[Cites 19, Cited by 0]
Madras High Court
The Commissioner Of Income Tax vs Super Spinning Mills Ltd on 9 April, 2026
Author: G.Jayachandran
Bench: G. Jayachandran
Tax Case (Appeal) No.459 & 460 of 2009
IN THE HIGH COURT OF JUDICATURE AT MADRAS
Reserved On: 01.04.2026 Delivered On: 09.04.2026
CORAM
THE HONOURABLE DR JUSTICE G. JAYACHANDRAN
AND
THE HONOURABLE MR.JUSTICE SHAMIM AHMED
Tax Case (Appeal) Nos.459 & 460 of 2009
The Commissioner of Income Tax,
Coimbatore. … Appellant in both appeals
vs.
M/s.Super Spinning Mills Ltd.,
P.B.No.3888, Race Course,
Coimbatore – 641 018. … Respondent in both appeals
Prayer in T.C.A.No.459 of 2009: Tax Case Appeals filed under Section
260-A of the Income Tax Act, 1961, against the order of the Income Tax Appellate
Tribunal ‘D’ Bench, Chennai dated 26th July 2005 passed in I.T.A.No.187/Mds/2001,
for the Assessment Year 1997-98.
Prayer in T.C.A.No.460 of 2009: Tax Case Appeals filed under Section
260-A of the Income Tax Act, 1961, against the order of the Income Tax Appellate
Tribunal ‘D’ Bench, Chennai dated 26th July 2005 passed in
I.T.A.No.1566/Mds/2000, for the Assessment Year 1996-97.
For Appellant : Mr.V.Mahalingam, Senior Standing Counsel,
in both Appeals & Mr.P.E.R.Mangala Suvigaran
For Respondent : Mr.A.S.Sriraman
in both cases
Page Nos.1/16
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Tax Case (Appeal) No.459 & 460 of 2009
COMMON JUDGMENT
M/s.Super Spinning Mills, engaged in manufacture and sale of
cotton/blended yarns, filed its return of income on 27.11.1996 for the Assessment
Year 1996-97, declaring an income of Rs.6,03,371/-. The said return was scrutinised
under Section 143(3) of the Act. A sum of Rs.6,19,43,673/- spent for the
replacement of machinery as revenue deductions. The Assessing Officer declined to
accept the claim stating that the machinery claimed under replacement are
independent, sophisticated and modern machinery capable of delivering higher
production and quality. Therefore, the expenditure would not be an expenditure of
revenue nature but it would be a capital expenditure. Section 10(2)(v) permits
deduction where the expenditure is a revenue expenditure and not if it is a capital
expenditure. However, depreciation at the rate of 12.5% was allowed on such
addition.
2. On appeal by the assessee, the Commissioner of Income Tax (Appeal)
partly allowed only in respect of items of spare parts which were satisfactorily
explained as replacements to the existing machinery and which were not as substitute
to the existing machinery.
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Tax Case (Appeal) No.459 & 460 of 2009
3. Identically, for the Assessment Year 1997-98 also, the assessee claim of
revenue expenditure Rs.13,10,00,563/- for replacement of Plant & Machinery was
disallowed by the Assessing Officer and treated it as capital expenditure, with
depreciation. The appeal by the assessee before the CIT (A) was dismissed following
the earlier order passed for the Assessment Year 1996-97.Before the appellate
authority several judgments were cited on either side. Finally, the Appellate
authority dismissed the appeal of the assessee confirming the Assessing Officer’s
order in respect of replacement of new machineries as capital expenditure. In both the
appeals, in respect of allowablity of capital loss, bonus paid to the employee and
cancellation of penalty were held in favour of the assessee.
4. Before the ITAT, the assessee filed a set of appeals challenging the order
of the Appellate Authority which confirmed the assessment orders for the year 1991-
92, 1994-96, 1996-97, 1998-99. In so far as the allowed portion the Revenue had
preferred a set of appeals. All those appeals were taken up together and common
order was passed on 26th July,2005.
