Judgment:
1. The assesses has filed the present appeal against the order dt. 11th June, 1996 of the CIT(A), Visakhapatnam, for the asst. yr. 1991-92.
2. The facts undisputed are that out of the debit of Rs. 62,55,945 in the P&L a/c under the head 'Repairs and maintenance of plant and machinery', the AO found a sum of Rs. 10,44,276 to be representing the expenditures on 'Replacement of pipes to the main factory for all sections such as, steam pipe, molasses and water-lines'. The AO did not consider such expenditure to be revenue expenditure as claimed by the assessee and, therefore, disallowing such claim, he added the sum of Rs. 10,44,276 to the income of the assessee. He, however, allowed depreciation on these pipes at 33.1/3 per cent being the rate applicable to plant and machineries. In appeal, learned CIT(A) upheld the order of the AO.3. Learned authorised representative of the assessee narrated, before us, the facts as to why there was necessity for repair and replacement of the pipelines in their factory. He stated that the sugar factory mainly consists of four sections namely : (1) Milling section (2) Boiling House, (3) Boiler section, and (4) Power House. Each and every of the above individual sections consists of number of water lines, juice lines, steam lines and oil lines of various sizes. The juice extracted from sugarcane is pumped to the boiling house through number of M.S. pipelines with the valve controls. In the same way number of M.S. pipelines are also used for water to use at various points in the milling tandem. In the same way number of pipelines are used for oil cooling and for steam distribution. In boiling house also there are number of M.S. pipelines of various sizes for pumping juice, syrup, massecuite, molasses and water from one point to another point. The rate of flow of material through these pipelines is controlled by valves. Learned authorised representative of the assessee further submitted that the life of these pipelines depends upon the material handled by them. For example the pipelines, which handle juices and sulphur dioxide gases will be damaged quickly due to the acidic nature of the materials passed through them. The pipelines which carry other than this acetic material will have a bit longer life. Generally the pipelines in all the sections are not being replaced in full lengths at a time. But the assessee replaces the damaged portion of the pipelines only by way of welding with a new piece. This type of replacement and repair works reoccur every year. It is for such repair and replacement of pipes the expenditures in question have been incurred by the assessee. Learned authorised representative of the assessee contended that because of the substantial high expenditure incurred for the year under consideration, the AO has come to adverse conclusion without looking into the fact that replacement of pipe by itself would not go to change the nature of expenditure from revenue to capital expenditure. He further submitted that considering the overall expenditure of Rs. 1.23 crores spent towards repairs and maintenance during the year under consideration, the expenditure of Rs. 10,44,276 towards repairs and maintenance of pipelines is nothing but reasonable expenditure in the nature of revenue. On the above basis, learned authorised representative of the assessee contended that the claim of expenditure under the heads 'Repairs and maintenance' should have been allowed by the authorities below as 'revenue expenditure'. He relied on the decision of Andhra Pradesh High Court in the case of Nathmal Bankatlal Parikh & Co. v. CIT (1980) 122 ITR 168 (AP)(FB) of Karnataka High Court in the case of CIT v. Mysore Spun Concrete Pipe (P) Ltd. (1992) 194 ITR 159 (Kar) of Kerala High Court in the case of CIT v.Vanaja Textiles Ltd. (1994) 208 ITR 161 (Ker). Learned Departmental Representative, on the other hand, supported the orders of the authorities below.
4. Heard both the parties, gone through the orders of the authorities below and the decisions relied on by the learned authorised representative of the assessee. To resolve the issue before us the pertinent question that falls for determination is what exactly is the intendment of the expenditure, whether the same was spent to preserve and maintain an already existing asset or with the specific purpose of bringing into existence an individual asset or to obtain a new advantage of an enduring nature. It is noticed from the facts narrated above particularly as to the requirement of repair and replacement of pipes, which the assessee claimed to have been occurring every year it becomes crystal clear that the expenditure in question was incurred to preserve and maintain an already existing asset 'Plant and Machinery'.
At no stretch of imagination, such expenditure can be said to have been spent with a specific purpose of bringing into existence an individual asset or to obtain a new advantage of an enduring nature. As it appears, learned AO was swayed away to hold the expenditure in question to be 'capital expenditure' considering the huge amount involved in the repairs and maintenance. In the case of Nathmal Bankatlal Parikh & Co.
(supra). Hon'ble Andhra Pradesh High Court in Full Bench has observed that repairs may be small or major. If it is a major repair, it may involve considerable amount of money. But the amount of money spent alone cannot be a factor to determine whether the expenditure falls under current repairs or not. It is the nature of the repairs carried out by the assessee that matters for grant of deduction. Their Lordships have further held that the test to determine whether the amount spent is capital or revenue in nature is, whether by spending such amount the assessee has brought any new asset into existence with an enduring benefit. If the amount is spent for preserving and maintaining the present asset in existence, it cannot be said that the expenditure so incurred is capital in nature. High Court of Karnataka in the case of CIT v. Mysore Spun Concrete Pipe (P) Ltd. (supra) has also taken almost similar view and held--whether an expenditure is capital or revenue in nature has to be decided in the context of the business. While establishing a factory, the initial investment of all kinds of machinery and their parts will be in the nature of capital expenditure. However, replacement of parts of machineries in the course of working them will be a revenue expenditure; similarly, effecting repairs of machineries is part of the revenue expenditure. Further, the fact that the benefit accruing by the expenditure was of an enduring nature by itself is not a conclusive test to hold it a capital expenditure. Kerala High Court, in the case of CIT v. Vanaja Textiles Ltd. (supra), has observed that the test of enduring benefit is not a.
certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. Moreover, the largeness of the total expenditure for the different assessment years is also not relevant. What is, therefore, relevant is the purpose of the outlay and its intended object and effect, considered in a commonsense way having regard to the business realities. If the object of making the payment is to acquire a capital asset, the payment would partake the character of a capital payment even though it is made not in lump sum but by instalments over a period of time, On the contrary, payment made in the course of and for the purpose of carrying on business or trading activity would be revenue expenditure even though the payment is of a large amount and has not to be made periodically. Keeping in view' the above settled position of law, and considering the nature of works undertaken by the assessee which it usually undertook almost in every year to keep the plant and machinery run effectively (as is seen from the statements of expenditures towards repairs and maintenance for the asst. yrs.
1990-91,1991-92 and 1992-93 placed in the paper book at pp. 26 to 38), we are of the firm view that the assessee had rightly claimed the expenditures under the heads of 'Repair and maintenance' to be the revenue expenditure which should not have been disallowed by the authorities below. The claim of the assessee as revenue expenditure in respect of this amount is now allowed and the AO is directed accordingly.
5. In course of hearing, learned Departmental Representative raised a contention that amongst others, the assessee has also replaced electric motor/pumps. Electric motor/pumps by themselves, taken as independent units, were capable of being installed as capital machinery, the expenditure incurred by the assessee on those independent units should be held as capital in nature.
But, such contention of the learned Departmental Representative is not at all acceptable because the replacement" of the electric motors/pumps was not in the nature of replacement of a capital machinery but in the nature of replacing a part of a machinery specially in the context of the entire set up being treated as one unit. For our above view, reliance is placed on the decision of Karnataka High Court in the case of Mysore Spun Concrete Pipe (P) Ltd. (supra).