Commissioner of Income Tax vs Salem Co-operative Spinning Mills Ltd.

Ramanujam, J.—This is a petition filed by the Revenue seeking a reference on the following question of law, as arising out of the court of the

order of the Income Tax Appellate Tribunal :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in law in holding that the expenditure incurred

towards replacement of conventional card clothing by metallic card clothing should be allowed as revenue expenditure for the year 1976-77 ?

As seen from the question sought to be referred, the point for consideration is whether the expenditure towards replacement of conventional

card clothing by metallic card clothing in the carding section of the assessee-mills is a revenue expenditure or whether it is capital in nature, not

exigible for deduction under s. 37 of the I.T. Act, 1961. The Tribunal, following the decision of the Mysore High Court in Hanuman Motor Service

Vs. Commissioner of Income Tax, Mysore, , has taken the view that the said expenditure should be taken to be expenditure incurred for repairing

the existing machinery and it cannot be taken to be expenditure incurred for substantial replacement of a fixed capital asset of the assessee-mills.

On its finding that the expenditure incurred in replacement of the conventional card clothing by metallic card clothing in the carding section of the

mills is in the nature of repairs, the Tribunal held that the said amount has to be allowed as an expenditure under s. 37 of the I.T. Act, 1961.

Though the learned counsel for the Revenue contends that the principle laid down by the Mysore High Court will not apply to the fact of the case

before us, we are of the view that the said decision applies to the facts of this case. As per the said decision, the expenditure incurred by the

assessee in this case in replacement of the conventional card clothing by metallic card clothing in the carding section should be taken to be

expenses for repairs to the existing machinery and it cannot be taken to be an expenditure in replacement of machinery or its parts. In the said

case, the Mysore High Court has pointed out that in finding out whether a given case falls within the scope of clauses (v) of s. 10(2) of the Indian

I.T. Act, 1922, the true test is whether, as a result of the expenditure which is claimed as expenditure for repairs, what is really being done is to

preserve and maintain an already existing asset or whether the object of such expenditure was to being a new asset into existence or to obtain a

new or fresh advantage and that if it is the former, then it is a ""repair"" but if it is the latter, it should be considered as a replacement or renewal of a

capital asset. The Mysore High Court also pointed out that the replacement of worn out part of a machinery does not by itself bring a new asset

into existence and that the fact that an old part of a machinery was replaced by a new part did not mean that a new asset has been brought into

existence.

In Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., , it has been held by the Supreme Court that the cost of

introduction of a system called ""Casablanca conversion system"" was expenditure towards current repairs to the machinery and plant and allowable

as an expenditure under s. 10(2)(v) of the Indian I.T. Act, 1922. In that case, the assessee was carrying on the business of manufacture and sale of

cotton yarn. In the relevant assessment year, the assessee introduced the ""Casebalance conversion system"" in its spinning plant. The said system

involved replacement of certain roller stands and fluted rollers fitted with rubber aprons to the spinning machinery, removal of ring-frames from

certain existing parts, introduction inter alia, of ball bearing jockey-pulleys for converting the original band-drivers to tape-drivers and other

additions and alterations in the drafting mechanism. A question arose whether development rebate was admissible for the cost of the introduction of

Casablanca conversion system. The ITO disallowed the claim on the ground that it did not involve the installation of a new machinery.

The AAC agreed with the ITO. Before the Tribunal, the assessee urged that the amount laid out for introducing the Casablanca conversion

system was in any event expenditure allowable under s. 10(2)(v) of the Indian I.T. Act, 1922. The Tribunal, after considering the effect of the

introduction of the Casablanca conversion system, held that the cost of introducing the said system may not be admissible as development rebate,

though it is admissible as allowance under s. 10(2)(v) of the Indian I.T. Act, 1922. The matter was taken to this court in Commissioner of Income

Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., . This court held that certain moving parts of the machinery had because of ""wear and tear"" to be

periodically replaced, and when it was found that the old type of replacement parts were not available in the market, the assessee introduced the

Casablanca conversion system, but thereby there was merely replacement of certain parts which were a modified version of the older parts and,

therefore, the expenditure should be taken as one of repairs. The said decision of this court was canvassed before the Supreme Court in the

decision referred to above and the Supreme Court affirmed the decision of this court aforesaid. We are inclined to accept the reasoning of this

court in Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., .

On the facts before us, there has been only a replacement of the conventional card clothing by metallic card clothing in the carding section of the

mills and this has been done with a view to preserve and maintain in good condition the already existing asset. The replacement of the conventional

card clothing by metallic card clothing does not result in bringing any new asset which was not there before.

Hence, applying the principles laid down by the Mysore High Court in Hanuman Motor Service Vs. Commissioner of Income Tax, Mysore,

and the Supreme Court in Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., , we have to hold that the expenditure in

question should be treated as charges for repairs and, therefore, it is exigible for deduction under s. 37 of the I.T. Act, 1961. The view taken by

the Tribunal, therefore, appears to be correct. The petition is dismissed. There will be no order as to costs.