1. This appeal is filed by the Revenue against the order of the CIT(A), Vijayawada dated 21-3-97 for the Assessment Year 1995-96. Grounds 1 and 5 of the appeal are of general nature requiring no adjudication. In grounds 2, 3 and 4 quoted below the Revenue has challenged the order of the CIT(A) directing to treat the expenditure of Rs. 2,07,16,498/- as on "current repairs" and allow the deduction under Section 31 of the I.T. Act.
"2. The learned CIT(A) is not correct in holding that the replacements made by the assessee in the year of account are current repairs and the expenditure thereon is allowable under Section 31 of the IT Act for the reason that the expression "Current repairs" means expenditure on buildings, machinery plant or furniture which is not for the purpose of renewal or restoration, but which is only for the purpose of preserving or maintaining an already existing asset and which does not bring a new asset into existence or does not give to the assessee a new or different advantage, as held by the Supreme Court in the case of Ballimal Naval Kishore and Anr. v. CIT (224-ITR-414).
3. The learned CIT(A) failed to appreciate that the replacements made do not fall under current repairs and are additions to capital assets a capital expenditure is not allowable under Section 37 of the act.
4. The CIT(A) is not correct in deleting the additions made regarding expenditure claimed on current repairs of Rs. 2,07,16,489/-." 2. During the year under consideration the assessee had purchased two Auto Conors costing Rs. 2.07 Crores to replace the existing two worn out cone winders. This expenditure was claimed as deduction being "current repairs" vide a note appended with the return, which is reproduced below.
"During the previous year, the company has replaced the existing 2 Nos. worn-out Cone-winders with 2 Nos. Autoconers. By incurring this expenditure no new machine has been brought into existence except that the old and unserviceable a machines were removed and the machinery as a whole was restored to its original position (ref: 1) I.T.A. No. 1287/Mds/1983, M/s. Gitanjali Mills Ltd., 2) Commissioner of Income Tax v. Chowgule and Co. (P) Ltd., (1995) 214 ITR 523 (BOMBAY). The said machines have no independent existence not utility unless it worked in unison with other machines. Further this replacement became necessary for the preservation and maintenance of the machinery and no additional spindlage was created. thus the company is claiming an amount of Rs. 2,07,16,498/-, the cost of 2 Nos. Autoconers, as current repairs." i) The Auto Conors are separate machines and not part of the manufacturing process of yarn. These have independent existence.
ii) The replaced conors are indigenous make and manually run whereas the new Auto Conors are imported and automatic.
iii) The capacity of the new Auto-Conors is almost ten times more than the old ones and hence, cannot be treated as replacement of the old ones.
iv) Relying on the judgment of the Hon'ble Bombay High Court in the case of CIT v. Chowgule & Co. (P) Ltd. (214 ITR 523), the AO held that the so-called repairs amounted to additions or improvements and do not fall under current repairs.
v) In earlier years similar expenditure on auto-coners was treated as capital expenditure by the assessee itself. Increase in the capacity of the Spinning Mill was not relevant to decide about the nature of expenditure.
Under the circumstances mentioned above the AO treated the expenditure incurred as capital in nature and added to the income. However, on such addition he allowed depreciation. On appeal, the learned CIT(A), relying on the judgment of the A.P. High Court in the case of Nathmal Bankatlal Parikh & Co. v. CIT 122 ITR 168, held that: "what is important to take note as if the replacement of old machinery with new one is in the nature of repair, and as an allowable expenditure under Section 31 of the I.T. Act, then whether the expenditure is substantial or not and whether the expenditure is capital or revenue in nature is immaterial, and the expenditure incurred for repairs should be allowed under Section 31 irrespective of the fact that whether it is capital or revenue in nature.
