Law:

Section:

Section 31 of the Income-tax Act, 1961 - Repair and insurance of machinery, plant and furniture - Assessment year 1995-96 - Whether each machine in a textile mill should be treated independently as such and not as a mere part of entire composite machinery of spinning mill - Held, yes - Whether, therefore, replacement of such an old machine with a new one would constitute bringing into existence a new asset in place of old one and not repair of old and existing machine to be allowed as deduction under section 31 - Held, yes Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1995-96s - Whether since replacement of an old machine in a textile mill with a new one amounts to bringing into existence a new asset and it also gives an enduring benefit to assessee-mill, such expenditure cannot be allowed as deduction under section 37 - Held, yes FACTS The assessee was engaged in the manufacture and sale of cotton yarn. During the relevant assessment year, it claimed expenditure incurred on replacement of machinery, as the revenue expenditure. The Assessing Officer disallowed the claim of the assessee and held the said expenditure to be of capital nature on the ground that each machine in a spinning mill does a different function and all the machines are not integrally connected. The Assessing Officer further held that the assessee had treated the said expenditure as capital expenditure by capitalizing the assets in its books of account, but from the tax point of view, it was claimed as revenue expenditure. On appeal, the Commissioner (Appeals) allowed the claim of the assessee holding that replacement of machinery by the assessee constituted revenue expenditure. The Tribunal upheld the order of the Commissioner (Appeals). The High Court also dismissed the appeal filed by the revenue holding that the expenditure on replacement of machinery was revenue in nature; and that the claim had to be determined only by relying on the provisions of the Act and not by the accounting practice followed by the assessee. On appeal : HELD In CIT v. Saravana Spg. Mills (P.) Ltd. 293 ITR 201 / 163 Taxman 201 , the Supreme Court has held that…

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