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Issues involved: Determination of whether the cost of replacement of machinery constitutes revenue expenditure or capital expenditure.
Summary: The appeal by the Revenue concerns the classification of the cost of replacing centrifugal fans, weft straightner, autoconers, dampers, blowers, etc., as revenue or capital expenditure. The Revenue argues that the replacement of machinery should be considered capital expenditure based on the decision in CIT v. Saravana Spinning Mills Limited. Conversely, the assessee relies on the later decision in CIT v. Mangayarkarasi Mills Ltd., emphasizing the need to assess if there was an increase in production capacity due to the replacement. The assessee, engaged in manufacturing and selling cotton yarn, replaced various machineries costing `6,20,07,785/-, claiming it as revenue expenditure. The Assessing Officer, following the precedent in CIT v. Saravana Spinning Mills Limited, deemed the expenditure as capital in nature, a decision upheld by the ld. CIT(A). During the proceedings, the ld. A.R. referred to a subsequent decision by the Hon'ble Apex Court in CIT v. Hindustan Textiles, which remitted a similar issue back to the High Court for reconsideration based on established tests. The ld. D.R. expressed no objection to remitting the issue back to the Assessing Officer for fresh consideration. After hearing both sides and examining the orders, the Tribunal noted that certain relevant decisions were not available to the lower authorities when dealing with the matter. Citing the law laid down by the Hon'ble Apex Court in various cases, including Ramaraju Surgical Cotton Mills, Saravana Spinning Mills P. Ltd., Sri Mangayarkarasi Mills Ltd., and Hindustan Textiles, the Tribunal concluded that the claim of the assessee needed to be re-evaluated by the Assessing Officer. Notably, items like Cummins Genset Engine were excluded from being treated as revenue expenditure. Consequently, the Tribunal set aside the previous orders and remitted the matter to the Assessing Officer for fresh consideration in light of the aforementioned decisions. As a result, the appeal of the Revenue was allowed for statistical purposes.
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