L. Narasimha Reddy, J.
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 (315 ITR 115 (SC))and a judgment of this Court in Commissioner of Income Tax v. Sarvaraya Textiles Limited (332 ITR 553 (AP)).
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., (214 ITR 523)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 Limited’s case (1 supra), the Hon’ble 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 Limited’s 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
Please Login To View The Full Judgment!
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.