2015 (1) TMI 430 - HC - Income Tax

Deduction u/s 31 - current repair to machinery or plant - replacement of parts - Capital expenditure or Revenue Expenditure - Held that - From a perusal Section 31, it becomes clear that an assessee would be entitled to deduct the expenditure incurred for any current repair to machinery or plant; and the one incurred for payment of premium of insurance. What constitutes current repairs was explained by various Courts. The Bombay High Court in Commissioner of Income Tax v. Chowgule and Co. (P) Ltd. 214 ITR 523 identified about 8 parameters, in this behalf. The gist thereof is that irrespective of the expenditure incurred, the replacement of a part of an existing machinery would constitute current repairs, and such expenditure cannot be treated as capital expenditure; and that in the name of causing repairs, an assessee shall not be entitled to bring an altogether a new asset, into existence. - The mere fact that the new parts are different from those that were replaced, in terms of cost, or efficiency; by itself does not lead to the conclusion that the assessee has acquired new item of machinery. It is not uncommon that the parts of an item of machinery, which is an independent unit, have different efficiency and endurance. Though the new part, which replaced the old one, in a machinery, is costlier and more efficient, it would not lead to an inference that an item of new machinery has been acquired, much less the cost incurred therefore can be treated as capital expenditure. - Decided against Revenue.

Summary

Issues:
1. Allowance of deduction under Section 31 of the Income Tax Act for replacement of parts in machinery.
2. Determination of whether the replacement of parts constitutes capital expenditure or current repairs.
3. Application of relevant legal principles from previous judgments to the current case.

Issue 1: Allowance of deduction under Section 31 of the Income Tax Act for replacement of parts in machinery:
The appeal was filed by the Revenue against the order of the Income Tax Appellate Tribunal regarding the deduction claimed by a Textile Mill for the cost incurred for replacing two parts known as Conors in one of the machines for the assessment year 1995-96. The Tribunal dismissed the appeal, upholding the view that the replacement cost qualifies as revenue expenditure under Section 31 of the Act. The appellant argued that the replacement cost should be treated as capital expenditure based on previous assessments and legal precedents. The respondent contended that the replacement of parts in existing machinery does not lead to an increase in capacity, and therefore, should be considered as current repairs eligible for deduction under Section 31.

Issue 2: Determination of whether the replacement of parts constitutes capital expenditure or current repairs:
The key provision relevant to this case is Section 31 of the Income Tax Act, which allows deductions for current repairs to machinery or plant. The Bombay High Court identified parameters for what constitutes current repairs, emphasizing that the replacement of a part of existing machinery qualifies as current repairs and not capital expenditure. Legal precedents highlighted by the appellant and respondent regarding the replacement of machinery parts were analyzed to determine whether the replacement of two Conors in the textile mill's machinery should be treated as capital expenditure or revenue expenditure.

Issue 3: Application of relevant legal principles from previous judgments to the current case:
The judgment referenced previous legal decisions, including Commissioner of Income Tax v. Sri Mangayarkarasi Mills Private Limited and Commissioner of Income Tax v. Sarvaraya Textiles Limited, to establish the distinction between replacing parts in independent machinery units versus existing machinery. The court emphasized that replacing parts in an existing item of machinery does not necessarily constitute acquiring a new item of machinery, even if the new parts differ in cost or efficiency. The Tribunal's decision was upheld, stating that the replacement of two parts in the textile mill's machinery did not result in the acquisition of a new item of machinery, and therefore, the replacement cost qualifies as current repairs under Section 31 of the Act. The appeal was dismissed, with no costs awarded.

This summary provides a detailed analysis of the judgment, addressing all the issues involved comprehensively while preserving the legal terminology and significant phrases from the original text.