Holding

Expenditure on replacement of whole machinery does not fall within the meaning of "current repairs" under Section 31(i) because it results in a new asset rather than preserving an existing one.

Summary

Mis Saravana Spinning Mills, a textile mill, claimed deductions of Rs. 97.95 lakh and Rs. 77.84 lakh for "modernisation and replacement expenses" as "current repairs" under Section 31(i) of the Income Tax Act for the years ending 31‑03‑1993 and 31‑03‑1994. The Revenue challenged the claim, arguing that the expenditure was for replacement of entire machines, not merely repairs. The Supreme Court examined whether such replacement qualifies as "current repairs" and whether a textile mill constitutes a single plant. It held that each machine in a textile mill functions independently and that replacement of an entire machine creates a new asset, which is outside the scope of "current repairs". Consequently, the deductions were disallowed. The Court allowed the Revenue's appeals, rejecting the assessees' claim for deduction.

Issues considered

The expenditure incurred for modernization and replacement of machinery qualifies as "current repairs" under Section 31(i) of the Income Tax Act, 1961.
Whether a textile mill can be treated as a single plant for the purpose of Section 31(i).
Whether the test for "current repairs" is based on the revenue‑capital nature of the expense or on the purpose of preserving the existing asset.

Legislation cited

Income Tax Act, 1961s. 30, s. 31, s. 31(i), s. 32, s. 33, s. 34, s. 35, s. 36, s. 37(1)

Subjects

Income TaxSection 31(i)current repairscapital vs revenue expendituremodernisationreplacement of machinerytextile milldeductionplant definition

Judgment

A THE COMMISSIONER OF INCOME TAX, MADURAI ETC. ETC.
>--·
v. ...
MIS. SARAVANA SPININNG MILLS PVT. LTD.

AUGUST 10, 2007

B [S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.]

Income Tay Act, 1961; Sections 3/(i) and 37:
.,,._
Deduction-Expenses incurred for modernization and replacement of
c parts of machinery etc. in a textile mill--Such expenses whether amounts to
current repairs in terms of Section 31 {i) of the 196 I Act for claiming
deductions-Held: Term 'current repairs' denotes repairs which are attended
to when its need arises from the view point of a businessmen-Object behind
Section 3 J(i) is to preserve and maintain the asset and not to bring a new
D asset-Section 3 I (i) limits the scope of al/owability of expenditure as
deduction in respect of repairs made to macHinery, plant or furniture by.
restricting it to current repairs-To decide the applicability of Section 3(i),
the test is not whether the expenditure is revenue or capital in nature but -..}
'
whether the expenditure amounts to current repairs-Expenditure in order
to qualify as expenditure towards current repairs must have been incurred
E to preserve and maintain the already existing asset and not to bring a new
asset into existence-Jn the present case, assessee claiming deduction for the
expenditure incurred for purchase of a new asset-Jn fact, Assessing Officer
was right in holding that each of such asset/machine is capable of independent
and specific function, therefore, such an expenditure could not be covered
as "current repairs" in terms of Section 31 (i)-However, High Court has lost
F
sight of the test to be applied for an expenditure to fall uls. 31 (i) as current
repairs-Replacement of the assets in question constituted substitution of an
•
i'
old asset by a new asset and hence the expenditure incurred does not
constitute current repairs-Hence, the assessees not entitled to claim
allowance uls. j I (i) of the Act.
G
Words and Phrases:

'Current repairs'-Meaning of in the context of Section 3/(i) of the
Income Tax Act, 1961.

H 944
COMMNR. OF INCOME TAX, MADURAI ETC. v. SARAVANA SPJNINNG MILLS PVT. LTD. 945

-', Respondent-assessee is a textile mill engaged in the manufacture of yarn. A
For the accounting year ending 31.3.1993, it claimed deduction on account ot
"modernization and replacement expenses" amounting to Rs. 97,95,755.00'
whereas in the year ending 31.3.1994 it has claimed Rs'.77,84,047.00 as
deduction under the same head. The questions which arose for determination'
in this appeal and other connected appeals were about the scope of Section.
3l(i) of the Income Tax Act as it stood during the accounting years ending B
31.3.1993 and 31.3.1994 and as to whether the assessee was entitled to claim
the aforestated amounts as "current repairs" under Section 3l(i) of the Act.
-t
Allowing the appeals filed by the Revenue, the Court

