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TMI Blog1978 (4) TMI 130X X X X Extracts X X X X X X X X Extracts X X X X ..... intact, he stated. Some minor machineries, according to the ITO, were purchased which would fall within the definition of 'conversion of drafting materials', (top arm drafting mechanism) etc. This he stated, would qualify for deduction as revenue in nature. There were other items which would be capital. The ITO eventually considered that items aggregating to Rs. 6,53,483 would be capital in nature. The break-up of the aforesaid items is as under: Pneumocol Rs. 89,137 Bearing conversion of Ring frames Rs. 18,191 Bearing conversion of Ring frames Rs. 33,783 Plug type spindles Rs. 3,14,604 Blow Room scuthher Rs. 46,415 Carding panel and starter Rs. 34,054 2 H.P. Motors Rs. 15,532 Card conversion Rs. 3,557 Cards conversion (wires) Rs. 48,314 Cards conversion (coilers) Rs. 49,896 . Rs. 6,53,483 3. The assessee appealed to the AAC and it was contended before him that the entire claim was admissible as revenue expenditure. It was stated that the conversion materials were utilised for converting old and conventional t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submitted that for the asst. yr. 1973-74 when also the assessee had claimed only 1/3rd of the expenditure on conversion of materials incurred in that year of Rs. 1,14,590 as a deduction, the ITO himself had allowed as a full deduction of Rs. 3,43,769. Having taken this view he contended that the ITO was not justified in respect of the same conversion materials in taking a different stand this year and holding that a portion thereof was capital in nature. The learned counsel relied on the decision of the Madras High Court in CIT vs. Mahalakshmi Textile Mills Ltd(1). (later upheld by the Supreme Court in the case reported at 66 ITR 710), in support of the plea that expenditure on conversion in the case of spinning mills was an admissible deduction being in the nature of current repairs. He also referred to certain other decisions, such as those in C.R. Corera Bros. vs. C.I.T(2) and CIT vs. Sri Ram Sugar Mills Ltd(3). 7. The learned Departmental Representative, on the other hand, submitted that the ITO this year had gone into an analysis of the expenditure and had made a classification between revenue and capital expenditure and the classification made was rational and did not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid amount of Rs. 3,43,768 which was allowed in full by the ITO in framing the assessment for the year 1973-74 and on which fact the assessee has placed reliance. 10. In the 36th Report relating to the year ended 31st March, 1974 now under consideration, the following appears in the Directors' Report: "The modernisation and renovation programmes which are being carried on in stages has started bearing fruits and full benefits will be derived when the programmes are completed. As you will see a sum of Rs. 29.03 lakhs has been incurred towards modernisation programme and a sum of Rs. 10.57 lakhs has been incurred towards renovation programme during the year. During this year 18 Ring Spinning Frames, 1 Draw Frame and 1 No. of 750 KVA transformer were bought besides other accessories to Preparatory Section etc. In the ensuing years further 6 Ring Spinning Frames, 2 Draw Frames, 1 Cone winder machine and other machinery and accessories will be installed to boost up the production. Your Directors are also glad to inform you that our Company has been sanctioned an additional spindleage licence for 2000 spindles. Actions are being taken for installation of same." 11. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .57 lakhs as a deduction which according to the assessee was incurred only in respect of renovation. Thus the spindles bought this year are not for any additional spindleage as the Directors' report itself would show that the additional spindleage of 2000 spindles had just been sanctioned and action was to be taken for installation of the same. The spindles purchased were thus replacement of existing spindles. 17. The Supreme Court in the case of CIT vs. Mir Mohammad Ali(4) has observed as under at page 171 and 172: "What then is the test for determining whether a mechanical contrivance is machinery for the purposes of the second paragraph of cl. (vi) and cl. (via)? The Privy Council in the case of Corporation of Calcutta vs. Chairman, Cossipore and Chitpore Municipality hazarded the following definition of "machinery." The word `machinery' when used in ordinary langauge prima facie means some mechanical contrivances which, by themselves or in combination with one or more other mechanical contrivances, by the combined movement and interdependent operation of their respective parts generate power, or evoke, modify, apply or direct natural forces with the object in each case ef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a massive scheme of modernisation, replacement and renovation in order that they may achieve maximum production as well as stand competition with more modern units. The expenditure on modernisation and to achieve greater production could perhaps be construed as being capital in nature. But the expenditure incurred for standing competition with more modern units could clearly be explained as "for the purpose of business" looking to the observations of the Supreme Court referred to and would be admissible as a deduction. We have already observed that expenditure on modernisation has been capitalised by the assessee. What the assessee had claimed as a revenue deduction is the expenditure on conversion. This was necessary to stand competition with other mills. An analysis of the list filed shows that there was replacement primarily of large number of parts in the conversion. In our view, looking to the ratio of the judgment of the Supreme Court in CIT vs. Mahalakshmi Textile Mills Ltd.(6) and the discussion of the Madras High Court in the same case reported as 56 ITR 256, looking to the productive unit as a whole, we consider that the expenditure on conversion material was only in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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