TaxTMI 
TaxTMI 
TaxTMI 
2013 (9) TMI 88
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....ferred an appeal before this Court in T.C(A).No.1074 of 2010, wherein, the same issue was raised, which reads as follows:- "1. Whether the replacement of machinery parts will amount to revenue expenditure or not ? 2. Whether brining into existence of a new asset or obtaining a new advantage would amount to revenue expenditure or not ?" 3. Under order dated 10.01.2011, this Court remanded the matter back to the Commissioner of Income Tax (Appeals) to reconsider the issue as to whether the replacement of machinery parts brings into existence a new asset or a new advantage, so as to hold the expenditure as revenue or not by following the decision of this Court in Tax Case (Appeal) No.261 of 2010 dated 22.06.2010, wherein, this Court followed the decision in T.C.Nos.1290 and 1291 of 2009 and 1216 to 1221 of 2009 and the decision of the Apex Court in S.L.P.Nos.413 and 414 of 2009 and Civil Appeal No.7297 of 2009. Thus, a reading of the order of this Court shows that based on the decisions on similar issues rendered by the Apex Court and that of this Court, this Court remanded the matters therein back to the Commissioner of Income Tax (Appeals) for fresh investigation of the facts and....
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....ome Tax Act. On appeal against the judgment of this Court, the Supreme Court considered the question in the decisions reported in (2007) 293 ITR 201 (SC) (CIT Vs. Saravana Spinning Mills P.Limited) and (2007) 294 ITR 328 (SC) (CIT Vs. Ramaraju Surgical Cotton Mills) as to (a) Whether the expenditure incurred on modernisation and replacement came with the constitution of the words "current repairs" in Section 31(i) and (b) Whether replacement of an old machinery by a new machinery constituted an advantage of an enduring nature and hence, capital in nature. 6. In the decision reported in (2007) 293 ITR 201 (SC) (CIT Vs. Saravana Spinning Mills P.Limited), the Apex Court considered the meaning of the phrase "current repairs". Reversing the decision of this Court, the Apex Court held that one of the basic tests to find out whether the expenditure was current repairs or not, was to see as to whether the expenditure was incurred to "preserve and maintain" an already existing asset. The expenditure must not be one to bring a new asset into existence or to obtain new advantage; the replacement of ring frames constituted substitution of an old asset by a new asset and therefore, the expend....
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....ture is revenue or capital, number of aspects are required to be considered therein; in the absence of any details regarding the production capacity even after replacement, the matter needed to be remitted back to the Commissioner of Income Tax (Appeals). The Apex Court pointed out that since there was confusion regarding the applicability between the tests to be applied in respect of Section 31 of the Act and the test to be applied in the case of Section 37 of the Act, the matter deserved to be remanded back to the Commissioner of Income Tax (Appeals) to decide the matter uninfluenced by any observations made in the orders of the Court. Thus, in the case of CIT Vs. Ramaraju Surgical Cotton Mills (SC) reported in (2007) 294 ITR 328 (SC), the Apex Court, after referring to the decision reported in (2007) 293 ITR 201(SC) in the case of CIT Vs. Saravana Spinning Mills (P) Ltd., held that Section 31 of the Act and Section 37 of the Act, operated on different spheres and the tests applicable to Section 31 of the Act could not be read into Section 37 of the Act. Thus, the matters were restored to the files of the Assessing Officer for fresh hearing. 8. Apart from these two decisions, th....
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....in a textile mill. Referring to its decision reported in (2007) 293 ITR 201 (SC) (CIT Vs. Saravana Spinning Mills P.Limited), it held that the expenditure could not be treated as current repairs under Section 31(i). The expenditure incurred for reaping long-term and enduring benefits by replacing the independent machine could only be a capital expenditure. Thus, the Apex Court restored the Assessing Officer's order and held that the expenditure was capital in nature. The decision in the case of CIT Vs. Sri Mangayarkarasi Mills P. Limited reported in 2009-TIOL-86-SC-II, thus rested on the facts of its case. 9. The question as to whether the expenditure incurred on replacement of machinery is revenue or capital expenditure, particularly in the nature of replacements of parts, thus rests on the nature of expenditure incurred, vis-a-vis the benefit that the assessee derives. The ratio deductible from the decisions referred to above are: (i) To decide the applicability of Section 31(i), the test is not whether the expenditure is revenue or capital in nature, but whether the expenditure is "current repairs". The basic test is to find out whether expenditure is incurred to "preserve and....
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....come Tax Vs. Saravana Spinning Mills P. Ltd.) 10. In the case of Empire Jute Co. Ltd Vs. Commissioner of Income Tax reported in (1980) 124 ITR 1 (SC), the Apex Court referred to the decision in the case of John Smith and Son Vs. Moore reported in (1921) 12 TC 266, 296 (HL) that for an expenditure to become a business expenditure, there must be an outlay of a business "in order to carry it on and to earn a profit out of this expense as an expense of carrying it on". The Apex Court further cautioned that when considering the question on the claim of the expenditure being revenue or capital, it must be viewed in the larger context of business necessity or expediency. The Apex Court further pointed out to the concept of an advantage of enduring benefit and further explained the question on capital or revenue expenditure in the following words:- "There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is materia....
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....f the Supreme Court in the case of CIT, Madras Vs. Mahalakshmi Textile Mills Limited reported in (1967) 66 ITR 710 (SC) read along with the decision the Madras High Court pointed out that there was no change in the method of spinning and that the parts that were replaced, performed precisely the same function as old parts and when it was found that the original old type of replacement parts were not available in the market, necessarily the company had to replace it with the new system; in that context, the Supreme Court affirmed the judgment of this Court that it was "current repairs" to the machinery and plant. 14. Keeping the decisions referred to above, one can detect that in considering the claim of the assessee, the decision must be guided by business prudency of the necessity or expediency which compel the assessee to carry on such repairs/replacement and if this repair ultimately has gone in for bettering its business profits in the nature of increasing its profits, as held by the Supreme Court in the case of CIT Vs Ramaraju Surgicial Cotton Mills reported in (2007) 294 ITR 328 (SC) through increase in the production capacity, then the outlay, not being just to carry on the....