Commissioner of Income Tax vs Salem Co-operative Spinning Mills Ltd.

P.D. Dinakaran, J.—The above tax case appeal is directed against the order of the Income Tax Appellate Tribunal in I. T. A. No. 562 of

2002 dated August 18, 2005.

The Revenue is the appellant. The assessee is a co-operative society engaged in the business of spinning mill. They have filed their return for the

assessment year 1994-95. Their claim with regard to the expenditure towards remodelling of the generator as revenue in nature, was disallowed by

the Assessing Officer, who was of the opinion that replacement of old by new machinery cannot be treated as revenue expenditure and allowed

depreciation. The expenditure was treated as capital expenditure. Further the Assessing Officer disallowed the contribution made by the assessee

towards ESI on April 21, 1994, on the ground that the same was not made within the previous year and the stipulated time. Aggrieved by the said

order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), who allowed the appeal, holding that the remodelling of the

generator is to be treated as revenue expenditure and also allowed the deduction towards ESI contribution made on April 21, 1994. The

Appellate Tribunal allowed the appeal on the issue of replacement of machinery by applying the decision of this Court in The Commissioner of

Income Tax Vs. Janakiram Mills Ltd., and contribution to the ESI on April 21, 1994, by following the decision of this Court in Commissioner of

Income Tax Vs. Shri Ganapathy Mills Company Limited, .

Aggrieved by the same, the Revenue has preferred the above appeal raising the following substantial questions of law :

Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the remodelling of the generator as revenue

expenditure ?

Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the contribution to the ESI on April 2, 1994, is

allowable deduction u/s 43B ?

The question whether the expenditure on replacement of machinery is capital or revenue is not determined by the treatment given in the books of

account or in the balance sheet. The claim has to be determined only by the provisions of the Act and not by the accounting practice of the

assessee. In the instant case, the Commissioner and the Appellate Tribunal, finding that remodelling of the generator is revenue expenditure, held

that the claim of the assessee cannot be disallowed.

The Supreme Court in Commissioner of Income Tax, West Bengal II, Calcutta Vs. Kalyanji Mavji and Company, , held that no new asset was

brought into existence nor was an advantage for the enduring benefit of the business acquired by the expenditure, and the expenditure was revenue

in character. Following the above decision, the Delhi High Court in Commissioner of Income Tax, New Delhi Vs. Delhi Cloth and General Mills

Co. Ltd., , held that the expenditure incurred on remodelling of furniture was deductible as revenue expenditure.

In view of the ratio laid down by the Supreme Court in the decision cited supra, we hold that the expenditure on remodelling of the generator is

revenue expenditure and therefore, the Tribunal was right in allowing the claim of the assessee.

With regard to question (2), viz., the Tribunal was right in holding that the contribution to the ESI on April 2, 1994, is allowable deduction u/s

43B, this Court, in Commissioner of Income Tax Vs. Shri Ganapathy Mills Company Limited, , held that the payments towards provident fund and

employees State insurance having been made within the grace time allowed under the relevant statute, those amounts were required to be deducted

in the computation of the taxable income of the assessee.

In view of the ratio laid down by this Court in the decision cited supra, we hold that the contribution to ESI is to be deducted in the computation

of the taxable income and, therefore, the Tribunal was right in allowing the claim of the assessee.

In view of the foregoing conclusion, we find no error in the order of the Tribunal and the same requires no interference. Hence, no substantial

question of law arises for consideration of this Court. Accordingly, the tax case appeal is dismissed. No costs.