I replaced worn-out ring frames in my spinning mill as part of modernisation. Can I write the cost off as current repairs because the whole mill is one plant?
No. The Supreme Court held that a ring frame is an independent machine with its own function, and replacing it substitutes a new asset for an old one rather than preserving an existing one. The test under section 31(i) is not whether the spending is revenue or capital but whether it is current repairs, and current repairs means expenditure to preserve and maintain an asset already in existence, not to bring a new asset into being or obtain a new advantage. The Court rejected the argument that a textile mill is one continuous integrated process and therefore a single plant.
Decided by the Supreme Court (Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy JJ; judgment by Kapadia J) on 2007-08-10, reported as 2007 AIR SCW 5196; 2007 (7) SCC 298; AIR 2007 SC (Supp) 741; 2007 Tax LR 741; (2007) 9 SCALE 697; (2007) 293 ITR 201. It bears on section 31(i), section 37(1) of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the decision that ended the Tamil Nadu replacement-cost line of cases, in which mills had been writing off machine replacements as modernisation on the strength of a SITRA report describing spinning as one continuous process. Two propositions in it do the work everywhere, not just in textiles. First, section 31(i) has its own test, and a finding that expenditure is revenue in nature does not answer it, so a Tribunal that reasons from revenue to current repairs has applied the wrong test. Second, the asset is the machine that malfunctions, not the production line it sits in; repair of a part is current repairs, replacement of the whole machine is not. The Court's own examples - the compressor in an air conditioner, the picture tube in a television, the autoleveller in a carding machine - are the ones a practitioner argues from.
Binding on every court and authority in India.
Read aloud by your device. Press again to stop.
A batch of appeals by the Department against a common judgment of the Madras High Court of 29 April 2005. In the lead case the assessee was a textile mill making yarn. For the year ended 31 March 1993 it claimed Rs 97,95,755 and for the year ended 31 March 1994 Rs 77,84,047 as modernisation and replacement expenses. During the earlier year it had installed three ring frames costing Rs 23,99,855, and claimed the cost as revenue expenditure on the footing that the new machines merely replaced old derelict ones. Its case was that the whole mill was a plant, the ring frame being one of about 25 machines in one single process, so that replacing a frame was replacing part of the plant. The Assessing Officer held that each ring frame was an independent machine capable of its own specific function, that the mill was not one plant, and that replacing old machines with new gave enduring benefit, so the spending was capital. The Commissioner (Appeals) reversed him, the Tribunal dismissed the Department's appeal, and the High Court affirmed, relying on a report of the South India Textile Research Association that intermediate outputs of a spinning mill cannot be sold or used otherwise and that a ring frame cannot work independently. Other assessees in the batch had replaced simplex machines, doubling machines, cone winders and card conversion equipment.
The appeals were allowed with no order as to costs. The assessees were not entitled to an allowance under section 31(i) as it stood at the relevant time. Each machine in a segment of the mill, including the ring frame, is an independent and separate machine capable of an independent and specific function, and the Assessing Officer was right to say so. Replacing three ring frames was the substitution of a new asset for an old one and not current repairs. The Tribunal and the High Court erred in treating manufacture in a textile mill as one continuous integrated process, and the High Court erred in relying on the SITRA report to hold the whole mill a plant for section 31(i). The Court also rejected the alternative plea that, the expenditure having been found revenue in nature by three authorities, deduction should be allowed under section 37(1): even revenue expenditure may not be current repairs, and the concurrent findings were interfered with precisely because none of the three authorities had applied the current repairs test. The Court expressly declined to express any opinion on whether section 37(1) applied.
Section 31(i) allows the amount paid on account of current repairs to machinery, plant or furniture used for the business. The Court stressed the qualifying word current: the legislature did not intend an allowance for all repairs, so the question whether the expenditure is conceptually revenue or capital is not the test, and the High Court went wrong by applying it. The governing test is the one Chagla CJ stated in New Shorrock Spinning and Manufacturing Co Ltd v CIT (1956) 30 ITR 338, approved by the Supreme Court in Ballimal Naval Kishore v CIT (1997) 2 SCC 449: what must be happening is the preservation and maintenance of an already existing asset, and the object must not be to bring a new asset into existence or to obtain a new or fresh advantage. Repair implies a part of a machine that has malfunctioned. The Court illustrated the boundary: repairing or even replacing an autoleveller is current repairs because the carding machine survives unchanged, as with a compressor in an air conditioner or a picture tube in a television. Replacing the machine itself is not. On the integrated process argument, the Court went through the mill segment by segment - blow room, carding, combing, drawing, roving, spinning, winding - and found that each has its own machines and its own distinct output passed to the next, unlike a continuous casting machine in a steel plant or a pasteurisation plant, where raw material goes in at one end and the finished product comes out at the other. Accepting the assessee's case would let each of 25 machines be replaced in turn and claimed as repairs, which would make section 31(i) redundant. Mahalakshmi Textile Mills was distinguished: there the Tribunal had found the old replacement parts were no longer available in the market, and the case never held a whole mill to be one asset. The Court noted that section 37(1) itself excludes what falls within sections 30 to 36, so the scope of the repairs allowance is delimited by section 31.
