The Commissioner of Income Tax vs The Rajarathna Mills Ltd.

P.D. Dinakaran, J.—The above tax case appeal is directed against the order of the Income Tax Appellate Tribunal dated 5.7.2006 made in ITA No. 1400/Mds/2005 for the assessment year 1999-2000.

The Revenue is the appellant. The issue raised in this appeal relates to the assessment year 1999-2000. The Assessing Officer, on completing the assessment, disallowed the claim of the assessee in respect of the expenditure incurred on replacement of one No. of simplex machine and for modernization of the mill as revenue expenditure and treated the same as capital expenditure. Aggrieved, the assessee went on appeal and the Commissioner of Income Tax (Appeals) held in favour of the assessee. The Revenue took up the issue before the appellate Tribunal and the Tribunal held the issue on favour of the assessee. Hence, this appeal by the Revenue raising the following questions of law:

Whether the replacement of machinery parts will amount to revenue expenditure or not?

Whether bringing into existence of a new asset or obtaining a new advantage would amount to revenue expenditure of not?

Mr. N. Muralikumaran, learned Standing Counsel for the appellant, fairly concedes that the issues raised in this appeal are covered against the Revenue in view of the decision of this Court in The Commissioner of Income Tax Vs. Janakiram Mills Ltd., .

The question whether the expenditure on replacement of machinery is capital or revenue is not determined by the treatment given in the books of account or in the balance sheet. the claim has to be determined only by the provisions of the Act and not by the accounting practice of the assessee. In the instant case, the Appellate Tribunal, finding that replacement of machinery represents revenue expenditure, held that the claim of the assessee cannot be disallowed.

This Court, in Commissioner of Income Tax v. Janakiram Mills Ltd. referred supra, held that all plant and machinery put together amounts to a complete spinning mills which is capable of manufacturing yarn and hence, each replaced machine could not be considered as an independent one and no intermediate marketable product was produced. It was also held that the question whether or not a new asset has come into existence has to be considered vis-a-vis the integrated sugar plant and not vis-a-vis each integral part of it and hence, the expenditure incurred on purchasing of new machinery to ensure sound functioning of the sugar mill to replace the old ones, should be held as revenue expenditure.

In the instant case, the assessee had only replaced one simplex machine without discontinuing their production activities and that there was no acquisition of any new asset, much less capital of any enduring advantage. Hence, in view of the ratio laid down by this Court in the decision cited supra, we hold that the expenditure incurred by the assessee on replacement of machinery is revenue expenditure and therefore, the Tribunal was right in allowing the claim of the assessee.

The above view was also taken by this Court in The Commissioner of Income Tax Vs. Loyal Textile Mills Ltd., .

In view of the ratio laid down by this Court in the decisions cited supra, no substantial question of law arises for our consideration in this appeal and therefore, this name is dismissed.