REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.4579 OF 2009 [Arising out of SLP©No.13264 of 2007]  

Commissioner of Income Tax, Madurai ..Appellant

Versus

M/S. Sri Mangayarkarasi Mills (P) Ltd. ..Respondent

J U D G M E N T

TARUN CHATTERJEE, J.

1. Leave granted.

2. This  appeal  has been filed  by the  appellant  to  challenge the  

judgment and order of the High Court of Madras dated 18th of  

December,  2006  whereby  the  High  Court  had  dismissed  the  

appeal  filed  by  the  revenue  holding  that  the  expenditure  on  

replacement  of  machinery  was  revenue  in  nature  and  thus,  

allowable  as  deduction  under  the  Income  Tax  Act,  1961  

(hereinafter referred to as the ‘Act’).

3. The relevant  facts  as arising from the case made out  by the  

parties, leading to the filing of this appeal, and which will help us  

in understanding the controversy involved, can be summarized  

as under :-

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The Respondent in this appeal is engaged in the manufacture and  

sale of cotton yarn.  During the assessment year 1995-1996 the  

assessee  claimed  an  amount  of  Rs.  61,  28,150/-,  being  

expenditure  incurred  on  replacement  of  machinery,  as  revenue  

expenditure.  The assessee believed that  such expenditure  was  

merely expenditure on replacement of spare parts in the spinning  

mill system and, therefore, amounted to revenue expenditure.  

4. The Assessing Officer (AO) did not, however, accept this view of  

the  assessee  because,  according  to  him,  each  machine  in  a  

spinning mill does a different function and the product from one  

machine is taken and manually fed into another machine and the  

output  is  taken,  all  the  machines  are,  thus,  not  integrally  

connected.  Based  on  this  reasoning,  the  AO  disallowed  the  

above claim of the assessee and held the said expenditure to be  

of a capital nature. The AO, in passing this order dated 31st of  

December,  1997,  followed  the  decision  of  the  Income  Tax  

Appellate Tribunal (ITAT) Madras “C” Bench in the case of M/s.  

Nagammal  Mills  Ltd. V.  DCIT  dated  31st of  October,  1997  

(rendered  in  I.T.A.  No.  2774/Mds/93/90-91)  and  also  the  

decision of this Court in  Ballimal Naval Kishore and Another  

v.  CIT (224  ITR  414)  in  which  it  was  held  that  any  capital  

expenditure  claimed  by  the  assessee  for  acquiring  plant  and  

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machinery,  buildings,  fixed assets,  etc.,  cannot  be treated as  

repairs or renewals, and, therefore, it cannot be held as revenue  

expenditure in the year of acquisition of such fixed assets. The  

AO  further  held  that  the  assessee  had  treated  the  said  

expenditure as capital expenditure by capitalizing the assets in  

the books of account and had, thus, shown profit in its profit and  

loss account to third parties, like bankers, financial institutions,  

creditors, shareholders, etc. However, from the tax point of view,  

the  respondent  wanted  to  reduce the  net  profit  and  the  total  

taxable  income  by  claiming  such  huge  expenditure  in  the  

statement  of  total  income computation for  acquisition  of  fixed  

assets, as revenue expenditure. Therefore, he disallowed such  

expenditure of the assessee to be covered under section 31 of  

the Act or as revenue expenditure under section 37 of the Act.  

The AO further held that the assessee could claim depreciation  

on the said assets as per the income tax rules.

5. An appeal  was preferred by the Respondent against  the said  

order of the AO before the Commissioner of Income Tax (CIT)  

(Appeals)-I,  Madurai.  The Commissioner of  Income Tax (CIT)  

(Appeals)-I, Madurai, by its order dated 12th of March, 1998 in  

Appeal No. 324/97-98, allowed the appeal of the assessee, inter  

alia, holding that replacement of machinery by the assessee in  

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this case constituted revenue expenditure. In allowing the claim  

of the assessee, the CIT (Appeals) followed its own order for the  

Assessment  Year  1991-92  wherein  a  similar  allowance  was  

granted in favour of the assessee.  

