INCOME TAX ACT, 1961

Section 37(1) Section 30

Capital or revenue expenditure - Enduring benefit - Replacement of old machine by new one vis-a-vis current repairs/expenditure under section 37(1) -

Assessee replaced three machineries at a cost of Rs. 5,33,93,930: The assessee, though capitalized the above expenditures in its books of account, but claimed as revenue expenditure. Further, the assessee had claimed that the entire machinery in the textile mill had to be considered as a single machine and replacement of any intermediary machine had to be treated as replacement of spares and allowed as current repairs. However, the AO observed that the above machineries were separate machines by themselves and the expenditure incurred in the purchase of the machinery was capital in nature. It was also observed that the assessee derived advantage of enduring nature by incurring this expenditure. Accordingly, by allowing eligible depreciation, the balance cost of replacement of machinery was brought to tax. by confirming the addition in respect of DG set, the CIT(A) allowed the claim in respect of auto coners and draw frames. On further appeal by the Department, the Tribunal set aside the issue in respect of auto coners and draw frames machineries to the file of the AO. In second round of litigation Vide order under section 143(3) read with section 254, the AO passed the impugned order by treating the expenditure on replacement of auto coners and draw frames as capital expenditure as in the original order. By following the decision in the case of CIT v. Sri Mangayarkarsai Mills Ltd. (2009) 315 ITR 114 (SC) : 2009 TaxPub(DT) 1917 (SC), the CIT(A) confirmed the disallowance.Held: As per the decision of the Supreme Court, it was clear that the replacement of entire machinery in the textile mill cannot be claimed as 'current repairs' by holding that each machine in a textile mill was part of the integrated process of manufacture of yarn and was integrally connected to the other machines in the mill for production of the final product. However, this inter-connection does not take away the independent identity and distinct function of each machine. Thus, each machine in a textile mill should be treated independently as such and not as a mere part of an entire composite machinery of the spinning mill. The expenditure incurred for acquiring or replacing any machinery to run a factory or mill should be treated as capital expenditure.

Distingushed:CIT v. Sri Mangayarkarasi Mills Ltd. (2009) 315 ITR 114 (SC) : 2009 TaxPub(DT) 1917 (SC), the Commissioner (Appeals) confirmed the disallowanceFollowed:CIT v. Sri Mangayarkarasi Mills Ltd. (2009) 315 ITR 114 (SC) : 2009 TaxPub(DT) 1917 (SC). Relied:CIT v. Sarvaraya Textiles Ltd. (2011) 332 ITR 553 (AP) : 2011 TaxPub(DT) 589 (AP-HC) and CIT v. Saravana Spinning Mills (2007) 293 ITR 201 (SC) : 2007 TaxPub(DT) 1442 (SC).

REFERRED : CIT v. Ramaraju Surgical Cotton Mills Ltd. (2007) 234 ITR 328 (SC) : 2007 TaxPub(DT) 1467 (SC), Assam Bengal Cement Co. Ltd. v. CIT (1955) 27 ITR 34 (SC) : 1955 TaxPub(DT) 73 (SC) and K.P.R. Spinning Mills (P) Ltd. v. ITO ITA No. 1873/Mds/2016, dt. 14-2-2017.

FAVOUR : Against the assessee.

A.Y. : 2001-02, 2002-03 & 2005-06

INCOME TAX ACT, 1961

Section 254

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