2012 (4) TMI 244 - AT - Income Tax

Modernization and replacement expenses - assessee claimed deduction under section 37(1) for expenditure incurred on replacement of machineries AO treated it as a capital expenditure assessee stated that replacement of ring frames and balancing machines was not done with a view to bring into existence a new asset and had been made only to restore the machinery to its original state of efficiency Held that - the issue stands fully covered by the judgment of the Hon ble Supreme Court in the case of CIT v. Sri Mangayarkarasi Mills (P) Ltd. - 2009 - TMI - 34189 - SUPREME COURT - the expenditure of the assessee in this case is capital in nature as it amounts to an enduring advantage for the business - replacement, in this case, amounts to bringing into existence a new asset and also an enduring benefit for the assessee against assessee. Additional Ground raised challenging the chargeability of interest under section 234B and 234C of the Act Held that - Since the ground was not before the lower authorities it is fit and proper to restore this issue back to the file of the Assessing Officer, who shall pass a speaking order with regard to chargeability of interest.

Summary

Issues Involved:
1. Classification of expenditure on replacement of machinery as capital or revenue expenditure.
2. Chargeability of interest under sections 234B and 234C of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Classification of Expenditure on Replacement of Machinery:

The primary issue in the appeals is whether the expenditure incurred by the assessee on the replacement of machinery should be treated as capital expenditure or revenue expenditure under section 37(1) of the Income-tax Act, 1961.

Background:
The assessee, engaged in the manufacture of cotton yarn towel and knit fabric, claimed expenses on modernization and replacement of machinery as revenue expenditure under section 37(1). The Assessing Officer (AO) treated this expenditure as capital expenditure, which was upheld by the Commissioner of Income-tax (Appeals).

Assessee's Argument:
The assessee contended that the replacement of ring frames and balancing machines did not result in the creation of a new asset or an increase in the installed capacity. The replacement was aimed at restoring the machinery to its original state of efficiency. The assessee distinguished its case from the Supreme Court judgment in CIT v. Saravana Spg. Mills (P.) Ltd., arguing that the judgment pertained to section 31(i) concerning "current repairs" and not section 37(1).

Revenue's Argument:
The Revenue argued that the benefit derived from the expenditure was of an enduring nature, thereby qualifying it as capital expenditure. The AO also noted that the assessee had capitalized the expenditure in its account books.

Tribunal's Analysis:
The Tribunal referred to the Supreme Court judgment in CIT v. Sri Mangayarkarasi Mills (P) Ltd., which dealt with similar issues. The Supreme Court held that expenditure resulting in an enduring benefit and bringing into existence a new asset should be treated as capital expenditure. The Tribunal concluded that the replacement of machinery in the assessee's case resulted in an enduring benefit and was thus capital expenditure.

Conclusion on this Issue:
The Tribunal upheld the Revenue's treatment of the expenditure on replacement of machinery as capital expenditure, thereby disallowing it as revenue expenditure under section 37(1).

2. Chargeability of Interest under Sections 234B and 234C:

Background:
The assessee raised an additional ground challenging the levy of interest under sections 234B and 234C, arguing that the disallowance of expenditure was based on subsequent Supreme Court judgments, which could not have been anticipated at the time of advance tax payment.

Assessee's Argument:
The assessee contended that the returned income was based on correct legal precedents prevailing at the time, and the subsequent disallowance should not attract interest under sections 234B and 234C.

Revenue's Argument:
The Revenue opposed the assessee's plea, pointing out that the AO had found the claim untenable even before the Supreme Court judgment in Sri Mangayarkarasi Mills (P) Ltd.

Tribunal's Analysis:
The Tribunal admitted the additional ground for adjudication, noting that it involves a pure question of law. The issue was remanded to the AO to pass a speaking order regarding the chargeability of interest under sections 234B and 234C, allowing the assessee a reasonable opportunity of being heard.

Conclusion on this Issue:
The Tribunal remanded the issue of chargeability of interest under sections 234B and 234C to the AO for adjudication in accordance with the law.

Final Decision:
The appeals were partly allowed, with the Tribunal upholding the treatment of the expenditure on replacement of machinery as capital expenditure and remanding the issue of interest chargeability under sections 234B and 234C to the AO.