HELD: 1.1. It cannot be said that the iextile mill constitutes a plant as c
it is one continuous process of manufacture beginning from 'Blow Room' to
the 'Winding Section'. Different Outputs flow from different Segments of
production like Blow Room, Carding, Combing, Roving, Winding etc. In the
case of a textile mill there is no process whereby raw-material is fed on one
end and the finished product comes out at the other end without intervention D
in-between. Therefore, the Tribunal and the High Court erred in holding that
the manufacturing process in the textile mill is one continuous integrated
y
I
process. (Para 10) (953-D, E, F, G)

2.1. An allowance is granted by clause (i) of Section 31 of the Income
Tax Act in respect of amount expended on current repairs to machinery, plant E
or furniture used for the purposes of business, irrespective of whether the
assessee is the owner of the assets or has only used them. The expression
"current repairs" denotes repairs which are attended to when the need for
them arises from the viewpoint of a businessman. The word "repair" involves
renewal. However, the words used in Section 3l(i) are "current repairs". The
,. object behind Section 3l(i) is to preserve and maintain the asset and not to
F
! bring in a new asset. Section 3l(i) limits the scope of allowability of
expenditure as deduction in respect of repairs made to machinery, piant or
furniture by restricting it to the concept of "current repairs". All repairs
are not current repairs. Section 37(1) of the Act excludes those items of
expenditure which expressly falls in Sections 30 to 36 of the Act. The effect G.
is to delimit the scope of allowability of deductions for repairs to the extent
provided for in Sections 30 to 36 of the Act. (Para l l) (953-G-H; 954-A, BJ

'\ 2.2 To decide the applicability of Section 31 (i) of the Act the test is
not whether the expenditure is revenue or capital in nature, which test has
H
"(

i
/

~

946 SUPREME COURT REPORTS [2007) 8 S.C.R.

A been wrongly applied by the High Court, but whether the expenditure is \.-
.....
"current repairs". The basic test to find out as to what would constitute
current repairs is that 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.
In fact, in the present case, in the balance sheet the assessee has indicated
B such expense as an item incurred for purchase of a New Asset. The High
Court had erred in placing reliance on the report of South Indian Textiles
Research Association (SITRA) in coming to the conclusion that the textile
mill is a plant under Section 31(i) of the Act. (Para 1 l) (954-B, C, DI --+--
2.3. Each machine in a segment has an independent role to play in the
c mill and the output of each division is different from the other "Repair"
implies the existence of a part of the machine which has malfunction. If the .' '
argument of the assessee is to be accepted it would result in absurdity and it
would make the provisions of Section 31(i) completely redundant. According
to the counsel for the assessee, the textile plant consists of about 25 machines.
D One of such machines is the Ring Frame. If the argument is to be accepted,
it would mean that periodically one machine out of25 machines in the textile
plant would be entitled to claim allowance under Section 31(i). Hence, the y s·
Assessing Officer was right in holding that each machine including the Ring
Frame was an independent and separate machine capable of independent and
specific function and, therefore, the expenditure incurred for replacement of
E
the new machine would not come within the meaning of the words "current
repairs". It is not the case of the assessee that a part of the machine (out of
25 machines) needed repairs. The entire machine had been replaced.
Therefore, the expenditure incurred by the assessee did not fall within the
meaning of "current repairs" in Section 31(i) of the Act.
F !Para 11 ( (954-E, F, G, H; 955-AI .. t
Ballimal Naval Kishore v. CIT, (1997) 2 SCC 449, relied on. 1
New Shorrock Spinning and Manufacturing Co. Ltd. v. CIT, (1956) 30 "
\
ITR 338, referred to. t
G "
2.4. The adjective, namely, "current" is put in by the Legislature. It
t=
I
indicates that the Legislature did not intend that the assessee should be
••
permitted to claim allowance for all kinds of repairs, even though
·r'
conceptually the expenditure may be revenue expenditure. The Legislature ~

intended to stress that under Section 31(i) the permissible deduction
H
¥~
COMMNR. OF INCOME TAX, MADURAI ETC. 1·. SARA VANA SPININNG MILLS PVT. LTD. 94 7

-' admissible is only for current repairs, therefore, the question as to whether A
,.,...
the expenditure incurred by the assessee conceptually is revenue or capital
in nature is not relevant for deciding the question as to whether such an
expenditure comes within the etymological meaning of the expression
"current repairs". (Para 121 (955-E, F, G)

