2012 (12) TMI 79 - HC - Income Tax

Expenditure on Iron rolls - Capital vs Revenue Expense - assessee does not claim its expenditure as replacement of whole machinery or repairing of machinery as such Held that - Whether expenditure is revenue or capital in nature would depend upon several factors, namely, nature of the expenditure, nature of business activity etc. - In the case of Commissioner of Income Tax Vs. Ramaraju Surgical Cotton Mills (2007 (8) TMI 39 - SUPREME COURT OF INDIA), the Supreme Court considered the decision in the case of CIT Vs. Saravana Spinning Mills P.Ltd reported in (2007 (8) TMI 16 - SUPREME COURT OF INDIA) and in the case of CIT Vs. Janakiram Mills Ltd 2005 (4) TMI 39 - MADRAS HIGH COURT and pointed out that in considering whether the expenditure is revenue or capital in nature, the proven tests have been evolved that if the expenditure is of the nature not leading to the increased production capacity and the same remaining as constant, even after replacement, then, the expenditure would be revenue in nature. Given the technicalities on the revenue and capital expenditure , current repairs and its application to a finding based on facts, Assessing Officer should have adverted to the various facts involved in the use of steel rolls to arrive at the decision as to whether the assessee is entitled to deduction under Section 37 of the Act or not. When the authorities below had not adverted to any of these, proper course herein would be to set aside the order of the Income Tax Appellate Tribunal. Accordingly, the order of the Income Tax Appellate Tribunal is set aside and the matter is restored to the files of the Assessing Officer to consider the claim of the assessee in the background of the nature of the expenditure incurred by the assessee and to the decisions of the Apex Court as referred to above and thereafter arrive at a finding - In the result, the Tax Case Appeal stands disposed of with the above observation. No costs.

Summary

Issues:
1. Whether the expenditure on iron rolls is revenue in nature and hence allowable in full?

Analysis:
The judgment involves an appeal by the assessee against the order of the Income Tax Appellate Tribunal regarding the allowance of depreciation on iron rolls for the assessment year 1992-93. The assessee, engaged in manufacturing steel re-rolls, claimed 100% depreciation on iron rolls, which was disputed by the Assessing Officer, leading to a revised return requesting the cost of iron rolls to be treated as revenue expenditure. The Managing Partner affirmed the necessity of the rolls for the machines to function and agreed to treat them as depreciable assets. The Assessing Officer granted depreciation at 50%, which was further contested by the assessee before the Commissioner of Income Tax (Appeals) and subsequently the Income Tax Appellate Tribunal.

The assessee contended that the iron rolls' replacement expenditure should be treated as revenue expenditure due to frequent damage during production, emphasizing that it did not increase production capacity but merely replaced worn-out parts. The Appellate Authority upheld the 50% depreciation decision, prompting the assessee to appeal to the Income Tax Appellate Tribunal. The Tribunal rejected the appeal based on the Managing Partner's statement agreeing to treat the rolls as depreciable assets, leading to the current appeal before the High Court.

The High Court considered the nature of the expenditure incurred by the assessee, emphasizing the distinction between revenue and capital expenditure. Referring to relevant Supreme Court decisions, the Court highlighted that expenditure on replacement of machinery parts does not qualify as current repairs and may be capital in nature if it results in an enduring benefit or increased production capacity. The Court found that the authorities below had not adequately considered the nature of the expenditure and its impact on production capacity, leading to the decision to set aside the Tribunal's order and remand the matter to the Assessing Officer for a detailed assessment based on the nature of the expenditure and relevant legal precedents.

In conclusion, the High Court allowed the appeal, setting aside the Tribunal's order and directing the Assessing Officer to reevaluate the claim in light of the expenditure's nature and the legal principles discussed in the judgment. The Court emphasized the need for a thorough examination of the facts surrounding the expenditure to determine its classification as revenue or capital, ensuring a fair and accurate decision based on the specific circumstances of the case.