2009 (4) TMI 110 - HC - Income Tax

Capital Expenditure Revenue Expenditure Supreme Court in the matter of CIT v. Ramaraju Surgical Cotton Mills 2007 -TMI - 2064 - SUPREME COURT OF INDIA has considered the issue that whether the replacement of assets without increasing the production capacity would amount to revenue expenditure therefore matter remitted to AO to ascertain whether in view of the addition made by the assessee any earning capacity has increased or decreased and also as per the other directions given in the above said judgment of the Supreme Court

Summary

Issues:
1. Whether the expenditure on replacement of spinning machinery and cone winding machinery is allowable as revenue expenditure.
2. Whether the Tribunal's order is perverse in not properly appreciating all facts and circumstances.
3. Whether the Tribunal was right in not allowing the depreciation claim without discussing it in the order.

Issue 1 - Replacement of Machinery:
The main issue in this case was whether the replacement of machineries, specifically spindles, led to an enhancement in production. The appellant contended that despite a slight rise in the number of spindles, there was no increase in the installed capacity. The Supreme Court's judgment in CIT v. Ramaraju Surgical Cotton Mills [2007] 294 ITR 328 was cited, emphasizing the need to consider various factors to determine if the expenditure was revenue or capital in nature. The court noted the lack of material regarding the impact on production capacity post-replacement and concluded that the matter required further examination by the authorities.

Issue 2 - Proper Appreciation of Facts:
The court observed that the authority had not considered the issue of machinery replacement in the proper perspective, focusing solely on the number of spindles. It was emphasized that a comprehensive assessment, as outlined in the Supreme Court's decision, was necessary to determine the impact on income earning capacity. The court highlighted the need for factual details on production capacity changes post-replacement to make a sound decision on the nature of the expenditure.

Issue 3 - Depreciation Claim:
Regarding the depreciation claim, the court set aside the Tribunal and Commissioner of Income-tax (Appeals) orders, remitting the matter back to the Commissioner of Income-tax (Appeals) for reconsideration. The court directed a reassessment in line with the Supreme Court's judgment in CIT v. Ramaraju Surgical Cotton Mills [2007] 294 ITR 328, emphasizing the importance of determining any increase or decrease in earning capacity due to the machinery addition. The court concluded by disposing of the appeals and closing the connected matters without costs.