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TMI Blog2007 (8) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... , as it stood during the accounting years ending March 31, 1993, and March 31, 1994. 3 For this purpose, we quote hereinbelow section 31, as it stood during the relevant period: 31. Repairs and insurance of machinery, plant and furniture.- In respect of repairs and insurance of machinery, plant or furniture used for the purposes of the business or profession, the following deductions shall be allowed- (i) the amount paid on account of current repairs thereto; (ii) the amount of any premium paid in respect of insurance against risk of damage or destruction thereof. 4 The facts in Civil Appeal Nos. 7604-7605 of 2005 are as follows 5 M/s. Sarvana Spinning Mills Pvt. Ltd. (the assessee) is a textile mill engaged in the manufacture of yarn. For the accounting year ending March 31, 1993, it claimed deduction on account of modernisation and replacement expenses amounting to ₹ 97,95,755 whereas in the case of year ending March 31, 1994, it has claimed ₹ 77,84,047 as deduction under the same head. The question which arises for determination i this case is whether the assessee was entitled to claim the aforestated amounts as current repairs under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred thereon constituted capital expenditure and not current repairs . Accordingly, the assessee's claim for deduction was dismissed. 6 Aggrieved by the said order, the matter was carried in appeal to the Commissioner of Income-tax (Appeals). By order dated October 24, 1996, the Commissioner of Income-tax (Appeals) came to the conclusion that the expenditure related to replacement of three ring frames, which constituted an integral part of the production system in a textile mill and, therefore, replacement of an item cannot be regarded as installation of separate machine. Accordingly, the Commissioner of Income-tax (Appeals) allowed the appeal and allowed the expenditure as revenue expenditure. 7 Aggrieved by the said decision of the appellate authority, the Department carried the matter in appeal to the Tribunal, which took the that different segments of a textile mill are integrated parts of a continuous process and the expenditure incurred on replacement of the machines in any segment of the plant should be treated as revenue expenditure. Accordingly, the appeals filed by. the Department stood dismissed. 8 Aggrieved by the decision of the Tribunal, the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng yarn. According to the High Court, all the above items of machines, though independent, are part of an integrated textile mill and, therefore, the expenditure incurred on replacement of any one of the above items of machine was an expenditure incurred to maintain production without breakdown and, therefore, the assessee was entitled to claim deduction for the said expenditure as revenue expenditure under section 31(i). Accordingly, the High Court has affirmed the view expressed by the Tribunal. Hence, these civil appeals. 10 The issue before us is whether the expenditure incurred by the assessee for modernisation and replacement came within the connotation of the words current repairs in section 31(i). 11 Before analysing section 31(i) of the Income-tax Act, we must look at the process of manufacture and the composition of a textile mill in the broad sense. Broadly, a textile mill manufactures different varieties of yarns, namely, cotton yarn, melange yarn, colour melange, polyester viscose yarn and the process of manufacture goes through various segments/divisions. The first segment is the blow room. The function of the blow room is to clean the raw cotton thoroughl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in the carding department we have carding machines with autolevelers. If the autoleveler fails, the carding machine becomes non-functional. If an autoleveler is to be repaired then that repair would come within the connotation of the word current repairs because it is a part of the carding machine. Even if in a given case, replacement of an autoleveler could come within the connotation of the word current repairs if the old part is not available in the market. It is a current repair because the carding machine remains an asset without any change even after repair or replacement of the auto- leveler. To give an example, a compressor is an important part of an air- condition machine. Repair of the compressor will come in the connotation of the word current repairs in section 31(i) of the said Act because the assessee does not replace the air-condition machine. At the highest, he replaces a part of the air-condition machine. So is the case of the picture tube in a television set, when the picture tube is replaced the television set is not replaced, therefore, such repairs alone can come within the connotation of the word current repairs in section 31(i) of the said Act as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure which expressly fall in sections 30 to 36. The effect is to delimit the scope of allowabiity of deductions for repairs to the extent provided for in sections 30 to 36. To decide the applicability of section 31(i) the test is not whether the expenditure is revenue or capital in nature, which test has been wrongly applied by the High Court, but whether the expenditure is current repairs . The basic test to find out as, to what would constitute current repairs is that the expenditure must have been incurred to preserve and maintain an already existing asset and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage. In fact, in the present case, in the balance-sheet the assessee, viz., M/s. Saravana Spinning Mills has indicated the above expense as an item incurred for purchase of a new asset. In our view, the High Court had erred in placing reliance on the report of SITRA in coming to the conclusion that the textile mill is a plant under section 31(i) As stated above, each machine in a segment has an independent role to play in the mill and the output of each division is different from the other repair' implies t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 allowance for all kinds of repairs, even though conceptually the expenditure may be revenue expenditure. The Legislature intended to stress that under section 31(i) the permissible deduction admissible is only for current repairs, therefore, the question as to whether the expenditure incurred by the assessee conceptually is revenue or capital in nature is not relevant for deciding the question as to whether such an expenditure comes within the etymological meaning of the expression current repairs . In other words, even if the expenditure is revenue, it may not fall in the connotation of current repairs in section 31(i). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old parts by introducing the said system. Accordingly, the Tribunal treated the expenditure incurred for introducing the Casablanca conversion system as allowance under section 10(2)(v) of the Indian Income-tax Act, 1922 The High Court accepted the findings recorded by the Tribunal saying that by the introduction of the Casablanca conversion system no new machinery or plant was installed, but the introduction of the system amounted to fitting of improved version and the expenditure in that behalf was of revenue nature. The High Court observed that certain parts of the machinery had worn-out, they needed replacement, and when it was found that the old type of replacement parts were not available in the market, the assessee had to introduce the Casablanca conversion system. This finding was accepted by this court in the above judgment. In our view, the said judgment has no application with the facts of the present case. At the outset, we may state that replacement generally may not fall under the expression current repairs but, in certain cases, where the old parts were not available in the market or where the old parts had worked for 50 to 60 years, replacement can, in such cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It was submitted on behalf of the assessees, in the present case, that although the assessees had claimed deduction under section 31(i), they should be permitted to claim deduction under section 37(1) as on the facts it has been held by the Commissioner of Income-tax (Appeals), Tribunal and the High Court that the expenditure was revenue in nature. We find no merit in this contention. As stated above, even if the expenditure incurred is revenue in nature, still it may not fall in the connotation of the words current repairs under section 31(i) which test has not kept in mind. As held by Chagla C. J. in the case of New Shorrock Spinning and Manufacturing Co. Ltd. [1956] 30 ITR 338 (Bom) all repairs do not attract section 31(i) even though the expenditure is revenue in nature. Therefore, the basic test, which had not been applied, in the present case, by the Commissioner of Income-tax (Appeals), the Tribunal and the High Court, is whether the expenditure came within the expression current repairs . Instead all the three authorities proceeded on the footing that since the expenditure was revenue it constituted current repairs . It is for this reason that we have interfered wi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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