important points
The repairs, not being ‘current repairs’, do not qualify for deduction u/s 31(i).
Current repairs interpreted.

Headnote:(a)Words and Phrases – Current repairs – Current repairs are affected to preserve and maintain the asset – All repairs are not current repairs – To decide the applicability of Section 31(i) the test is not whether the expenditure is revenue or capital in nature, but whether the expenditure is “current repairs” – The basic test to find out as to what would constitute current repairs is that the expenditure must have been incurred to “preserve and maintain” an already existing asset, and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage – In the context of textile mill, the repair or replacement of ‘autoleveler’ preserves the Carding Machine, hence it would come within the connotation of ‘current repairs’.(Paras 10 and 11)
       (b)Words and Phrases – Plant – Plant employs a process whereby raw-material is fed on one end and the finished product comes out at the other end without intervention in-between – That not being the case in a Textile mill, as it employs one continuous process of manufacture beginning from Blow Room to the Winding Section, it cannot be said to be a plant.(Para 10)
       (c)Income Tax Act, 1961 – Section 31(i) – The section allows expenditures on ‘current repairs’ – The object behind it being to preserve and maintain the asset and not to bring in a new asset – Thus Section 31(i) limits the scope of allowability of expenditure as deduction in respect of repairs made to machinery, plant or furniture by restricting it to the concept of “current repairs”. (Para 11)
       (d)Income Tax Act, 1961 – Section 31(i) – The assessee, in its balance sheet, indicating the expense as an item incurred for purchase of a New Asset – The entire machine had been replaced, therefore, the expenditure incurred by the assessee did not fall within the meaning of “current repairs” u/s 31(i) – High Court has erred in its decision. (Para 11)
       (1997) 2 SCC 449; (1956) 30 ITR 338; (1967) 3 SCR 957 – Relied upon
       (e)Income Tax Act, 161 – Section 37 – Under Section 37, a particular item of expenditure may be deductible if the expenditure does not fall within Sections 30 to 36 – It should have been incurred in the accounting year; in respect of a business carried on by the assessee and spent wholly and exclusively for business – It should not be on personal account of the assessee, or in the nature of capital expenditure – Whether expenditure is ‘revenue’ or ‘capital in nature’ would depend upon several factors, namely, nature of the expenditure, nature of the business activity etc. – For example, construction of the building for self-use may be capital in nature whereas in the hands of the builder a building constitutes his stock-in-trade and, therefore, on the sale of the building the expenditure has to be revenue. (Para 14)
       (f)Income Tax Act, 1961 – Section 31(i) – Even if the expenditure incurred is revenue in nature, still it may not fall in the connotation of the words “current repairs” under Section 31(i) – The same would not qualify for deduction.(Para 15)
       Facts of the case:
       M/s Sarvana Spinning Mills Pvt. Ltd. (the assessee) is a textile mill engaged in the manufacture of yarn. For the accounting year ending 31.3.1993, it claimed deduction on account of “modernisation and replacement expenses” amounting to Rs. 97,95,755.00 whereas in the case of year ending 31.3.1994 it has claimed Rs. 77,84,047.00 as deduction under the same head. The question which arises for determination in this case is whether the assessee was entitled to claim the aforestated amounts as “current repairs” under Section 31(i). This is the basic controversy in the above civil appeals. To complete the chronology of events, it may be stated that the assessee claimed the aforestated amounts as deduction in its annual returns. The aforestated figures are mentioned in the Profit and Loss account for the year ending 31.3.1994. The return for the assessment year 1993-94 was filed on 31.12.1993. It was processed under Section 143(1)(a). Subsequently, a Notice under Section 143(2) was issued to the assessee. Pursuant to the said Notice, the representative of the assessee appeared. He contended that during the previous year, the assessee had installed three Ring Frames at the cost of Rs. 23,99,855.00. According to the assessment order, the assessee claimed the cost of the new machinery as revenue expenditure on the ground that the expenditure involved should be treated as current repairs, since the new machinery was installed only as a replacement of the old machinery, which had become derelict. According to the assessee, the whole Textile Mill was a “Plant” and the Ring Frames was one of the 25 machines which constituted one single process and, therefore, replacement of the frames be treated as replacement of part of the Plant/ Total Machinery and not replacement of a machine. The claim of the assessee was disallowed.
       Aggrieved by the said order, the matter was carried in appeal to the CIT(A). CIT(A) allowed the appeal and allowed the expenditure as revenue expenditure.
       Aggrieved by the said decision of the Appellate Authority, the Department carried the matter in appeal to the Tribunal, which took the view that different segments of a textile mill are integrated parts of a continuous process and the expenditure incurred on replacement of the machines in any segment of the plant should be treated as revenue expenditure. Accordingly, the appeals filed by the Department stood dismissed.
       Aggrieved by the decision of the Tribunal, the matter was carried in reference to the Division Bench of the Madras High Court. The High Court affirmed the decision of the Tribunal
       Findings of the Court:
       The repairs, not being ‘current repairs’, do not qualify for deduction u/s 31(i).
       Result : Appeals allowed.

