where an industry, comprises of several machines, each devoted to an independent activity, the replacement of one such machinery, cannot be treated as an act of repair and that it is only when the parts in an independent item of machinery are replaced, or repaired, that the expenditure incurred therefor would qualify for deduction under Section 31 of the Act = THE HONBLE SRI JUSTICE L.NARASIMHA REDDY AND THE HONBLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.No.149 of 2004 23-12-2014 The Commissioner of Income Tax, Guntur... Appellant. M/s. Shri Dhanalakshmi Cotton and Rice Mills Ltd., Guntur... Respondent.
THE HONBLE SRI JUSTICE L.NARASIMHA REDDY AND THE HONBLE SRI JUSTICE CHALLA KODANDA RAM
I.T.T.A.No.149 of 2004
23-12-2014
The Commissioner of Income Tax, Guntur... Appellant.
M/s. Shri Dhanalakshmi Cotton and Rice Mills Ltd., Guntur... Respondent.
Counsel for Appellant: Ms. M.Kiranmayee, assisting Sri J.V.Prasad.
Counsel for Respondent : Sri Shiva Karthikeya
<GIST:
>HEAD NOTE:
? Cases referred
1. 315 ITR 115 (SC)
2. 332 ITR 553 (AP)
3.. 214 ITR 523
THE HONBLE SRI JUSTICE L.NARASIMHA REDDY
AND
THE HONBLE SRI JUSTICE CHALLA KODANDA RAM
I.T.T.A.No.149 of 2004
JUDGMENT: (Per the Honble Sri Justice L.Narasimha Reddy)
This appeal is preferred by the Revenue feeling aggrieved by the
order, dated 29.11.2002 passed by the Visakhapatnam Bench of the
Income Tax Appellate Tribunal (for short the Tribunal), in
I.T.A.No.1045/Hyd/1997. The matter pertains to the assessment
1995-96.
The respondent is a Textile Mill, functioning in Guntur District.
In the returns filed for the assessment year 1995-96, it claimed
deduction under Section 31 of the Income Tax Act, 1961 (for short the
Act), in relation to the cost incurred for replacement of two parts known
as Conors, in one of the machines. The Assessing Officer did not
allow deduction by treating the items as addition to the machinery, and
thereby, constituting capital expenditure. The appeal preferred by the
respondent was allowed by the Commissioner of Income Tax (Appeals).
The Department carried the matter in appeal to the Tribunal. Through
the order under appeal, the Tribunal dismissed the I.T.A., and upheld
the view taken by the Commissioner. Hence, this appeal.
Ms. M.Kiranmayee, learned Junior Standing Counsel, assisting
Sri J.V.Prasad, learned Senior Standing Counsel for the appellant,
submits that the Assessing Officer has analysed the relevant facts and
applied the correct principles of law in disallowing the deduction and
that the Commissioner and the Tribunal have taken a different view.
She contends that the respondent itself has treated the cost of
replacement of Conors in an earlier assessment year, as capital
expenditure and there was no basis for it to claim it as expenditure
towards repairs i.e. revenue expenditure, for the assessment year
1995-96. She has placed reliance upon the judgment of the Supreme
Court in Commissioner of Income Tax v. Sri Mangayarkarasi
Mills Private Limited and a judgment of this Court in
Commissioner of Income Tax v. Sarvaraya Textiles Limited .
Sri Shiva Karthikeya, learned counsel for the respondent, on the
other hand, submits that the Assessing Officer himself recorded a clear
finding to the effect that two parts in the existing machinery were
replaced and that such replacement did not lead to increase in the
capacity. He contends that it is only when an altogether new item of
machinery constituting an independent unit, is acquired, or replaced,
that the occasion to treat the cost thereof as capital expenditure, would
arise; and not when some parts of the existing machinery, are replaced.
He submits that the facts of the two precedents relied upon by the
learned counsel for the appellant are totally different from those in the
case on hand.
The provision, which becomes relevant for this case, is, Section
31 of the Act. It reads:
Repairs and Insurance of machinery, plant and
furniture.
In respect of repairs and insurance of machinery,
plant or furniture used for the purposes of the business or
profession, the following deductions shall be allowed
(i) the amount paid on account of current repairs thereto;
(ii) the amount of any premium paid in respect of
insurance against risk of damage or destruction thereof.
From a perusal of this, it becomes clear that an assessee would
be entitled to deduct the expenditure incurred for any current repair to
machinery or plant; and the one incurred for payment of premium of
insurance. What constitutes current repairs was explained by various
Courts. The Bombay High Court in Commissioner of Income Tax v.