the expenditure must have been incurred to "preserve and maintain" an already existing asset, and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that a ring frame is an independent machine with its own function, and replacing it substitutes a new asset for an old one rather than preserving an existing one. The test under section 31(i) is not whether the spending is revenue or capital but whether it is current repairs, and current repairs means expenditure to preserve and maintain an asset already in existence, not to bring a new asset into being or obtain a new advantage. The Court rejected the argument that a textile mill is one continuous integrated process and therefore a single plant. This was decided by the Supreme Court (Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy JJ; judgment by Kapadia J) and bears on section 31(i), section 37(1) of the Income Tax Act 1961. It is reported as 2007 AIR SCW 5196; 2007 (7) SCC 298; AIR 2007 SC (Supp) 741; 2007 Tax LR 741; (2007) 9 SCALE 697; (2007) 293 ITR 201. This is the decision that ended the Tamil Nadu replacement-cost line of cases, in which mills had been writing off machine replacements as modernisation on the strength of a SITRA report describing spinning as one continuous process. Two propositions in it do the work everywhere, not just in textiles. First, section 31(i) has its own test, and a finding that expenditure is revenue in nature does not answer it, so a Tribunal that reasons from revenue to current repairs has applied the wrong test. Second, the asset is the machine that malfunctions, not the production line it sits in; repair of a part is current repairs, replacement of the whole machine is not. The Court's own examples - the compressor in an air conditioner, the picture tube in a television, the autoleveller in a carding machine - are the ones a practitioner argues from. If it applies to you, the first step is this: Frame the claim around the identity of the asset: show that what was repaired or replaced was a part of a machine that continued to exist unchanged, and name that machine.
A batch of appeals by the Department against a common judgment of the Madras High Court of 29 April 2005. In the lead case the assessee was a textile mill making yarn. For the year ended 31 March 1993 it claimed Rs 97,95,755 and for the year ended 31 March 1994 Rs 77,84,047 as modernisation and replacement expenses. During the earlier year it had installed three ring frames costing Rs 23,99,855, and claimed the cost as revenue expenditure on the footing that the new machines merely replaced old derelict ones. Its case was that the whole mill was a plant, the ring frame being one of about 25 machines in one single process, so that replacing a frame was replacing part of the plant. The Assessing Officer held that each ring frame was an independent machine capable of its own specific function, that the mill was not one plant, and that replacing old machines with new gave enduring benefit, so the spending was capital. The Commissioner (Appeals) reversed him, the Tribunal dismissed the Department's appeal, and the High Court affirmed, relying on a report of the South India Textile Research Association that intermediate outputs of a spinning mill cannot be sold or used otherwise and that a ring frame cannot work independently. Other assessees in the batch had replaced simplex machines, doubling machines, cone winders and card conversion equipment. The matter was decided on 2007-08-10 by the Supreme Court (Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy JJ; judgment by Kapadia J). On those facts the Supreme Court held as follows. The appeals were allowed with no order as to costs. The assessees were not entitled to an allowance under section 31(i) as it stood at the relevant time. Each machine in a segment of the mill, including the ring frame, is an independent and separate machine capable of an independent and specific function, and the Assessing Officer was right to say so. Replacing three ring frames was the substitution of a new asset for an old one and not current repairs. The Tribunal and the High Court erred in treating manufacture in a textile mill as one continuous integrated process, and the High Court erred in relying on the SITRA report to hold the whole mill a plant for section 31(i). The Court also rejected the alternative plea that, the expenditure having been found revenue in nature by three authorities, deduction should be allowed under section 37(1): even revenue expenditure may not be current repairs, and the concurrent findings were interfered with precisely because none of the three authorities had applied the current repairs test. The Court expressly declined to express any opinion on whether section 37(1) applied.
