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2005 (4) TMI 39
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....the accounting year on the cost of carding system (Rs. 31,22,679) was amount paid on current repairs and allowable under section 31 of the Income-tax Act? (2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in directing allowance of the entire amount of Rs. 31,22,679 as revenue expenditure?" For convenience we shall refer to the facts in T.C. No. 144 of 1999. The assessee in that case had claimed that the expenditure of Rs. 31,22,679 on replacement of the carding system by high production cards, be treated as revenue expenditure for the assessment year 1986-87. The Assessing Officer had negatived the assessee's claim. On appeal by the assessee, the Commissioner of Income-tax (Appeals), following the decision of the Appellate Tribunal in the case of ITO v. Sri Varadraja Textiles P. Ltd. [1984] 9 ITD 469 (Mad) and the decision of the Supreme Court in the case of CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 held that the expenditure incurred was only for replacement of part of the textile machinery and therefore was allowable as revenue expenditure. Aggrieved by the order of the Commissioner of Income-tax (Appeals), ....
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....ng of several spindles, have been erroneously assumed to be parts of machinery, and the expenditure on replacement thereof has been allowed as a revenue expenditure. It is also her claim that the fact that replacement of worn out machinery with new machinery results in an enduring benefit to the assessee has not been considered either by the Tribunal, or by this court in the decisions rendered earlier. According to her, wherever a new machine is purchased, the assessee is granted depreciation spread over a period of time, since it will result in an enduring benefit to him. This enduring benefit would be there, regardless of whether the assessee purchases the machinery for the first time, or purchases it as a replacement of an old or worn out machine. It would lead to an absurd result if the purchase of a new machine by a first time user were to be treated as a capital expenditure as it results in enduring benefit, but the purchase of the same machine by some one who already owned a similar machine, is treated as a revenue expenditure/current repairs. The Tribunal has been treating the entire textile mill as a single plant, and all the machinery therein as parts of the plant. ....
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.... changed every year, resulting in a practically new plant in the course of two or three years. Large capital investment in new machinery, merely because it is for the modernisation of a factory cannot be treated as anything other than capital expenditure. It is the further claim of the Department that after the introduction of the concept of block of assets, any sale of depreciable assets, would result in its value being removed from the block, and any addition of new machinery would result in addition to the block. If the removal from the block is reduced, but the addition is treated as revenue expenditure, the value of the block of assets would show a really low picture not in consonance with the real value of the assets. Whereas depreciation is granted at a fixed percentage depending on the type of depreciable asset, taking into account its wear and tear and useful life, the textile mills have sought to take 100 per cent. depreciation by a backdoor method of claiming it as current repairs/revenue expenditure. The schedule of depreciation given in the Appendix to the Income-tax Rules specifically mentions items of machinery or equipment eligible for 100 per cent. depreciation.....
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.... commonly ascribed to it. The Gujarat High Court has held that since four different terms, viz., buildings, machinery, plant and furniture have been used in section 32, it would follow that the term "plant" has been used in a narrow sense to mean whatever apparatus is used by a person to carry on the business which does not fall under the category of "building", "machinery" or "furniture". Thus, according to the Department, for the purpose of the Income-tax Act, a view cannot be taken that the entire textile mill is a plant. With regard to the claim that the Department has not gone on appeal in respect of the judgments rendered by this court, holding that the replacement of textile machinery amounted to revenue expenditure, it is stated that the Supreme Court has held in a number of cases that appeals cannot be filed in one assessee's case without filing in respect of another assessee without justifiable cause. It is also stated that all the cases decided earlier pertained to the period prior to the introduction of the concept of block of assets with effect from 1988-89 onwards, during which time the fact of no increase in capacity, and the mill being an integrated unit would ha....
