HIGH COURT OF MADRAS

Commissioner of Income tax

v.

Fenner (India) Ltd.

P.D. Dinakaran and Mrs. Chitra Venkataraman, JJ.

T.C.(A) No. 2712 of 2006

January 22, 2007

Section 37(1) of the Income-tax Act, 1961 - Business Expenditure - Allowability of - Assessment year 1996-97 - Whether expenditure incurred by assessee on replacement of machinery without there being any acquisition of any new asset, much less capital of any enduring advantage, was allowable as revenue expenditure - Held, yes

FACTS

For the assessment year 1996-97, the assessee-company claimed expenditure in respect of the replacement of auto coner and moulds as revenue expenditure. The Assessing Officer disallowed the said claim and treated the same as capital expenditure. On appeal, the Commissioner (Appeals) held that the expenditure was revenue in nature and hence, deductible under section 37(1)

On revenue’s appeal, the Tribunal upheld the order of the Commissioner (Appeals).

In appeal under section 260A, the revenue contended that the Tribunal was not right in deciding the issue without going into the concept of block of asset.

HELD

The question whether the expenditure on replacement of machinery is capital or revenue is not determined by the treatment given in the books of account or in the balance-sheet. The claim has to be determined only by the provisions of the Act and not by the accounting practice of the assessee. (Para 4)

In the instant case, the assessee had only replaced the auto corner and moulds without discontinuing their production activities and there was no acquisition of any new asset much less capital of any enduring advantage. A perusal of the orders of the authorities below showed that no claim for depreciation was ever made before any authorities either by the assessee or by the revenue to consider the question of block of assets nor was there any necessity to do so. Moreover, the department did not raise any objection before the Tribunal regarding the claim of allowance on the premise of the block of assets concept. Therefore, such question did not arise out of the order of the Tribunal for considering the same by the High Court under section 260A. (Para 8)

Therefore, the expenditure on replacement of machinery was revenue expenditure and the Tribunal was right in allowing the claim of the assessee.

EDITOR’S NOTE:

In view of the decision of the madras High Court in CIT v. Wheels India Ltd. [2005] 275 ITR 319/416 Taxman 442 and CIT v. Sundaram Fasteners Ltd. [2005]272 ITR 652, the Tribunal was right in holding that excise duty and sales tax collection do not form part of the turnover for the purpose of calculation of deduction under section 80HHC.