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2007] 292 ITR 605 [2008] 169 TAXMAN 62 (MAD.) 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 was allowable as revenue expenditure - Held, yes FACTS For the relevant assessment year, the assessee-company claimed expen-diture in respect of 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 CIT v. Janakiram Mills Ltd. [2005] 275 ITR 403 / 146 Taxman 40 (Mad.), the Court held that all plant and machinery put together amounts to a complete spinning mill which is capable of manufacturing yarn and, hence, each replaced machine could not be considered as an independent one and no intermediate marketable product was produced. [Para 5] In view of the ratio laid down by the Court in the decision cited supra, the expenditure on replacement of machinery is revenue expenditure and, therefore, the Tribunal was right in allowing the claim of the assessee. [Para 6] In the instant case, the assessee had only replaced the auto coner and moulds without discontinuing its 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…

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