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TMI Blog1991 (4) TMI 206X X X X Extracts X X X X X X X X Extracts X X X X ..... o reduce the cost of assets by subtraction cash subsidy received, and to compute the depreciation based upon the gorss figures. The Department objects to this. But the Madras High Court in Srinivasa Industries vs. CIT (1991) 92 CTR (Mad) 17 : (1991) 188 ITR 22 (Mad) has held that subsidy for SIPCOT need not be deducted from the cost off assets while computing depreciation. Respectfully following this decision of the Madras High Court, we uphold the order of the CIT(A). 5. The CIT(A) deleted the addition on account of payment guarantee commission relying upon the Madras High Court decisions in the cases of Sivakami Mills Ltd. vs. CIT (1979) 120 ITR 211 (Mad) and CIT vs. Rukmani Mills Ltd. (1982) 27 CTR (Mad) 135 : (1982) 133 ITR 154 (Mad). As the order of the CIT(A) is based upon the Madras High Court decisions referred to above, the order of the CIT(A) on this particular issue is upheld. 6. We no take up for consideration the appeal filed by the assessee. The assessee claimed that during the accounting year it had expended a sum of Rs.5,31,55,319 on installing and commissioning a new cement mill by the name "Combidan Cement Mill" It stated that such installation was in pursuanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licence appears to be required to manufacture clinker. (e) The assessee originally powdered the clinker using four old cement mills. These mills had become inefficient over the years and as per the modernisation programme of the assessee, a new cement mill called the "Combidan Mill" was installed by the assessee. By such installation the capacity to produce cement did not undergo a change. The capacity of the new mill was equal to the combined capacities of the four cement mill units. Factually the production of cement did not alter materially after the commissioning of the new mill. (f) on 6th Nov., 1985 in connection wit the obtaining a NOC from the Assessing Officer, the assessee wrote to the officer informing him that they were installing a highly efficient Combidan Cement Mill at their existing cement factory as part of their modernisation programme. The trial-run for this newly erected mill was started on 6th Dec., 1985. Upto 27th Dec., 1985 the old cement mills were also being operated so as not to lose production during the trial-run period. Once full production was obtained from the new mill, effective 28th Dec., 1985, the four old mills were scrapped. Subsequently, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13 : (1980) 124 ITR 1 (SC) has also indicated that such a test must yield where there are special circumstances leading to a contrary conclusion. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of each case. 11. There is no doubt that the expenditure on the new Combidan Mill was capital expenditure, applying the test of enduring benefit. Hence, such expenditure would not be normally allowable under the provisions of s. 37(1), which contains a specific embargo against the deductibility of capital expenditure not under s. 37(1) but under the provision of s. 31(1) pertaining to "Current Repairs". 12. Courts have consistently taken the view (in the authorities referred to by us) that "Current Repairs" by implication would include replacement expenditure. Even if the part replaced itself, was a capital item, so long as the whole or that entirety remains substantially the same the replacement expenditure would constitute "Current repairs". "Current Repairs" were not petty repairs. Just because the assessee as postponed the repair work and a heavy rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is expenditure by means of a subsisting agreement and according to the needs of his business. But the owner of the building is free to spend whatever he likes and for whichever purpose he likes for improving the building or otherwise. Consequently, current repairs (repairs according to current needs only) are allowed in the case of the owner. Since the tenant's occupancy of the building is limited by time, expenditure on any repair incurred by the tenants is allowed and the word "repairs" is used in contradistinction to the words " current repairs" to enlarge the scope of deduction in his case. In the case of the owner, as he can undertake the repair expenditure over the life of the building, without reference to business needs, he is allowed only "current repairs", i.e., repairs current to the use of the building, for business and the adjective "current" is added to restrict the extent of deduction in his case. Thus the different expressions emanate from the need to define the scope of the deductions for the tow kinds of assessees and do not imply any distinction in the nature of capital and revenue. But "Repairs" includes capital expenditure according to the decision in Instalmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he older pats, though