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M/s. Vishnu Lakshmi Mills Pvt. Ltd. Versus Deputy Commissioner of Income Tax, Company Circle- III (4) , Chennai

2015 (8) TMI 1092 - ITAT CHENNAI

Replacement of carding & roving machines and ring frames expenditure - revenue expenditure deductible under section 37 or Current repairs deductible under section 31 - Held that:- Following the decision of the Hon’ble Supreme Court in the case of CIT v. Srif Mangayarkarasi Spinning Mills (P) Ltd. (2009 (7) TMI 17 - SUPREME COURT) were in held that though accounting practices may not be the best guide in determining the nature of expenditure, in this case they are indicative of what the assessee .....

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(8) TMI 1064 - ITAT CHENNAI] - Decided against assessee. - I.T.A.No.2205 & 2206/Mds/2014 - Dated:- 19-8-2015 - SHRI CHANDRA POOJARI AND SHRI CHALLA NAGENDRA PRASAD, JJ. For The Appellant : Dr. Anita Sumanth, Advocate For The Respondent : Mr. N.Madhavan, JCIT ORDER Per Challa Nagendra Prasad, JM: Both these appeals are filed by the assessee against common order of the Commissioner of Income Tax (Appeals)-III, Chennai dated 19.06.2014 for the assessment years 2007-08 and 2008-09. The only issue i .....

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nue expenditure. However, the Assessing Officer treated this expenditure as capital expenditure and allowed depreciation on such machinery, placing reliance on the decision of CIT Vs. Sri Mangayarkarasi Mills Pvt.Ltd. (315 ITR 114). The assessee preferred appeal before the Commissioner of Income Tax (Appeals) and contended that carding machine, roving machine and ring frames replaced by the assessee has not increased any production capacity and since the replacement of parts machines had not res .....

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there is no capacity addition by way of replacement of machinery, therefore in view of the decision of the Hon ble Supreme Court in the case of CIT Vs. Ramaraju Surgical Cotton Mills (294 ITR 328), the matter has to be remitted back to the Assessing Officer to find out whether there is any increase in production and in case if there is no increase in production it has to be allowed as revenue expenditure. 4. Departmental Representative vehemently supports the orders of the lower authorities and .....

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the decision of the Supreme Court in the case of CIT Vs. Ramaraju Surgical Cotton Mills (supra) and submits that the matter has to be looked into by the Assessing Officer in respect of the capacity addition in view of the replacement made by the assessee. According to the counsel for the assessee, there is no increase in spindleage even after replacement of machinery and there is no increase in production and there is increase in quality or production. She submits that in view of the decision of .....

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e Commissioner of Income Tax (Appeals) as there was no clarity in the contentions raised by the assessee in those appeals as to under which proviso the claim was made either under section 31 as current repairs or under 37 as revenue expenditure. Thus, the Hon ble Supreme Court remitted the matter to the file of the Commissioner of Income Tax (Appeals) as there is no clarity in the claim of the assessee. This position was made clear in the case of CIT Vs. Sri Mangayarkarasi Mills Pvt.Ltd.(supra), .....

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. It is pertinent to mention here that the respondent only stated that its claim was limited to the expenditure being of a revenue nature and thus allowable under section 37 of the Act. Nowhere had the respondent claimed that the said expenditure amounted to Rs. Current repairs under section 31 of the Act. Further, the appellant itself had restricted the issue to that of revenue expenditure in its appeal to the High Court of Madras, against which it has now filed this appeal. According to the re .....

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entire system of the spinning mills, makes it clear that a question has arisen here as to whether replacement of one or more items of machinery amounts to repair of the entire integrated machinery of the spinning mill or acquisition of a new independent machinery. 11. The learned counsel for the appellant submitted that the courts below erred in rejecting the contention of the department that each item of machinery in a textile mill should be treated as independent and not an integral part of th .....

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n a roller mill. As per the learned counsel for the appellant, the courts below erred in distinguishing this decision of the Madras High Court. Thus, given that each item of machinery is independent, the replacement of any such machine will amount to acquisition of a new asset and not Rs.repair of the entire integrated machinery of the spinning mill. In this connection, reliance was placed on a decision of this Court in Ballimal Naval Kishore s case (supra) wherein it is clearly held that Rs. Cu .....