5. The subject matter of the appeals under consideration are the orders
passed by the ITAT in ITA No:1566/Mds/2000 (Assessment Year 1996-97) and ITA
No:187/Mds/2001 (Assessment Year 1997-98). The treatment of the expenditure
incurred for replacement of machineries by new machineries as revenue expenditure
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Tax Case (Appeal) No.459 & 460 of 2009
instead of capital expenditure by the ITAT is the common issue in both these appeals.
6. The perusal of the impugned order of ITAT, we find that the Tribunal
has held in favour of the Assessee relying the Judgement of the Madras High Court in
Commissioner of Income Tax (Revenue) vs. Janakiraman Mills Ltd reported in
(2005) 275 ITR 403 (Mad).
7. For convenient appreciation, the relevant portion of the Tribunal order
which is impugned herein are as below:-
I.T.A.No:1566/Mds/2000:
This appeal by the revenue is directed against the
order of the CIT (A) and relates to the Assessment Year 1996-
The solitary issue raised in this appeal relates to the
allowability of expenditure towards replacement of machinery
as revenue expenditure. Both the parties agreed that the issue
now stands covered by the decision of the jurisdictional High
Court rendered in the case of CIT v. Janakiram Mills Ltd. (275
ITR 403). In this case the Hon’ble High Court has held that
expenditure on replacement of worn out machinery can be
considered as expenditure under current repairs. As the
expenditure was laid out wholly and exclusively for the purpose
of business, the same is allowable under the law. Respectfully
following the precedent, we decide this appeal in favour of the
assessee and against the Revenue.
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Tax Case (Appeal) No.459 & 460 of 2009
I.T.A.No:187/Mds/2001:
This appeal by the assessee is directed against the
order of the CIT (A) and relates to the assessment year 1997-98.
This first issue relates to the allowability of
expenditure towards replacement of machinery as revenue
expenditure. Both the parties agreed that the issue now stands
covered by the decision of the jurisdictional High Court
rendered in the case of CIT v. Janakiram Mills Ltd (275 ITR
403). In this case the Hon’ble High Court has held that
expenditure on replacement of worn out machinery can be
considered as expenditure under current repairs. As the
expenditure was laid out wholly and exclusively for the purpose
of business, the same is allowable under the Law. Respectfully
following the precedent, we decide this appeal in favour of the
assessee and against the Revenue.
8. The substantial questions of law framed in both the appeals are same and
it reads as below:-
1) Whether the replacement of machinery parts will
amount to revenue expenditure or not?
2) Whether bringing into existence of a new asset or
obtaining a new advantage would amount to revenue
expenditure or not?
9. Before adverting to the substantial question of law, it is necessary to
recollect the reasoning given by the Assessing Officer to add the cost of replacement
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Tax Case (Appeal) No.459 & 460 of 2009
of machinery parts under revenue expenditure and to allow only depreciation.
“It is stated that various machineries are used in the
manufacture of yarn from cotton and they are part of a single
processing unit. Though each machinery may be inter dependent
but each machinery is not part of the whole machinery, because
processing in each machinery is different and each machinery is
independently functioning. In the case of Aruna Mills Ltd Vs.
C.I.T., Ahmedabad the Gujarat High Court had occasion to
consider the question whether the assessee-company was
entitled to development rebate under Section.10 (2)(vii) of the IT
Act, 1922, in respect of the expenditure incurred in replacing
ordinary spindles by roller bearing spindles. The Gujarat High
Court pointed out that the Supreme Court in C.I.T. Vs. Mir
Mohd. Ali (53 ITR 165) adopted with approval the definition of
the word 'machinery'given by the Privy Council in Corporation
of Calcutta Vs. Chairman, Cossipore and Chitpore
Municipality, namely, that 'machinery' meant some mechanical
contrivances which, by themselves or in combination with one
or more other mechanical contrivances, by the combined
movement and inter dependent operation of their respective
parts generate power, or evoke, modify; apply or direct natural
forces with the object in each case of effecting so definite and
specific a result, and observed that the word "machinery" used
in Section. 10(2)(iv b) of the I.T. Act was an ordinary and not a
technical word. The Gujarat High Court held that spindles are
clearly machinery and when installed in the ring-frames would
constitute a self contained unit for spinning. Though, therefore
they by themselves may not be said to be a self-contained unit,
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Tax Case (Appeal) No.459 & 460 of 2009
they must be held to be "machinery".
