2013 (8) TMI 1132 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of modernization expenses on Compact Drafting System as revenue expenditure u/s 37.
2. Classification of Clean Development Mechanism (CDM) receipts as revenue or capital receipts.
3. Classification of expenditure on modernization and replacement of machinery as revenue or capital expenditure.

Summary:

Issue 1: Deduction of Modernization Expenses on Compact Drafting System as Revenue Expenditure u/s 37
The Revenue's appeal contested the Commissioner of Income Tax (Appeals)'s decision allowing the deduction of modernization expenses on Compact Drafting System as revenue expenditure u/s 37. The Tribunal upheld the CIT(A)'s decision, referencing the co-ordinate Bench's ruling in the case of M/s. Prabhu Spinning Mills Pvt. Ltd. for AY 2008-09, which determined that the Compact Spinning System is an attachment to existing machinery and thus qualifies as revenue expenditure. The Tribunal dismissed the Revenue's appeal.

Issue 2: Classification of Clean Development Mechanism (CDM) Receipts as Revenue or Capital Receipts
The assessee's appeal challenged the CIT(A)'s classification of CDM receipts as revenue receipts. The Tribunal referenced the co-ordinate Bench's decision in the case of Sri Velayudhaswamy Spinning Mills P. Ltd., which held that CDM receipts are capital receipts, not revenue receipts. The Tribunal followed this precedent, ruling in favor of the assessee and setting aside the CIT(A)'s order on this issue.

Issue 3: Classification of Expenditure on Modernization and Replacement of Machinery as Revenue or Capital Expenditure
The assessee's appeal also contested the CIT(A)'s decision to treat the expenditure on the replacement of autoconer machines as capital expenditure. The Tribunal upheld the CIT(A)'s decision, which was based on the Supreme Court's ruling in CIT Vs. Mangayarkarasi Mills P. Ltd., determining that such expenditure results in an enduring benefit and thus qualifies as capital expenditure. The Tribunal rejected the assessee's grounds on this issue.

Conclusion:
The appeal of the Revenue (ITA No.606/Mds/2013) was dismissed, and the appeal of the assessee (ITA No.617/Mds/2013) was partly allowed. The Tribunal's decisions were pronounced in the open court on August 30, 2013, in Chennai.