Dear Friends,
I am a Ca student doing my articleship.
Kindly give your invaluable advice/suggestions on the case given below.
M/s. X are in the business of manufacturing printed circuit boards. Due to intense competition in the International Market the whole manufacturing process of boards had to be changed, to survive in the market. Some key /major parts have been replaced in the machinery so as to manufacture as per new requirements. Such repalcement to an extent has enduring benefit. However, major replacements were necessary to retain existing customers.
Another issue to be examined is that, such replacements have been capitalised in the books, however in the computation of income it is claimed as revenue expenditure U/.s 37(1).
Though there are umpteen number of decisions upholding the view that the above expenditure is of capital nature, our objective is to reasonably substantiate that the exp can be considered as revenue.
My questions are given hereunder ::
1) In The case of: CIT vs. Sri Mangayarkarasi Mills (Supreme Court), it was held that replacement of machinery was neither current repairs nor revenue. However, after referring to Comprehensive Income Tax Summary and Novel Ideas on Tax Planning by the Tax Publishers, I could find a few instances where some expenditure akin to the case in question have been allowed as revenue [ I will attach such cases soon]. I would like to know whether the replacement of existing engines with a more efficient engine as held in the case of CIT Vs. Polyolefins Industries Ltd. 169 ITR 538 (Bom) be used to substantiate the claim in the above case???
2)Also, in CIT vs ICI 139 ITR 105,the court held that "though the repairs and replacements are huge,these had not extended the original life of the asset". Can the above be used to defend the claim? Because in the above case, some parts have been replaced and one cannot conclude whether a new asset was indeed introduced.
3) Can we also use the decision in Alembic Chemical Works Co. Ltd. VS. Commissioner Of Income Tax, Gujarat to our advantage? Is it possible to insinuate something?
I will be posting one more attachment soon. Kindly help me crack this case and please let me know where i am going wrong as far as interpretation of the provisions are concerned. I would be more than happy to learn from you all
Thanks in advance
CAclubindia