In the instant case the assessee-company has shown
the replaced items of machinery as addition to assets in the
balance sheet and therefore keeping in view the sound
accountancy principles the installation of these machineries
forms part of the addition to the assets in the balance sheet. The
Possession of machinery is necessary for carrying on the
manufacturing and business operation and the object of
incurring expenditure on these machines was not repair of old
machines but installations of new machines because some old
machinery / assets were condemned or sold by the assessee-
Company.
There is no section in the Income-tax Act which
allows deduction of cost of plant and machinery irrespective of
any condition or limit and solely on the ground that such plant
and machinery is by way of replacement of existing ones. When
plant and machinery are purchased, the Section that applies
directly is sec.32 of the Income-tax Act. Sec.32 (1)(ii) provides
for depreciation allowance in respect of block of assets. Block of
assets means assets falling within a class of assets being
buildings, machinery or plant or furniture. Clause (b) of the first
proviso is also worth noting for understanding the scheme of
deduction under the Income-tax Act in respect of cost of plant
and machinery. It refers to Sec.42. Under Sec. 42, there is a
separate provision for deduction of cost of plant and machinery
in certain circumstances. Thus, it is clear from a perusal of sec.
32(1)(ii) and the first proviso thereto that cost of plant or
machinery can be allowed as a deduction only when the case
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Tax Case (Appeal) No.459 & 460 of 2009
falls under sec. 42. In all other cases, depreciation allowance
alone could be given
It can thus be seen that replacement and
modernisation is inbuilt in the concept of depreciation. That is
the reason why there is no separate deduction available for
replacement and modernisation. If the claim of the appellant is
to be accepted, it will be necessary to scrap sec.32 itself.
The question is whether there is an option available
to the assessee regarding whether to claim depreciation and
other capital allowances or whether to claim replacement as
repairs. It does not seem that such an option is available. In this
connection, the observation of the Hon'ble Madras High Court
in the case of CIT vs. Southern Petro Chemical (No.2) (233 ITR
400) is worth noting: "The option of the assessee in the matter of
grant of depreciation after the particulars were available is
practically nil and it is the duty of the Income Tax Officer to
determine the total income under the Act and if he finds that
there are particulars for the grant of depreciation, as an Officer
to determine the correct income of the assessee, he has
jurisdiction to grant the depreciation even where the assessee
has not desired the deduction for reasons of its own and there is
no question of bargain in the grant of statutory allowances. If
the choice is granted to the assessee in the matter of grant of
statutory allowances, it would in effect distort the determination
of the total income and it will contort the priorities in the matter
of granting statutory deduction available under the Act."
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Tax Case (Appeal) No.459 & 460 of 2009
10. Now, let us see the reason given by the Appellate Authority in IT
appeal No:178-C/1999-2000, dated 21.07.2000, for the Assessment Year 1996-97
and in I.T.Appeal No:64-C/2001-01, dated 24.11.2000, for the Assessment Year
1997-98.
I.T.A No:178-C/99-2000:
“The first ground relates to disallowance of a claim of
Rs.6 crores 19 lakhs 43 thousand and 673 as revenue
expenditure. The appellant replaced machineries in its plants as
part of a systematic programme of modernisation spread over a
number of years. The cost of such replacement was claimed as
revenue expenditure. For the detailed reasons given by the A.O.
in the assessment order, the claim was negatived by him. I agree
with him. Similar claim of replacement of Rs.6 crores 96 lakhs
56 thousand and 40 was considered by me for the immediately
preceding year and I had for the detailed reasons given in my
order in ITA No.265-C/98-99 dated 30-7-1999 decided the issue
against the appellant. No purpose will be served by repeating
the same. Therefore, the cost of replacements of independent
machines will be treated as capital expenditure.”
