Commissioner Of Income Tax Madurai v. M/S.southern Roadways Ltd., Lakshmi Buildings, Kochadai, Madurai 625 016

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 27.10.2006 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA T.C.(A) No.2454 of 2006 Commissioner of Income TaxMadurai...Appellant Vs. M/s.Southern Roadways Ltd.,Lakshmi Buildings,Kochadai, Madurai 625 016 ..Respondent Appeal under Section 260A of the Income Tax Act, 1961 against theorder of the Income Tax Appellate Tribunal, Madras 'C' Bench dated28.4.2006 in ITA Nos.96/Mds/2000, for the assessment year 1999-2000against ITA No.164/2002-03 order dt.16.10.2003 on the file of theCommissioner of Income Tax, Appeals-I, Madurai and PAN/GIRNo. /CX-4060 order dt. 6.3.2002 on the file of the Dy.Commissioner of Income Tax, Company Circle-I, Madurai. The above tax case appeal is directed against the order of theIncome-tax Appellate Tribunal dated 28.4.2006 made in ITANos.96/Mds/2000 for the assessment year 1999-2000. 2. The Revenue is the appellant. The Assessing Officer disallowedthe claim of replacement expenditure of Vibrator 0.5 HP Motor and costof repairing Driver Cabins and Oil Tanker holding that replacement ofold by new machinery cannot be treated as revenue expenditure. Theassessing officer also disallowed the claim of assessee towardspurchase of software treating the same as capital expenditure. TheCommissioner of Income-tax (Appeals), however, decided the issues in https://hcservices.ecourts.gov.in/hcservices/ favour of the assessee. The Tribunal, on appeal by the Revenue, heldthe issues in favour of the assessee. Hence, this appeal by theRevenue raising the following questions of law:- "1. Whether in the facts and circumstances of the case,the Tribunal was right in allowing a deduction of theamounts spent on replacement of machinery as revenueexpenditure ? 2.Whether in the facts and circumstances of the case,the Appellate Tribunal was right in holding that theexpenditure incurred on the upgradation of software isrevenue expenditure? 3. With regard to 1[st] question, the question whether theexpenditure on replacement of machinery is capital or revenue is notdetermined by the treatment given in the books of account or in thebalance sheet. The claim has to be determined only by the provisionsof the Act and not by the accounting practice of the assessee. In theinstant case, the Commissioner and the Appellate Tribunal, finding thatreplacement of machinery is revenue expenditure, held that the claim ofthe assessee cannot be disallowed. 4. This Court, in COMMISSIONER OF INCOME-TAX v. JANAKIRAM MILLSLTD. (2005) (275 ITR 403), held that all plant and machinery puttogether amounts to a complete spinning mill which is capable ofmanufacturing yarn and hence, each replaced machine could not beconsidered as an independent one and no intermediate marketable productwas produced. 5. In view of the ratio laid down by this Court in the decisioncited supra, we hold that the expenditure on replacement of machineryis revenue expenditure and therefore, the Tribunal was right inallowing the claim of the assessee. Accordingly, the 1[st] question isanswered in the affirmative, against the Revenue and in favour of theassessee. 6. With regard to the 2[nd] question, viz., whether the expenditureincurred on the upgradation of software is revenue expenditure, theassessee did not claim any expenditure for installation of newcomputers, but claimed the expenditure for upgradation of existingcomputers. Further, the expenditure was incurred for improving theefficiency of the existing system with a view to keep pace withimprovement of technology and no machinery was brought into existence.Such expenses incurred by the assessee for enhancement of efficiency,in our considered opinion, is nothing but an upgradation of computersfor achieving the desired result and therefore, the same has to betreated as revenue expenditure. 6. With regard to the 2[nd] question, viz., whether the expenditureincurred on the upgradation of software is revenue expenditure, theassessee did not claim any expenditure for installation of newcomputers, but claimed the expenditure for upgradation of existingcomputers. Further, the expenditure was incurred for improving theefficiency of the existing system with a view to keep pace withimprovement of technology and no machinery was brought into existence.Such expenses incurred by the assessee for enhancement of efficiency,in our considered opinion, is nothing but an upgradation of computersfor achieving the desired result and therefore, the same has to betreated as revenue expenditure. 7. The Apex Court in Alembic Chemical Works Co. Ltd. (177 ITR377), after referring to B.P. Australia Ltd. v. Commissioner ofTaxation of the Commonwealth of Australia [1966] AC 224 (PC), heldthat, "What is capital expenditure and what is revenue are noteternal verities but must need be flexible so as to respondto the changing economic realities of business. Theexpression 'asset or advantage of an enduring nature' wasevolved to emphasise the element of a sufficient degree ofdurability appropriate to the context." It was also held that the phrase 'enduring benefit' is not thinking ofadvantages that are permanent. There is a difference between thelasting and the everlasting. 8. In the light of the above ratio laid down by the Supreme Court,we are of the view that upgradation of computers by changing certainparts thereby enhancing the configuration of the computers forimproving their efficiency, but without making any structuralalterations is not of an enduring nature. The expenditure incurred bythe assessee has therefore to be treated as revenue expenditure. 9. Similar view has been taken by this Court in T.C.Nos.1397 and1398 of 2005, by judgment dated 20.1.2006. Accordingly, the 2[nd]question is answered in the affirmative, against the Revenue and infavour of the assessee. In the result, the tax case appeal stands dismissed. No costs. Sd/Asst.Registrar /true copy/ na.To Sub Asst.Registrar 1.The Assistant Registrar,Income Tax Appellate TribunalMadras 'C' Bench, III Floor, Rajaji Bhavan,Madras-90. 2.The Commissioner of Income-Tax (Appeals) I, Madurai.Tax (Appeals) I, Madurai. 3.The Deputy Commissioner of Income-tax, Company Circle-1,Madurai-2.of Income-tax, Company Circle-1,Madurai-2. 4.The Commissioner of Income Tax,Madurai.Madurai. +1cc to M/s.Pushya Sitaraman, Advocate Sr 50620 JE(CO)km/16.11. TC (A) No.2454 of 2006