2009 (1) TMI 78 - HC - Income Tax

Replacement cost of machinery AO held that capacity of the machinery had increased and provided an enduring benefit and advantage in the production and disallowed the claim of assessee for deduction as revenue expenditure Commissioner held that addition should be deleted and treated as revenue expenditure - issue involved is covered by the SC s decision in the case of CIT v. Ramaraju Surgical Cotton Mills - matter to the CIT (Appeals) with a direction to consider the matter again afresh

Summary

Issues:
1. Whether replacement of carding machinery constitutes revenue expenditure?
2. Whether the amount spent on replacement of carding machinery is deductible as current repairs under section 31 of the Income-tax Act?

Analysis:
Issue 1:
The appeal before the Madras High Court involved a dispute regarding the treatment of the replacement cost of one carding machinery by an assessee engaged in the manufacture and sale of cotton yarn. The Assessing Officer had added back the claimed cost of machinery as revenue expenditure, considering it to be capital expenditure due to the increased machinery capacity and enduring benefit in production. The Commissioner of Income-tax (Appeals) disagreed with the Assessing Officer, holding the replacement cost as revenue expenditure and withdrawing the depreciation granted. The Income-tax Appellate Tribunal upheld the Commissioner's decision, leading to the current appeal by the Revenue. The court referred to the decision in CIT v. Ramaraju Surgical Cotton Mills [2007] 294 ITR 328, where the Supreme Court remanded similar matters for fresh consideration. In line with this precedent, the court remanded the matter to the Commissioner of Income-tax (Appeals) for a fresh assessment.

Issue 2:
The second issue pertained to whether the amount spent on replacing the carding machinery could be deducted as current repairs under section 31 of the Income-tax Act. The court's decision to remand the matter for fresh consideration encompassed this aspect as well, directing the Commissioner of Income-tax (Appeals) to review the case in light of the Supreme Court's judgment in CIT v. Ramaraju Surgical Cotton Mills [2007] 294 ITR 328. The court's directive aimed at ensuring a comprehensive evaluation of the expenditure in question to determine its nature and the appropriate tax treatment.

In conclusion, the High Court of Madras remanded the appeal to the Commissioner of Income-tax (Appeals) for a fresh assessment in accordance with the Supreme Court's guidance, emphasizing the need for a thorough reconsideration of whether the replacement of the carding machinery constituted revenue expenditure and if the amount spent was deductible as current repairs under the Income-tax Act.