2.5. In the present case, the High Court has lost sight of the test to be B
applied for an expenditure to fall under Section 31(i) as "current repairs". It
has embarked on the test which was not applicable, viz., whether the
-t- expenditure is revenue or capital in nature. The above test was not relevant
during the assessment years in question as the explanation to Section 3l(i)
was inserted later on. Applying the test laid down in the case of New Shorrock
Spinning and Manufacturing Co. ltd. v. CIT, the assessees were not entitled
c
. to claim allowance under Section 3l(i) for current repairs. The Ring Frame
by itself constituted an independent machine with an independent function,
which was replaced by a new Ring Frame giving enduring advantage to the
assessee and, therefore, the expenditure incurred in that regard cannot come
within the expression "current repairs": Replacement of three Ring Frames D
constituted substitution of an old asset by a new asset and, therefore, the
'!>' expenditure incurred did not constitute current repairs.
'
[Para 121 (955-G, H; 956-A, B, CJ

New Shorrock Spinning and Manufacturing Co. Ltd. v. CIT, (1956) 30
ITR 338, referred to. E

2.6. Replacement generally may not fall under the expression "current

.. }-
repairs" but, in certain cases, where the old parts were not available in the
market or where the old parts had worked for 50 to 60 years, replacement
can in such cases of exception, fall within the expression "current repairs".
[Para 13) !957-A)

CIT v. Mahalakshmi Textile Mills Ltd., !196713 SCR 957, held
f

inapplicable.

3.1. Whether an expenditure is revenue or capital in nature would depend
G
on the facts of each case. Hence, no opinion has been expressed on the
applicability o ~Section 37(1) of the Act in the present case. There were certain
civil appeals wrongly tagged with the present batch which will be decided
~. separately by this Court as they concern with Section 37(1) of the Act.
(Para 14) (957-F, G)
I-t
948 SUPREME COURT REPORTS [2007) 8 S.C.R.

A 3.2. The basic test, which had not been applied, in the present case, by
CIT (A), Tribunal and the High Court, is whether the e~penditure came within
the expression "current repairs". Instead all the three authorities proceeded
on the footing that since the expenditure was revenue it constituted "current
repairs". It is for this reason that the concurrent findings given by CIT(A),
Tribunal and the High Court are interfered with. Hence, the assessees were
B not entitled to claim allowance u/s. 31 (i) of the Act as it stood at the relevant
time. fParas 15 and 1611958-B, C, DI

New Shorrock Spinning and Manufacturing Co. Ltd. v. CIT, (1956) 30 +-
ITRJ38, referred to.
c CIVIL APPELLATE JURISDICTION : Civil Appeal No. 7604-7605 of
2005.

From the Judgment & Order dated 29.04.2005 of the High Court of
Judicature at Madras in Tax Case (Appeal) No. 53 of 2004 and 277 of 2004.
D WITH

C.A. Nos. 7606, 7597-98, 7596, 7599 and 7603 of2005.

Vikas Singh, ASG, Mathai M. Paikeday, Arijit Prasad, Ranbir Chandra,
Alka Sharma, Vikram Gulati, R. Basant, Preetish Kapur, Raghvendra Rao,
E Amrita Narayan, B. V. Balaram Das, Shishir Pinaki and A. Deb Kumar for the
Appellants.

R. Venkataraman, S. Ganesh, K.K. Mani, C.K.R. Sekar, Mayur R. Shah,
S. Nandakumar K. Mayil Samy, G. Anandselvam, V.N. Raghupathy and Radha
F Rangaswamy for the Respondents.

The Judgment of the Court was delivered by

KAPADIA, J. I. Aggrieved by the common judgment dated 29 .4.2-005
passed by the High Court of Judicature at Madras in Tax Case (Appeal) Nos.
G 53/2004 etc., the Department has come to this Court by way of a batch of civil
appeals. For the sake of convenience, we have set out hereinbelow the facts
in the lead case of M/s Saravana Spinning Mills Pvt. Ltd. (Civil Appeal Nos.
7604-7605/2005):

2. In this group of civil appeals we are required to decide the extent and
H scope of Section 31 (i) of the Income Tax Act, 1961 as it stood during the
COMMNR. OF INCOME TAX, MADURAI ETC. v. SARAVANA SPININNG MILLS PVT. LTD. [KAPADIA. J.J949
~
--"' accounting years ending 31.3. 1993 and 31.3. 1994. A
3. For this purpose, we quote hereinbelow Section 3 I, as it stood during
the relevant period:

"31. Repairs and insurance of machinery, plant and furniture.- In
respect of repairs and insurance of machinery, plant or furniture used B
for the purposes of the business or profession, the following
deductions shall be allowed-
-t-
(i) the amount paid on account of current repairs thereto;
(ii) the amount of any premium paid in respect of insurance
against risk of damage or destruction thereof."
c
4. The facts in Civil Appeal Nos. 7604-7605/2005 are as follows:

Mis Sarvana Spinning Mills Pvt. Ltd. (the assessee) is a textile mill
engaged in the manufacture of yam. For the accounting year ending 31.3. 1993,
D
it claimed deduction on account of "modernisation and replacement expenses"
,, amounting to Rs. 97,95, 755.00 whereas in the case of year ending 31.3.1994
it has claimed Rs. 77,84,047.00 as deduction under the same head. The question
which arises for determination in this case is whether the assessee was
entitled to claim the aforestated amounts as "current repairs" under Section
3 l(i). This is the basic controversy in the above civil appeals. To complete E
the chronology of events, it may be stated that the assessee claimed the
aforestated amounts as deduction in its annual returns. The aforestated
figures are mentioned in the Profit and Loss account for the year ending
3 l.3. l 994. The return for the assessment year I993-94 was filed on 31.12.1993.
~
It was processed under Section 143(l)(a). Subsequently, a Notice under Section F
~ 143(2) was issued to the assessee. Pursuant to the said Notice, the
representative of the assessee appeared. He contended that during the previous
year, the assessee had installed three Ring Frames at the cost of Rs.
23,99,855.00. According to the assessment order, the assessee claimed the
cost of the new machinery as revenue expenditure on the ground that the
expenditure involved should be treated as current repairs, since the new
G
machinery was installed only as a replacement of the old machinery, which
had become derelict (see page 93 of the J>aper Book). According to the
~ c.ssessee, the whole Textile Mill was a "Plant" and the Ring Frames was one
of the 25 machines which constituted one single process and, therefore,
replacement of the frames be treated as replacement of part of the Plant/ Total H
Machinery and not replacement of a machine. The claim of the assessee was
950 SUPREME COURT REPORTS [2007) 8 S.C.R.

A disallowed on the ground that the expenditure was on capital account; that. _
it was not a revenue expenditure as the assessee had obtained enduring
benefit by replacing the old machine with new machine. The claim of the
assessee was also rejected on the ground that the machine replaced was an
independent machine by itself and that it was not a part or portion of the
B other textile machinery (plant) as claimed by the assessee. The above
arguments of the assessee were rejected by the A.O. stating, that the entire
mill cannot be construed as Plant/ Total Machinery; that the said Ring Frames
constituted independent and separate machines; that each Frame was capable
of independent and specific function and, therefore, it was not possible to
hold that the entire process as one single item of machinery of which all the
C . others are parts. In this connection, the A.O. held that the assessee had
replaced the existing old machines by new machines and thereby it had
obtained endu:ing benefit and, therefore, the expenditure incurred thereon
constituted capital expenditure and not "current repairs". Accordingly, the
assessee's claim for deduction was dis1nissed. .
D
5. Aggrieved by the said order, the matter was carried in appeal to the
CIT(A). By Order dated 24.10.1996 the CIT{A) came to the conclusion that the
expenditure related to replacement of three Ring Frames; which constituted an
integral part of the production system in a textile mill and, therefore, replacement
of an item cannot be regarded as installation of separate machine. Accordingly,
E the CIT(A) allowed the appeal and allowed the expenditure as revenue
expenditure.

6. Aggrieved by the said decision of the Appellate Authority, the
Department carried the matter in appeal to the Tribunal, which took the view
F that different segments of a textile mill are integrated parts of a continuous
process and the expenditure incurred on replacement of the machines in any
segment of the plant should be treated as revenue expenditure. Accordingly,
the appeals filed by the Department stood dismissed.