Section 31(i) allows the amount paid on account of current repairs to machinery, plant or furniture used for the business. The Court stressed the qualifying word current: the legislature did not intend an allowance for all repairs, so the question whether the expenditure is conceptually revenue or capital is not the test, and the High Court went wrong by applying it. The governing test is the one Chagla CJ stated in New Shorrock Spinning and Manufacturing Co Ltd v CIT (1956) 30 ITR 338, approved by the Supreme Court in Ballimal Naval Kishore v CIT (1997) 2 SCC 449: what must be happening is the preservation and maintenance of an already existing asset, and the object must not be to bring a new asset into existence or to obtain a new or fresh advantage. Repair implies a part of a machine that has malfunctioned. The Court illustrated the boundary: repairing or even replacing an autoleveller is current repairs because the carding machine survives unchanged, as with a compressor in an air conditioner or a picture tube in a television. Replacing the machine itself is not. On the integrated process argument, the Court went through the mill segment by segment - blow room, carding, combing, drawing, roving, spinning, winding - and found that each has its own machines and its own distinct output passed to the next, unlike a continuous casting machine in a steel plant or a pasteurisation plant, where raw material goes in at one end and the finished product comes out at the other. Accepting the assessee's case would let each of 25 machines be replaced in turn and claimed as repairs, which would make section 31(i) redundant. Mahalakshmi Textile Mills was distinguished: there the Tribunal had found the old replacement parts were no longer available in the market, and the case never held a whole mill to be one asset. The Court noted that section 37(1) itself excludes what falls within sections 30 to 36, so the scope of the repairs allowance is delimited by section 31. In the words reproduced by the source cited on this page: "the expenditure must have been incurred to "preserve and maintain" an already existing asset, and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage."
It was decided by the Supreme Court on 2007-08-10 and is reported as 2007 AIR SCW 5196; 2007 (7) SCC 298; AIR 2007 SC (Supp) 741; 2007 Tax LR 741; (2007) 9 SCALE 697; (2007) 293 ITR 201. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 31(i), section 37(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeals were allowed with no order as to costs. The assessees were not entitled to an allowance under section 31(i) as it stood at the relevant time. Each machine in a segment of the mill, including the ring frame, is an independent and separate machine capable of an independent and specific function, and the Assessing Officer was right to say so. Replacing three ring frames was the substitution of a new asset for an old one and not current repairs. The Tribunal and the High Court erred in treating manufacture in a textile mill as one continuous integrated process, and the High Court erred in relying on the SITRA report to hold the whole mill a plant for section 31(i). The Court also rejected the alternative plea that, the expenditure having been found revenue in nature by three authorities, deduction should be allowed under section 37(1): even revenue expenditure may not be current repairs, and the concurrent findings were interfered with precisely because none of the three authorities had applied the current repairs test. The Court expressly declined to express any opinion on whether section 37(1) applied. It arises in Deductions & Disallowances matters, on section 31(i), section 37(1) of the Income Tax Act 1961, and was decided by Supreme Court of India - S.H. Kapadia and B. Sudershan Reddy JJ; judgment by Kapadia J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the machine itself was replaced, do not claim under section 31(i). Consider depreciation on the new machine instead, and keep section 37(1) open on its own facts, since the Court expressly declined to decide that. Where a whole part was replaced because the original was no longer available in the market, plead and prove that unavailability, since that is the exception the Court preserved from Mahalakshmi Textile Mills. Watch how your own books describe the spending. The Court noted that this assessee's balance sheet showed the amount as purchase of a new asset, and that told against it.
Still good law. The current repairs test as restated here follows New Shorrock and Ballimal Naval Kishore and is the settled position on the face of the judgment. Two qualifications from the judgment itself: it decides section 31(i) as it stood for the years ended 31 March 1993 and 1994, before the Explanation to section 31 was inserted, and the Court says so; and it deliberately leaves the section 37(1) question open, noting that appeals concerning that section were wrongly tagged with this batch and would be decided separately. I have not checked those companion decisions or any later Supreme Court treatment. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The Court left section 37(1) undecided, so this record cannot say whether replacement cost of a machine is deductible on any other footing, and the separate judgment it promised on the tagged appeals has not been read. The judgment also does not say how the replaced machines were to be treated instead - depreciation on the new machines is nowhere discussed. The Explanation to section 31 mentioned in the judgment is not set out, so its wording should be read separately for later years. I have not read the Madras High Court judgment that was reversed. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were allowed with no order as to costs. The assessees were not entitled to an allowance under section 31(i) as it stood at the relevant time. Each machine in a segment of the mill, including the ring frame, is an independent and separate machine capable of an independent and specific function, and the Assessing Officer was right to say so. Replacing three ring frames was the substitution of a new asset for an old one and not current repairs. The Tribunal and the High Court erred in treating manufacture in a textile mill as one continuous integrated process, and the High Court erred in relying on the SITRA report to hold the whole mill a plant for section 31(i). The Court also rejected the alternative plea that, the expenditure having been found revenue in nature by three authorities, deduction should be allowed under section 37(1): even revenue expenditure may not be current repairs, and the concurrent findings were interfered with precisely because none of the three authorities had applied the current repairs test. The Court expressly declined to express any opinion on whether section 37(1) applied.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
Can a pharmaceutical company deduct the cost of gifts given to doctors?
The whole disallowance rests on an Investigation Wing report. Is that enough?
I passed borrowed money to my sister concern interest-free. Can the AO disallow the interest I paid?
Can I deduct my provision for leave encashment in the year I make it, or only when I pay?