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TMI Blog2009 (7) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... ved that such expenditure was merely expenditure on replacement of spare parts in the spinning mill system and, therefore, amounted to revenue expenditure. 4. The Assessing Officer (AO) did not, however, accept this view of the assessee because, according to him, each machine in a spinning mill does a different function and the product from one machine is taken and manually fed into another machine and the output is taken, all the machines are, thus, not integrally connected. Based on this reasoning, the AO disallowed the above claim of the assessee and held the said expenditure to be of a capital nature. The AO, in passing this order dated 31st of December, 1997, followed the decision of the Income Tax Appellate Tribunal (ITAT) Madras "C" Bench in the case of M/s. Nagammal Mills Ltd. V. DCIT dated 31st of October, 1997 (rendered in I.T.A. No. 2774/Mds/93/90-91) and also the decision of this Court in Ballimal Naval Kishore and Another v. CIT (224 ITR 414) in which it was held that any capital expenditure claimed by the assessee for acquiring plant and machinery, buildings, fixed assets, etc., cannot be treated as repairs or renewals, and, therefore, it cannot be held as rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of machinery was revenue in nature. The High Court further held that the question whether the expenditure on replacement of machinery was capital or revenue in nature was not determined by the treatment given to it by the assessee in the books of accounts or in the balance sheet. The claim has to be determined only by relying on the provisions of the Act and not by the accounting practice followed by the assessee. 9. The main question that needs to be decided in this appeal may be formulated as follows : - "Whether expenditure incurred on replacement of machinery, in the facts and circumstances of this case, amounts to `revenue expenditure' deductible under section 37 of the Act or `current repairs' deductible under section 31 of the Act." 10. 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 `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, again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge. Learned counsel for the appellant further contended that replacement of old machinery with new machinery cannot be considered as current repairs as such or even revenue 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 `assets' and `block of assets' under explanation 3 of section 32(1)(ii) of the Act and thus, misconstruing the provision for composition of the `block of assets' as per the definition of `written down value' as given under section 43(6)(C) of the Act, which aid the charging section 28, as to the assessability of income from business and profession. Learned counsel for the appellant further contended that the courts below had gone wrong in equating the complicated machinery of a spinning mill with a tube-light in relying on the Boards' Circular No. 69 dated 27th of November, 1957 on "tube-lights" which stated that only first time purchase of a tube-light amounts to capital expenditure, and subsequent replacement woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have heard and considered all these contentions of the learned counsel for the parties and also perused the materials on record and also examined the impugned order passed by the High Court. 14. The first issue that needs to be resolved is whether each machine in a textile mill is an independent item or merely a part of a complete spinning mill, which only together are capable of manufacture, and there is no intermediate marketable product produced. In our view, this issue has been satisfactorily answered by the recent decision of this Court in CIT v. Saravana Spinning Mills (P) Ltd. ((2007) 7 SCC 298). 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 the other machines in the mill for production of the final product. However, this interconnection does not take awa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akshmi Textile Mills Ltd. (AIR 1968 SC 101), or 7 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 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. 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 `revenue expenditure' of the nature envisaged under section 37 of the Act. The Saravana Mills (supra) case holds that expenditure is deductible under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase and remitted the matter to the Commissioner (Appeals) to dispose of the matter in accordance with law. In the light of the observations made herein above, it is thus clear that the High Court decision in Janakiram Mills (supra) case is not good law on which reliance may be placed. 19. Consideration of the definition of `assets' and `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 for the purposes of computing its profit and for the purpose of payment of income tax. The said expenditure has been treated as an addition to the existing assets in the former and as revenue expenditure in the latter. 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 itself thought of the expenditure it made on replacement of machinery and that the claim for deduction under the Act was made merely to diminish the tax burden, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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