In The Appeal Filed By The Appellant Assessee, The Cit(A) Allowed The Appealof The Assessee On The Aforesaid Issue. Aggrieved With The Order Of Thecit(A), The R v. Asst. Commissioner Of Income Tax, Circle-6, Kolkata & Ors

ORDER IN THE HIGH COURT AT CALCUTTASPECIAL JURISDICTION (INCOME TAX)ORIGINAL SIDE A.F.R. OD – 1 ITA/373/2009NAGREEKA EXPORTS LIMITEDVERSUSASSISTANT COMMISSIONER OF INCOME TAX,CIRCLE-6, KOLKATA & ORS. BEFORE : THE HON’BLE JUSTICE SURYA PRAKASH KESARWANIANDTHE HON’BLE JUSTICE RAJARSHI BHARADWAJDate : 27[th] February 2024. Appearance: Mr. Ranjeet Kr. Murarka, AdvocateMr. S.D. Verma, AdvocateMr. Ananda Sen, AdvocateMr. Vivek Murarka, Advocate… for the appellant.Mr. S. Roychowdhury, AdvocateMr. Soumen Bhattacharjee, Advocate… for the respondents 1.Heard Sri Ranjeet Murarka, learned counsel for the appellant assesseeand Sri S. Roychowdhury, learned senior standing counsel for therespondents. 2.This appeal was admitted by this Court by order dated 04.02.2010, on thefollowing substantial questions of law:- “I.Whether on the facts and circumstances of the case the order ofthe Tribunal is erroneous as being perverse in reversing the order ofthe Tribunal is erroneous as being perverse in reversing the order of the C.I.T.(A) on the basis of the decision of the Hon'ble Supreme Courtwhere the question for consideration was not allowability underSection 37(1) of the Act as was in the present case? II.Whether on the facts and in the circumstances of the order of theTribunal was erroneous in not properly appreciating the decision of theHon'ble Supreme Court in RE: Ramaraji Surgical Cotton Mills, (294 ITR328) a later decision of the Hon'ble Supreme Court and specificallyreferred to in the petitioner’s submission before the Tribunal?” 3.After hearing learned counsel for the parties, the substantial questions oflaw is re-framed as under:-law is re-framed as under:- “Whether under the facts and circumstances of the case, expenditureincurred by the assessee on replacement of nine “ring frames” is arevenue expenditure and allowable as deduction under Section 37 ofthe Income Tax Act, 1961?” 4.Briefly stated, the facts of the present case are that the appellant assesseeis a manufacturer of cotton yarns and had established a manufacturingunit in which the plant and machinery were installed in 1994-95 whichincluded a ring frame unit also. As per South India Textile ResearchAssociation report dated 19.12.2003 in a textile spinning mill, cottonfibres are converted to yarns and the process of fibre to yarn conversioncomprises of various stages being blow room, carding process, lap former,combing process, drawing, fly frames, ring frames and cone winding.During the assessment year in question i.e. assessment year 2005-06, the appellant assessee replaced nine ring frames out of total twenty-six ringframes earlier installed by him. The total expenditure incurred onreplacement of nine ring frames came to Rs.2,26,67,804/-, which theassessee reduced by Rs.56,06,159/- representing the sale proceeds of oldframes and thus, claimed balance sum of Rs.1,70,61,645/- as revenueexpenditure as cost of replacement of machinery i.e. ring frames. Theassessing officer rejected the claim of the appellant assessee holding thatit is not a revenue expenditure under Section 37 of the Income Tax Act,1961 [hereinafter referred to as ‘Act 1961’] and accordingly disallowed theexpenditure so claimed. 5.In the appeal filed by the appellant assessee, the CIT(A) allowed the appealof the assessee on the aforesaid issue. Aggrieved with the order of theCIT(A), the revenue filed ITA No.1474/KOL/2008 [Deputy Commissioner ofIncome Tax, Circle-6, Kolkata v. Nagreeka Exports Limited, Kolkata]. Across objection No.102/KOL/2008 was also filed by the appellant assesseeagainst confirmation of disallowance of Rs.1 lakh under the head ‘baddebts’. In the present appeal, we are not concerned with the issue raisedin the cross objection. By the impugned order dated 21.08.2009, theappeal of the revenue on the issue of assessee’s claim of replacement costas revenue expenditure was allowed by the ITAT and the order of theCIT(A) was set aside. Aggrieved with the aforesaid order of the ITAT, theappellant assessee has filed the present appeal. 6.Learned counsel for the appellant assessee submits that the expenditureincurred for replacement of ring frames is a revenue expenditure liable fordeduction under Section 37 of the Act 1961. He submits that thejudgment of Hon'ble Supreme Court in the case of Commissioner ofIncome Tax v. Sri Mangayarkarasi Mills (P) Limited [2009] 315 ITR 114(SC) is not applicable inasmuch as in subsequent judgment inCommissioner of Income Tax v. Hindustan Textiles [2010] 190 Taxman294 (SC) [paragraph 6], Hon'ble Supreme Court directed the High Court toconsider the tests laid down in Commissioner of Income Tax v.Sugavaneeshwara Spinning Mills Ltd. 293 ITR 20 (SC), Commissioner ofIncome Tax v. Ramaraju Surgical Cotton Mills [2007] 294 ITR 328 (SC)and Sri Mangayarkarasi Mills (P) Limited case (supra) for de novoconsideration of the case of the assessee of that case. He, therefore,submits that the question as to whether the expenditure incurred forreplacement of nine ring frames is a revenue expenditure or capitalexpenditure, needs reconsideration. 