Madras HC explains principles when repairs is current and when non current

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HIGH COURT OF JUDICATURE AT MADRAS

Dated : 24.07.2013

Tax Case (Appeal) Nos.140 to 143 of 2013

489 to 491 of 2012 and 319 of 2013

and connected MPs

Tax Case (Appeal).No.140/2013:-

M/s.Super Spinning Mills Ltd.

-vs-

The Assistant Commissioner of Income-tax

 

The question as to whether the expenditure incurred on replacement of machinery is revenue or capital expenditure, particularly in the nature of replacements of parts, thus rests on the nature of expenditure incurred, vis-a-vis the benefit that the assessee derives. The ratio deductible from the decisions referred to above are:

(i) 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 is to find out whether expenditure is incurred to “preserve and maintain” an already existing asset and the expenditure must not be to bring a new asset into existence or to obtain a new advantage vide [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.)

(ii) Under Section 31(i), the deduction admissible is only for current repairs. Therefore, the question as to whether the expenditure incurred by the assessee conceptually is revenue or capital in nature is not relevant for deciding the question whether such expenditure comes within the etymological meaning of the expression “current repairs”. In other words, even if the expenditure is revenue in nature, it may not fall in the connotation of “current repairs” [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.)

(iii) A new asset or new/different advantage cannot amount to `current repairs’. – 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited)

(iv) Repair implies existence of a part of the machine which has malfunctioned, thereby requiring repair to that machinery, plant etc. Replacement cannot be a current repair, for, “replacement” and “current repair” do not go hand in hand . If one is to hold otherwise, it would only make Section 31(i) wholly redundant and absurd. Thus, replacement expenditure cannot be said to be `current repairs’ vide [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.) and 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited)

(v) Expenditure is deductible under section 37 only if it (a) is not deductible under sections 30-36, (b) is of a revenue nature, (c) is incurred during the current accounting year and (d) is incurred wholly and exclusively for the purpose of the business. – 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited);

(vi) Expenditure is of a capital nature when it amounts to an enduring advantage for the business and repair is different from bringing a new asset for the business. Further, bringing into existence a new asset or an enduring benefit for the assessee amounts to capital expenditure vide Lakshmiji Sugar Mills (P) Co. v. CIT (AIR 1972 SC 159) referred in 2009-TIOL-86-SC-II (CIT Vs. Sri Mangayarkarasi Mills P. Limited).

(vii) Therefore, whether an expenditure is revenue or capital in nature would depend on the facts of each case. – [2007] 293 ITR 201 (SC) (Commissioner of Income Tax Vs. Saravana Spinning Mills P. Ltd.)