the manufacturer claimed that these parts were more efficient. The Tribunal found that no new asset or new advantage was derived by the assessee. It was held by the Madras High Court: "The replacement of worn out parts does not by itself bring in a new asset; but in having regard to the nature of the expenditure, one should consider the productive unit as a whole and not pick out parts therein which are new. Where only a replaceable part of a composite piece of machinery is renewed, such party having a comparatively lesser lease of life than the machinery itself, it would be reasonable to regard the cost of such renewal as revenue expenditure. Merely because a large sum was involved, it could not lead to the conclusion that it was a reconstruction. The nature of the expenditure must be viewed as a whole in order to see whether the repairs effected only restored the machinery to its original condition or whether by reason of the repairs any additional advantage or features which improved its income- earning capacity were introduced." 17. In the case of Samuel Jones Co. (Devonvale) Ltd. vs. Commissioner of Inland Revenue, the assessee carried on a trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s an indispensable part of the factory, doubtless an integral party; but none the less a subsidiary part, and one of many subsidiary parts, of a single industrial profit earning undertaking." 18. There is not doubt that the new Combidan Mill is an asset. But when that asset is only a replacement of an existing asset, could it be regarded as replacement of a part of a Plant? We should be mindful of the fact that the claim made by the assessee is for allowance of the expenditure under s.31(1) (Current Repair). As held in a plethora of decisions referred to supra, replacement of a part of a plant would be a "current repair" (even though that part itself may be an asset), whereas tha replacement of the whole would be in the capital field and, hence disallowable. 19. In the context of the; facts of this case, what is the "whole"?, what is the "entirety", 20. A cement plant is an integrated process industry. The assessee has obtained licence to manufacture cement. The process encompasses three stages, viz., lime- stone cursing, burning of powdered limestone in a kiln to produce clinker, and powdering the clinker to obtain cement. No intermediate product is readily saleable. Hence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng up an entirely new cement milling section, with chutes, conveyors and the cement mill would be about Rs.30 crores (the cement mill itself costing Rs. 5 crores). Hence, the cement milling section would be "plant" and tha mill itself a replacement of part of the whole and hence, would partake of the nature of "current repairs" 23. It may also be noted in passing, that if the expenditure on the Combidan Mill is held to be capital in nature, the assessee would be entitled to a write off at 100 per cent depreciation over the life of the asset, plus investment allowance at 25 per cent (in the aggregate 125 per cent). If allowed as revenue, the allowance would be restricted to 100. Again this fact can in no manner alter the principles involved for determining the allowability or otherwise of this expenditure, except to indicate that the Revenue may not be prejudiced by allowing the claim of the assessee. 24. The learned departmental representative then put forward the following arguments: (a) As the assessee has itself capitalised the asset in the book, it is precluded from claiming this expenditure as revenue. However, it is now well recognised that entries in the books of accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r case falls." "Again, Lord Coleridge in Mayor of Southport vs. Morris, (1893) 1 QB 359 at pg. 361 said : the Attorney-General has asked where we are to draw the line. The answer is that it is not necessary to draw it any precise point. It is enough for us to say that the present case is on the right side of any line that could reasonable be drawn." 26. But the question that yet remain for consideration is "what is the quantum of expenditure allowable for the asst. yr. 1986-87?" We have already found that the expenditure incurred partakes of the nature of "Current Repairs". What is "Current"? It means incurred during the accounting period. Arrears of repairs done in one year are not deductible under this section (Nathmal Bankatlal Parikh Co. vs. CIT (1980) 15 CTR (AP) 216 (FB): 122 ITR 168 (AP) (FB)). The normal procedure while debiting repair expenditure would be to debit revenue account as and when incurred. The assessee has capitalised the entire expenditure on the Combidan Mills during the previous tear relevant to the asst. yr. 1986-87. However, the assessee himself has claimed that allowance for income-tax purposes should not be linked to exhibition made in the books ..... X X X X Extracts X X X X X X X X Extracts X X X X
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