7.Learned Counsel for the revenue supports the impugned order of the ITA. 8.We have considered the rival contentions of learned counsels for theparties and perused the records of the appeal.parties and perused the records of the appeal. 9.We find that in Sri Mangayarkarasi Mills (P) Ltd. supra) (supra) two issueswere considered by the Hon’ble Supreme Court, namely, firstly, whethereach machine in a textile is an independent item and/or part of awere considered by the Hon’ble Supreme Court, namely, firstly, whethereach machine in a textile is an independent item and/or part of a spinning mill and thus, the replacement of asset would amount tocurrent repairs under Section 31 of the Act, 1961; and, secondly,whether the expenditure incurred for replacement of ring frame is ofrevenue in nature or capital nature. The Hon’ble Supreme Court heldas under : “We have heard and considered all these contentions of the learnedcounsel for the parties and also perused the materials on record andalso examined the impugned order passed by the High Court. The first issue that needs to be resolved is whether each machine ina textile mill is an independent item or merely a part of a completespinning mill, which only together are capable of manufacture, andthere is no inter- mediate marketable product produced. In our view,this issue has been satisfactorily answered by the recent decision ofthis court in CIT v. Saravana Spinning Mills P. Ltd. [2007] 7 SCC2983. In that case, this court has held unambiguously that "eachmachine in a segment of a textile mill has an independent role toplay in the mill and the output of each division is different from theother." Dealing with a ring frame in a textile mill, this court has heldthat it is an "independent and separate" machine. Further, it isaccepted that each machine in a textile mill is part of the integratedpro- cess of manufacture of yarn and is integrally connected to theother machines in the mill for production of the final product.However, this Interconnection does not take away the independentidentity and distinct function of each machine. Thus, each machinein a textile mill should be treated independently as such and not asa mere part of an entire composite machinery of the spinning mill. Asstated above, it can at best be considered part of an integratedmanufacture process employed in a textile mill Moving on to the issue of "current repairs" under section 31 of theAct, the decision of this court in CIT v. Saravana Spinning Mills P.Ltd. [2007] 7SCC 298, is again relevant. This court has laid downthat in order to determine whether a particular expenditure amountsto "current repairs" the test is "whether the expenditure is incurred topreserve and maintain" an already existing asset and not to bring anew asset into existence or to obtain a new advantage. For "currentrepairs" determination, whether the expenditure is "revenue orcapital is not the proper test." It is our opinion that the entire textilemill machinery cannot be regarded as a single asset, replacement ofparts of which can be considered to be for the mere pur- pose of"preserving or maintaining this asset. All machines put togetherconstitute the production process and each separate machine is anindependent entity. Replacement of such an old machine with a newone would constitute the bringing into existence of a new asset inplace of the old one and not repair of the old and existing machine.Also, a new asset in a textile mill is not only for temporary use.Rather it gives the purchaser an enduring benefit of better and moreefficient production over a period of time. Thus, replacement ofassets as in the instant case cannot amount to "current repairs". Thedecision in Saravana Mill's case clearly mentions that replacement ofa derelict ring frame by a new one does not amount to "currentrepairs". Further, in Ballimal Naval Kishore this court has held that anew asset or new/different advantage cannot amount to "currentrepairs", which has been subsequently approved in the SaravanaMills case. For these reasons, the expenditure made by the assesseecannot be allowed as a deduction under section 31 of the Act. Thejudgment of this court in the Saravana Mills' case mentions twoexceptions in which replacement could amount to current repairs,namely: "Where old parts are not available in the market (as seen in