6. Against this order of the CIT (Appeals), the revenue department  

went in appeal before the Tribunal. The appeal was disposed of  

by the ITAT, Chennai Bench-C in ITA No. 1139/Mad/1998 by its  

order  dated  16th of  June,  2004.  The  tribunal  followed  the  

decision of the Madras High Court  wherein it was decided that  

replacement  of  ring  frame is  only  replacement  of  part  of  the  

machinery in the textile mills. The tribunal, thus, upheld the order  

of the CIT (Appeals) and dismissed the appeal of the revenue.  

7. Aggrieved by the said order of the Tribunal, the revenue filed an  

appeal under section 260A of the Act before the High Court of  

Judicature at Madras.  

8. The High Court, relying on its own decision in CIT v. Janakiram  

Mills Ltd. (275 ITR 403) and  CIT v.  Loyal Textile Mills Ltd.  

(284  ITR  658), by  its  order  dated  18th of  December,  2006,  

dismissed  the  appeal  filed  by  the  revenue  and  held  that  the  

expenditure  on  replacement  of  machinery  was  revenue  in  

nature. The High Court  further held that the question whether  

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the  expenditure  on  replacement  of  machinery  was  capital  or  

revenue in nature was not determined by the treatment given to  

it by the assessee in the books of accounts or in the balance  

sheet. The claim has to be determined only by relying on the  

provisions of the Act and not by the accounting practice followed  

by the assessee.

9. The main question that needs to be decided in this appeal may  

be formulated as follows : -

“Whether  expenditure  incurred  on  replacement  of  machinery,  in the facts and circumstances of  this case,  amounts  to  ‘revenue  expenditure’  deductible  under  section 37 of the Act or ‘current repairs’ deductible under  section 31 of the Act.”

10.It is pertinent to mention here that the respondent only stated  

that its claim was limited to the expenditure being of a revenue  

nature and thus allowable under section 37 of the Act. Nowhere  

had  the  Respondent  claimed  that  the  said  expenditure  

amounted  to  ‘current  repairs’  under  section  31  of  the  Act.  

Further,  the appellant  itself  had restricted the issue to that  of  

revenue expenditure in its appeal to the High Court of Madras,  

against  which  it  has  now  filed  this  appeal.  According  to  the  

Respondent,  there  is  no  issue  regarding  the  expenditure  

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amounting to ‘current repairs’ under section 31 of the Act. We  

are not inclined to uphold this submission of the Respondent.  

The  fact  that  the  appellant  has  contended  before  the  courts  

below that each of the item of machinery in a spinning mill  is  

independent, that the respondent has argued against it, and has  

given evidence to try to support its contention, and also that the  

assessee believes that replacement is only of spare parts in the  

entire system of the spinning mills, makes it clear that a question  

has arisen here as to whether replacement of one or more items  

of  machinery  amounts  to  repair  of  the  entire  integrated  

machinery  of  the  spinning  mill  or  acquisition  of  a  new  

independent machinery.       

11. The learned counsel for the appellant submitted that the courts  

below erred in rejecting the contention of the department that  

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.  The Madras High Court has held in the case of  

Commissioner of Income Tax vs. Madras Cements Ltd..(255  

ITR 245) that each item of machinery in a cement factory has to  

be  considered  as  being  an  independent  machinery.  Learned  

counsel for the appellant, further, contended that the scheme of  

production in a textile mill is similar to the integrated scheme of  

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production  in  a  cement  factory,  where  no  independent  

commodity can be said to have been produced before it, which  

is a ground in a roller mill. As per the learned counsel for the  

appellant, the courts below erred in distinguishing this decision  

of  the  Madras  High  Court.  Thus,  given  that  each  item  of  

machinery is independent, the replacement of any such machine  

will amount to acquisition of a new asset and not ‘repair’ of the  

entire  integrated  machinery  of  the  spinning  mill.  In  this  

connection, reliance was placed on a decision of this Court in  

Ballimal Naval Kishore (supra) wherein it is clearly held that  

‘current repairs’ under the Act means expenditure on machinery,  

plant  or  furniture  which  is  not  for  the  purpose  of  renewal  or  

restoration but  which is only for  the purpose of  preserving or  

maintaining an already existing asset and that does not bring a  

new asset into existence or does not give to the assessee a new  

or different advantage. Learned counsel for the appellant further  

contended  that  replacement  of  old  machinery  with  new  

machinery cannot be considered as current repairs as such or  

even revenue expenditure, since it gives an enduring benefit to  

the assessee. Also, if in every case such replacement is allowed  

as revenue expenditure the principle of allowing depreciation will  

lose its significance. Learned counsel further submitted that the  

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courts below erred in overlooking the definitions of ‘assets’ and  

