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TMI Blog2011 (6) TMI 339X X X X Extracts X X X X X X X X Extracts X X X X ..... purchased by the assessee in the year 1981 and it broke down on 24.10.1991. The work for repairs was assigned to M/s. HMT Limited, a concern of the Government of India. The said HMT Limited submitted the appeal in the aforesaid sum for carrying out the repairs. The Assessing Officer was of the view that the expenditure of the aforesaid magnitude incurred by the assessee for reconditioning the machine had given the assessee a benefit of enduring nature and therefore, the amount was not allowable as current repairs. He, thus, treated the expenditure as capital in nature and allowed depreciation @ 12.5%. According to him, it was evident not only from the quantum of expenditure, which was huge, while reconditioning the machine various spare parts were replaced. The assessee challenged the order of the Assessing Officer and the matter was re-examined by CIT(A) in appeal who held otherwise. He was of the view that expenditure was of revenue nature. While giving this finding the CIT(A) was influenced by the following factors:- "(a) The repairs have been carried out by a purchase memo where the mandate regarding the capacity of the machine is recorded and it is mentioned that mach ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consist merely in facilitating the assessee‟s trading operations or enabling the management and conduct of the assessee‟s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future." 6. In the background of the above extract, the ITAT observed in para 17 that machine which was lying idle in a broken down position and was unfit for production resulted in a benefit of enduring nature by subsequent reconditioning and imparting useful life to hitherto an old and unfit machinery. On the basis of this plea the ITAT came to the conclusion that "this benefit of enduring nature is very much in capital field inasmuch as the machinery is an apparatus for manufacturing products, thereby generating profits by way of sales. It cannot be said that the expense is merely to facilitate the assessee‟s business opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 9. An alternative submission was also made that when a machine which is put to continuous use for decades is to be replaced, even the expenditure incurred on the replacement of the said machine is to be treated as expenditure on account of current repairs in view of the aforesaid judgment of the Supreme Court in Sri Mangayarkarsai Mills Pvt. Ltd. (supra) and CIT v. Saravana Spinning Mills Pvt. Ltd., [2007] 293 ITR 201 (SC). 10. Mrs. Prem Lata Bansal, learned senior counsel appearing for the Revenue, countered the aforesaid submissions adopting the reasons given by the Tribunal and also relying upon the same judgments which are referred to by the learned counsel for the appellant. 11. We have considered the respective submissions. The nature of repairs which were carried in the instant case has already been stated above. It would be useful to refer to the legal position to find an answer as to whether such repairs, in the given case, would constitute as current repairs and thus, revenue in nature or it should be treated as capital expenditure. Any expenditure incurred by an assessee can qualify for deduction under Section 37 of the Income-Tax Act (hereinafter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. 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 a given case. (iii) What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency." (emphasis supplied) 12. When the expenditure is incurred on the repairs of a machinery, plant or furniture used for the purposes of business or profession, specific provision is made in Section 31 of the Act. This Section, inter alia, provides that if the amount paid is on account of "current repairs" then deduction in respect of the said amount is to be allowed. We may point out at this stage itself that Explanation to this Section was inserted by the Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts object the obtaining of a new or fresh advantage. This can be the only definition of „repairs‟ because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure. If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which the Legislature has permitted under section 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure." 15. After extracting the aforesaid, the Supreme Court in Saravana Spinning Mills Pvt. Ltd. (supra) elucidated this test further in the following manner:- "In the said judgment, it has been further observed by Chagla, C.J. that the definition of the word "repair" does not create much difficulty, but the difficulty is created by the word "current" which qualifies the expression "repair". This adjective, namely, "current" is put in by the Legislature. It indicates that the Legislature did not intend that the assessee should be permitted to claim allowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not relevant during the assessment years in question as the Explanation to section 31(i) was inserted later on. In our view, applying the test laid down by Chagla, C.J. in the case of New Shorrock Spinning and Manufacturing Co. Ltd., [1956] 30 ITR 338 (Bom.) the assessees were not entitled to claim allowance under section 31(i) for current repairs. In our view, the ring frame by itself constituted an independent machine with an independent function, which was replaced by a new ring frame giving enduring advantage to the assessee and, therefore, the expenditure incurred in that regard cannot come within the expression "current repairs". In our view, replacement of three ring frames constituted substitution of an old asset by a new asset and therefore, the expenditure incurred did not constitute current repairs." 