2019 (6) TMI 1299 - HC - Income Tax

Expenditure on replacement of old machinery by purchase and installation of new machinery - revenue expenditure as current repairs or capital expenditure - HELD THAT - As decided in SARAVANA SPINNING MILLS P. LTD. 2007 (8) TMI 16 - SUPREME COURT there are several machines and perform different functions. Therefore, when each of the department/division perform different functions, repair/ substitution of an old machine will not come within the definition of the word current repairs and deduction cannot be claimed thereunder. In this view of the matter, we are of the considered opinion that the impugned judgement and order passed by the Gujarat High Court as also the orders passed by the Income Tax Appellate Tribunal and the Commissioner of Income Tax Appeals on this issue cannot be sustained and are thereby set aside. It is held that the respondent is not entitled for any deduction under the head current repairs as claimed and allowed by the two authorities. - Decided in favour of revenue

Summary

Issues:
1. Whether expenditure on replacement of old machinery by purchase and installation of new machinery was allowable as revenue expenditure?

Analysis:
The Tax Case Appeals were filed by the Revenue under Section 260-A of the Income Tax Act, 1961, challenging the order of the Income Tax Appellate Tribunal regarding the allowability of expenditure on replacement of old machinery with new machinery as revenue expenditure for the assessment years 1994-95, 1995-96. The substantial question of law raised was whether the Tribunal was correct in allowing such expenditure as revenue expenditure. The respondent did not appear during the hearing. The Supreme Court's decision in the case of Commissioner of Income Tax, Gujarat Vs. Sarangpur Cotton Mfg. Co. Ltd. was cited, where a similar issue was considered. The Apex Court allowed the Revenue's appeal in that case, indicating a precedent against allowing such expenditure as revenue.

In the case of Sarangpur Cotton Mfg.Co.Ltd., the respondent-assessee claimed a deduction for expenditure on machinery replacement. The assessing authority disallowed a portion of the claimed expenditure, considering it as capital expenditure. The Commissioner of Income Tax Appeals allowed a reduced amount as revenue expenditure but directed the withdrawal of depreciation and development rebate on these items. The Income Tax Appellate Tribunal upheld the Commissioner's order. The Revenue then appealed to the High Court, which ruled in favor of the respondent-assessee. The Revenue further appealed to the Supreme Court, arguing that the repairs claimed were not eligible under the head of "current repairs." The Court held that if repairs related to independent machines instead of parts of a machine, they could not be claimed as current repairs. The Court referred to the case of Saravana Spg.Mills(P.) Ltd., where it was established that repair/substitution of an old machine in a textile mill with various departments/divisions and machines performing different functions did not qualify as current repairs under Section 31(i) of the Income Tax Act, 1961.

Based on the Supreme Court's decision in the Sarangpur Cotton Mfg.Co.Ltd. case, the High Court concluded that the respondent was not entitled to the deduction claimed under the head of "current repairs." The judgment and orders of the lower authorities were set aside, and the appeal by the Revenue was allowed. The High Court found the facts of the instant case to be similar to the Sarangpur Cotton Mfg.Co.Ltd. case and decided in favor of the Revenue, disallowing the expenditure claimed as revenue expenditure.