TMI Blog2011 (6) TMI 339X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue expenditure incurred for business purposes which will qualify as deduction under Section 37. Therefore, the expenditure incurred by the assessee on repairs of machinery in the present years under appeal is a revenue expenditure allowable for deduction to the assessee. - ITA No.14/2005, 1600 & 1670/2010 - - - Dated:- 3-6-2011 - MR. JUSTICE A.K. SIKRI, MR. JUSTICE M.L. MEHTA, JJ. For Appellant : Mr. O.S. Bajpai, Sr. Advocate with Mr. V.N. Jha For Respondent : Ms. Prem Lata Bansal, Sr. Advocate with Mr. Deepak Anand A.K. SIKRI, J. 1. In all these three appeals the assessee is the same and even the issue is identical, which pertains to three different assessment years, the factual premise on which such an issue has arisen for consideration is somewhat different. Therefore, we propose to first take up the facts of ITA No.14/2005 to understand and appreciate the question of law on which this appeal is admitted. 2. This appeal relates to assessment year 1994-95 and is filed by the assessee. In this year the assessee had claimed an expenditure of ₹ 83,79,134/- as revenue expenditure on the ground that this was incurred by repairs and reconditi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resulted in bringing into existence altogether new machinery or in other words, the appellant secured a benefit of enduring nature. The ITAT in the same para observed that they were conscious of the assessee‟s plea that there had been no enhancement in the capacity of the machinery even after incurring the expenditure on repairs, but according to the ITAT, the repairs had enhanced the life of the machinery. The ITAT further observed that admittedly the machinery is used in the production process of the assessee and is an apparatus by way of which the profit of business are generated. Therefore, the Tribunal held that it had no hesitation in concluding that the expenses had resulted in a benefit of enduring nature in the capital field. 5. In support of this conclusion, the ITAT relied upon the following extract from the judgment of the Apex Court in Empire Jute Co. Ltd. vs. CIT, [1980] 124 ITR 1 (SC):- There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by the assessee that bring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and highlighted made the expenditure in question revenue in nature having regard to the latest judgment of the Supreme Court in the case of CIT vs. Sri Mangayarkarsai Mills Pvt. Ltd., [2009] 315 ITR 114 (SC):- i. It is a case of maintaining and preserving the machine. ii. It is not a case of replacement. iii. It does not create any new asset. iv. It only restores the functional efficiency by removing the defect. v. It does not increase the capacity of production. It only prevents the loss. vi. It is not an independent unit and cannot be compared with ring frames of a textile mill. It only performed the functions of machining of gears produced in the preceding line of manufacture by performing earlier functions. vii. Quantum of repairs is not the relevant criterion determinative of the nature of expenditure as to whether it is current repairs or not. viii. Enduring benefit is no longer a criterion. After current repairs, machine becomes usable for or number of years. That does not mean that the expenditure on current repairs is in the capital field. ix. Replacement of worn out parts in the process of current repairs is not the replacemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reme Court formulated the following principles on this aspect:- (i) It is not a universally true proposition that what may be a capital receipt in the hands of the payee must necessarily be capital expenditure in relation to the payer. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer. (ii) There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to 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 consists 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (supra) and Sri Mangayarkarsai Mills Pvt. Ltd. (supra) the entire gamut of case law has been revisited and the principle stated in a most lucid manner. Therefore, discussion on these two judgments must suffice our purpose. 14. In Saravana Spinning Mills Pvt. Ltd. (supra) (which was also a case pertaining to assessment years 1993-94 and 1994-95) the Supreme Court explained the meaning of current repairs . It was clarified that test was not the same as the test for revenue expenditure but different therefrom. The Court took note of its earlier judgment in Balliml Naval Kishore and another v. Commissioner of Income-Tax, (1997) 2 SCC 449 = 224 ITR 414 wherein the test formulated by Chagla, C.J., in the case of New Shorrock Spinning and Manufacturing Co. Ltd., [1956] 30 ITR 338 (Bom.) was approved. The Bombay High Court in the said judgment had laid down the following test:- The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the 25 machines which constituted one single process and, therefore, replacement of the frames had to be treated only as a replacement of old parts which had become derelict and not replacement of a machine. The Assessing Officer held that by the replacement the assessee had obtained an enduring benefit and the expenditure incurred constituted capital expenditure and not current repairs . This decision of the Assessing Officer was reversed by the CIT(A) which view was upheld by the ITAT as well as the High Court. However, the Supreme Court set aside the order of the High Court and restored the opinion of the Assessing Officer holding that the expenditure constituted capital expenditure and not current repairs . After discussing the