Commissioner of Income Tax vs Sri Raju Cotton Mills

P.D. Dinakaran, J.—The above tax case appeals are directed against the common order of the Income Tax Appellate Tribunal in I.T.A.

Nos. 1383, 1384 and 1385/Mds/2002 dated June 6, 2005.

The Revenue is the appellant. The assessee is a partnership firm. They have filed their returns for the assessment years 1996-97 to 1998-99.

Their claim with regard to the cost of replacement of simplex machine and doubling frame costing Rs. 18,63,666 for the assessment year 1996-97,

draw frame, simplex machine and doubling frame costing Rs. 25,03,443 for the assessment year 1997-98 and blow room and ring frame costing

Rs. 37,47,933 for the assessment year 1998-99, 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. Aggrieved by

the said orders, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), who allowed the appeal, holding that the cost of

replacement of machinery is to be treated as revenue expenditure by applying the decision of the Income Tax Appellate Tribunal, Madras, in the

case of Ambika Cotton Mills Ltd. and consequently, the depreciation granted was withdrawn. The Appellate Tribunal dismissed the appeal filed

by the Revenue holding that the replacement of parts in a machinery has to be treated as revenue in nature.

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

Whether, in the facts and circumstances of the case, the Tribunal was right in allowing a deduction of the amounts spent on replacement of

machinery as revenue expenditure ?

Whether, in the facts and circumstances of the case, replacement of independent complete machinery can be treated as revenue expenditure ?

Whether, in the facts and circumstances of the case, the Tribunal was right in deciding the issue without going into the concept of block of

assets?

4.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 asses-

see. In the instant case, the Commissioner and the Appellate Tribunal, finding that replacement of machinery is revenue expenditure, held that the

claim of the assessee cannot be disallowed.

This court, in The Commissioner of Income Tax Vs. Janakiram Mills Ltd., , held that all plant and machinery put together amount to a complete

spinning mill which is capable of manufacturing yarn and hence each replaced machinery could not be considered as an independent one and no

intermediate marketable product was produced.

In view of the ratio laid down by this Court in the decision cited supra, we hold that the expenditure on replacement of machinery is revenue

expenditure and therefore, the Tribunal was right in allowing the claim of the assessee. Accordingly, we answer the questions (a) and (b) in the

affirmative, against the Revenue and in favour of the assessee.

With regard to question (c), this Court, in the decision cited supra, explained the principle or object of introducing the concept of ""block of

assets"" in detail. It is apposite to refer to the following (page 427) :

Regarding the argument relating to ''block of assets'', it is the claim of learned Counsel for the assessees that the said principle or object of

introduction of the above concept is totally not applicable relating to the nature of expenditure incurred by the respondent. These provisions were

introduced from April 2, 1987, as defined under Sections 2(11) of the Income Tax Act, 1961 and they are in operation on different field. It is

stated that they were intended to replace the provisions on depreciation of capital assets. The block of assets concept was introduced with a view

to streamline the excess depreciation allowed and to allow terminal depreciation. When the block of assets concept was introduced, the provisions

relating to terminal depreciation and the profit result from the sale of assets, which were originally considered under Sections 32(1)(iii) and 41(2),

were suitably amended to fall in line with the proposed simplification of the concept of block of assets. The circular describing the concept of block

of assets is explained by the Central Board of Direct Taxes by Circular No. 469 dated September 23, 1986 reported in [1986] 162 ITR 21. In

the instant case, no acquisition of any new asset, much less capital of any enduring advantage resulted to the assessee-respon-dent. The assessees

replaced the worn out part of machineries without discontinuing their production activities. No claim for depreciation was ever made before any

authorities either by the assessees or by the Revenue to consider the question as block of assets nor was there any necessity to do so. The

Department did not raise any objection before the Tribunal regarding the claim of allowance on the premise of the block of assets concept. It is,

therefore, stated that such question does not arise out of the order of the Appellate Tribunal for considering the same by this Court under Sections

260A.

In the instant case also, the assessee had only replaced the simplex machine and doubling frame, blow room and ring frame without discontinuing

their production activities and we have already held that there was no acquisition of any new asset, much less capital of any enduring advantage. A

perusal of the orders of the authorities below shows that no claim for depreciation was ever made before any authorities by the assessee, nor the

Revenue raised the question of block of assets. Therefore, applying the law laid down by the decision cited supra, such question does not arise out

of the order of the Appellate Tribunal for considering the same by this Court under Sections 260A of the Act. Accordingly, question (c) is

answered in the affirmative, against the Revenue and in favour of the assessee.

The appeal is dismissed. No costs. Consequently, connected T.C.M.P. are also dismissed.