Supreme Court Of India
CIT vs. Saravana Spinning Mills (P) Ltd.
Section 31(i)
Asst. Year 1993-94 & 1994-95
S.H. Kapadia & B. Sudershan Reddy, JJ.
Civil Appeal Nos. 7596 to 7599 and 7603 to 7606 of 2005
10th August, 2007
Counsel Appeared :
Vikas Singh & Mathai M. Paikeday with Arijit Prasad, Ranbir Chandra, Ms. Alka Sharma, Vikram Gulati, R. Basant, Preetish Kapur, Raghvendra Rao, Ms. Amrita Narayan, B.V. Balaram Das, Shishir Pinaki & A. Deb Kumar, for the Appellants : R. Venkataraman & S. Ganesh with K.K. Mani, C.K.R. Sekar, Mayur R. Shah, S. Nandakumar, K. Mayil Samy, G. Anandselvam, V.N. Raghupathy & Ms. Radha Rangaswamy, for the Respondents
JUDGMENT
S.H. Kapadia, J. :
Aggrieved by the common judgment dt. 29th April, 2005 passed by the High Court of judicature at Madras in Tax Case (Appeal) Nos. 53/2004 etc., the Department has come to this Court by way of a batch of civil appeals. For the sake of convenience, we have set out hereinbelow the facts in the lead case of Saravana Spinning Mills (P) Ltd. (Civil Appeal Nos. 7604-7605/2005). In this group of civil appeals we are required to decide the extent and scope of s. 31(i) of the IT Act, 1961 as it stood during the accounting years ending 31st March, 1993 and 31st March, 1994. For this purpose, we quote hereinbelow s. 31, as it stood during the relevant period :
“31. Repairs and insurance of machinery, plant and furniture.—In respect of repairs and insurance of machinery, plant or furniture used for the purposes of the business or profession, the following deductions shall be allowed— (i) the amount paid on account of current repairs thereto; (ii) the amount of any premium paid in respect of insurance against risk of damage or destruction thereof.”
4. The facts in Civil Appeal Nos. 7604-7605/2005 are as follows : M/s Sarvana Spinning Mills (P) Ltd. (the assessee) is a textile mill engaged in the manufacture of yarn. For the accounting year ending 31st March, 1993, it claimed deduction on account of “modernisation and replacement expenses” amounting to Rs. 97,95,755 whereas in the case of year ending 31st March, 1994 it has claimed Rs. 77,84,047 as deduction under the same head. The question which arises for determination in this case is whether the assessee was entitled to claim the aforestated amounts as “current repairs” under s. 31(i). This is the basic controversy in the above civil appeals. To complete the chronology of events, it may be stated that the assessee claimed the aforestated amounts as deduction in its annual returns. The aforestated figures are mentioned in the P&L a/c for the year ending 31st March, 1994. The return for the asst. yr. 199394 was filed on 31st Dec., 1993. It was processed under s. 143(1)(a). Subsequently, a notice under s. 143(2) was issued to the assessee. Pursuant to the said notice, the representative of the assessee appeared. He contended that during the previous year, the assessee had installed three ring frames at the cost of Rs. 23,99,855. According to the assessment order, the assessee claimed the cost of the new machinery as revenue expenditure on the ground that the expenditure involved should be treated as current repairs, since the new machinery was installed only as a replacement of the old machinery, which had become derelict (see p. 93 of the paper book). According to the assessee, the whole textile mill was a “plant” and the ring frames was one of the 25 machines which constituted one single process and, therefore, replacement of the frames be treated as replacement of part of the plant/total machinery and not replacement of a machine. The claim of the assessee was disallowed on the ground that the expenditure was on capital account; that it was not a revenue expenditure as the assessee had obtained enduring benefit by replacing the old machine with new machine. The claim of the assessee was also rejected on the ground that the machine replaced was an independent machine by itself and that it was not a part of portion of the other textile machinery (plant) as claimed by the assessee. The above arguments of the assessee were rejected by the AO stating, that the entire mill cannot be construed as plant/total machinery; that the said ring frames constituted independent and separate machines; that each frame was capable of independent and specific function and, therefore, it was not possible to hold that the entire process as one single item of machinery of which all the others are parts. In this connection, the AO held that the assessee had replaced the existing old machines by new machines and thereby it had obtained enduring benefit and, therefore, the expenditure incurred thereon constituted capital expenditure and not “current repairs”. Accordingly, the assessee’s claim for deduction was dismissed.