‘block of assets’ under explanation 3 of section 32(1)(ii) of the  

Act and thus, misconstruing the provision for composition of the  

‘block of assets’ as per the definition of ‘written down value’ as  

given under section 43(6)(C) of the Act, which aid the charging  

section 28, as to the assessability of income from business and  

profession. Learned counsel for the appellant further contended  

that  the  courts  below  had  gone  wrong  in  equating  the  

complicated  machinery  of  a  spinning  mill  with  a  tube-light  in  

relying on the Boards’ Circular No. 69 dated 27th of November,  

1957 on “tube-lights” which stated that only first time purchase of  

a  tube-light  amounts  to  capital  expenditure,  and  subsequent  

replacement would only be revenue expenditure. Lastly, learned  

counsel for the appellant emphasised that the reliance on the  

decision in Janakiram Mills (supra) case by the High Court was  

misplaced, in as much as the High Court had failed to appreciate  

that an appeal had already been filed against it before this Court  

and thus the decision of the High Court in the Janakiram Mills  

(supra) case was not final and binding.

12. The  learned  counsel  for  the  respondent  submitted  that  the  

respondent had incurred expenditure for replacing the old and  

worn  out  parts  of  machinery  of  the  spinning  mill.  They  are  

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merely parts of the spinning mill, dependent on other parts of the  

textile  mill,  and  the  replaced  machinery  cannot  function  

independently. Further, the learned counsel for the respondent  

argued  that  the  High  Court  rightly  distinguished  the  Madras  

Cements  Ltd. (supra)  case  because  in  that  case  the  whole  

plant  was  relocated  and  in  its  place  a  whole  new plant  was  

installed. The learned counsel for the respondent further argued  

that  the  case  of  Ballimal  Naval  Kishore (supra)  is  not  

applicable  here  because  in  that  case  a  ginning  factory  was  

converted to a cinema theatre and what the assessee there did  

was not replacement of machinery parts of an integrated plant  

but total conversion into a theatre. The learned counsel for the  

respondent has contended that the provisions relating to ‘assets’  

and ‘block of assets’ are immaterial in the instant case, which  

deals  with  revenue expenditure  on replacement  of  machinery  

and would not come under ‘block of assets’. Further, the learned  

counsel for the respondent also relied on the Boards’ Circular  

No.  69  dated  27th of  November,  1957  which,  the  respondent  

claimed, is still valid and as per which, replacement of worn out  

parts,  even  if  the  same  is  in  a  textile  mill,  would  constitute  

revenue expenditure.  The learned counsel  for  the respondent  

has also argued that  the argument  of  enduring benefit  to  the  

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respondent,  taken by the appellant,  is  no longer  a good law.  

Lastly,  learned counsel  for  the respondent  submitted that  the  

High Court was right in relying on its own judgment in the case  

of Janakiram Mills Ltd. (supra) because this Court, by its order  

dated 21st of August, 2007 in Civil Appeal No. 7594/2005, has  

already pronounced upon the validity of the judgment of the High  

Court in that matter and has disposed of the appeal in the same.

13.  We have  heard  and considered  all  these contentions  of  the  

learned counsel for the parties and also perused the materials  

on record and also examined the impugned order passed by the  

High Court.

14. The  first  issue  that  needs  to  be  resolved  is  whether  each  

machine in a textile mill is an independent item or merely a part  

of a complete spinning mill, which only together are capable of  

manufacture,  and there is no intermediate marketable product  

produced.  In  our  view,  this  issue  has   been  satisfactorily  

answered  by  the  recent  decision  of  this  Court  in  CIT v.  