test which is to be laid down (which we have already extracted above), the Supreme Court applied the same on the aforesaid facts in the following manner:- In the present case, the High Court has lost sight of the test to be applied for an expenditure to fall under section 31(i) as current repairs . It has embarked on the test which was not applicable, viz., whether the expenditure is revenue or capital in nature. The above test was not rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... version 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 of exception, fall within the expression current repairs . In Mahalakshmi Textile Mills case [1967] 3 SCR 957 the finding recorded by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has held that a new asset or new/different advantage cannot amount to `current repairs', which has been subsequently approved in the Saravana Mills (supra) case. For these reasons, the expenditure made by the assessee cannot be allowed as a deduction under Section 31 of the Act. The judgment of this Court in the Saravana Mills (supra) case mentions two exceptions in which replacement could amount to current repairs, namely: Where old parts are not available in the market (as seen in the case of CIT v. Mahalakshmi Textile Mills Ltd., AIR 1968 SC 101, or Where old parts have worked for 50-60 years. 19. In the case at hand the facts were that the assessee was engaged in the manufacture and sale of cotton yarn. During the assessment year 1995-96 it had claimed an amount of ₹ 61,28,150/- being the expenditure incurred on replacement of machinery, as revenue expenditure. According to the assessee, this expenditure was merely explained on replacement of spare parts in the spinning mill system and therefore, amounted to revenue expenditure deductible under Section 37 of the Act or current repairs‟ deductible under Section 31 of the Act. The assessee‟s contenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset and also an enduring benefit for the assessee. It is clear then that expenditure of the assessee here is not of a revenue nature and thus, cannot be claimed as a deduction under Section 37 of the Act. 20. When we apply these tests to the facts of the present case, according to us, the answer is always, namely, the expenditure in question incurred is capital in nature and cannot be treated as on account of current repairs‟. It has come on record that the machine in question which was purchased in the year 1981 had broken down completely. It remained idle from 5th December, 1991. The negotiations for reconditioning and repair were held with HMT Limited as a result of which purchase order dated 20th June, 1992 was placed with HMT Limited. Total reconditioning and overhauling of the machinery was undertaken. The machinery had, thus, outlived its utility and huge expenditure was incurred by replacing many vital parts in order to make the same functional. Expenditure was of such a nature that it brought into existence altogether new machinery. In any case, the expenditure was for the purpose of securing a benefit of enduring nature. Even if technically new asset had n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars 2005-06 and 2006-07. Here again expenditure claimed on account of current repairs‟ was claimed as revenue in nature. Though the Assessing Officer treated the expenditure on repairs of plant and machinery as capital in nature, the CIT(A) held otherwise and view of CIT(A) has been upheld by the ITAT. 24. We may point out that the expenditure incurred in these years to the tune of ₹ 39,18,342/- and 36,18,112/- was not on account of reconditioning of a particular machine as was the case in the assessment year 1994-95 dealt with above. Another distinguishing feature, which is material, is that expenditure was not incurred on one particular machine as happened in the assessment year 1994-95. In these years the assessee had incurred the expenditure on repairs of a number of machines and the aforesaid amounts were paid to various agencies from time to time. The expenditure consisted of the following:- (i) Dismantling, cleaning and inspection of various parts. (ii) Repair and replacement of worn out parts (iii) Geometrical alignments of machines (iv) Painting of machines (v) Overhauling and repair of power transmission unit. (vi) Replaceme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be replaced after a long time. The mere fact that the repairs result in an improvement is not enough to take the repairs out of the category of current repairs. The old principle invoking the test of improvement has to be applied with discernment in the present age when the march of technology and the unending fabrication of new materials and products make even current repairs, primarily, so called yield improvement in varying degrees. Therefore, we are of the view that the expenditure incurred by the assessee on repairs of machinery in the present years under appeal is a revenue expenditure allowable for deduction to the assessee. We, therefore, in view of the facts of the case in each of the assessment year under consideration, confirm the orders of the CIT(A) and dismiss the ground of appeal of the Revenue for each of the five assessment years under consideration. 26. Significantly, no appeal was preferred by the Revenue against that order. The position remained the same till 2004-05, i.e., from the assessment year 1995-96 to the assessment year 2004-05. Similar expenses were allowed by the ITAT as revenue in nature and all these orders were accepted by the Departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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