"In view of the decision of the A.P. High Court cited above, I find that if the replacement of old machinery in nature of repairs it is an allowable expenditure under Section 31 of the Act. The Assessing Officer is directed to treat the expenditure of Rs. 2,07,16,498/- as current repairs and allow the deduction under Section 31 of the I.T. Act." 3. During the course of hearing the learned DR submitted that the CIT(A) erred in holding the expenditure incurred on replacements as current repairs and allowable under Section 31 of I.T. Act. It was further submitted that the replacements made by the assessee do not fall under current repairs and therefore, the order of the AO treating the expenditure, as capital expenditure should be upheld. In support of his argument he relied on the judgment of the Supreme Court in the case of Ballimal Naval Kishore 224 ITR 414. The gist of the case laws relied upon by the AO and the learned DR are given as under: i) CIT v. Chowgule and Co. Pvt. Ltd. (214 ITR 523) (Bom.) : In this case the assessee had affected major repairs to one of its vessels, which resulted in an expenditure of Rs. 99,52,440/- and claimed as "current repairs". The Revenue disallowed the claim on the ground that the expenditure together with UDV of the ship exceeded the original cost and conferred on the assessee the benefit of an enduring nature. The Hon'ble Supreme Court held that: "The fact that old parts of the ship were replaced by new parts, in our opinion, is not relevant for determining whether the expenditure was on "current repairs" or not. The replacement of the old parts by new parts does not mean that a new asset was brought into existence in relation to the ship in question. The replacement of the parts was only in the process of current repairs of the ship. The expenditure claimed in this case, therefore, amounts to "current repairs" which is allowable as a deduction under Section 31 of the Act." ii) Ballimal Naval Kishore and Anr. v. CIT (224 ITR 415) (Supreme Court) : In this case a ginning factory was converted into a cinema theatre and the expenditure incurred was claimed as "current repairs." The Hon'ble Supreme Court held that: "that the facts of the case made it evident that what the appellant did was not mere repairs but a total renovation of the theatre. New machinery, new furniture, new sanitary fittings and new electrical wiring were installed besides extensively repairing the structure of the building. As against the sum of Rs. 17,000 for which the appellant purchased the factory in 1937, the expenditure incurred in the relevant year was in the region of Rs. 1,20,000. By no stretch of imagination could the said repairs qualify as "current repairs" within the meaning of Section 10(2)(v). This was a case of total renovation and the expenditure in question had rightly been held by the High Court to be capital in nature." 3.1. On the other hand, the learned AR of the assessee strongly supported the orders of the CIT(A). It was argued that no doubt in the Assessment Year 1994-95 the expenditure incurred on Auto-Conors were capitalised but the facts prevailing in that year and during the year under consideration are significantly different.It was pointed out that in the earlier year the number of ring flames and spindles installed were increased as a result the installed capacity also increased due to which the value of Auto-Conors purchased were capitalised. Besides, in the earlier year the Auto-Conors were purchased as additional machinery and not as replacement to meet the additional production due to increase in capacity whereas in the year under consideration the Auto-Conors were purchased as replacement of old and worn out machinery and there was no increase in the capacity of the spinning mill. It was further submitted by the learned AR that the Auto-Conors have no independent existence as held by the AO but are only a part of the machinery used in the spinning mill. It was also submitted that when the assessee went for replacement it was natural that it should go for improved and modern equipment for better performance and such action should not be interpreted against the assessee. It was further argued that since the Auto-Conors were installed only as replacement, the expenditure so incurred has to be allowed under the head "current repairs". In support of such argument the learned AR specifically relied on several judicial pronouncements. The gist of which are given as under: i) CIT v. Mahalakshmi Textile Mills Ltd., 66 ITR 710 (S.C.): Expenditure incurred on introduction of "Casablanca conversion system" involving replacement of certain machinery was held to be expenditure on current repairs allowable under Section 10(2)(v) of I.T. Act 1922 in the case of the assessee carrying on business of manufacture and sale of cotton yarn.
ii) CIT v. Co-operative Sugars Ltd., 235 ITR 343 (Ker.): In this case the assessee had incurred substantial expenditure on replacement of juice heater, sugar grader, juice sulphiter, vacuum filter drum, centrifugal machinery, pumps and metres etc., in sugar plant. It was held that simply because each equipment changes the form or shape of the sugarcane juice, that does not mean that sugar is produced by each equipment or machinery. It would be wrong to held each machinery as an independent unit, sugar plant was there and the same plant existed even after replacement. Therefore, it would be wrong to say that any new asset of enduring nature has came into existence. The question as to whether a new asset has came into existence has to be considered vis-a-vis the integrated sugar plant and not vis-a-vis each integral plant of it. The expenditure incurred was held to be revenue in nature.
iii) CIT v. Madras Spinners Ltd., 207 ITR 35 (Ker.): Expenditure incurred on modernizing the machinery by replacement of old worn out and unserviceable parts in order to run the business smoothly and efficiently was held to be revenue expenditure.
iv) CIT v. Vanaja Textiles, 208 ITR 161 (Ker.): Replacement of unserviceable parts for better conduct and improvement of existing business does not amount to bringing new assets into existence.
