2007 (6) TMI 171 - HC - Income Tax

Amounts spent on replacement of machinery - capital or revenue expenditure claim had to be determined only by the provisions of the Act, not by the accounting practice of assessee - Department did not raise any objection before the Tribunal regarding the claim of allowance on the premise of the block of assets concept - Tribunal was right in allowing a deduction of the amounts spent on replacement of machinery as revenue expenditure deduction allowed

Summary

Issues:
- Whether the Tribunal was right in allowing a deduction for amounts spent on machinery replacement as revenue expenditure?
- Can replacement of independent complete machinery be treated as revenue expenditure?
- Was the Tribunal correct in deciding the machinery replacement issue without considering the block of assets concept?

Analysis:

1. The appeals were against the Income-tax Appellate Tribunal's order disallowing the assessees' claim for machinery replacement expenditure as capital expenditure. The Commissioner of Income-tax (Appeals) ruled in favor of the assessees, a decision upheld by the Tribunal, leading to the Revenue filing the appeals raising substantial legal questions.

2. The Revenue acknowledged that previous court decisions, specifically CIT v. Janakiram Mills Ltd. [2005] 275 ITR 403, were unfavorable to their position, as conceded by the standing counsel for the appellant.

3. The court clarified that the treatment of machinery replacement expenditure as capital or revenue should be determined by the provisions of the Income-tax Act, not the assessee's accounting practices. The Tribunal, considering the replacement as revenue expenditure, found in favor of the assessee.

4. Referring to the Janakiram Mills Ltd. case, the court emphasized that each replaced machine could not be seen as independent, and the expenditure on machinery replacement should be considered revenue expenditure, aligning with the Tribunal's decision.

5. Regarding the block of assets concept, the court explained the rationale behind its introduction and its inapplicability to the nature of the expenditure in question. As there was no acquisition of new assets with enduring advantages, and no claim for depreciation, the court found no necessity to consider the block of assets concept.

6. In the present case, the assessee replaced machinery without acquiring new assets or discontinuing production activities. As no claim for depreciation was made, and the Revenue did not raise block of assets objections, the court concluded that no substantial legal questions arose for consideration, leading to the dismissal of the appeals without costs.