2015 (10) TMI 2438 - AT - Income Tax

Replacement cost - submission that the Assessee had submitted that the said expenditure was incurred for increasing the efficiency of the said machinery - revenue v/s capital expenditure - Held that - A perusal of the photographs of the MDSI controller shows that the said equipment is a computer terminal which controls the lathe. It is an admitted fact that the said controller has been replaced due to technological advancement and not on account of damage or irreparable position of the MDSI controller. Further, it is an admitted fact that the MDSI controller which was already available on the said machine was low memory variety which was replaced by a high memory variety. Thus, totally new equipment has been added under the guise of replacement. On a specific query it was admitted by the ld. AR on behalf of the Assessee that the actual cost of the total equipment including the lathe in 2001 was ₹ 53 lacs whereas the replacement of the controller alone in 2007-08 is at a cost of ₹ 35 lacs. The Assessee in its written submission has also categorically admitted that the said replacement was due to technological advancement and for increasing the efficiency. Thus, it becomes clear that the said lathe by this replacement has become more efficient thereby resulting in increase in the capacity and getting extended life. This is nothing but in the capital field. Thus, the said expenditure can be termed only as a capital expenditure and not as current repairs. This is because no repair has been done but replacement of an already running equipment with another higher efficiency equipment. - Decided in favour of revenue.

Summary

Issues: Appeal against order of CIT(A) regarding treatment of expenditure as revenue or capital in A.Y 2007-08.

Analysis:
1. The appeal was filed by the Revenue against the order of CIT(A) regarding the treatment of expenditure incurred by the Assessee in the A.Y 2007-08. The Assessee, engaged in manufacturing complex engineering parts and developing computer software, had replaced an MDSI controller and accessories for a CNC machine at a cost of Rs. 35,63,722. The Assessee claimed it as revenue expenditure for enhancing machinery efficiency, while the Revenue contended it should be treated as capital expenditure due to enduring benefits. The ld. CIT(A) had ruled in favor of the Assessee, considering the expenditure as current repairs.

2. The Assessee's representative argued that the replacement of the MDSI controller was necessary due to technological advancements to increase efficiency. The controller, being part of the CNC machine, was upgraded from low memory to high memory variety, enhancing the overall efficiency of the machinery. The ld. AR presented evidence, including photographs of the controller, to support the claim that the replacement was essential for operational enhancement and not a complete machinery overhaul. The Assessee maintained that the expenditure qualified as revenue and cited relevant case laws in support of their position.

3. Upon reviewing the submissions, the Tribunal observed that the replacement of the MDSI controller with a higher memory version was not due to irreparable damage but technological advancements. The new controller significantly improved the efficiency of the lathe, leading to increased capacity and extended life of the machinery. The Tribunal noted that the total cost of the lathe and equipment in 2001 was Rs. 53 lakhs, whereas the replacement controller alone cost Rs. 35 lakhs in 2007-08. As the replacement resulted in enhanced efficiency and capacity, it was deemed a capital expenditure rather than current repairs. The Tribunal held that the order of the ld. CIT(A) was unsustainable, reversing it and restoring the decision of the Assessing Officer.

4. Consequently, the appeal of the Revenue was allowed, and the expenditure incurred by the Assessee for replacing the MDSI controller and accessories was classified as capital expenditure due to the enduring benefits and increased efficiency brought about by the technological upgrade. The decision was pronounced in open court on 7.9.2015 by the Tribunal.