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....ent of machines resulted in increased capacity or not will have no bearing. When any item belonging to the block is removed, its value is reduced, and if any new item comes in its place, its value is added to the block. Learned senior counsel for the Revenue highlighted that the question of law in the batch is very wide in scope inasmuch as it questions whether the Tribunal was right in treating the replacement of machinery as revenue expenditure. The arguments relating to the concept of depreciation on block of assets are only grounds raised to strengthen the contentions of the Department that the replacement of machinery cannot be treated as revenue expenditure, and to point out how the present situation after the assessment year 1988-89 varies from the law as it stood earlier, and therefore none of the case law cited by and relied on by the respondents would have any bearing on the present cases, which all relate to the assessment years subsequent to 1988-89. It is also projected by the Revenue that most of the case law on the issue of replacement of textile machinery were rendered in the context of the law as it stood prior to the introduction of the concept of block of asse....
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....slivers, are fed to fly frames which draft and twist these slivers into roving, and then wound on bobbins. 7. Ring frames: Roving bobbins are fed to ring frames which draft and twist the roving to form the final product, i.e., yarn. This yarn is wound on cops mounted on spindles in the ring frame. 8. Cone winding: The output of the ring frames in the form of cops is fed to cone winding machines (conventional winder automatic winder) which remove the various faults in the yarn with the help of yarn clearers and convert the yarn in cop form into a convenient form of package called cones. In the post spinning section, besides the cone winding machines, depending upon the requirement of the market, reels and doubling machines (ring doublers or TFO twisters) are also used to convert yarn into suitable packages (reeled yarn/doubled yarn). We would therefore like to certify that all the above processes are inter-linked and the output from various intermediate stages of production (carding, combing and draw frames slivers and roving) cannot be sold or marketed and used for other purposes. The output from ring frames in the form of cops also cannot be sold in the market. I....
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....9 ITR 694 (Mad); (4) CIT v. Sree Bhagavathi Textiles Ltd. [1994] 207 ITR 826 (Ker); (5) CIT v. Mahalakshmi Textiles Mills Ltd. [1965] 56 ITR 256 (Mad) and CIT v. Mahalakshmi Textiles Mills Ltd. [1967] 66 ITR 710 (SC) 2. Four set of card conversion (1) CIT v. Salem Co-operative Spinning Mills Ltd. [1984] 148 ITR 176 (Mad); (2) Vanaja Textiles Ltd. v. CIT [1994] 208 ITR 161 (Ker). 3. Cone winder (1) CIT v. Shri Rani Lakshmi Ginning Spinning and Weaving Mills Ltd. [2002] 256 ITR 592 (Mad); (2) Tuticorin Spinning Mills Ltd. v. CIT [2003] 261 ITR 291 (Mad); (3) CIT v. Sri Hari Mills P. Ltd. [1999] 237 ITR 188 (Mad) 4. Electronic yarn cleaner (1) Tuticorin Spinning Mills Ltd. v. CIT [2003] 261 ITR 291 (Mad); (2) CIT v. Sakthi Textiles Ltd. [2001] 250 ITR 449 (Mad). In the following judgments, expenses of similar nature were held allowable: (1) CIT v. Gitanjali Mills Ltd. [2004] 265 ITR 681 (Mad); (2) CIT v. Tuticorin Spinning Mills Ltd. [2001] 249 ITR 694 (Mad); (3) CIT v. Sree Bhagavathi Textiles Ltd. [1994] 207 ITR 826 (Ker); (4) CIT v. Mahalakshmi Textiles Mills Ltd. [1965] 56 ITR 256 (Mad) and CIT v. Mahalakshmi Textiles Mills Ltd. [....
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....r as "revenue expenditure" allowable under section 37 of the Act (similar provisions of section 10(2)(v) and section 10(2)(xv) of the Indian Income-tax Act, 1922. The following judgment of the Supreme Court in the case of CIT v. Kalyanji Mavji and Co. [1980] 122 ITR 49 at page 53 is relevant: "The repairs made by the assessee, it is said, cannot be described as 'current repairs'. Now, this contention rests on the principle that if a special provision covers the case, resort cannot be had to a general provision. It seems to us that if the renovation of the building, the reconditioning of machinery and the removal of debris cannot be described as 'current repairs'-and we assume that to be so-the case would be entitled to consideration under section 10(2) (xv). Section 10(2)(v) deals with current repairs only. The subject-matter of section 10(2)(v) is 'current repairs' and it appears difficult to agree that repairs which are not 'current repairs' should not be considered for deduction on general principles or under section 10(2)(xv). There must be very strong evidence that in the case of such repairs, the Legislature intended a departure from the principle that an expenditure, laid....