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venue expenditure, since it gives an enduring benefit to the assessee. Also, if in every case such replacement is allowed as revenue expenditure the principle of allowing depreciation will lose its significance. Learned counsel further submitted that the courts below erred in overlooking the definitions of Rs. Assets and Rs. Block of assets under Explanation 3 of section 32(1)(iz) of the Act and thus, misconstruing the provision for composition of the Rs. Block of assets as per the definition of .....

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nd subsequent replacement would only be revenue expenditure. Lastly, learned counsel for the appellant emphasised that the reliance on the decision in Janakiram Mills Ltd. Rs.s case (supra) by the High Court was misplaced, inasmuch as the High Court had failed to appreciate that an appeal had already been filed against it before this Court and thus the decision of the High Court in Janakiram Mills Ltd. Rs.s case (supra) was not final and binding. 12. The learned counsel for the respondent submit .....

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s installed. The learned counsel for the respondent further argued that the case of Ballimal Naval Kishore (supra) is not applicable here because in that case a ginning factory was converted to a cinema theatre and what the assessee there did was not replacement of machinery parts of an integrated plant but total conversion into a theatre. The learned counsel for the respondent has contended that the provisions relating to Rs. Assets and Rs. Block of assets are immaterial in the instant case, wh .....

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nt, taken by the appellant, is no longer a good law. Lastly, learned counsel for the respondent submitted that the High Court was right in relying on its own judgment in the case of Janakiram Mills Ltd. (supra) because this Court, by its order dated 21-8-2007 in Civil Appeal No. 7594/2005, has already pronounced upon the validity of the judgment of the High Court in that matter and has disposed of the appeal in the same. 13. We have heard and considered all these contentions of the learned couns .....

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pg. Mills (P) Ltd. [2007] 293 ITR 201. In that case this Court has held unambiguously that each machine in a segment of a textile mill has an independent role to play in the mill and the output of each division is different from the other. Dealing with a ring frame in a textile mill, this Court has held that it is an independent and separate machine. Further, it is accepted that each machine in a textile mill is part of the integrated process of manufacture of yarn and is integrally connected to .....

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rs, under section 31 of the Act, the decision of this Court in Saravana Spg. Mills (P) Ltd. s case (supra) is again relevant. This Court has laid down that in order to determine whether a particular expenditure amounts to Rs. Current repairs the test is whether the expenditure is incurred to Rs.preserve and maintain an already existing asset and not to bring a new asset into existence or to obtain a new advantage. For Rs. Current repairs determination, whether expenditure is revenue or capital i .....

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old and existing machine. Also, a new asset in a textile mill is not only for temporary use. Rather it gives the purchaser an enduring benefit of better and more efficient production over a period of time. Thus, replacement of assets as in the instant case cannot amount to Rs. Current repairs . The decision in Saravana Spg. Mills (P) Ltd s case (supra) clearly mentions that replacement of a derelict ring frame by a new one does not amount to Rs. Current repairs . Further in Ballimal Naval Kisho .....

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parts are not available in the market (as seen in the case of CITv. Mahalakshmi Textile Mills Lid. (AIR 1968 SC 101), or + Where old parts have worked for 50-60 years. In the instant case, the assessee has not claimed any of the above stated exceptions. The Saravana Spg. Mills (P) Ltd s case (supra) also restricts the scope of Rs. 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 manufa .....

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Ltd. s case (supra). 16. 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 Rs.revenue expenditure of the nature envisaged under section 37 of the Act. The Saravana Spg. Mills (P) Ltd s case (supra) holds that expenditure is deductible under section 37 only if it (a) is not deductible under sections 30-36, (b) is of a revenue nature, (c) is incurred during the current accounting year and (d) is incurred wholl .....

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0 this Court held that expenditure is of a capital nature when it amounts to an enduring advantage for the business and repair is different from bringing a new asset for the business. Further, in Lakshmiji Sugar Mills (P) Co. v. CIT AIR 1972 SC 159 it has been held by this Court that bringing into existence a new asset or an enduring benefit for the assessee amounts to capital expenditure. We have already explained why replacement, in this case, amounts to bringing into existence a new asset and .....