Expenditure to be allowed as revenue expenditure.
v) CIT v. Shree Bhagavati Textiles Ltd., 207 ITR 826 (Ker.): In this case the principles laid down in 207 ITR 35 and 208 ITR 161 were followed.
vi) CIT v. Jofarbhai Akbarali & Bros. 211 ITR 496 (Bom.): Expenditure incurred on replacement of old petrol engine by new diesel engine was held to be allowable as revenue expenditure as no new asset is created.
vii) CIT v. Binny Ltd., 215 ITR 536 (Mad.): Expenditure on replacement of roof of wooden frames with GI Sheets by asbestos sheets placed on steel frames, without altering the entire structure was held to be revenue expenditure.
viii) CIT v. Jawahar Mills Ltd., 226 ITR 230 (Mad.): Expenditure on replacement of worn out hard board fixed to false ceiling by asbestos was allowable as revenue expenditure since it does not bring into existence any new asset or enduring benefit to the assessee.Ambica Cotton Mills Ltd., v. Joint Commissioner of Income Tax, 71 TTJ 871 (I.T.A.T., Madras): Business expenditure - capital or revenue expenditure - Replacement of machinery - If the machine that is replaced gives the end product and only one process is involved, the expenditure incurred would definitely be a capital expenditure - However, this conclusion would not apply to cotton mill which has various machineries for carrying out various processes and where some of the machineries are replaced by improved versions - Carding machine performs the initial process where cotton is cleaned before it is converted into yarn - Yarn is not the end product of a manufacturer of textiles - Therefore, replacement of carding machine by a new and improved carding machine would constitute revenue expenditure - Similarly, old cone winding machines were replaced by new and improved coners for producing better output - Such conversion into improved method is only to facilitate better business - Coners are not capable of functioning independently - assessee uses it by connecting it to the earlier process - Therefore, the expenditure on replacement is revenue expenditure.
x) Durairaj Mills Ltd., v. Deputy Commissioner of Income Tax, 72 TTJ 799 (I.T.A.T., Madras): Business expenditure - Capital or revenue expenditure - Replacement of textile machinery - Assessee-company replaced old combers and lap formers by similar machinery of same capacity - Individual machines are to be considered as part and parcel of entire machinery - There was qualitative improvement in the product as a result of replacement - Expenditure on replacement is revenue expenditure.
4. We have carefully considered the rival submissions, the fats of the case and have perused the case laws relied upon. In the expression "current repairs" which is not defined in the Act, two elements i.e., periodicity and necessity are implicit. But it is neither possible nor desirable to prescribe a period nor it is possible to evolve a formula to prescribe the extent of necessity that would justify an expenditure on repairs as "current repairs". With regard to both the elements a reasonable view is to be taken and a decision taken by a prudent businessman is to be allowed to prevail. Current repairs should ordinarily mean to be those repairs, which are needed periodically to maintain building, plant and machinery and furniture in their present condition, which arise for attention during the course of the year for efficient operation of business. One should not be swayed away by sheer extent of expenditure incurred on "current repairs" and to treat the same as capital expenditure.
4.1. While considering the nature of expenditure incurred on replacement of machinery i.e., whether capital or revenue, it has been held by Courts that if the replaced machinery gives the end product and only one manufacturing process is involved then the expenditure would be capital expenditure. However, expenditure on replacement of a machinery in a manufacturing concern having various machineries for carrying out various manufacturing processes would be revenue expenditure. In the case of a spinning mill, as in the case of the assessee, without doubt there are several processes like blowing cotton, carding, yarn making, winding of yarn etc. Winding the yarn in spindles with the help of auto-coners is only one of the manufacturing processes, which normally come into last few processes in the processing of cotton and making of yarn. The coners have no role other than preparing the cones, which are used for textile manufacturing.
Therefore, it cannot be said that coners are capable of functioning independently. One could argue about independent functioning of coners if the assessee was only engaged in job work or contract work of some one else and using the coners for such work. But the assessee under consideration was not engaged in such activity. The auto-coners are only parts of the whole plant, though they may be capable of carrying out independent activity in the circumstances mentioned above. The spinning mill was there and even after replacement of improved auto-coners for better performance the same plant continued to exist and it would be wrong to say that any new asset of enduring nature had come into existence.
4.2. In view of the above discussion and keeping in view the principles laid down the case laws referred to above we hold that the AO was not justified to disallow the expenditure incurred treating the same as capital expenditure. Deduction is to be allowed as "current repairs" as claimed by the assessee. Before parting we also state that the case laws relied upon by the Revenue do not tend any support to their grounds of appeals. Accordingly, order of CIT(A) is upheld.