2007 (9) TMI 183 - HC - Income Tax

Expenditure incurred on replacement of turbine rotor on account of repairs will be treated as revenue expenditure no error in order of tribunal no question arise to treat them as capital expenditure

Summary

Issues involved:
Interpretation of revenue expenditure vs. capital expenditure for the replacement of Turbine Rotor in a captive power plant.

Analysis:
1. The Income Tax Appellate Tribunal referred the question of whether the expenditure on replacing a Turbine Rotor should be treated as revenue or capital expenditure for the Assessment Year 1979-80.

2. The respondent, a captive power plant, claimed the cost of Turbine Rotor replacement as revenue expenditure, which was disallowed by the Assessing Authority and the First Appellate Authority. The Tribunal found that the replacement was part of ordinary business operations and not a separate machinery, thus accepted the claim.

3. The standing counsel argued that the expenditure should be capital as the Turbine Rotor is a plant, citing a House of Lords judgment. In contrast, the counsel for the assessee contended it was a repair, referring to a Division Bench judgment.

4. The Tribunal found the Turbine Rotor integral to the Turbo Generator Set, not an independent machinery, raising the question of whether the replacement expenditure is revenue or capital.

5. The Court analyzed the judgment in Commissioner of Income Tax Vs. Kanodia Cold Storage, emphasizing that replacement of parts does not create a new asset and if it maintains the existing setup efficiently, it qualifies as revenue expenditure.

6. Referring to the Commissioner of Income-tax Vs. M/s. Saravana Spinning Mills Pvt. Ltd., the Court highlighted that current repairs aim to preserve and maintain existing assets without creating new advantages.

7. Distinguishing a previous case, the Court noted that the Turbine Rotor was part of the Turbo Generator Set and not separate tools, concluding that the replacement expenditure was revenue and not capital.

8. Consequently, the Court upheld the Tribunal's decision, ruling that the expenditure on Turbine Rotor replacement was revenue expenditure, answering the question in favor of the assessee against the Revenue.