2009 (12) TMI 105 - HC - Income Tax

Revenue expenditure versus Capital Expenditure - Replacement of machinery - The Company is a Public Limited Company,which is engaged in the business of manufacture and sale of cotton and blended yarn. The assessee filed its return of income on 27.11.1996 with a total income of Rs.6,06,370/- after claiming deduction of Rs.6,19,43,673/- on account of Replacement of plant & machinery claimed as revenue expenditure . The scrutiny assessment was initiated by issuing notice under Section 143(2) on 17.3.2007. The assessment was made vide order under Section 143(3) dated 26.3.1999, wherein machinery replacements to the extent of Rs.6,19,43,673/- was disallowed CIT(A) partly allowed the claimed ITAT disallowed the deduction of expenditure following the decision of supreme court in the matter of MANGAYARKARASI MILLS (P) LTD 2009 -TMI - 34189 - SUPREME COURT held that - . When the matter is remitted to the first appellate authority, there is no harm in allowing the assessee to give additional materials about the additional machinery, for which they are claiming benefit under Section 37 of the Income-tax Act. Even in the case of Ramaraju Surgical Cotton Mills reported in Ramaraju Surgical Cotton M such a direction is given to the authorities to re-consider the issue on the basis of the materials produced before the authorities by both the parties matter remanded back

Summary

Issues Involved:
1. Disallowance of expenditure on replacement of machinery as revenue expenditure.
2. Criteria for determining whether expenditure is capital or revenue in nature.
3. Role of treatment in books of accounts in determining the allowability of expenditure under the Income Tax Act, 1961.
4. Proper examination of facts before presuming similarity with previous judgments.

Issue 1: Disallowance of Expenditure on Replacement of Machinery as Revenue Expenditure
The Tax Case Appeals were filed against the order of the Income Tax Appellate Tribunal, which disallowed the claim of expenditure on machinery replacement as revenue expenditure. The Tribunal's decision was based on the Supreme Court's judgment in the case of MANGAYARKARASI MILLS (P) LTD. The Commissioner of Income Tax (Appeals) had initially allowed the expenditure as revenue, but the Tribunal reversed this decision. The High Court remitted the matter back to the Commissioner of Income Tax (Appeals) for reconsideration in line with the Supreme Court's directions, emphasizing the need for a specific finding on the enduring nature of assets or increase in production capacity.

Issue 2: Criteria for Determining Expenditure Nature
The Court referenced several Supreme Court judgments, including cases like Commissioner of Income Tax vs. Saravana Spinning Mills Pvt Ltd and Commissioner of Income Tax vs. Sri Mangayarkarasi Mills P. Ltd, to highlight the importance of considering enduring benefit and production capacity increase in determining whether an expenditure is capital or revenue in nature. The Court emphasized the need for a detailed assessment of these factors before categorizing expenditures.

Issue 3: Role of Treatment in Books of Accounts
The Court considered whether the treatment of expenditures in the books of accounts should be a determining factor for their allowability under the Income Tax Act, 1961. While the Commissioner of Income Tax (Appeals) had favored the appellant by treating the expenses as revenue in nature, the Tribunal aligned with the Supreme Court's decision in MANGAYARKARASI MILLS (P) LTD., emphasizing that the expenses on machinery replacement were not allowable under Section 37 of the Income Tax Act, 1961.

Issue 4: Proper Examination of Facts
The Court highlighted the importance of a proper examination of facts before presuming similarity with previous judgments. It referenced the Supreme Court's decision in COMMISSIONER OF INCOME-TAX, COIMBATORE VS. M/S.HINDUSTAN TEXTILES, which directed a reconsideration of the issue based on the enhancement of production capacity and machinery additions or replacements. The Court remitted the matter back to the Commissioner of Income Tax (Appeals) for a thorough reassessment in line with the Supreme Court's directives.

In conclusion, the High Court's judgment in the Tax Case Appeals addressed the complexities surrounding the categorization of expenditures as capital or revenue, emphasizing the need for a detailed assessment of factors such as enduring benefit and production capacity increase. The Court's decision to remit the matter back for reconsideration in accordance with the Supreme Court's directives reflects a commitment to ensuring a thorough and accurate evaluation of the issues at hand.