CIT vs. Sri Mangayarkarasi Mills (Supreme Court)

Replacement expenditure is neither “current repairs” nor “revenue”

The assessee incurred expenditure on replacement of machinery in a textile mill and claimed the same as revenue expenditure on the ground that it was merely for replacement of spare parts in the spinning mill system and did not give rise to a new asset. In the books, the expenditure was capitalized. The CIT (A), ITAT and High Court decided in favour of the assessee. However, on appeal by the revenue, HELD, reversing all the lower authorities:

(i) Each machine in a textile mill is a separate and independent item though it is a part of the integrated process of manufacture of yarn and is integrally connected to the other machines in the mill for production of the final product. The machine cannot be treated as a mere part of an entire composite machinery of the spinning mill.

(ii) To constitute “current repairs” u/s 31 the expenditure must be incurred to ‘preserve and maintain’ an already existing asset and not to bring a new asset into existence or to obtain a new advantage. For determination of ‘current repairs’ the question whether the expenditure is revenue or capital is not the proper test. However, as the machine was an independent entity, its’ replacement brought into existence a new asset and was not current repairs.

(iii) The expenditure was also not “revenue” u/s 37 (1) as the replacement brought into existence a new asset and also gave rise to an enduring benefit.

(iv) Though accounting practices may not be the best guide in determining the nature of expenditure, the fact that the assessee treated the expenditure as an addition to the existing assets shows that the claim for deduction under the Act was made merely to diminish the tax burden and not under the belief that it was actually revenue expenditure.