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. Ramaraju Surgical Cotton Mills [2007] 294. IIR 328,where this Court decided on the validity of the Madras High Court judgment in Janakiram Mills (supra), this Court clarified that this High Court judgment has been set aside in the Saravana Spg. Mills (P) Ltd s case (supra) mainly on the ground that section 31 and section 37 of the Act, operate in different spheres and the tests applicable to section 31 cannot be read into section 37 of the Act. Further, even in the Ramaraju Surgical Cotton Mil .....

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that the High Court decision in Ianakiram Mills Lt s case (supra) is not good law on which reliance may be placed. 19. Consideration of the definition of Rs. Assets and Rs. Block of assets and the concept of depreciation under the Act is not required to be decided upon whether the expenditure incurred by the assessee is a deductible expenditure or not. Hence we are not inclined to discuss the same. 20. It is clear on record that the assessee has sought to treat the said expenditure differently f .....

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to diminish the tax burden, and not under the belief that it , was actually revenue expenditure. 21. For the reasons aforesaid, we set aside the impugned judgment of the High Court, thereby restoring the judgment of the Assessing Officer disallowing the claim of deduction of the respondent. 7. The above decision of the Hon ble Supreme Court is squarely applicable to the facts of the present case. We also find that co-ordinate Bench in the case of M/s.Rajnarayan Textiles Ltd. Vs. ACIT in ITA No. .....

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ing frames, two transformers, and one Uster Evenness Tester, totaling to ₹ 62,96,685j-. The said expenditure was claimed as revenue expenditure allowable under sec.37 of the Act.. The Assessing Officer treated the said expenditure as capital expenditure and allowed depreciation. The assessee succeeded before the Tribunal and before the High Court and the matter reached the Hon ble Supreme Court in Civil Appeal No.922j2006 and other batch of appeals. 3. Before the Hon ble Supreme Court both .....

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nce with law and in terms of directions given in the judgment in the case of CIT v. Ramaraju Surgical Cotton Mills & Others(supra). The Hon ble Supreme Court in the case of CIT v. Ramaraju Surgical Cotton Mills & Others held as under :- 4. There are number of tests which are required to be considered while deciding whether the expenditure was revenue or capital in nature. Number of judgements have been cited before us in that regard. However, in the absence of the requisite details regar .....

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e merits of the case we remit the matter to C!T(A) who will decide the question in accordance with law. Meanwhile, the Hon ble Supreme Court in the case of Sri Mangayarkarasi Spinning Mills (P) Ltd. (315 ITR 114) held that expenditure of an assessee for replacement of parts of textile mills for spinning yarn is not revenue expenditure under sec.37 of the I. T. Act. 4. The appeal of the assessee was taken up by the Commissioner of Income Tax (Appeals) as directed by the Hon ble Supreme Court to d .....

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tmental Representative supported the orders of the lower authorities. 7. The Commissioner of Income Tax (Appeals), after considering the decisions of Hon ble Supreme Court in the case of CIT v. Ramaraju Surgical Cotton Mills& Others (supra), Sri Mangayarkarasi Mills (P) Mills Ltd. (315 ITR 114) (S. C) (supra), CIT v. Saravana Spinning Mills (P) Ltd (211 CTR 281)(S. C) etc., held that the expenditure incurred on replacement of machinery is capital expenditure. The Commissioner of Income Tax ( .....

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f draw frames are capital expenditure not allowable as deduction under sec.37 of the Act. The Co-ordinate Bench held as under :- 5. We have heard both the sides, perused the records and gone through the orders of the authorities below. The only issue for adjudication before us is whether the expenditure incurred for the purpose of replacement of Draw Frame is revenue expenditure or capital expenditure. The learned CIT(Appeals) by considering the entire facts of the case and also the decisions of .....

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bserved that it has been held by this court that bringing into existence a new asset or an enduring benefit for the assessee amounts to capital expenditure. We have already explained why replacement, in this case, amounts to bringing into existence a new asset and also an enduring benefit for the assessee It is clear then that the 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. . 6. The Hon ble jurisdictional Hig .....

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his tax case appeal are answered against the assessee and in favour of the revenue. 13. With regard to the third substantial question of law, it is submitted by the learned counsel for the appellant that when each of the machinery in question such as Ring Frames, Draw Frames and Speed Frame is purchased for the first time, then it is a capital asset, on which depreciation should be granted. Whereas, it is submitted that the sale of a worn out machinery and replacement thereof by new machinery ca .....

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