CIT Vs Super Spinning Mills Ltd. (Madras High Court)
The case concerns the treatment of expenditure incurred on replacement of machinery by an assessee engaged in the manufacture and sale of cotton/blended yarn. For Assessment Year 1996–97, the assessee filed its return declaring income of ₹6,03,371 and claimed deduction of ₹6,19,43,673 incurred on replacement of machinery as revenue expenditure.
The Assessing Officer disallowed the claim, holding that the replaced machinery consisted of independent, modern, and sophisticated machines capable of higher production and improved quality. Therefore, the expenditure was treated as capital expenditure, and only depreciation at 12.5% was allowed.
On appeal, the Commissioner of Income Tax (Appeals) partly allowed the claim only in respect of certain spare parts that were found to be replacements of existing machinery and not substitutes for entire machinery. For Assessment Year 1997–98, a similar claim of ₹13,10,00,563 was disallowed and treated as capital expenditure, and the appellate authority upheld the Assessing Officer’s decision.
The assessee and the Revenue filed cross-appeals before the Income Tax Appellate Tribunal (ITAT). The ITAT allowed the assessee’s claim by relying on a jurisdictional High Court decision which held that replacement of worn-out machinery could be treated as current repairs and allowable as revenue expenditure if incurred wholly and exclusively for business purposes.
