2018 (12) TMI 1270 - HC - Income Tax

Allowable revenue expenditure - claim of modernization/expenditure incurred - whether the expenditure incurred by the assessee on replacement of old machinery by purchase and installation of new machinery, replacement of spares of textile machinery be allowable as a Revenue expenditure? - Held that - A Division Bench of this Court in the case of Super Spinning Mills Ltd. Vs. ACIT 2013 (9) TMI 88 - MADRAS HIGH COURT considered an identical substantial question of law as framed in this appeal and after taking note of the decisions of Saravana Spinning Mills Pvt. Ltd. 2007 (8) TMI 16 - SUPREME COURT OF INDIA and Mangayarkarasi Mills (P) Ltd 2009 (7) TMI 17 - SUPREME COURT remanded the matter to the Commissioner of Income Tax (Appeals) for short, the CIT (A) to decide the issue as to whether the expenditure, in effect, could be treated as revenue expenditure. In the light of the legal position as enunciated above we are of the considered view that the matter has to be remanded for fresh consideration.

Summary

Issues:
Interpretation of revenue expenditure for modernization expenses in income tax assessment.

Analysis:
The High Court of Madras heard an appeal filed by the Revenue under Section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal. The substantial question of law in consideration was whether the claim of modernization/expenditure incurred amounting to a specific sum should be allowable as revenue expenditure. The court examined the expenditure incurred by the assessee on replacing old machinery with new machinery and spares of textile machinery. Reference was made to a previous judgment by the Hon'ble Supreme Court in the case of CIT v. Mahalakshmi Textile Mills Ltd. where the concept of "current repairs" and replacement of old parts was discussed. The court differentiated the facts of the present case from the Mahalakshmi Textile Mills case, emphasizing the need for old parts to be unavailable in the market for replacement to qualify as "current repairs."

In another case, the Hon'ble Supreme Court clarified the independent nature of each machine in a textile mill, stating that each machine plays a distinct role in the manufacturing process. The court highlighted that while machines are interconnected in the production process, they should be treated independently for assessment purposes. A Division Bench of the High Court, in a similar case, remanded the matter to the Commissioner of Income Tax (Appeals) for further consideration based on the Supreme Court's decisions.

Based on the legal precedents and interpretations provided by the Supreme Court, the High Court of Madras allowed the appeal filed by the Revenue. The court set aside the orders of the Tribunal and the CIT (A), remanding the matter to the Assessing Officer for fresh consideration. The Assessing Officer was directed to provide the assessee with an opportunity to present their case effectively and determine whether the expenditure could be classified as revenue expenditure in light of the legal principles discussed in the judgment.