Saravana Spinning Mills (P) Ltd. ((2007) 7 SCC 298). In that  

case this Court has held unambiguously that “each machine in a  

segment of a textile mill has an independent role to play in the   

mill and the output of each division is different from the other.”  

Dealing with a ring frame in a textile mill, this Court has held that  

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it  is  an  “independent  and  separate”  machine.  Further,  it  is  

accepted  that  each  machine  in  a  textile  mill  is  part  of  the  

integrated  process of  manufacture  of  yarn  and  is  integrally  

connected to the other machines in the mill for production of the  

final product. However, this interconnection does not take away  

the independent identity and distinct function of each machine.  

Thus,  each  machine  in  a  textile  mill  should  be  treated  

independently  as  such  and  not  as  a  mere  part  of  an  entire  

composite machinery of  the spinning mill.  As stated above,  it  

can at  best  be considered  part  of  an  integrated  manufacture  

process employed in a textile mill.   

15. Moving on to the issue of ‘current repairs’ under section 31 of  

the Act, the decision of this Court in CIT v. Saravana Spinning  

Mills (P) Ltd. (supra) is again relevant. This court has laid down  

that  in  order  to  determine  whether  a  particular  expenditure  

amounts to ‘current repairs’ the test is “whether the expenditure  

is incurred to ‘preserve and maintain’ an already existing asset  

and not to bring a new asset into existence or to obtain a new  

advantage.  For  ‘current  repairs’  determination,  whether  

expenditure is revenue or capital is not the proper test.” It is our  

opinion that the entire textile mill machinery cannot be regarded  

as  a  single  asset,  replacement  of  parts  of  which  can  be  

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considered to be for mere purpose of ‘preserving or maintaining’  

this asset. All  machines put together constitute the production  

process and each separate machine is an independent entity.  

Replacement  of  such  an old  machine  with  a  new one  would  

constitute the bringing into existence of a new asset in place of  

the old one and not repair of the old and existing machine. Also,  

a new asset in a textile mill is not only for temporary use. Rather  

it  gives the purchaser an enduring benefit  of  better  and more  

efficient production over a period of time. Thus, replacement of  

assets as in the instant case cannot amount to ‘current repairs’.  

The decision in  Saravana Mills  (supra)  case clearly mentions  

that replacement of a derelict ring frame by a new one does not  

amount to ‘current repairs’. Further in  Ballimal Naval Kishore  

(supra) this Court  has held  that a new asset or new/different  

advantage cannot amount to ‘current repairs’,  which has been  

subsequently approved in the Saravana Mills (supra) case. For  

these reasons, the expenditure made by the assessee cannot  

be allowed as  a  deduction  under  section  31  of  the  Act.  The  

judgment  of  this  Court  in  the  Saravana  Mills  (supra)  case  

mentions two exceptions in which replacement could amount to  

current repairs, namely:

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• “Where old parts are not available in the market (as seen  

in  the case of  CIT v.  Mahalakshmi Textile  Mills  Ltd.  

(AIR 1968 SC 101), or

• Where old parts have worked for 50-60 years.”

In the instant case, the assessee has not claimed any of the above  

stated exceptions. The Saravana Mills (supra) case also restricts the  

scope of ‘current repairs’ to repairs made to machinery, plant and/or  

furniture. In this case, replacement of machine can at best amount to  

a repair  made to the  process  of manufacture of  yarn.  Further  this  

court  has  also  observed  in  Saravana   Mills  (supra)  case  that  if  

replacement  was held to  be ‘current  repair’  in  such cases,  section  

31(i) will be completely redundant and absurdity will creep in because  

repair  implies  existence  of  a  part  of  the  machine  which  has  

malfunctioned, which is impossible in the case of such replacement.  

Thus,  this  replacement  expenditure  cannot  be  said  to  be  ‘current  

repairs’ after the decision in the Saravana Mills (supra) case.  