judgment

KAPADIA, J. —

1.Aggrieved by the common judgment dated 29.4.2005 passed by the High Court of Judicature at Madras in Tax Case (Appeal) Nos. 53/2004 etc., the Department has come to this Court by way of a batch of civil appeals. For the sake of convenience, we have set out hereinbelow the facts in the lead case of M/s Saravana Spinning Mills Pvt. Ltd. (Civil Appeal Nos. 7604-7605/2005).

2.In this group of civil appeals we are required to decide the extent and scope of Section 31(i) of the Income Tax Act, 1961 as it stood during the accounting years ending 31.3.1993 and 31.3.1994.

3.For this purpose, we quote hereinbelow Section 31, as it stood during the relevant period:

“31.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.”

4.The facts in Civil Appeal Nos. 7604-7605/2005 are as follows :

M/s Sarvana Spinning Mills Pvt. Ltd. (the assessee) is a textile mill engaged in the manufacture of yarn. For the accounting year ending 31.3.1993, it claimed deduction on account of “modernisation and replacement expenses” amounting to Rs. 97,95,755.00 whereas in the case of year ending 31.3.1994 it has claimed Rs. 77,84,047.00 as deduction under the same head. The question which arises for determination in this case is whether the assessee was entitled to claim the aforestated amounts as “current repairs” under Section 31(i). This is the basic controversy in the above civil appeals. To complete the chronology of events, it may be stated that the assessee claimed the aforestated amounts as deduction in its annual returns. The aforestated figures are mentioned in the Profit and Loss account for the year ending 31.3.1994. The return for the assessment year 1993-94 was filed on 31.12.1993. It was processed under Section 143(1)(a). Subsequently, a Notice under Section 143(2) was issued to the assessee. Pursuant to the said Notice, the representative of the assessee appeared. He contended that during the previous year, the assessee had installed three Ring Frames at the cost of Rs. 23,99,855.00. According to the assessment order, the assessee claimed the cost of the new machinery as revenue expenditure on the ground that the expenditure involved should be treated as current repairs, since the new machinery was installed only as a replacement of the old machinery, which had become derelict (see page 93 of the Paper Book). According to the assessee, the whole Textile Mill was a “Plant” and the Ring Frames was one of the 25 machines which constituted one single process and, therefore, replacement of the frames be treated as replacement of part of the Plant/ Total Machinery and not replacement of a machine. The claim of the assessee was disallowed on the ground that the expenditure was on capital account; that it was not a revenue expenditure as the assessee had obtained enduring benefit by replacing the old machine with new machine. The claim of the assessee was also rejected on the ground that the machine replaced was an independent machine by itself and that it was not a part or portion of the other textile machinery (plant) as claimed by the assessee. The above arguments of the assessee were rejected by the A.O. stating, that the entire mill cannot be construed as Plant/ Total Machinery; that the said Ring Frames constituted independent and separate machines; that each Frame was capable of independent and specific function and, therefore, it was not possible to hold that the entire process as one single item of machinery of which all the others are parts. In this connection, the A.O. held that the assessee had replaced the existing old machines by new machines and thereby it had obtained enduring benefit and, theref

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2007 Supreme(SC) 1056

important pointsThe repairs, not being ‘current repairs’, do not qualify for deduction u/s 31(i).Current repairs interpreted.

Cases Referred (2)

important points
The repairs, not being ‘current repairs’, do not qualify for deduction u/s 31(i).
Current repairs interpreted.