2005 (4) TMI 39 - HC - Income Tax

(1) Whether Tribunal is right in law in holding that the expenditure incurred by the assessee during the accounting year on the cost of carding system (Rs. 31, 22, 679) was amount paid on current repairs and allowable under section 31? (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? - Held that the claim of the assessees that replacement of parts of a textile mill is revenue expenditure is justified and deserves to be upheld. We answer the questions against the Revenue and in favour of the assessees - Appeals filed by the Revenue are dismissed

Issues Involved:
1. Whether the expenditure incurred on the replacement of machinery in a textile mill should be treated as "current repairs" and allowable as "revenue expenditure" under section 31 of the Income-tax Act.
2. Whether the replacement of machinery should be considered as "capital expenditure" as claimed by the Revenue.

Issue-wise Detailed Analysis:

1. Allowability of Expenditure as "Current Repairs" or "Revenue Expenditure":

The primary issue was whether the expenditure on replacing the carding system and other machinery parts in a textile mill constitutes "current repairs" and thus allowable as "revenue expenditure" under section 31 of the Income-tax Act. The court examined the facts and noted that the assessee claimed the expenditure as revenue expenditure for the assessment year 1986-87, which was initially disallowed by the Assessing Officer but allowed by the Commissioner of Income-tax (Appeals) and subsequently by the Tribunal.

The Tribunal's rationale was based on the premise that the entire textile mill should be treated as a single plant, and each machinery part is only a component of it. Moreover, it was observed that the replacement did not increase the spindlage or capacity, thus not providing any enduring advantage. The court upheld this view, emphasizing that the replacement of machinery parts in a textile mill is integral to maintaining the production process and does not create a new asset.

2. Consideration as "Capital Expenditure" by the Revenue:

The Revenue argued that the replacement of machinery should be treated as capital expenditure, asserting that the replaced machinery was complete and capable of independent operation, thus providing an enduring benefit to the assessee. The Revenue contended that the Tribunal and earlier court decisions had erroneously treated complete machines as parts of machinery and allowed the expenditure as revenue expenditure.

The court addressed these arguments by referring to various judicial precedents, including decisions of the Supreme Court and High Courts, which consistently held that the replacement of machinery parts in a textile mill constitutes revenue expenditure. The court emphasized that the entire spinning mill, from blow room to cone winding section, is an integrated plant, and the replacement of machinery parts is essential for maintaining the production process without enhancing the overall capacity.

The court also noted that the concept of "block of assets" introduced from the assessment year 1988-89 did not alter the nature of the expenditure. It was highlighted that the replacement of worn-out machinery parts does not result in the acquisition of new assets but merely restores the machinery to its original state of efficiency.

Conclusion:

The court concluded that the expenditure incurred on the replacement of machinery parts in a textile mill is allowable as revenue expenditure under section 31 of the Income-tax Act. The court dismissed the appeals filed by the Revenue and allowed the tax appeals filed by the assessees, affirming that the replacement of parts of a textile mill is revenue expenditure. The court's decision was based on the factual details, judicial precedents, and the report of the South India Textile Research Association (SITRA), which supported the view that the entire spinning mill is an integrated plant.

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