2014 (11) TMI 1217 - HC - Income Tax

Deductible revenue expenditure u/s 37(i) - repairing of the furnace - HELD THAT - Expenses in question incurred by the assessee on dismantling the old furnace and construction of a new furnace are clearly capital in nature, which is not supported by the factual matrix. The Apex Court in CIT VS. SARAVANA SPINNING MILLS P. LTD. 2007 (8) TMI 16 - SUPREME COURT wherein, the Apex Court held that to decide the applicability of section 31(i) the test is not whether the expenditure is revenue or capital in nature, which test has been wrongly applied by the High Court, but whether, the expenditure is current repairs . The Apex Court, further, held that the basic test to find out as to what would constitute current repairs is that the expenditure must have been incurred to reserve and maintain an already existing asset and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage. We are, hence, of the opinion that the present appeal deserves to be allowed. In view of the above discussion, the decision relied on by Mrs. Bhatt in BRITANNIA INDUSTRIES LTD. VS. CIT ANR. 2005 (10) TMI 30 - SUPREME COURT shall not apply to the facts of the case on hand. Present appeal is allowed.

Summary

Issues:
Challenge to ITAT order allowing revenue appeal; Deductibility of furnace repair expenditure under IT Act; Capital vs. revenue expenditure determination.

Analysis:
The case involved an appeal by the assessee challenging the ITAT order allowing the revenue's appeal. The assessee had carried out repairs on an old furnace amounting to a substantial sum, which was disallowed by the AO. The main issues revolved around whether the expenditure on furnace repair was deductible under Section 37(i) of the Income Tax Act, 1961, and if not, whether it could be allowed under Section 31(i) even if considered capital expenditure.

Upon framing the questions of law, the Court considered the nature of the repair work carried out by the assessee. The Tribunal had deemed the expenditure as capital in nature, leading to the disallowance. The assessee argued that despite being capital expenditure, it should be allowed under Section 31(i) due to the repairing nature of the expenses. The Court referred to the decision in "CIT VS. SARAVANA SPINNING MILLS P. LTD." [2007] 293 ITR 2001 (SC) cited by the assessee to support their claim for deduction.

The respondent-revenue supported the Tribunal's order, citing the decision in "BRITANNIA INDUSTRIES LTD. VS. CIT & ANR." [2005] 278 ITR 546, which held that certain repair and maintenance expenses were not allowable. The Court, however, emphasized that the nature of the repair work was crucial in determining deductibility. The repairing of the old furnace was found to be essential for consistent production, with no increase in production capacity due to the repairs. The CIT(A) had allowed the repair expenses as deduction for the relevant assessment year.

The Court highlighted the principle that the nature of repair, not just the amount spent, determines deductibility. It referenced the Saravana Spinning Mills case to emphasize that the test for current repairs is to preserve and maintain an existing asset without creating a new asset or advantage. Ultimately, the Court allowed the appeal, quashing the Tribunal's order and restoring the CIT(A)'s decision, as the repair expenses were deemed deductible under Section 31(i) despite being capital in nature.