Income-tax---

----Capital or revenue expenditure ---Repair---Expenditure on replacement of worn out parts of machinery---Machinery not replaced wholly---Expenditure was revenue expenditure---Indian Income Tax Act, 1961, S.37.

Held, that the expenditure on replacement of worn out parts of the machinery could not be treated as a capital expenditure as such replacements, renewals and repairs were to keep the business going and the amounts expended was for the purpose of continuing the business without break down of machinery and not starting a new business. The machinery was not replaced wholly nor were new machines added. The repairs, which involved the replacement of some parts did not amount to a fresh investment in capital goods and such expenditure could not be treated as capital expenditure.

Mrs. Chitra Venkataraman for the Commissioner.

P. P. S. Janarthana Raja for the Assessee.

JUDGMENT

R. JAYASIMHA BABU, J.---The question referred to us at the instance of the Revenue is "whether, on the facts and in the circumstances of the case, having regard to the fact that the additions were made to plant and machinery, thus, resulting in the addition. to cost of capital assets, the Appellate Tribunal was right in law in holding that all the replacement has been done in the worn out machinery and it is a revenue expenditure?"

The assessment year is 1978-79.

The respondent assessee-company is engaged in the manufacture and sale of yarn. During the previous year relevant to this assessment year, the assessee-company incurred an expenditure of Rs.4, 23, 736 on repairs and. renewals and replacement of worn-out parts of machinery. The Income-tax Officer treated that amount as capital expenditure, while on appeal, the Commissioner held it to be revenue expenditure. The Tribunal concurred with the view of the Commissioner.

The Commissioner in his order at paragraph 6 observed thus;

"In the previous year for the assessment year 1978-79, expenditure to the tune of Rs.4, 23, 000 odd was incurred on replacing a large number of very minor parts of the machinery installed in the preparatory, carding, spinning and cone winding sections of the appellant's spinning mill. While the aggregate outlay on the replacements was in absolute terms not inconsiderable, the replacement did not have the effect of increasing the capacity of the mill, and neither can they be regarded as having resulted in the reconstruction of the whole or substantially the whole, of the production apparatus, for, the expenditure incurred on them was relative to the current cost of replacement of the entire mill, which has a spindlage of over 28,000 practically negligible. Looking to all this, I shall have to hold that the cost of the replacements was deductible as outlay on repairs chargeable to revenue. The Income tax Officer's finding to the contrary has hence to be reversed."

The Tribunal affirmed the finding of the Commissioner and observed that practically all the items are in replacement of the worn-out parts of existing machinery.

The replacement of the worn-out parts of the machinery is not to be treated as a capital expenditure as such replacements, renewals and repairs were to keep the business going and the amounts expended was for the purpose of continuing the business without break down of machinery and not starting a new business. The machineries were not replaced wholly nor new machines were added. The repairs, which involved the replacement of some parts does not amount to a fresh investment in capital goods and such expenditure cannot be treated as capital expenditure.

The Tribunal, therefore, was right in the view that it took.

The question referred to us is, therefore, answered it, favour of the assessee and against the Revenue. No costs.

M.B.A./7/FC

Reference answered.