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....ubes is revenue expenditure and no advantage of enduring nature was acquired. In fact in Circular No. 69 dated November 27, 1957, the Board has stated that the correct procedure is that the initial expenditure on the first installation of fluorescent lights, including the expenditure on wiring and fittings should be treated as capital expenditure as it creates an asset and that all subsequent expenditure for replacement of the tubes should be treated as of a revenue nature allowable in toto under section 37(1). This principle squarely applies to the cases of replacement of worn out machinery. It is also pertinent to note that the Supreme Court in UCO Bank's case [1999] 237 ITR 889 held that the circulars are binding on the Department. Therefore what applies for replacement of fluorescent tubes applies to all replacement of machinery as well. In CIT v. Udaipur Distillary Co. Ltd. (No. 3) [2004] 268 ITR 451 (Raj) replacement of old transformer by a new one has been held to be revenue in nature. As discussed earlier, the issues involved in these references and appeals relate to replacement of machinery done in one or more of the several processes of a textile industry, namely, spin....
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....y unless worked with other machines, that their function is ancillary, that they are only a supporting machines, used for drafting, twisting and winding the yarn, that they by themselves are not machines capable of independent function, and therefore the cost incurred on such ring frames is not dissimilar in nature and character say to the replacement of a radiator or a carburettor in a motor engine. Further, the Kerala High Court in the case of Vanaja Textiles Ltd. v. CIT [1994] 208 ITR 161 has held that the expenditure on modernisation is allowable as revenue expenditure. In the textile industry old machineries having functioned for few decades were either worn out or were in the process of getting worn out and hence necessitated replacement in order to keep pace with the competing world. Therefore, the High Court after referring to various decisions of English courts held that "In these cases also as in the case of Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC), the comprehensive scheme of modernisation and rehabilitation is for improvement in the operation of an existing business and its efficiency and profitability not removed from the area of the day-to-day....
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.... does not, in any way, advance the case of the Department. As rightly pointed out, the Revenue has not brought out any error either in law or on facts in the decision rendered by the Tribunal. The Department, in the course of their arguments, relied heavily on CIT v. Madras Cements Ltd. reported in [2002] 255 ITR 243 (Mad) and Ballimal Naval Kishore v. CIT [1997] 224 ITR 414 (SC). The following observation in the former decision is relevant: "... Replacement is different from repair. Replacement implies the removal or discarding of the thing that was in use, by a different or new thing capable of performing the same function with the same, lesser or greater efficiency. The replacement of a section in a series of machines which are interconnected, in a segment of the production process which together form an integrated whole may, in some circumstances, be regarded as amounting to repair when without such replacement that unit in that segment will not function. That logic cannot be extended to the entire manufacturing facility from the stage of raw material to the delivery of the final finished product." In the above case (Madras Cements's case [2002] 255 ITR 243 (Mad)), wha....
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....he case in that decision stands no comparison with the facts of the cases on hand. It is the further contention of the Department that since the machineries are new, have independent function and are of enduring nature, that therefore, the expenditure is capital in nature. To substantiate their claim, they relied on the decision in CIT v. Madras Cements Ltd. [2002] 255 ITR 243 (Mad) which we have already discussed. As rightly pointed out by learned counsel for the assessees, the argument of counsel for the Department that the machineries are new and have independent function and are of enduring benefit are no longer relevant in view of the categorical decision of the Supreme Court in Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 wherein it has been held: "The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holing an outlay such as this as capital.... There is also no single definitive criterion which, by itself, is determinative as to whether a particular outlay is capital or revenue. The 'once for all' payment test is also inconclusive. What is relevant is the purpose of the outlay and its....
