Facts:- M/s. Sri Mangayarkarasi Mills (P) Ltd. (“assessee/SMMP Ltd.”), engaged in the manufacture and sale of cotton yarn, incurred expenditure on replacement of machinery. While on one hand, SMMP Ltd. capitalized the said expenditure in its books of account and in its return of income, on the other, the same was claimed as revenue expenditure on the basis that such expenditure was merely incurred on replacement of spare parts in the spinning mill system.
The Assessing Officer disallowed the claim of the assessee. The Commissioner of Income-tax (Appeals), however, allowed the claim of the assessee, which was upheld by the Income-tax Appellate Tribunal and the High Court. The Revenue, thereafter, filed an appeal before the Supreme Court against the order of the High Court.
Issue before the Supreme Court:- Whether expenditure incurred on replacement of machinery is revenue expenditure deductible under section 37 of the Income-tax Act, 1961 (“the Act”) or „current repairs? deductible under section 31 of the Act?
Revenue’s contention
- Each item of machinery in a textile mill should be treated as independent and not an integral part of the whole plant of the spinning mill. Consequently, replacement of any such machine of the mill would amount to acquisition of a new asset and not repair of the entire integrated machinery of the spinning mill.
- Repairs can be said to be carried out when the expenditure is incurred only for the purpose of preserving or maintaining an existing asset and not for renewal or restoration of an asset which is the case of the assessee, wherein by replacement of old machinery with new machinery, it has derived benefit of enduring nature.
Assessee’s contention
