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2015 (8) TMI 1092 - AT - Income TaxReplacement of carding & roving machines and ring frames expenditure - revenue expenditure deductible under section 37 or Current repairs deductible under section 31 - Held that - Following the decision of the Hon ble Supreme Court in the case of CIT v. Srif Mangayarkarasi Spinning Mills (P) Ltd. (2009 (7) TMI 17 - SUPREME COURT) were in held that though accounting practices may not be the best guide in determining the nature of expenditure, in this case they are indicative of what the assessee itself thought of the expenditure it made on replacement of machinery and that the claim for deduction under the Act was made merely to diminish the tax burden, and not under the belief that it was actually revenue expenditure Order of AO restored by holding that the expenditure is capital in nature. We hold that replacement of machinery in textile mills is capital expenditure and not allowable as deduction under section 37 of the I. T. Act. Also see M/s.Rajnarayan Textiles Ltd. Vs. ACIT 2015 (8) TMI 1064 - ITAT CHENNAI - Decided against assessee.
Issues Involved:
1. Whether the replacement of carding & roving machines and ring frames constitutes revenue expenditure under section 37 of the Income Tax Act. Issue-wise Detailed Analysis: 1. Classification of Expenditure on Replacement of Machinery: The primary issue in both appeals is whether the expenditure incurred by the assessee on the replacement of carding & roving machines and ring frames should be classified as revenue expenditure under section 37 of the Income Tax Act. The assessee claimed the expenditure as revenue expenditure, arguing that the replacement did not increase production capacity and thus should be allowed under section 37. The Assessing Officer, relying on the decision in CIT Vs. Sri Mangayarkarasi Mills Pvt. Ltd. (315 ITR 114), treated the expenditure as capital expenditure and allowed depreciation instead. 2. Assessing Officer's and CIT(A)'s Position: The Assessing Officer treated the expenditure as capital expenditure, citing the Supreme Court's decision in CIT Vs. Sri Mangayarkarasi Mills Pvt. Ltd., which held that machinery replacement in spinning mills is neither current repairs nor allowable as revenue expenditure. The Commissioner of Income Tax (Appeals) upheld the Assessing Officer's decision, rejecting the assessee's contention that the replacement did not result in capacity addition and should be treated as revenue expenditure. 3. Assessee's Argument and Legal Precedents: The counsel for the assessee argued that there was no capacity addition due to the replacement and relied on the Supreme Court's decision in CIT Vs. Ramaraju Surgical Cotton Mills (294 ITR 328), which necessitates remitting the matter back to the Assessing Officer to verify if there was any increase in production. The counsel emphasized that the replacement did not result in an increase in spindleage or production, thus qualifying it as revenue expenditure under section 37. 4. Departmental Representative's Argument: The Departmental Representative supported the lower authorities' orders, emphasizing the Supreme Court's ruling in CIT Vs. Sri Mangayarkarasi Mills Pvt. Ltd., which clearly stated that machinery replacement in spinning mills is not current repairs and not allowable as revenue expenditure. 5. Tribunal's Analysis and Decision: The Tribunal reviewed the decisions of the lower authorities and the relevant Supreme Court rulings. It noted that the Supreme Court in CIT Vs. Sri Mangayarkarasi Mills Pvt. Ltd. had distinguished the decision in Ramaraju Surgical Cotton Mills, clarifying that machinery replacement in spinning mills is not revenue expenditure. The Tribunal also referenced a similar case, M/s. Rajnarayan Textiles Ltd. Vs. ACIT, where it was held that such replacements are capital expenditures and not allowable under section 37. The Tribunal concluded that the expenditure incurred by the assessee on the replacement of machinery is capital in nature and not deductible under section 37, thereby dismissing the assessee's appeals. Conclusion: The Tribunal, following the Supreme Court's decision in CIT Vs. Sri Mangayarkarasi Mills Pvt. Ltd. and similar precedents, held that the replacement of carding & roving machines and ring frames constitutes capital expenditure and is not allowable as revenue expenditure under section 37 of the Income Tax Act. The appeals of the assessee were dismissed.
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