17. It would be significant to point out that another judgment of the Supreme Court in CIT v. Mahalakshmi Textile Mills Ltd., [1967] 3 SCR 957 relied upon by the counsel for the assessee was held not applicable and distinguished on the following basis:- "On behalf of the assessee, reliance was placed on the judgment of this court in the case of CIT v. Maha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g recorded by the Tribunal and the High Court was that old type of replacement parts were not available in the market and, therefore, the expenditure came within the expression "current repairs". That is not the case before us, hence, the said judgment has no application to the facts of the present case. Moreover, the judgment of this Court in Mahalakshmi Textile Mills [1967] 3 SCR 957 has not defined the word "asset" to mean the entire production system in the textile mill. In the said judgment, it is nowhere stated that the entire textile mill is one single asset and that it represents one single integrated process." 18. In Sri Mangayarkarsai Mills Pvt. Ltd. (supra) the Supreme Court rendered beautiful analysis of Saravana Spinning Mills (P) Ltd. (supra) and the following passage in this behalf needs to be reproduced:- "Moving on to the issue of `current repairs' under Section 31 of the Act, the decision of this Court in CIT v. Saravana Spinning Mills (P) Ltd. (supra) is again relevant. This Court has laid down that in order to determine whether a particular expenditure amounts to `current repairs' the test is "whether the expenditure is incurred to `prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee‟s contention was negatived in the light of the principle stated in Saravana Spinning Mills (P) Ltd. (supra) in the following manner:- "In the instant case, the assessee has not claimed any of the above stated exceptions. The Saravana Mills (supra) case also restricts the scope of `current repairs' to repairs made to machinery, plant and/or furniture. In this case, replacement of machine can at best amount to a repair made to the process of manufacture of yarn. Further this Court has also observed in Saravana Mills (supra) case that if replacement was held to be `current repair' in such cases, Section 31(i) will be completely redundant and absurdity will creep in because repair implies existence of a part of the machine which has malfunctioned, which is impossible in the case of such replacement. Thus, this replacement expenditure cannot be said to be `current repairs' after the decision in the Saravana Mills (supra) case. Given that Section 31 of the Act is not applicable to the said expenditure of the assessee, the next issue is whether it can be considered `revenue expenditure' of the nature envisaged under Section 37 of the Act. The Saravana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re. Even if technically new asset had not come into existence or the capacity of the overhauled machine after reconditioning was not enhanced, fact remains that after prolonged use this machinery was lying idle in a broken down condition, totally unfit for production. Therefore, by subsequent reconditioning carried out had resulted in imparting useful life to and hitherto old and unfit machinery, thus, resulting in a benefit of enduring nature. This benefit of enduring nature would be very much in capital field. In so far as the alternate submission of the assessee is concerned, that also does not cut any ice. 21. Learned senior counsel appearing for the assessee had tried to bring the case within the exception enumerated by the Supreme Court in Saravana Spinning Mills Pvt. Ltd. (supra) by arguing that replacement of plant and machinery which was put to continuous use for decades can be treated as „current repairs‟. However, as noted above, this exception is stipulated in Saravana Mills‟s case (supra) in the following manner:- "where the old parts are not available in the market (as is seen in the case of CIT v. Mahalakshmi Textile Mills Ltd. AIR 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; (v) Overhauling and repair of power transmission unit. (vi) Replacement of electronic panel. 25. It is also pertinent to mention that deduction in respect of similar nature of expenditure were claimed by the assessee from 1995-96 onward. In respect of assessment year 1995-96, the Assessing Officer had disallowed following the order in respect of 1994-95. However, deduction was allowed by the CIT(A), which was upheld by the ITAT. The expenditure qua 1994-95 was distinguished in the following manner by the ITAT while passing the orders in respect of the assessment year 1994-95:- "We find that the facts in the present years are distinguishable from the facts that were before the Tribunal in the assessment year 1994-95. In that year the assessee repaired the machinery which were completely broken down and lying unutilized since the year ending on 31/03/1992. The same were renewed in the assessment year 1994-95 relevant to the year ending on 31/03/1994. In these circumstances, the Tribunal held that the machine had become unfit for production and by subsequent reconditioning carried out resulted in imparting useful life to an old and unfit machine. Thus, re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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