TaxTMI 
TaxTMI 
2015 (8) TMI 1092
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....owever, the Assessing Officer treated this expenditure as capital expenditure and allowed depreciation on such machinery, placing reliance on the decision of CIT Vs. Sri Mangayarkarasi Mills Pvt.Ltd. (315 ITR 114). The assessee preferred appeal before the Commissioner of Income Tax (Appeals) and contended that carding machine, roving machine and ring frames replaced by the assessee has not increased any production capacity and since the replacement of parts machines had not resulted in capacity addition of the undertaking, they have to be allowed as revenue expenditure. The Commissioner of Income Tax (Appeals) considering the submissions of the assessee and taking into account the decision of the Hon'ble Supreme Court in the case of CIT Vs. Sri Mangayarkarasi Mills Pvt.Ltd.(supra) rejected the contentions of the assessee and upheld the action of the Assessing Officer in treating the expenditure as capital expenditure. 3. Counsel for the assessee before us submits that there is no capacity addition by way of replacement of machinery, therefore in view of the decision of the Hon'ble Supreme Court in the case of CIT Vs. Ramaraju Surgical Cotton Mills (294 ITR 328), the matter has t....
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....e holding so, the Hon'ble Supreme Court observed as under:- "9. The main question that needs to be decided in this appeal may be formulated as follows :- "Whether expenditure incurred on replacement of machinery, in the facts and circumstances of this case, amounts to Rs.revenue expenditure' deductible under section 37 of the Act or Rs. Current repairs' deductible under section 31 of the Act." 10. It is pertinent to mention here that the respondent only stated that its claim was limited to the expenditure being of a revenue nature and thus allowable under section 37 of the Act. Nowhere had the respondent claimed that the said expenditure amounted to Rs. Current repairs' under section 31 of the Act. Further, the appellant itself had restricted the issue to that of revenue expenditure in its appeal to the High Court of Madras, against which it has now filed this appeal. According to the respondent, there is no issue regarding the expenditure amounting to Rs. Current repairs' under section 31 of the Act. We are not inclined to uphold this submission of the respondent. The fact that the appellant has contended before the courts below that each of the item of machinery in a spi....
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....ill lose its significance. Learned counsel further submitted that the courts below erred in overlooking the definitions of Rs. Assets' and Rs. Block of assets' under Explanation 3 of section 32(1)(iz) of the Act and thus, misconstruing the provision for composition of the Rs. Block of assets' as per the definition of Rs.written down value' as given under section 43(6)(c) of the Act, which aid the charging section 28, as to the assess ability of income from business and profession. Learned counsel for the appellant further contended that the courts below had gone wrong in equating the complicated machinery of a spinning mill with a tube-light in relying on the Boards' Circular No. 69, dated 27-11-1957 on "tube-lights" which stated that only first time purchase of a tube-light amounts to capital expenditure, and subsequent replacement would only be revenue expenditure. Lastly, learned counsel for the appellant emphasised that the reliance on the decision in Janakiram Mills Ltd. Rs.s case (supra) by the High Court was misplaced, inasmuch as the High Court had failed to appreciate that an appeal had already been filed against it before this Court and thus the decision of the High Court....
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....ing mill, which only together are capable of manufacture, and there is no intermediate marketable product produced. In our view, this issue has been satisfactorily answered by the recent decision of this Court in CIT v. Saravana Spg. Mills (P) Ltd. [2007] 293 ITR 201. In that case this Court has held unambiguously that "each machine in a segment of a textile mill has an independent role to play in the mill and the output of each division is different from the other." Dealing with a ring frame in a textile mill, this Court has held that it is an "independent and separate" machine. Further, it is accepted that each machine in a textile mill is part of the integrated process of manufacture of yarn and is integrally connected to the other machines in the mill for production of the final product. However, this interconnection does not take away the independent identity and distinct function of each machine. Thus, each machine in a textile mill should be treated independently as such and not as a mere part of an entire composite machinery of the spinning mill. As stated above, it can at best be considered part of an integrated manufacture process employed in a textile mill. 15. Moving....