Chowgule and Co. (P) Ltd., identified about 8 parameters, in this
behalf. The gist thereof is that irrespective of the expenditure incurred,
the replacement of a part of an existing machinery would constitute
current repairs, and such expenditure cannot be treated as capital
expenditure; and that in the name of causing repairs, an assessee shall
not be entitled to bring an altogether a new asset, into existence.
In Sri Mangayarkarasi Mills Private Limiteds case
(1 supra), the Honble Supreme Court held that, where an industry,
comprises of several machines, each devoted to an independent activity,
the replacement of one such machinery, cannot be treated as an act of
repair and that it is only when the parts in an independent item of
machinery are replaced, or repaired, that the expenditure incurred
therefor would qualify for deduction under Section 31 of the Act. The
same principle was elaborated and amplified by this Court in Sarvaraya
Textiles Limiteds case (2 supra).
In the instant case, the replacement was of two parts in a
particular item of machinery. Two items known as Conors that are
used in widening up the thread, are replaced by new ones, may be of
different description and value. The Assessing Officer himself recorded
a finding to the effect that the replacement of two parts did not result,
in increase of the capacity of the machinery. What appears to have
impressed the Assessing Officer to treat replacement of two Conors as
not qualifying for deduction under Section 31 of the Act, is that, the
respondent itself has shown the expenditure incurred for replacement of
two Conors, in the preceding assessment year, as capital expenditure.
This aspect has been clarified by the Tribunal. It was mentioned that
during the earlier assessment year, the respondent has acquired new
item of machinery and the Conors were referable to that new machinery
itself. In the assessment year 1995-96, no such acquisition, of
machinery, has taken place.
The mere fact that the new parts are different from those that
were replaced, in terms of cost, or efficiency; by itself does not lead to
the conclusion that the assessee has acquired new item of machinery.
It is not uncommon that the parts of an item of machinery, which is an
independent unit, have different efficiency and endurance. For
example, an ordinary tyre of a car, may cost less, and its service and
endurance may be relatively low compared to a radial tyre, whose cost
is fairly high. Same is the case with fuel injection systems. Instances
are not lacking, where certain companies supply the LPG fuel systems,
in the place of the conventional fuel systems and if fitted to a vehicle,
the fuel efficiency may increase. Though the new part, which replaced
the old one, in a machinery, is costlier and more efficient, it would not
lead to an inference that an item of new machinery has been acquired,
much less the cost incurred therefor can be treated as capital
expenditure.
Though in the course of discussion the Tribunal slightly deviated
from the settled principles, we are of the view that the conclusions
arrived at by it are correct. The appeal is accordingly dismissed. There
shall be no order as to costs.
The miscellaneous petitions filed in this appeal shall also stand
disposed of.
____________________
L.NARASIMHA REDDY, J.
_____________________
CHALLA KODANDA RAM, J.
Date:23.12.2014
I.T.T.A.No.149 of 2004
23-12-2014
The Commissioner of Income Tax, Guntur... Appellant.
M/s. Shri Dhanalakshmi Cotton and Rice Mills Ltd., Guntur... Respondent.
Counsel for Appellant: Ms. M.Kiranmayee, assisting Sri J.V.Prasad.
Counsel for Respondent : Sri Shiva Karthikeya
<GIST:
>HEAD NOTE:
? Cases referred
1. 315 ITR 115 (SC)
2. 332 ITR 553 (AP)
3.. 214 ITR 523
THE HONBLE SRI JUSTICE L.NARASIMHA REDDY
AND
THE HONBLE SRI JUSTICE CHALLA KODANDA RAM
I.T.T.A.No.149 of 2004
JUDGMENT: (Per the Honble Sri Justice L.Narasimha Reddy)
This appeal is preferred by the Revenue feeling aggrieved by the
order, dated 29.11.2002 passed by the Visakhapatnam Bench of the
Income Tax Appellate Tribunal (for short the Tribunal), in
I.T.A.No.1045/Hyd/1997. The matter pertains to the assessment
1995-96.
The respondent is a Textile Mill, functioning in Guntur District.
In the returns filed for the assessment year 1995-96, it claimed
deduction under Section 31 of the Income Tax Act, 1961 (for short the
Act), in relation to the cost incurred for replacement of two parts known
as Conors, in one of the machines. The Assessing Officer did not
allow deduction by treating the items as addition to the machinery, and
thereby, constituting capital expenditure. The appeal preferred by the
respondent was allowed by the Commissioner of Income Tax (Appeals).
The Department carried the matter in appeal to the Tribunal. Through
the order under appeal, the Tribunal dismissed the I.T.A., and upheld
the view taken by the Commissioner. Hence, this appeal.
Ms. M.Kiranmayee, learned Junior Standing Counsel, assisting
Sri J.V.Prasad, learned Senior Standing Counsel for the appellant,
submits that the Assessing Officer has analysed the relevant facts and
applied the correct principles of law in disallowing the deduction and
that the Commissioner and the Tribunal have taken a different view.