11. The Appellate Authority, after taking into consideration that not all
machineries shown in the assessment orders are replacement of new machineries,
there are some replacement of only spare parts. Examining the materials item wise,
the appellate authority found some of the items being only spare parts to the
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Tax Case (Appeal) No.459 & 460 of 2009
machineries and replaced due to wear and tear. Hence, directed the Assessing Officer
to verify if the replacement were only of defective spares, in which case the claim
should be allowed and depreciation to be withdrawn.
12. Reason assigned by the Appellate Authority to justify his order in the
I.T.A 64-C/2000-01:
“At the time of appeal, various grounds were taken
which are more or less repetition of the grounds taken in the
earlier assessment years. The details of the manufacturing
process has been given and the essence of the submission is that
the process involved is integrated and hence replacement of
machineries should not be considered as replacement of
individual machines but parts of integrated machinery. Reliance
was placed on 139 ITR 105, 49 ITR 188, 21 ITR 191, 11 DTC
637, 177 ITR 377, 237 ITR 902. All these arguments and the
case laws have already been dealt with by me in the appellant's
own case by my order in ITA No.265-C/98-99 dated 30-7-1999
and 178-C/99-2000 dated 21-7-2000 and for the detailed
reasons given therein the claim of the appellant cannot be
allowed.
I, therefore, agree with the A.O. that the replaced
machineries are independent machineries performing to their
own capacities and that the spindleage of the entire mill has got
nothing to do with the determination of such capacity. It is also
against common sense that the replacements involving crores of
rupees will not result in improved functioning of the particular
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Tax Case (Appeal) No.459 & 460 of 2009
component. It may also be noted that capital expenditure
obviously cannot be allowed under section 37(1). Similarly,
current repairs to any plant or machinery cannot also constitute
capital expenditure in terms of the decision of the Hon'ble
Supreme Court which is binding on everybody concerned with
the administration of the Law under article 141 of the
Constitution. The Hon'ble ITAT, which is the ultimate fact
finding authority had in the case of Nagammai Cotton Mills, on
an inspection of a textile mill come to the conclusion that these
machineries are independent machines. The Hon'ble Supreme
Court has long ago laid down the proposition that even
substantial replacement of a capital asset constitutes capital
expenditure. In the present case, there was wholesale
replacement. There is, therefore, no doubt that the expenditure
constituted capital expenditure. It may also be pointed out that
there cannot be one set of texts for determining the nature of an
expenditure when it comes to adjudicating on a claim pertaining
to development rebate, investment allowance and such other
capital allowances and another set for determining when the
claim is a revenue expenditure.”
13. When both the above orders of the CIT (A) came up for consideration,
the Tribunal in its order dated 26.07.2005 had recorded that the parties have conceded
that the issue whether the expenditure on replacements of worn out machinery can be
considered as expenditure under current repair is covered by the decision of the High
Court in Janakiraman Mills Ltd (275 ITR 403). As the expenditure was laid out
wholly and exclusively for the purpose of business, the same is allowable under the
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Tax Case (Appeal) No.459 & 460 of 2009
law.
14. Whereas in the grounds of appeal, the contention of the revenue is that,
the judgment of Madras High Court in Janakiraman Mills case is challenged before
the Hon’ble Supreme Court and the appeal is pending. There is no concealment as
observed by the ITAT. After 20 years, when the appeal is taken up for final hearing,
it is brought to our notice that, the Judgment of the Madras High Court rendered in
Janakiraman Mills Ltd case reversed in Commissioner of Income Tax vs. Saravana
Spinning Mills (P) Ltd reported in [2007] 293 ITR 201 and same also referred in the
subsequent judgment of the Hon’ble Supreme Court in Commissioner of Income Tax
vs. Ramaraju Surgical Cotton Mills reported in [2008]166 Taxman 356 (SC).