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....to the true original intention. Accordingly the interpreter is to make allowances for any relevant changes that have occurred, since the Act's passing, in law, social conditions, technology, the meaning of words, and other matters. Just as the US Constitution is regarded as "a living constitution", so an ongoing British Act is regarded as "a living Act". That today's construction involves the supposition that Parliament was catering long ago for a state of affairs that did not then exist is no argument against that construction. Parliament, in the wording of an enactment, is expected to anticipate temporal developments. The drafter will try to foresee the future, and allow for it in the wording. An enactment of former days is thus to be read today, in the light of dynamic processing received over the years, with such modification of the current meaning of its language as will now give effect to the original legislative intention. The reality and effect of dynamic processing provides the gradual adjustment. It is constituted by judicial interpretation, year in and year out. It also comprises processing by executive officials'." In this connection, learned counsel for the asses....
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....t existed even after replacement and, therefore it is wrong to say that any new asset of enduring nature has come into existence. Whether or not a new asset has come into existence-this question has to be considered vis-a-vis the integrated sugar plant and not visa-vis each integral part of it. When expenditure incurred on technical know-how on consideration of 'once for all payments' was held to be the expenditure as revenue in nature in the case of Alembic Chemical Works Co. Ltd. [1989] 177 ITR 377 (SC), we see no reason why expenditure incurred on purchasing of new machinery to ensure sound functioning of the sugar mill to replace the old ones, should not be held as revenue expenditure." The above decision was dissented from in Madras Cements Ltd. [2002] 255 ITR 243 (Mad) because their Lordships felt that the language of section 31 would not support such a construction. It is relevant to submit that though the words "machinery maintenance" were used there, nowhere in the Kerala decision was any particular section mentioned to support its conclusion. It is also relevant to submit that this court subsequent to Madras Cements Ltd.'s case [2002] 255 ITR 243, in CIT v. Gitanjali M....
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.... is explained by the Central Board of Direct Taxes by Circular No. 469 dated September 23, 1996 reported in [1986] 162 ITR (St.) 21, 24. In the instant case, no acquisition of any new asset, much less capital of any enduring advantage resulted to the assessee-respondent. The assessees replaced the worn out part of machineries without discontinuing their production activities. No claim for depreciation was ever made before any authorities either by the assessees or by the Revenue to consider the question as block of assets nor was there any necessity to do so. The Department did not raise any objection before the Tribunal regarding the claim of allowance on the premise of the block of assets concept. It is, therefore, stated that such question does not arise out of the order of the Appellate Tribunal for considering the same by this court under section 260A. It is submitted that no such question was also raised in the tax case appeal (Vide Deputy CIT v. Vellore Co-operative Sugar Mills Ltd. [2000] 242 ITR 170 (Mad); CIT v. Tata Chemicals Ltd. [2002] 256 ITR 395 at 398 (Bom); CIT v. Diners Club India Ltd. [2001] 248 ITR 679 at 680 (Bom) and M. Pappu Pillai v. ITO [2000] 243 ITR 726 a....
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....ctions are considered in their own right. Assuming for a moment, that learned senior counsel's arguments were correct, then sections 31 and 37 exist even after the introduction of "block of assets" concept and have not become otiose or redundant. In other words, with the introduction of "block of assets", sections 31 and 37 according to the Department has become non-existent. Even otherwise, this court in Gitanjali Mills' case [2004] 265 ITR 681, accepted the claim of the assessee for the assessment year 1990-91, i.e., subsequent to the introduction of the "block of assets" concept. The question whether an item of expenditure is capital or revenue is not determined by the treatment given in the books of account or in the balance-sheet. The claim has to be determined only by the provisions of the Act and not by the accounting practice of the assessee. It has been held in the following cases that for the purpose of income-tax which is concerned with determining the real income, the entries in a balance-sheet required to be maintained in the statutory form are not conclusive: (1) UCO Bank v. CIT [1999] 240 ITR 355 (SC); (2) Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 36....