Aggrieved by the said order, the matter was carried in appeal to the CIT(A). By order dt. 24th Oct., 1996 the CIT(A) came to the conclusion that the expenditure related to replacement of three ring frames, which constituted an integral part of the production system in a textile mill and, therefore, replacement of an item cannot be regarded as installation of separate machine. Accordingly, the CIT(A) allowed the appeal and allowed the expenditure as revenue expenditure. Aggrieved by the said decision of the appellate authority, the Department carried the matter in appeal to the Tribunal, which took the view that different segments of a textile mill are integrated parts of a continuous process and the expenditure incurred on replacement of the machines in any segment of the plant should be treated as revenue expenditure. Accordingly, the appeals filed by the Department stood dismissed. Aggrieved by the decision of the Tribunal, the matter was carried in reference to the Division Bench of the Madras High Court. The High Court has given a common judgment in this batch of civil appeals. There are different assessees including M/s Saravana Spinning Mills (P) Ltd. Apart from ring frames, different assessees have claimed deduction for other items like simplex machines, doubling machines, cone winders, card conversion equipments. Each of these items have been treated by the Department as independent machines in the mill. At this stage, suffice it to state that the High Court had affirmed the decision of the Tribunal by holding that textile mills in Tamil Nadu have been claiming deduction on account of purchase of new machinery as revenue expenditure where the purchase was as a part of modernisation programme and where the purchase was concerning replacement of old machinery. This answer was given by the High Court in para 6 of its judgment with reference to the question framed in para 5. We quote hereinbelow para 5 of the said judgment :
The point for consideration is, whether the modernization/current/repair expenditure is allowable as “revenue expenditure”, as claimed by the assessees or the replacement of cards/blow room machinery/combing machinery etc., are to be considered as “capital expenditure”, as claimed by the Revenue ?” (emphasis, italicised in print, supplied) While disposing of the appeals, the High Court had relied upon the report of South India Textile Research Association (“SITRA”), Coimbatore. Placing reliance on the said report, the High Court held, that the process of converting fibre to yarn was one continuous interlinked process; that the output from various intermediate stages of production (carding, combing, draw frame silvers and roving) cannot be sold or marketed or used for any other purpose and, therefore, according to the High Court, the entire textile mill should be considered to be as one continuous process plant commencing from the blow room to the winding section. In the context of the ring frame the High Court held by placing reliance on the report of SITRA that ring frame cannot work independently, but it can work only as a part of spinning unit. According to the High Court, all the above items of machines put together would amount to one complete textile mill which is capable of manufacturing yarn. According to the High Court, all the above items of machines, though independent, are part of an integrated textile mill and, therefore, the expenditure incurred on replacement of any one of the above items of machine was an expenditure incurred to maintain production without breakdown and, therefore, the assessee was entitled to claim deduction for the said expenditure as revenue expenditure under s. 31(i). Accordingly, the High Court has affirmed the view expressed by the Tribunal. Hence, these civil appeals.
The issue before us is whether the expenditure incurred by the assessee for modernisation and replacement came within the connotation of the words “current repairs” in s. 31(i). Before analysing s. 31(i) of the IT Act, we must look at the process of manufacture and the composition of a textile mill in the broad sense. Broadly, a textile mill manufactures different varieties of yarns, namely, cotton yarn, melange yarn, colour melange, polyster viscose yarn and the process of manufacture goes through various segments/divisions. The first segment is the blow room. The function of the blow room is to clean the raw cotton thoroughly before it is fed to the Carding Department. The function of the Carding Department is to remove the waste in the cotton received from the blow room. In the Carding Department there are individual carding machines. They are equipped with autolevelers to produce silver. The carding machine removes neps formed in the blow room line during the process. The carding machine produces silver for better quality of yarn. This silver produced in the Carding Department is carried to the Combing Department, for manufacturing combed yarn. After the carding operation, the impurities present in the silver will be removed in the Combing Department. That silver which is produced in the combing Department will pass through the draw frames used in the drawing Department in order to obtain parallel fibers. These parallel fibers go through speed frames in the Roving Department in order to convert the silver into thinner forms called as roves which roves are thereafter sent to the Spinning Department. In the Spinning Department we have what is called as the ring frames (machines) which are used to spin the roves received from the Roving Department. The ring frames are machines, which are equipped with cleaners, removes the accumulated dirt. The ring frames play an important role in producing quality yarn. Thereafter, the yarn obtained from the Spinning Department goes to the winding Department. In the winding Department we have autoconers in order to produce fault-free yarn.