15. Several judgments were cited on either side to buttress their
submission. One judgment which, in our opinion, is more appropriate and relevant to
the present case appears to be the decision of this Court in Super Spinning Mills Ltd
vs. Assistant Commissioner of Income Tax, Company Circle-1(2), Coimbatore
reported in (2013) 37 Taxmann.com 290 (Madras), since it is not only in respect of
the same issue but also in respect of same assessee.
16. The assessee, a spinning mill, in its spear of modernising its plant been
for several years keep replacing its machineries. While doing so, the costs of
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Tax Case (Appeal) No.459 & 460 of 2009
machineries in question were capitalised in the books of account but claimed as
revenue expenditure for Income-Tax purposes. This accounting was never accepted
by the Department. The decision of the Assessing Officer is consistently challenged.
For the Assessment Year 2005-06, when the assessee claimed the expenditure under
revenue expenditure and the same was denied by the Department and assessed to tax,
the matter was challenged before the Appellate authority and the ITAT and finally
came up to High Court for consideration. By that time, the Hon’ble Supreme Court
had reversed the judgment rendered by the High Court in M/s.Janakiraman Mills Ltd
case, which was relied by the ITAT in the impugned orders.
17. Thus, Income Tax Appellate Tribunal held in favour of the assessee
without any discussion but solely relied on the judgment that was later overruled.
Therefore, on this ground alone the appeals herein are liable to be allowed.
18. What should be the test to decide, whether the replacement of
machinery is capital expenditure or revenue expenditure, we find, in Commissioner
of Income Tax vs. Sri Mangayarkarasi Mills (P) Ltd reported in (2009) 182
Taxman 141(SC), the Hon’ble Supreme Court has upheld the view expressed in
M/s.Saravana Spinning Mills Case, that entire textile mills machineries cannot be
regarded as a single asset, replacement of parts of which can be considered to be for
mere purpose of preserving or maintaining this asset, all machineries put together
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Tax Case (Appeal) No.459 & 460 of 2009
constitute the production process and each separate machine is an independent entity.
To fall under the ambit of ‘current repairs’, the assessee should satisfactorily explain
that: i) the old parts are not available in the market or ii) the old parts are worked for
more than 50 to 60 years. (See: Commissioner of Income Tax vs. Mahalakshmi
Textile Mills Ltd reported in (1967) 66 ITR 710 (SC).
19. For the above reasons, we are of the considered view that, the judgment
of the co-ordinate bench rendered in Super Spinning Mills Case vs. Assistant
Commissioner of Income Tax, Company Circle-1(2), Coimbatore (AY 2004-05)
reported in 2013 (37) Taxmann.com 290 (Madras), squarely applies to the case in
hand, hence the order passed by ITAT in ITA No:1566/Mds/2000 and ITA
No:187/Mds/2001 relying of M/s.Janakiraman Mills Ltd cited supra, which was
later reversed the matter is remanded back to the Appellate Authority for fresh
hearing giving opportunity to the assessee to place necessary materials to justify how
the replacement are revenue expenditure. The appellate authority is directed to decide
the issue in the light of the Hon’ble Supreme Court guidelines and the High Court
order in Super Spinning Mills Ltd vs. Assistant Commissioner of Income Tax,
Company Circle-1(2), Coimbatore reported in (2013) 37 Taxmann.com 290 (Mad).
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Tax Case (Appeal) No.459 & 460 of 2009
20. As a result, the Tax Case (Appeals) Nos.459 of 2009 and 460 of 2009
stands disposed of on the above terms. There shall be no order as to costs.
(Dr. G.JAYACHANDRAN, J.) & (SHAMIM AHMED, J.)
09-04-2026
Index :Yes.
Neutral Citation :Yes/No.
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Tax Case (Appeal) No.459 & 460 of 2009
Dr. G.JAYACHANDRAN, J.
&
SHAMIM AHMED, J.
bsm
Pre-Delivery common judgment made in
Tax Case (Appeal) Nos.459 & 460 of 2009
09-04-2026
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