She contends that the respondent itself has treated the cost of
replacement of Conors in an earlier assessment year, as capital
expenditure and there was no basis for it to claim it as expenditure
towards repairs i.e. revenue expenditure, for the assessment year
1995-96. She has placed reliance upon the judgment of the Supreme
Court in Commissioner of Income Tax v. Sri Mangayarkarasi
Mills Private Limited and a judgment of this Court in
Commissioner of Income Tax v. Sarvaraya Textiles Limited .
Sri Shiva Karthikeya, learned counsel for the respondent, on the
other hand, submits that the Assessing Officer himself recorded a clear
finding to the effect that two parts in the existing machinery were
replaced and that such replacement did not lead to increase in the
capacity. He contends that it is only when an altogether new item of
machinery constituting an independent unit, is acquired, or replaced,
that the occasion to treat the cost thereof as capital expenditure, would
arise; and not when some parts of the existing machinery, are replaced.
He submits that the facts of the two precedents relied upon by the
learned counsel for the appellant are totally different from those in the
case on hand.
The provision, which becomes relevant for this case, is, Section
31 of the Act. It reads:
Repairs and Insurance of machinery, plant and
furniture.
In respect of repairs and insurance of machinery,
plant or furniture used for the purposes of the business or
profession, the following deductions shall be allowed
(i) the amount paid on account of current repairs thereto;
(ii) the amount of any premium paid in respect of
insurance against risk of damage or destruction thereof.
From a perusal of this, it becomes clear that an assessee would
be entitled to deduct the expenditure incurred for any current repair to
machinery or plant; and the one incurred for payment of premium of
insurance. What constitutes current repairs was explained by various
Courts. The Bombay High Court in Commissioner of Income Tax v.
Chowgule and Co. (P) Ltd., identified about 8 parameters, in this
behalf. The gist thereof is that irrespective of the expenditure incurred,
the replacement of a part of an existing machinery would constitute
current repairs, and such expenditure cannot be treated as capital
expenditure; and that in the name of causing repairs, an assessee shall
not be entitled to bring an altogether a new asset, into existence.
In Sri Mangayarkarasi Mills Private Limiteds case
(1 supra), the Honble Supreme Court held that, where an industry,
comprises of several machines, each devoted to an independent activity,
the replacement of one such machinery, cannot be treated as an act of
repair and that it is only when the parts in an independent item of
machinery are replaced, or repaired, that the expenditure incurred
therefor would qualify for deduction under Section 31 of the Act. The
same principle was elaborated and amplified by this Court in Sarvaraya
Textiles Limiteds case (2 supra).
In the instant case, the replacement was of two parts in a
particular item of machinery. Two items known as Conors that are
used in widening up the thread, are replaced by new ones, may be of
different description and value. The Assessing Officer himself recorded
a finding to the effect that the replacement of two parts did not result,
in increase of the capacity of the machinery. What appears to have
impressed the Assessing Officer to treat replacement of two Conors as
not qualifying for deduction under Section 31 of the Act, is that, the
respondent itself has shown the expenditure incurred for replacement of
two Conors, in the preceding assessment year, as capital expenditure.
This aspect has been clarified by the Tribunal. It was mentioned that
during the earlier assessment year, the respondent has acquired new
item of machinery and the Conors were referable to that new machinery
itself. In the assessment year 1995-96, no such acquisition, of
machinery, has taken place.
The mere fact that the new parts are different from those that
were replaced, in terms of cost, or efficiency; by itself does not lead to
the conclusion that the assessee has acquired new item of machinery.
It is not uncommon that the parts of an item of machinery, which is an
independent unit, have different efficiency and endurance. For
example, an ordinary tyre of a car, may cost less, and its service and
endurance may be relatively low compared to a radial tyre, whose cost
is fairly high. Same is the case with fuel injection systems. Instances
are not lacking, where certain companies supply the LPG fuel systems,
in the place of the conventional fuel systems and if fitted to a vehicle,
the fuel efficiency may increase. Though the new part, which replaced
the old one, in a machinery, is costlier and more efficient, it would not
lead to an inference that an item of new machinery has been acquired,
much less the cost incurred therefor can be treated as capital
expenditure.
Though in the course of discussion the Tribunal slightly deviated
from the settled principles, we are of the view that the conclusions
arrived at by it are correct. The appeal is accordingly dismissed. There
shall be no order as to costs.
The miscellaneous petitions filed in this appeal shall also stand
disposed of.
____________________
L.NARASIMHA REDDY, J.
_____________________
CHALLA KODANDA RAM, J.
Date:23.12.2014
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