From the above facts, it is clear that blow room, carding, combing, drawing, roving, spinning and winding are different Departments/divisions in a textile mill. In each Department/division there are several machines. Each of the above Departments/divisions perform different functions and the functioning of each Department/division produces a different output which is carried forward to the next Department/division having different machines therein. For example, in the blow room there are different beaters (machines) which open the raw cotton and remove the dirt therefrom. That cotton is forwarded to the Carding Department in which there are carding machines equipped with autolevelers which produces silver which is then carried forward to the combing Department. It is important to note that each Department has different items of machines, for example, in the blow room we have machines called as beaters. Similarly, in the Carding Department we have carding machines with autolevelers. If the autoleveler fails, the carding machine becomes non-functional. If an autoleveler is to be repaired then that repair would come within the connotation of the word “current repairs” because it is a part of the carding machine. Even if in a given case, replacement of an autoleveler could come within the connotation of the word “current repairs” if the old part is not available in the market. It is a “current repair” because the carding machine remains as an asset without any change even after repair or replacement of the autoleveler. To give an example, a compressor is an important part of an air-condition machine. Repair of the compressor will come in the connotation of the word “current repairs” in s. 31(i) of the said Act because the assessee does not replace the air- condition machine. At the highest, he replaces a part of the air-condition machine. So is in the case of the picture tube in a television set, when the picture tube is replaced the television set is not replaced, therefore, such repairs alone can come within the connotation of the word “current repairs” in s. 31(i) of the said Act as it stood at the material time.
They are effected to preserve and maintain the asset, viz., air-conditioner or carding machine. Lastly, it cannot be said that the textile mill constitutes a plant as it is one continuous process of manufacture beginning from blow room to the winding section. As stated above, different outputs flow from different segments of production like blow room, carding, combing, roving, winding etc. In the case of a textile mill there is no process whereby raw material is fed on one end and the finished product comes out at the other end without intervention in between. For example, in the case of continuous casting machine in the steel industry we have one continuous integrated process under which scrap (raw material) is put in and what comes out is steel or iron or aluminium. Another example, in the case of “pasteurization plant” we have three chambers and ducts. In the first milk is collected, in the second it is heated and in the third it is cooled. Duct carries hot and cold water. The raw material is raw milk, the end product is the pasteurized milk. In the heat chamber there is the heater. In the cooling chamber we have cooling plant which has a concept similar to air-condition plant. Such a process is one integrated process. Therefore, the Tribunal and the High Court erred in holding that the manufacturing process in the textile mill is one continuous integrated process. An allowance is granted by cl. (i) of s. 31 in respect of amount expended on current repairs to machinery,
plant or furniture used for the purposes of business, irrespective of whether the assessee is the owner of the assets or has only used them. The expression “current repairs” denotes repairs which are attended to when the need for them arises from the viewpoint of a businessman. The word “repair” involves renewal. However, the words used in s. 31(i) are “current repairs”. The object behind s. 31(i) is to preserve and maintain the asset and not to bring in a new asset. In our view, s. 31(i) limits the scope of allowability of expenditure as deduction in respect of repairs made to machinery, plant or furniture by restricting it to the concept of “current repairs”. All repairs are not current repairs. Sec. 37(1) allows claims for expenditure which are not of capital nature. However, even s. 37(1) excludes those items of expenditure which expressly falls in ss. 30 to 36. The effect is to delimit the scope of allowability of deductions for repairs to the extent provided for in ss. 30 to 36. To decide the applicability of s. 31(i) the test is not whether the expenditure is revenue or capital in nature, which test has been wrongly applied by the High Court, but whether the expenditure is “current repairs”. The basic test to find out as to what would constitute current repairs is that the expenditure must have been incurred to “preserve and maintain” an already existing asset, and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage.