the case of CIT v. Mahalakshmi Textile Mills Ltd., AIR 1968 SC 1013,or Where old parts have worked for 50-60 years." In the instant case, the assessee has not claimed any of the abovestated exceptions. The Saravana Mills case also restricts the scopeof "current repairs" to repairs made to machinery, plant and/orfurniture. In this case replacement of machine can at best amount toa repair made to the process of manufacture of yarn, Further, thiscourt has also observed in Saravane Mills case that if replacementwas held to be "current repair" in such cases, section 31(1) will becompletely redundant and absurdity will creep in because repairimplies existence of a part of the machine which has mal functioned,which is impossible in the case of such replacement. Thus, thisreplacement expenditure cannot be said to be "current repairs" afterthe decision in the Saravana Mills' case. Given that section 31 of the Act is not applicable to the saidexpenditure of the assessee, the next issue is whether it can beconsidered "revenue expenditure" of the nature envisaged undersection 37 of the Act. The Saravana Mills case' holds thatexpenditure is deductible under section 37 only if it: (a) is notdeductible under sections 30-36, (b) is of a revenue nature, (c) isincurred during the current accounting year, and (d) is incurredwholly and exclusively for the purpose of the business. We aresatisfied that the assessee's expenditure satisfies requirements (a),(c) and (d) as stated above. The dispute is with respect to the natureof expenditure, that is, whether it is revenue or capital in nature. We are of the opinion that the expenditure of the assessee in thiscase is capital in nature and there is sufficient judicial precedent tosupport this view. In the case of Travancore Cochin Chemicals Ltd. v.CIT [1977] 2 SCC 20 this court held that expenditure is of a capital We are of the opinion that the expenditure of the assessee in thiscase is capital in nature and there is sufficient judicial precedent tosupport this view. In the case of Travancore Cochin Chemicals Ltd. v.CIT [1977] 2 SCC 20 this court held that expenditure is of a capital nature when it amounts to enduring advantage for the business andrepair is different from bringing a new asset for the business.Further, in Lakshmiji Sugar Mills P. Co. v. CIT, AIR 1972 SC 159 ithas been held by this court that bringing into existence a new assetor an enduring benefit for the assessee amounts to capitalexpenditure. We have already explained why replacement, in thiscase, amounts to bringing into existence a new asset and also anenduring benefit for the assessee. It is clear then that theexpenditure of the assessee here is not of a revenue nature andthus, cannot be claimed as a deduction under section 37 of the Act.” 10.Thus, as per law settled; ring frame in a textile mill is an “independent and separate” machine. Each machine in a textile mill is part of theintegrated process of manufacture and is integrally connected to the othermachine in the mill for production of the final product. But thisinterconnection does not take away the independent identity and distinctfunction of each machine. Therefore, each machine in a textile mill isliable to be treated independently as such and not as mere part of anentire composite machinery of the spinning mill. Thus “ring frame”, atbest, is part of an integrated manufacture process employed in a textilemill. Therefore, replacement of an old ring frame by a new one wouldconstitute the bringing into existence a new asset in place of the existingring frame. Such a new asset in the assessee’s textile mill is not fortemporary use but it gives an enduring benefit of better and more efficientproduction over a period of time. In Lakshmi Sugar Mills P. Co. v. CIT, AIR 1972 SC 159, Hon'ble Supreme Court has held that bringing intoexistence a new asset or an enduring benefit for the assessee amounts tocapital expenditure. In Travancore Cochin Chemicals Ltd. v. CIT [1977] 2SCC 20, Hon'ble Supreme Court has held that an expenditure is of capitalnature when it amounts to enduring advantage for the business. Repair isentirely different as it does not bring into existence a new asset. Thus,amount spent by the assess on replacement of existing old ring frames bya new one is not of revenue nature rather it is capital in nature. Hencethe amount so spent is not an allowable expenditure under Section 37 ofthe Act, 1961. 11.For all the reasons aforestated, we do not find any merit in this appeal.The substantial question of law is answered against the assessee and infavour of the revenue. The Appeal is dismissed.The substantial question of law is answered against the assessee and infavour of the revenue. The Appeal is dismissed. (SURYA PRAKASH KESARWANI, J.) S. Kumar / S. Das A.F.R. (RAJARSHI BHARADWAJ, J.)