Vijayashree Spinning Mills P. Ltd. vs Assistant Commissioner of Income Tax

K. Raviraja Pandian, J.—The appeals are filed against the order of the Income Tax Appellate Tribunal, Madras "C" Bench, dated October 31, 2008, made in I. T. A. Nos. 256 and 257/Mds/2000, respectively. The relevant assessment years are 2003-04 and 2004-05. The substantial questions of law formulated for entertainment of the appeals are as follows:

Whether the Tribunal was right in holding that the expenditure on replacement of spinning machinery and cone winding machinery is not allowable as revenue expenditure ?

Whether the Tribunal''s order is perverse especially when the entire facts and circumstances have not been properly appreciated while coming to the conclusion that the expenditure in question is capital expenditure ?

Whether the Tribunal is right in not allowing the depreciation claim made by the appellant before the lower authorities without discussing the same in the impugned order, even though additional grounds appeal were raised before the Tribunal?

The issue involved in this case is whether replacement of the machineries, particularly spindles in this case, enhanced the production is the question to be resolved.

Mr. V.S. Jayakumar, the learned Counsel appearing for the appellant, has given us a chart for the assessment year 2003-04 wherein he has stated the income statement, the number of spindles added/sold, installed capacity and the nature of machinery and contended that even though there is slight rise in respect of the number of spindles, there is no addition in the installed capacity. The issue is covered by the judgment of the Supreme Court in the case of Commissioner of Income Tax Vs. Ramaraju Surgical Cotton Mills, . However, the authority has not considered the issue in the proper perspective but merely has decided the matter on the number of spindles.

We heard the arguments of the learned Counsel for the appellant and perused the materials available on record.

We are of the view that the matter has to be considered by the authorities only. As the issue involved is a question of fact in respect of addition or deletion of the spindles and whether the income earning capacity has increased or decreased, it has to be considered by the authority following the dictum laid down by the Supreme Court in the case of Commissioner of Income Tax Vs. Ramaraju Surgical Cotton Mills, . In the said judgment, the decision of this Court in The Commissioner of Income Tax Vs. Janakiram Mills Ltd., was considered by the Supreme Court with reference to the contention of the assessee that replacement of assets without increasing the production capacity would amount to revenue expenditure. The Supreme Court remanded the matter by observing that there are a number of tests which are required to be considered while deciding whether the expenditure was revenue or capital in nature. In the absence of the requisite details regarding the production capacity remaining constant even after replacement, the matter could not be decided on for consideration of that particular issue with reference to the production capacity. In this case also, there is no material available as to the increase or otherwise of the production capacity in replacement of the machineries. Without the factual details, the questions of law cannot be decided. Hence, this case also requires to be remitted back to the Commissioner of Income Tax (Appeals) as done by the Supreme Court in the aforesaid decision.

Hence, the order of the Tribunal as well as the Commissioner of Income Tax (Appeals) is set aside and the matter is remitted back to the Commissioner of Income Tax (Appeals) to redo the exercise with reference to the judgment of the Supreme Court in the case of Commissioner of Income Tax Vs. Ramaraju Surgical Cotton Mills, , particularly a finding has to be arrived at as to whether in view of the addition made by the assessee any earning capacity has increased or decreased and also as per the other directions given in the above said judgment of the Supreme Court. With the above observations, the appeals are disposed of. Consequently the connected M.Ps. are closed. No costs.