The replacement of textile machinery is revenue expenditure.

Common Judgment (P. Sathasivam, J.)

Since the Tax Case reference and Appeals relate to same question to be considered by this Court, all the above matters are being disposed of by the following common order.

2. T.C.No.144/199 (Ref) relates to reference made by Income-tax Appellate Tribunal, Madras Bench-B. By the Reference Application, wherein the Commissioner of Income-tax, Madurai is the applicant, and Messrs Janakiram Mills Ltd., Tenkasi Road, Rajapalayam is the respondent, the Revenue requested the Income Tax Tribunal to refer the following questions of law arising out of the order of the Tribunal dated 19-12-97 to this Court for its opinion. They are:

"1). Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the expenditure incurred by the assessee during the accounting year on the cost of carding system (Rs.31,22,679/-) was amount paid on current repairs and allowable under section 31 of the Income-tax Act?

2). Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in directing allowance of the entire amount of Rs.31,22,679/- as revenue expenditure?"

3. For convenience we shall refer the facts in T.C.No.144/99. The assessee in that case had claimed that the expenditure of Rs.31,22,679/- on replacement of carding system by high production cards, be treated as revenue expenditure for the assessment year 1986-87. The Assessing Officer had negatived the assessee's claim. On appeal by the assessee, the C.I.T. (Appeals), following the decision of the Appellate Tribunal in the cases of ITO v. SRI VARADHARAJA TEXTILES PVT. LTD., (9 ITR 469) and the decision of the Supreme Court in the case of CIT v. MAHALAKSHMI TEXTILE MILLS LTD., (66 ITR 710) held that the expenditure incurred was only for replacement of part of the textile machinery and therefore was allowable as revenue expenditure. Aggrieved by the order of the CIT (Appeals), the department had filed further appeal before the Tribunal. The Tribunal after noting the inspection report and on verifying similar machineries installed in Indira Cotton Mills, Chennai and after following earlier decision of the Tribunal on the same point, has treated the expenditure on carding machine as revenue expenditure and thus allowed the asessee's claim. Inasmuch as the second question raised by the Revenue is covered by the first question, the Tribunal has referred only the first question, as set out earlier, to this Court for its opinion.

4. Heard Mrs., Nalini Chidambaram, learned senior counsel for the Department; Mr. C. Natarajan, learned senior counsel for appellants in T.C.Nos. 62 to 64/2003, 93 and 251/2003; and Messrs N. Quadir Hopeyu, P.P.S. Janarthana Raja, T.N. Seetharaman, R. Venkataraman, J. Balachandar, R. Meenakshisundaram, N. Devanathan, and R. Srinivasan for respondents.

5. The point for consideration is, whether the modernisation/current/repair expenditure is allowable as “revenue expenditureâ€, as claimed by the assessees or the replacement of cards/blow room machinery/combing machinery etc., are to be considered as “capital expenditureâ€, as claimed by the Revenue?

6. The materials placed by both sides show that Textile Mills, largely in Tamil Nadu, have been claiming the expenses relating to purchase of new machinery as current repairs/revenue expenditure, where the said purchase was as a part of modernisation programme or replacement of old machinery. It is the claim of the Department that the machinery replaced in most of the cases are complete machinery, capable of independent operation. The Tribunal has allowed deduction as current repairs/revenue expenditure on the premise that:

a. The entire textile mill should be treated as one single plant, and each machinery therefore is only a part of it.

b. Wherever the spindlage or capacity has not increased due to the purchase of the new machinery in the place of the old one, it cannot be said that there is any enduring adv