2020 (1) TMI 507 - HC - Income Tax

High Court rules machinery replacement not revenue expenditure under Income Tax Act

The High Court allowed the Revenue's appeals, ruling against the cost of machinery replacement as revenue expenditure. It emphasized the distinction ... Nature of expenditure - current repairs - cost of replacement of machineries like Motor Rollers, Spindles, Gears etc. in the Textile Mill of the Assessee - revenue expenses or capital expenses - HELD THAT:- The total replacement cost of three machineries in question purchased by the Assessee came to be allowed by the Tribunal as 'repairs maintenance expenditure' or 'revenue expenditure'. The said findings of the learned Tribunal are clearly contrary to the decision of the Hon'ble Supreme Court Sarangpur Cotton Mfg. Co. Ltd. [2017 (4) TMI 301 - SUPREME COURT] and therefore, the view of the Tribunal cannot be sustained and the replacement of the machineries as a whole by the Assessee cannot be held to be current repairs or allowable revenue expenditure. Therefore, respectfully following the binding precedent of the Hon'ble Supreme Court in the case of Commissioner of Income Tax, Gujarat V. Sarangpur Cotton Mfg. Co. Ltd. [2017 (4) TMI 301 - SUPREME COURT] the present Appeals filed by the Revenue deserves to be allowed and the substantial question of law framed is answered in favour of the Revenue and against the Assessee Issues:1. Whether the cost of replacement of machinery can be claimed as revenue expenditure.2. Whether expenditure on replacement of old machinery by purchase and installation of machinery is allowable as revenue expenditure.Analysis:1. The Revenue filed appeals under Section 260A of the Income Tax Act, 1961, regarding the cost of replacement of machineries in a Textile Mill for Assessment Years 1993-94 and 1994-95. The Tribunal allowed the cost of replacement, citing a previous High Court judgment that held such expenditure as revenue expenditure. The Revenue challenged this decision, arguing that the replacement of machineries cannot be considered as current repairs or revenue expenditure. The Tribunal's decision was deemed contrary to the decision of the Hon'ble Supreme Court, leading to the Appeals being allowed in favor of the Revenue.2. The controversy surrounding the replacement of old machinery by purchase and installation of machinery was addressed by the Hon'ble Supreme Court in a separate case. The Supreme Court held that each item for which deduction under 'current repairs' was sought should be a machine by itself, and repair/substitution of an old machine does not fall under the definition of 'current repairs.' The Court emphasized that if current repairs relate to independent machines instead of repairs of a part of a machine, deduction cannot be granted under the Income Tax Act. Consequently, it was held that the respondent was not entitled to any deduction under 'current repairs.' The judgment and orders passed on this issue were set aside.In conclusion, the High Court allowed the Appeals filed by the Revenue, ruling in favor of disallowing the cost of replacement of machinery as revenue expenditure and emphasizing the distinction between current repairs and replacement of machinery based on the decisions of the Hon'ble Supreme Court.