Kerala H.C : The assessee claimed expenditure during the relevant assessment years on modernising its machinery.

Counsel Appeared

P.K. Ravindranatha Menon & N.R.K. Nair, for the Petitioner : C.M. Devan & V. Chitambaresh, for the Respondent

K.S. PARIPOORNAN, J. :

The same question arises for consideration in these three cases. In these original petitions, the Revenue is the petitioner. The same assessee is the respondent in all the cases. The matter relates to the asst. yrs. 1974-75, 1978- 79 and 1979-80. The assessee claimed expenditure during the relevant assessment years on modernising its machinery. It was claimed as revenue expenditure.

The assessing authority took the view that the expenditure incurred for all the years constituted cost of conversion of materials which would be either major renovation of the existing machinery or installation of new assets. Either way, it was for an enduring benefit. So it is capital expenditure. In appeal, the AAC, relying on the decision of the Supreme Court in CIT vs. Mahalakshmi Textile Mills Ltd. (1967) 66 ITR 710(SC) allowed the claim of the assessee in full. In further appeals to the Tribunal, a remit was ordered. After remit, the CIT (A) again allowed the claim of the assessee in full. The Revenue again appealed to the Tribunal. The Tribunal held that the decision of the CIT (A) did not call for any interference. The Revenue filed applications under s. 256(1) of the IT Act, for all the three years. Briefly stated, the question which the Revenue wanted the Tribunal to refer to this Court was whether the expenditure incurred by the assessee on modernising its machinery by replacing worn out and unserviceable parts in order to run the business smoothly and efficiently is allowable as a revenue expenditure.

The Tribunal declined to refer the questions desired by the Revenue for the decision of this Court. Thereafter, these three original petitions have been filed by the Revenue praying that the Tribunal may be directed to refer the question of law formulated in para.8 of the original petition for the decision of this Court.

2. We heard counsel for the Revenue, Mr. P. K. Ravindranatha Menon, as also counsel for the respondent- assessee. In para.4 of its appellate order, dated September l7, 1985 the Tribunal held as follows: “After elaborately examining the case, the CIT (A) has clearly held that the machinery of the assessee was quite old that it was essential to replace the old and worn out parts of the machinery for the efficient functioning of the unit and that the cost of the replaced parts constituted only 20 per cent of the value of the machinery. He has further held that the replacement of the parts which had become unserviceable has not, increased the overall capacity of the machinery though it has improved its working. These findings of the CIT (A) stand unrebutted. The ITO has not given his reasons in detail to justify his finding that the expenditure of Rs. 3,81,507 was of capital nature. There is no material on record to hold that the old asset was totally replaced by an absolutely new asset. In our opinion, therefore, the expenditure incurred by the assessee-company on renovating and replacing the old and worn out machinery is of revenue nature. In view of the fiercely competitive nature of present day business, the need for modernisation of the machinery cannot be over emphasised. That being so, the expenditure incurred by the assessee-company on modernising its machinery by replacing the old, worn out and unserviceable parts, in order to run its business smoothly, efficiently and profitably is allowable as revenue expenditure.”

3. We are of the view that what has been done by the assessee is just to replace old and worn out parts in order to make the unit function effectively. No new machinery or plant was installed and no new asset came into existence. On the facts of this case, and in the light of the findings of the Tribunal, the conclusion is inescapable that the expenditure incurred by the respondent-assessee for modernising its machinery by replacing old, worn out and unserviceable parts in order to run its business smoothly and efficiently is only revenue expenditure. The conclusion of the Tribunal is in accord with the decision of the Supreme Court in CIT vs. Mahalakshmi Textile Mills Ltd. (supra). We are of the view that no referable question of law arises out of the order of the Tribunal.

4. These original petitions are without merit. They are dismissed.

[Citation : 177 ITR 495]