2015 (8) TMI 1064 - AT - Income Tax

Aggregate expenditure incurred during the year on replacement of various items of textile machinery - capital or revenue expenditure - Held that - On identical facts, the Co-ordinate Bench of this Tribunal in the case of The Kumaran Mills Ltd. v. ACIT 2015 (8) TMI 1063 - ITAT CHENNAI held that replacement of draw frames are capital expenditure not allowable as deduction under sec.37 . Also see CIT v. Srif Mangayarkarasi Spinning Mills (P) Ltd. (2009 (7) TMI 17 - SUPREME COURT) - Decided against assessee.

Summary

Issues involved:
1. Determination of whether the expenditure incurred on replacement of various items of textile machinery is capital or revenue expenditure.

Detailed Analysis:
1. The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) directing the Assessing Officer to treat the aggregate expenditure incurred during the year on replacement of textile machinery as capital expenditure. The key contention was whether the expenditure should be treated as capital or revenue expenditure under sec.37 of the Act.

2. The assessee, engaged in the manufacture of yarn, replaced specific machinery during the assessment year. The Assessing Officer treated the expenditure as capital, allowing depreciation. The matter had previously been litigated up to the Hon'ble Supreme Court, which remitted the appeal to the Commissioner of Income Tax (Appeals) for further consideration in line with legal directions.

3. The Commissioner of Income Tax (Appeals) considered various judgments, including the decision in the case of CIT v. Ramaraju Surgical Cotton Mills & Others, and held that the expenditure on machinery replacement constituted capital expenditure. The Commissioner noted that the Counsel for the Assessee acknowledged that certain machinery replacement led to an increase in production capacity, supporting the capital expenditure classification.

4. The Tribunal analyzed similar cases and found that replacement of draw frames was considered capital expenditure, not allowable as a deduction under sec.37 of the Act. The Tribunal referred to legal precedents, such as Travancore Cochin Chemicals Ltd. v. CIT and Lakshmiji Sugar Mills P. Co. v. CIT, to support the capital expenditure classification for replacement activities.

5. The Tribunal also cited the decision of the jurisdictional High Court in a related case, emphasizing that replacement of machinery in textile mills should be considered capital expenditure. The Tribunal aligned with the Supreme Court's ruling in CIT v. Sri Mangayarkarasi Spinning Mills (P) Ltd., affirming that replacement of machinery in textile mills is capital expenditure and not deductible under sec.37 of the I.T. Act.

6. Ultimately, the Tribunal dismissed the appeal, upholding the decision that the replacement of machinery in textile mills constituted capital expenditure. The order was pronounced, confirming the dismissal of the appeal.

This comprehensive analysis outlines the legal journey and considerations leading to the determination of the nature of expenditure on machinery replacement in textile mills as capital expenditure, as per the relevant legal provisions and judicial precedents.