In fact, in the present case, in the balance sheet the assessee, viz., M/s Saravana Spinning Mills has indicated the above expense as an item incurred for purchase of a new asset. In our view, the High Court had erred in placing reliance on the report of SITRA in coming to the conclusion that the textile mill is a plant under s. 31(i). As stated above, each machine in a segment has an independent role to play in the mill and the output of each division is different from the other. “Repair” implies the existence of a part of the machine which has malfunction. If the argument of the assessee herein before us is to be accepted it would result in absurdity and it would make the provisions of s. 31(i) completely redundant. According to Shri R. Venkataraman, learned senior counsel for the assessee, the textile plant consists of about 25 machines. One of such machines is the ring frame. If the argument of the assessee is to be accepted, it would mean that periodically one machine out of 25 would be replaced, and on that basis, from time to time, each of these 25 machines in the textile plant would be entitled to claim allowance under s. 31(i). In our view, the AO was right in holding that each machine including the ring frame was an independent and separate machine capable of independent and specific function and, therefore, the expenditure incurred for replacement of the new machine would not come within the meaning of the words “current repairs”. In the present case, it is not the case of the assessee that a part of the machine (out of 25 machines) needed repairs. The entire machine had been replaced. Therefore, the expenditure incurred by the assessee did not fall within the meaning of “current repairs” in s. 31(i).
This Court in the case of Ballimal Naval Kishore vs. CIT (1997) 138 CTR (SC) 284 : (1997) 2 SCC 449 approved the test formulated by Chagla C.J. in the case of New Shorrock Spinning & Manufacturing Co. Ltd. vs. CIT (1956) 30 ITR 338 (Bom) as to when the expenditure can be said to have been incurred on current repairs. In that case it was observed as follows : “The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of “repairs” because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure. If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which the legislature has permitted under s. 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure.” In the said judgment, it has been further observed by Chagla C.J. that the definition of the word “repair” does not create much difficulty, but the difficulty is created by the word “current” which qualifies the expression “repair”. This adjective, namely, “current” is put in by the legislature. It indicates that the legislature did not intend that the assessee should be permitted to claim allowance for all kinds of repairs, even though conceptually the expenditure may be revenue expenditure. The legislature intended to stress that under s. 31(i) the permissible deduction admissible is only for current repairs, therefore, the question as to whether the expenditure incurred by the assessee conceptually is revenue or capital in nature is not relevant for deciding the question as to whether such an expenditure comes within the etymological meaning of the expression “current repairs”. In other words, even if the expenditure is revenue, it may not fall in the connotation of “current repairs” in s. 31(i). The test formulated above applies to cases where the assessee claims allowance under s. 31(i). In the present case, the High Court has lost sight of the test to be applied for an expenditure to fall under s. 31(i) as “current repairs”. It has embarked on the test which was not applicable, viz., whether the expenditure is revenue or capital in nature. The above test was not relevant during the assessment years in question as the Explanation to s. 31(i) was inserted later on. In our view, applying the test laid down by Chagla C.J. in the case of New Shorrock Spinning & Manufacturing Co. Ltd. (supra) the assessees were not entitled to claim allowance under s. 31(i) for current repairs. In our view, the ring frame by itself constituted an independent machine with an independent function, which was replaced by a new ring frame giving enduring advantage to the assessee and, therefore, the expenditure incurred in that regard cannot come within the expression “current repairs”. In our view, replacement of three ring frames constituted substitution of an old asset by a new asset and, therefore, the expenditure incurred did not constitute current repairs.
