Expenditure incurred by the assessee towards replacement of machinery with new machinery constitutes a capital expenditure.

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Expenditure incurred by the assessee towards replacement of machinery with new machinery constitutes a capital expenditure.

Short Overview of the Case:
In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming order of the Assessing Officer disallowing expenditure on replacement of machinery and holding it as capital expenditure not revenue in nature.
The appellant was a company incorporated under the provisions of the Companies Act, 1956.  It was engaged in the business of manufacturing of machinery parts.
The return of income (ITR) was filed declaring a loss. The case was selected for scrutiny under CASS by issuing notice u/s 143(2) of the Income Tax Act, 1961 (‘the Act’).
The assessee had incurred an expenditure towards the cost of replacement of machinery which was claimed under the repairs and maintenance.
The Assessing Officer (AO) while completing the assessment, made an addition treating the expenditure incurred on Repairs and Maintenance as capital expenditure.
The CIT(A) placing reliance on the judgment of the Hon’ble Supreme Court confirmed the action of the Assessing Officer by holding that it was a case of substitution of old asset by new asset and the expenditure did not fall within the meaning of current repairs and maintenance as defined u/s 31 of the Act.
The assessee submitted that the expenditure was incurred on a main part of main machines and it could not function independently and placing reliance on various judgments, it submitted that the expenditure should be treated as revenue.
The Tribunal observed that it was a part of the main machinery which could not perform any function independently and there was no increase of productivity or capacity on account of incurring that expenditure.
The Tribunal noted that the Hon’ble Supreme Court did categorically held that the expenditure incurred by the assessee towards replacement of machinery with new machinery constitutes a capital expenditure.  Even it was held that each machinery which functions independently should be treated as such not as a mere part of any composite machinery of the plant.
The Tribunal further noted that the said decisions of the Apex Court had been considered by the High Court in decision relied upon by the assessee.
The Tribunal further noted that even the Hon’ble Supreme Court in the subsequent decision had laid down the proposition that the expenditure incurred on replacement of a part of machinery can be allowed as a revenue deduction in case there is no increase of productivity or capacity as result of this expenditure. In this case, the Hon’ble Supreme Court held that ratio of decision in the case relied upon by the Revenue was not applicable.
The Tribunal further observed that the Hon’ble Supreme Court in series of subsequent judgments set-aside the issue to the lower authorities to find out the relevant facts and render the decision in accordance with law without accepting the ratio laid down in judgment relied upon by the Revenue.
The Tribunal held the reasoning of the ld. CIT(A) cannot be sustained in the eyes of law.  In the present case admittedly the claim for deduction was not u/s 31 but u/s 37 of the Act.  Therefore, the test to be applied what is replaced is only part and the necessity of replacement had arisen on account of the part become old and there is no increase in productivity or capacity after the replacement.
The Tribunal noted that it was not the case of the Revenue that on account of replacement of the part of machinery in productivity or capacity of production had gone up and that part of machine can independently work and deliver the different output.
Accordingly, the Tribunal set-aside the orders of the lower authorities and directed the Assessing Officer to allow the same as revenue expenditure and allowed the appeal of in favour of the assessee.
ABCAUS 3441 (2021) (01) ITAT.
Important case law relied referred:
CIT vs. Sri Mangayarkarasi Mills P. Ltd, 315 ITR 114
CIT vs. Sarvana Spinning Mills Ltd., 293 ITR 201.
Elgi Equipments Ltd. vs. JCIT, 120 taxmann.com 142
CIT vs. McDowell and Co. Ltd., 314 ITR 177
CIT vs. McDowell and Co. Ltd., 314 ITR 180
CIT vs. Udaipur Distillery Co. Ltd., 314 ITR 188
Shreyans Industries Ltd. vs. CIT, 314 ITR 302.
CIT vs. Neyveli Lignite Corporation Ltd., 388 ITR 172
CIT vs. Midas Rubber (P.) Ltd., 43 taxmann.com 112
CIT Vs. Ramaraju Surgical Cotton Mills, 294 ITR 328

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