found that the machineries in a segment of textile mill has an independent role to play. Therefore, it has to be construed as independent machinery. The question arises for consideration is when there was a replacement of certain machinery in the textile mill, can we say that there was a enduring benefit to the assessee especially when the production activity remains as such. As rightly submitted by the assessee, the production capacity of the spinning mill would always depending upon the number of spindles installed in the spinning mill. In the case before us, no spindles were replaced. What was replaced is only blow room machinery, carding machine, draw frame, speed frame and compressor. Therefore, we can safely conclude that there was increase in production capacity of the spinning mill after the replacement of the above machinery. Merely because certain machineries were replaced, it could not automatically result in increase in production capacity. It has to be demonstrated that due to change of machinery or replacement of machinery, the production capacity in fact actually increased. Merely because there was efficiency in running the machinery, this Tribunal is of the considered opinion that alone cannot be a reason to disallow the claim of the assessee. Unless and until, the assessee replaces the machinery, it may not be able to run the spinning mill at all. Maintenance of machinery in the course of manufacturing activity is one of the requirements, if the assessee intends to continue in the business. Therefore, this Tribunal is of the considered opinion that unless and until the production capacity was increased, the expenditure incurred by the assessee has to be allowed as current repair. Decided in favour of assessee Issues:Disallowance of expenditure on account of replacement of machinery in a spinning mill.Detailed Analysis:1. The main issue in this case was the disallowance of expenditure amounting to Rs. 2,30,93,720 on account of the replacement of machineries and parts in a spinning mill. The counsel for the assessee argued that the replacement did not result in an increase in production capacity as the new machinery did not increase the number of spindles in the mill. The counsel relied on precedents to support the claim that the expenditure should be considered as current repair or revenue expenditure under Section 37 of the Income Tax Act.2. On the contrary, the Departmental Representative argued that the replacement of machinery created a new asset with enduring benefits, thus the expenditure should be capitalized. Referring to judgments, the representative contended that the replaced machinery should be considered as independent machinery in the textile mill, resulting in a commercial advantage for the assessee in the capital field. The representative supported the Assessing Officer's decision to disallow the claim.3. The Tribunal analyzed the submissions and found that the replaced machinery, including blow room machinery, carding machine, draw frame, speed frame, and compressor, did not increase the production capacity of the spinning mill as the number of spindles remained constant. The Tribunal agreed with the assessee's argument that mere efficiency in running the machinery does not automatically lead to an increase in production capacity. The Tribunal emphasized that maintenance of machinery is essential for business continuation and unless there is a demonstrated increase in production capacity, the expenditure should be allowed as current repair.4. In conclusion, the Tribunal set aside the lower authorities' orders and deleted the addition made by the Assessing Officer, allowing the appeal of the assessee. The judgment highlighted the importance of actual increase in production capacity to determine the nature of expenditure on machinery replacement in a spinning mill.