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....pairs' to repairs made to machinery, plant and/or furniture. In this case, replacement of machine can at best amount to a repair made to the process of manufacture of yarn. Further this Court has also observed in Saravana Spg. Mills (P) Ltd' s case (supra) that if replacement was held to be Rs. Current repair' in such cases, section 31(i) will be completely redundant and absurdity will creep in because repair implies existence of a part of the machine which has malfunctioned, which is impossible in the case of such replacement. Thus, this replacement expenditure cannot be said to be Rs. Current repairs' after the decision in the Saravana Spg. Mills (P) Ltd.'s case (supra). 16. Given that section 31 of the Act is not applicable to the said expenditure of the assessee, the next issue is whether it can be considered Rs.revenue expenditure' of the nature envisaged under section 37 of the Act. The Saravana Spg. Mills (P) Ltd's case (supra) holds that expenditure is deductible under section 37 only if it (a) is not deductible under sections 30-36, (b) is of a revenue nature, (c) is incurred during the current accounting year and (d) is incurred wholly and exclusively for the purpose o....
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....law. In the light of the observations made herein above, it is thus clear that the High Court decision in Ianakiram Mills Lt's case (supra) is not good law on which reliance may be placed. 19. Consideration of the definition of Rs. Assets' and Rs. Block of assets' and the concept of depreciation under the Act is not required to be decided upon whether the expenditure incurred by the assessee is a deductible expenditure or not. Hence we are not inclined to discuss the same. 20. It is clear on record that the assessee has sought to treat the said expenditure differently for the purposes of computing its profit and for the purpose of payment of Income-tax. The said expenditure has been treated as an addition to the existing assets in the former and as revenue expenditure in the latter. Though accounting practices may not be the best guide in determining the nature of expenditure, in this case they are indicative of what the assessee itself thought of the expenditure it made on replacement of machinery and that the claim for deduction under the Act was made merely to diminish the tax burden, and not under the belief that it , was actually revenue expenditure. 21. For the reaso....
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....ion capacity remaining constant even after replacement, the matter needs to be remitted to the C!T(A). There is one more reason why we are inclined to remit the matter. As stated above, the impugned judgment of the Madras High Court in the case of Janakiram Mills Ltd. (supra) has been set aside by this Court as there was confusion between the tests to be applied in respect of s.31 vis-a-vis the test to be applied in case of s.37 of the !T Act. Without expressing any opinion on the merits of the case we remit the matter to C!T(A) who will decide the question in accordance with law." Meanwhile, the Hon'ble Supreme Court in the case of Sri Mangayarkarasi Spinning Mills (P) Ltd. (315 ITR 114) held that expenditure of an assessee for replacement of parts of textile mills for spinning yarn is not revenue expenditure under sec.37 of the I. T. Act. 4. The appeal of the assessee was taken up by the Commissioner of Income Tax (Appeals) as directed by the Hon'ble Supreme Court to decide the issue in accordance with law and in terms of directions in the case of CIT v. Ramaraju Surgical Cotton Mills & Others (supra). 5. The Counsel for the Assessee submitted before the Commissioner of ....
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....fit for the assessee amounts to capital expenditure. We have already explained why replacement, in this case, amounts to bringing into existence a new asset and also an enduring benefit for the assessee It is clear then that the expenditure of the assessee here is not of a revenue nature and thus, cannot be claimed as a deduction under section 37 of the Act.". 6. The Hon'ble jurisdictional High Court in the case of CIT, Madurai v. Madura Coats (2012) 205 Taxman 357 (Madras) has observed as under :- "11. When the tax case appeals came up for consideration it is submitted by the learned counsel for the Appellant/Revenue that with regard to the substantial question of law 1 and 2 they are covered as per the judgment of this Court dated 25-04-2011 in Tax Case (Appeals) Nos. 71 and 72 of 2008. 12. In view of the above, following the same, the substantial question of law 1 and 2 raised in this tax case appeal are answered against the assessee and in favour of the revenue. 13. With regard to the third substantial question of law, it is submitted by the learned counsel for the appellant that when each of the machinery in question such as Ring Frames, Draw Frames and Speed Frame....