2024 (2) TMI 1432 - HC - Income Tax

Nature of expenditure - Allowability u/s 37(1) - expenditure incurred by the assessee on replacement of nine ring frames - whether is a revenue expenditure and allowable as deduction under Section 37? - Tribunal was erroneous in not properly appreciating the decision of the Hon'ble Supreme Court in RE Ramaraji Surgical Cotton Mills, 2007 (8) TMI 39 - SUPREME COURT a later decision of the Hon'ble Supreme Court and specifically referred to in the petitioner s submission before the Tribunal? HELD THAT - As per law settled; ring frame in a textile mill is an independent and separate machine. Each machine in a textile mill is part of the integrated process of manufacture and is integrally connected to the other machine in the mill for production of the final product. But this interconnection does not take away the independent identity and distinct function of each machine. Therefore, each machine in a textile mill is liable to be treated independently as such and not as mere part of an entire composite machinery of the spinning mill. Thus ring frame , at best, is part of an integrated manufacture process employed in a textile mill. Therefore, replacement of an old ring frame by a new one would constitute the bringing into existence a new asset in place of the existing ring frame. Such a new asset in the assessee s textile mill is not for temporary use but it gives an enduring benefit of better and more efficient production over a period of time. In Lakshmi Sugar Mills P. Co. v. CIT 1971 (8) TMI 13 - SUPREME COURT Hon'ble Supreme Court has held that bringing into existence a new asset or an enduring benefit for the assessee amounts to capital expenditure. In Travancore Cochin Chemicals Ltd. 1977 (1) TMI 2 - SUPREME COURT has held that an expenditure is of capital nature when it amounts to enduring advantage for the business. Repair is entirely different as it does not bring into existence a new asset. Thus, amount spent by the assess on replacement of existing old ring frames by a new one is not of revenue nature rather it is capital in nature. Hence the amount so spent is not an allowable expenditure under Section 37 of the Act, 1961. Decided in favour of revenue.

Summary

Issues:
- Whether expenditure incurred by the assessee on replacement of ring frames is a revenue expenditure and allowable as deduction under Section 37 of the Income Tax Act, 1961.

Detailed Analysis:
The appellant assessee, a manufacturer of cotton yarns, replaced nine ring frames during the assessment year 2005-06. The assessing officer disallowed the expenditure claimed by the assessee as revenue expenditure under Section 37 of the Income Tax Act, 1961. The CIT(A) initially allowed the appeal, but the ITAT later set aside the decision. The appellant assessee argued that the expenditure for replacement of ring frames should be considered a revenue expenditure. The Hon'ble Supreme Court in previous cases highlighted that each machine in a textile mill is independent, and replacement of assets does not amount to current repairs. The replacement of old ring frames with new ones creates an enduring benefit, making it capital expenditure, not revenue expenditure. Therefore, the expenditure incurred by the assessee on replacement of ring frames is not allowable under Section 37 of the Act.

The judgment emphasized that each machine in a textile mill is separate and plays an independent role in the manufacturing process. The replacement of old ring frames with new ones results in the creation of a new asset that provides enduring benefits, classifying it as capital expenditure. Previous legal precedents have established that expenditure resulting in an enduring advantage for the business is of a capital nature, not revenue nature. As the replacement of ring frames falls under capital expenditure, it is not deductible under Section 37 of the Income Tax Act, 1961. The court dismissed the appeal, ruling in favor of the revenue and against the assessee based on the settled legal principles and precedents regarding the nature of the expenditure incurred for replacement of machinery in a textile mill.