IN THE HIGH COURT OF JUDICATURE AT MADRAS

DATED: 20.11.2018

Coram :

The Honourable Mr.Justice T.S.SIVAGNANAM

and

The Honourable Mr.Justice N.SATHISHKUMAR

Tax Case Appeal No.260 of 2009

The Commissioner of Income

Tax, Coimbatore.

...Appellant

Vs

Prabhu Spinning Mills (P) Ltd.,

Tirupur

...Respondent

APPEAL under Section 260A of the Income Tax Act, 1961

against the order of the Income Tax Appellate Tribunal Madras

'D' Bench dated 30.11.2007 in ITA No.2902/Mds/2005 for the

assessment year 2002-03 against the order of commissioner Income

Tax(Appeals)-II made in ITA 76-C/05-06 dated 14.10.2005 in PAN

AABCPO750E passed by the Assistant Commissioner of Income Tax

Circle-I, Tiruppur dated 23.03.2005.

For Appellant :

Mr.T.R.Senthil Kumar

For Respondent:

Mr.R.Sivaraman

Judgment was delivered by T.S.SIVAGNANAM,J

This appeal by the Revenue filed under Section 260A of the

Income Tax Act, 1961 is directed against the order of the Income

Tax Appellate Tribunal Madras 'D' Bench, dated 30.11.2007 in ITA

No.2902/Mds/2005 for the assessment year 2002-03.

2. The above appeal has been admitted on 24.4.2009 on the

following substantial question of law :

“Whether,

in

the

facts

and

circumstances of the case, the Tribunal was

right in holding that the claim of

modernization/expenditure incurred amounting

to Rs.2,58,21,005/- is allowable as revenue

expenditure?”

3. Heard Mr.T.R.Senthil Kumar, learned Senior Standing

Counsel for the Revenue and Mr.R.Sivaraman, learned counsel for

the assessee.

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4. The short question which falls for consideration is as to

whether the expenditure incurred by the assessee on replacement

of old machinery by purchase and installation of new machinery,

replacement of spares of textile machinery be allowable as a

Revenue expenditure. The law has been settled by the Hon'ble

Supreme Court in the case of CIT, Madurai & others Vs. Saravana

Spinning Mills Pvt. Ltd. [reported in (2007) 293 ITR 201]

wherein it has been held as follows:

“13. On behalf of the assessee,

reliance was placed on the judgement of this

Court in the case of CIT v. Mahalakshmi

Textile Mills Ltd., MANU/SC/0142/1967:

reported in [1967] 66 ITR 710 (SC). In that

case, the assessee carried on the business

of manufacture and sale of cotton yarn. In

the previous year relevant to assessment

year 1956-57, the assessee spent Rs.93,000/-

approx. For introduction of “Casablanca

Conversion System” in its plant. The I.T.O

disallowed the claim of the assssee. The

Appellate Authority agreed with I.T.O.

Before the Tribunal, the assessee contended

that the amount expended for introducing

Casablanca Conversion System was current

expenditure under Section 10(2)(v) of the

Indian Tax Act, 1922 (Section 31(i) of the

1961 Act). The Tribunal inspected the

spinning factory of the assessee. It studied

the working of the machinery with the

Casablanca Conversion System. It also

studied the literature published by the

manufacturer of Casablanca Conversion

System. After a detailed study, the Tribunal

held that on account of the stress and

strain of production over a long period

there was a need for change and that the

assessee had replaced old parts by

introducing the said system. Accordingly,

the Tribunal treated the expenditure

incurred for introducing the Casablanca

Conversion System as allowance under Section

10(2)(v) of the Indian Income Tax Act, 1922.

The High Court accepted the findings

recorded by the Tribunal saying that by the

introduction of Casablanca Conversion System

no new machinery or plant was installed, but

the introduction of the system amounted to

fitting of improved version and the

expenditure in that behalf was of revenue

nature. The High Court observed that certain

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