Commissioner Of Income Tax-I v. M/S. Banco Products (India) Ltd.....opponent(S

O/TAXAP/531/2007 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 531 of 2007 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ?the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ?judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ?to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ COMMISSIONER OF INCOME TAX-I....Appellant(s) Versus M/S. BANCO PRODUCTS (INDIA) LTD.....Opponent(s) ================================================================ Appearance: MR KM PARIKH, ADVOCATE for the Appellant(s) No. 1 MR BS SOPARKAR, ADVOCATE WITH MRS SWATI SOPARKAR, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Date : 22/12/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE KS JHAVERI) 1.Being aggrieved and dissatisfied with the impugned order dated 31.07.2006 passed by the Income Tax Appellate Tribunal, Ahmedabad (Tribunal) in Income Tax Appeal No. 2673/Ahd/2004 for the assessment year 2000-01, the revenue has preferred the present tax appeal. 1.1The following substantial question of law was formulated while admitting this appeal: “Whether on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the disallowance of Rs. 7,14,488/- being the expenditure on replacement of two machineries, without appreciating the scope of ‘current repairs’ in section 31(i) which covered the impugned expenditure at the exclusion of section 37(1) and by wrongly applying the ratio of decisions in which the issue was either not decided or was decided in favour of revenue?” 2.The facts leading to the present tax appeal in a nutshell are set out as under: 2.1The Assessing Officer disallowed the cost of gas fired fan coil unit for Rs. 3,56,000/- and plough mixer for Rs. 3,58,488/- as revenue expenditure during the course of assessment proceedings and treated it as capital expenditure. The assessee preferred appeal before the CIT(A) who upheld the disallowance made by the Assessing Officer and dismissed the appeal. 2.2Being aggrieved by the order of the first appellate authority sustaining the disallowance, the assessee preferred appeal before the Tribunal and the Tribunal vide impugned order allowed the same and held that said expenditure was revenue in nature. 3.Mr. K.M. Parikh, learned advocate appearing for the revenue submitted that the Tribunal has erred in law in not appreciating the fact that when the expenditure was made on substantial replacement of the equipment it is capital expenditure. He submitted that the replacement of parts of the machinery was distinct from the replacement of the machinery as a whole. 4.Mr. B.S. Soparkar, learned advocate appearing for the assessee supported the impugned order passed by the Tribunal and submitted that the same having been passed in accordance with law does not call for any interference by this Court. 3.Mr. K.M. Parikh, learned advocate appearing for the revenue submitted that the Tribunal has erred in law in not appreciating the fact that when the expenditure was made on substantial replacement of the equipment it is capital expenditure. He submitted that the replacement of parts of the machinery was distinct from the replacement of the machinery as a whole. 4.Mr. B.S. Soparkar, learned advocate appearing for the assessee supported the impugned order passed by the Tribunal and submitted that the same having been passed in accordance with law does not call for any interference by this Court. 5.Heard learned advocates for both the sides. It is trite that nature of expenditure will determine the question that whether the same is in the nature of revenue or the same is in the nature of capital. From the records it is borne out that the fan coil unit and plough mixers were replacements of the old machines which were not working properly. The nature of expenditure incurred also does not show that any asset has been created for which it could be said that the assessee has obtained enduring benefit. Having perused Section 37 of the Act, we are of the view that the Tribunal has not committed any illegality in treating the said expenditures as revenue. Section 37 of the Act deals with any expenditure not being an expenditure of the nature described under Sections 30 to 36 of the Act, and not being in the nature of capital expenditure or personal expenditure of the assessee, laid down or extended wholly or exclusively for the purpose of the business or profession. The Tribunal in para 9 of the impugned order has held as under: “9.We have heard the parties and considered their rival submissions. In the narration portion of the aforesaid chart, it is clear that it is a replacement of the old machine, which was not working properly, and therefore, they cannot be held to be capital expenditure, they are allowed as revenue expenditure. This view is supported by the decision of Gujarat High Court in the case of H. Mohmed & Company vs. CIT [107 ITR 637] and the decision of the Andhra Pradesh High court in the case of Sri Rama Talkies vs. CIT [59 ITR 63]. We accordingly allow the claim of the assessee. The depreciation, if any, granted to the assessee, of course, be withdrawn.” 6.In view of the finding of the Tribunal it cannot be disputed that the expenditure incurred in replacing the fan coil unit and plough mixer is not an expenditure contemplated by Section 31 of the Act as "current repairs". It is a settled position of law that where the expenditure was made for the initial outlay or for the extension of a business or a substantial replacement of the equipment, there could be no doubt that it would be capital expenditure and that when the parts of capital assets are required to be changed fairly frequently, the theory of normal depreciation would not be adequate from the point of view of commercial practice and hence the concept of replacement of parts of the capital assets has been introduced and such expenditure for replacement of parts is also to be treated as revenue expenditure as distinguished from capital expenditure. We are in complete agreement with the finding of facts arrived at by the Tribunal and therefore see no reason to interfere with the same. 7.In the premises aforesaid, we answer the question raised in the present appeal in the affirmative i.e. against the revenue and in favour of the assessee. We hold that the Tribunal was right in law in deleting the disallowance of Rs. 7,14,488/- being the expenditure on replacement of two machineries. The impugned order passed by the Tribunal is confirmed. Appeal stands dismissed accordingly. (K.S.JHAVERI, J.) divya (K.J.THAKER, J)