16. Given that  section 31 of  the Act  is not  applicable to the said  

expenditure of the assessee, the next issue is whether it can be  

considered ‘revenue expenditure’ of the nature envisaged under  

section 37 of the Act. The  Saravana Mills  (supra)  case holds  

that expenditure is deductible under section 37 only if it (a) is not  

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deductible under sections 30-36, (b) is of a revenue nature, (c) is  

incurred during the current accounting year and (d) is incurred  

wholly and exclusively for the purpose of the business. We are  

satisfied that the assessees’ expenditure satisfies requirements  

(a), (c) and (d) as stated above. The dispute is with respect to  

the nature of expenditure, that is, whether it is revenue or capital  

in nature.

17. We are of the opinion that the expenditure of the assessee in  

this  case  is  capital  in  nature  and  there  is  sufficient  judicial  

precedent  to  support  this  view.  In  the  case  of  Travancore  

Cochin Chemicals Ltd. V.  CIT ((1997) 2 SCC 20)  this Court  

held that expenditure is of a capital nature when it amounts to an  

enduring advantage for the business and repair is different from  

bringing a new asset  for  the business.  Further,  in  Lakshmiji   

Sugar Mills (P) Co. v. CIT (AIR 1972 SC 159) it has been held  

by  this  Court  that  bringing  into  existence  a  new asset  or  an  

enduring  benefit  for  the  assessee  amounts  to  capital  

expenditure.  We have already explained why replacement,  in  

this case, amounts to bringing into existence a new asset and  

also an enduring benefit for the assessee. It is clear then that  

expenditure of the assessee here is not of a revenue nature and  

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thus, cannot be claimed as a deduction under section 37 of the  

Act.

18.  As far  as reliance on the High Court  decision in  Janakiram  

Mills  (supra)  case is concerned, the  Saravana Mills  (supra)  

case has clearly set aside the said judgment of the Madras High  

Court  by  its  finding  on  the  scope  of  ‘current  repairs’  under  

section 31 of the Act. In CIT v. Ramaraju Surgical Cotton Mills  

(MANU/SC/8156/2007), where this court decided on the validity  

of the Madras High Court judgment in Janakiram Mills (supra),  

this court clarified that this High Court judgment has been set  

aside in the Saravana Mills (supra) case mainly on the ground  

that section 31 and section 37 of the Act,  operate in different  

spheres and the tests applicable to section 31 cannot be read  

into  section  37  of  the  Act.  Further,  even  in  the  Ramaraju  

(supra) case,  where  this  Court  distinguished  the Saravana  

Mills  (supra)  case  on  the  ground  that  that  appeal  was  with  

respect to deduction only under section 37 of the Act unlike the  

Saravana Mills (supra) case, this court set aside the High Court  

judgment  in  Janakiram  Mills  (supra)  case  and  remitted  the  

matter to the Commissioner (Appeals) to dispose of the matter in  

accordance  with  law.  In  the  light  of   the  observations  made  

herein  above,  it  is  thus  clear  that  the  High Court  decision in  

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Janakiram Mills (supra) case is not good law on which reliance  

may be placed.  

19.Consideration of the definition of ‘assets’ and ‘block of assets’  

and the concept of depreciation under the Act is not required to  

be  decided  upon  whether  the  expenditure  incurred  by  the  

assessee is a deductible expenditure or not. Hence we are not  

inclined to discuss the same.  

20. It is clear on record that the assessee has sought to treat the  

said  expenditure  differently  for  the  purposes  of  computing  its  

profit and for the purpose of payment of income tax. The said  

expenditure  has  been  treated  as  an  addition  to  the  existing  

assets in the former and as revenue expenditure in the latter.  

Though  accounting  practices  may  not  be  the  best  guide  in  

determining  the  nature  of  expenditure,  in  this  case  they  are  

indicative of what the assessee itself thought of the expenditure  

it  made  on  replacement  of  machinery  and  that  the  claim  for  

deduction under the Act was made merely to diminish the tax  

burden,  and not  under  the belief  that  it  was actually  revenue  

expenditure.         

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21.For the reasons aforesaid, we set aside the impugned judgment  

of  the  High  Court,  thereby restoring  the  judgment  of  the  AO  

disallowing the claim of deduction of the respondent.

22.The appeal is accordingly allowed. There will be no order as to  

costs.  

    …………….………J.

[Tarun Chatterjee]

New Delhi;           ……………………J.

July 21, 2009 [Aftab Alam]

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