On behalf of the assessee, reliance was placed on the judgment of this Court in the case of CIT vs. Mahalakshmi Textile Mills Ltd. (1967) 3 SCR 957. In that case, the assessee carried on the business of manufacture and sale of cotton yarn. In the previous year relevant to asst. yr. 195657, the assessee spent Rs. 93,000 approximately for introduction of “Casablanca Conversion System” in its plant. The ITO disallowed the claim of the assessee. The appellate authority agreed with the ITO. Before the Tribunal, the assessee contended that the amount expended for introducing Casablanca Conversion System was current expenditure under s. 10(2)(v) of the Indian IT Act, 1922 [s. 31(i) of the 1961 Act]. The Tribunal inspected the spinning factory of the assessee. It studied the working of the machinery with the Casablanca Conversion System. It also studied the literature published by the manufacturer of Casablanca Conversion System. After a detailed study, the Tribunal held that on account of the stress and strain of production over a long period there was a need for change and that the assessee had replaced old parts by introducing the said system. Accordingly, the Tribunal treated the expenditure incurred for introducing the Casablanca Conversion System as allowance under s. 10(2)(v) of the Indian IT Act, 1922. The High Court accepted the findings recorded by the Tribunal saying that by the introduction of the Casablanca Conversion System no new machinery or plant was installed, but the introduction of the system amounted to fitting of improved version and the expenditure in that behalf was of revenue nature. The High Court observed that certain parts of the machinery had worn out, they needed replacement, and when it was found that the old type of replacement parts were not available in the market, the assessee had to introduce the Casablanca Conversion System.
This finding was accepted by this Court in the above judgment. In our view, the said judgment has no application with the facts of the present case. At the outset, we may state that replacement generally may not fall under the expression “current repairs” but, in certain cases, where the old parts were not available in the market or where the old parts had worked for 50 to 60 years, replacement can, in such cases of exception, fall within the expression “current repairs”. In Mahalakshmi Textile Mills case (supra) the finding recorded by the Tribunal and the High Court was that old type of replacement parts were not available in the market and, therefore, the expenditure came within the expression “current repairs”. That is not the case before us, hence, the said judgment has no application to the facts of the present case. Moreover, the judgment of this Court in Mahalakshmi Textile Mills (supra) has not defined the word “asset” to mean the entire production system in the textile mill. In the said judgment, it is nowhere stated that the entire textile mill is one single asset and that it represents one single integrated process. Some of the decisions cited on behalf of the assessees are not being discussed by us as they deal with cases falling under s. 37. That section is a residuary section. Under s. 37, a particular item of expenditure may be deductible if the expenditure does not fall within ss. 30 to 36; that it should have been incurred in the accounting year; that it should be in respect of a business carried on by the assessee; that it should not be on personal account of the assessee; that it should not be in the nature of capital expenditure and that it should be spent wholly and exclusively for business. Whether expenditure is ‘revenue’ or ‘capital in nature’ would depend upon several factors, namely, nature of the expenditure, nature of the business activity etc. For example, construction of the building for self-use may be capital in nature whereas in the hands of the builder a building constitutes his stock- in-trade and, therefore, on the sale of the building the expenditure has to be revenue. Therefore, the builder would be entitled to deduct such expenditure from the sale proceeds/gross income. Therefore, whether an expenditure is revenue or capital in nature would depend on the facts of each case. We do not wish to express any opinion on the applicability of s. 37(1) in the present case. There were certain civil appeals wrongly tagged with the present batch which will be decided separately by us as they concern with s. 37(1). Hence we do not wish to express any opinion on applicability of s. 37(1).
Before concluding, one aspect needs to be discussed. It was submitted on behalf of the assessees, in the present case, that although the assessees had claimed deduction under s. 31(i), they should be permitted to claim deduction under s. 37(1) as on facts it has been held by CIT(A), Tribunal and the High Court that the expenditure was revenue in nature. We find no merit in this contention. As stated above, even if the expenditure incurred is revenue in nature, still it may not fall in the connotation of the words “current repairs” under s. 31(i) which test has not kept in mind. As held by Chagla C.J. in the case of New Shorrock Spinning & Manufacturing Co. (supra) all repairs do not attract s. 31(i) even though the expenditure is revenue in nature. Therefore, the basic test, which had not been applied, in the present case, by CIT(A), Tribunal and the High Court, is whether the expenditure came within the expression “current repairs”. Instead all the three authorities proceeded on the footing that since the expenditure was revenue it constituted “current repairs”. It is for this reason that we have interfered with the concurrent findings given by CIT(A), Tribunal and the High Court. For the aforestated reasons, we find merit in the above batch of civil appeals filed by the Department. Accordingly, we hold in this batch of civil appeals that the assessees were not entitled to claim allowance under s. 31(i) of the IT Act as it stood at the relevant time. Accordingly, the civil appeals stand allowed with no order as to costs.
[Citation : 293 ITR 201]
