Income-tax---

----Capital or revenue expenditure---Textile mills---Purchase of new motors replacing worn out motors---Replacement of motors only for continuous production---Expenditure on purchase of, new motors was deductible as revenue expenditure---Indian Income Tax Act, 1961, S.37.

The assessee was a manufacturer of textiles. During the assessment, year 1980-81, the assessee replaced certain electric motors within the mill and claimed deduction of expenditure. The Income-tax Officer did not allow the deduction holding that the expenditure was capital in nature. On appeal, the Commissioner of Income-tax allowed the deduction holding-that renewal as distinguished from repair was reconstruction of the entirety. The Tribunal affirmed the Commissioner's view. The Revenue contended that the electric motors being items of machinery, which were capable of independent use, could not be regarded as parts of a machinery and the expenditure incurred on purchase of new motors must necessarily be regarded as capital expenditure: On a reference:

Held, that it could not be said that a new advantage was gained by the assessee in installing motors, as without the motors the entire productive system would have come to a halt. Replacement of such motors was only for the purpose of keeping the looms and spindles running and making it possible for production to continue. Therefore, it could not be held that the expenditure on the purchase of new motors was capital expenditure and not revenue expenditure.

New Shorrock Spinning and Manufacturing Co. Ltd. v. CIT (1956) 30 ITR 338 (Bom.) applied.

Ballimal Naval Kishore v. CIT (1997) 224 ITR 414 (SC) and Lurcott v. Wakely and Wheeler (1911) 1 KB 905 (CA) ref.

C.V. Rajan 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 as to whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding and had valid materials to hold that the expenditure only represents repairs and renewal to replace the worn out motors in the plant and machinery. The assessment year with which we are concerned is 1980-81.

The assessee is a manufacturer of taxtiles. It had, during the assessment year, replaced certain electric motors within the mill and claimed deduction of the expenditure incurred by it for the replacement of motors. The view of the Income-tax Officer was that the expenditure was not allowable as revenue expenditure, as the expenditure was capital in nature.

The Commissioner of Income-tax, on appeal disagreed with the. Income-tax Officer. He held that renewal as distinguished from repair is reconstruction of the entirety, meaning by the entirety, not necessarily the whole but substantially the whole subject-matter under discussion, as was observed by Buckley, L.J. in Lurou. Wakely and Wheeler (1911) 1 KB 905 (CA). He held that the entirety of the production apparatus of a spinning mill must not include electric motors, which power the spinning frames and the cost of replacement of motors represents revenue expenditure on repairs by way of renewal.

The Tribunal affirmed that view of the Commissioner and observed that, "it is not in dispute that the motor's purchased with the sum of Rs.35,727 have been used to replace the worn out motors in the plant and machinery".

Learned counsel for the Revenue submitted that the electric motors being items of machinery which are capable of independent use cannot be regarded as parts of a machinery and the expenditure incurred on purchase of new motors must necessarily, be, regarded as capital expenditure. Counsel relied on the oft-quoted statement of Chagla, C.J., in the case of New Shorrock Spinning and Manufacturing Co. Ltd. v. CIT (1956) 30 ITR 338 (Bom.), wherein it was observed that (page 343):

"The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its-object the obtaining of a new or fresh advantage. This -can be the only definition of 'repairs' because it is only by reason of this definition of repairs that the expenditure is, a revenue expenditure.

If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be capital expenditure, and it is clear that the deduction which the-Legislature has permitted under section 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure."

Reliance was also placed on the decision of the Supreme Court in the case of Ballimal Naval Kishore v. CIT (1997) 224 ITR 414, wherein the test set out by Chagla, C.J., was approved.

In this case, it cannot be said that a new advantage was gained by the assessee in installing motors as without the motors entire productive system would have come to a halt and the whole object for, which the business was established would have been rendered infructuous. Looms and spindles used for the manufacture of yarn and textiles could only be run with the aid of motors and the motors which had been installed at the time of establishment of the mills having become worn out needed replacement. Replacement of such motors is only for the purpose of keeping: the looms and spindles tanning and making it possible for the production to continue. Having regard to the nature of the use to which the motors were put in the factory which had merely replaced the worn out motors and the motors were essential for running the machinery with the aid of which the product, viz., textiles was manufactured, it cannot be held that the expenditure on the purchase of new motors was capital expenditure and not revenue expenditure.

Our answer to the question referred to us, therefore, is' in the affirmative, against the Revenue and in favour of the assessee. The assessee is entitled to costs of Rs.750.

M.B.A./105/FCReference answered.