7. Aggrieved by the decision of the Tribunal, the matter was carried in
G reference to the Division Bench of the Madras High Court. The High Court
has given a common judgment in this batch of civil appeals. There are
different assessees including M/s Saravana Spinning Mills Pvt. Ltd .. Apart
from Ring Frames, different assessees have claimed deduction for other Items
like simplex machines, _doubling machines, cone winders, card conversion
H equipments. Each of these items have been treated by the Department as
independent machines in the mill.At this stage, suffice it to state that the High
COMMNR. OF INCOME TAX, MADURAI ETC. r. SARAVANA SPININNG MILLS PVT.LTD. [KAPADIA, J.J95}

....(_ Court had affinned the decision of the Tribunal by holding that textile mills A
.,>
in Tamil Nadu have been claiming deduction on account of purchase of new
machinery as revenue expenditure where the purchase was as a part of
modernisation programme and where the purchase was concerning replacement
of old machinery. This answer was given by the High Court in para 6 of its
judgment with reference to the question framed in para 5. We quote hereinbelow
para 5 of the said judgment. B

"The point for consideration is, whether the modernization/current/
.-:.t repair expenditure is allowable as "revenue expenditure", as claimed
by the assessees or the replacement of cards/blow room machinery/
combing machinery etc., are to be considered as "capital expenditure",
as claimed by the Revenue?"
c
(emphasis supplied)

While disposing of the appeals, the High Court had relied upon the report
of South India Textile Research Association ("SITRA"), Coimbatore. Placing
reliance on the said report, the High Court held, that the process of converting
D
fibre "to yam was one continuous interlinked process; that the output from
1' various intermediate stages of production (Carding, Combing, Draw Frame
Silver~ and Roving) cannot be sold or marketed or used for any other purpose
and, therefore, according to the High Court, the entire textile mill should be
considered to be as one continuous process plant commencing from the blow E
room to the winding section. In the context of the Ring Frame the High Court
held by placing reliance on the report of SITRA that Ring Frame cannot work
independently, but it can work only as a part of spinning unit. According to
the High Court, all the above items of machines put together would amount
to one complete textile mill which is capable of manufacturing yam. According
to the High Court, all the above items of machines, though independent, are F
).
part of an integrated textile mill and, therefore, the expenditure incurred on
replacement of any one of the above items of machine was an expenditure
incurred to maintain production without breakdown and, therefore, the assessee
was entitled to claim deduction for the said expenditure as revenue expenditure
under Section 3 l(i). Accordingly, the High Court has affinned the view expressed G
by the Tribunal. Hence, these civil appeals.

8. The issue before us is whether the expenditure incurred by the
assessee for modernisation and replacement came within the connotation of
the words "current repairs" in Section 31 (i).
H
i•'
952 SUPREME COURT REPORT-$-· [2007) 8 S.C.R.

A 9. Before analysing Section 31 (i) of the Income-tax Act, we must look "
at the process of manufacture and the composition of a textile mill in the broad
sense. Broadly, a textile mill manufactures djJTerent varieties of yams, namely,
Cotton Yam, Melange Yarn, Colour Mel~nte, Polyester Viscose Yam and the
process of manufacture goes through various Segments/Divisions. The first
Segment is the Blow Room. The function of the Blow Room is to clean the
B raw cotton thoroughly before it is fed to the Carding Department. The function
of the Carding Department is to remove the waste in the cotton received from
the Blow Room. In the Carding Department there are individual carding i-
machines. They are equipped with Autolevelers to produce silver. The carding
machine removes neps formed in the blow room line during the process. The
C carding machine produces Silver for better quality of yam. This Silver produced
in the Carding Department is carried to the Combing Department, for
manufacturing Combed Y:im. After the carding operation, the impurities present
in the Silver will b~, removed in the Combing Department. That silver which
is produced in the Combing Department will pass through the Draw Frames
used in the Drawing Department in order to obtain parallel fibers. These
D parallel fibers go through Speed Frames in the Roving Department in order
to convert the Silver into thinner forms called as Roves which Roves are
thereafter sent'.to the Spinning Department. In the Spinning Department we
have what is called as the Ring Frames (machines) which are used to spin the
Roves received from the Roving Department. The Ring Frames are machines,
E which are equipped with cleaners, removes the accumulated dirt. The Ring
Frames play an important role in producing quality yarn. Thereafter, the yarn
obtained from the Spinning Department goes to the Winding Department. In
the Winding Department we have Autoconers in order to produce fault-free
yam.

F I 0. From the above facts, it is clear that Blow Room, Carding, Combing,
Drawing, Roving, Spinning and Winding are different Departments/Divisions
in a textile mill. In each Department/Division there are several machines. Each
of the above Departments/Divisions perform different functions and the
functioning of each Department/Division produces a different Output which
G is carried forward to the next Department/Division having different machines
therein. For example, in the Blow Room there are different beaters (machines)
which open the raw-cotton and remove the dirt therefrom. That cotton is
forwarded to the Carding Department in which there are Carding Machines
equipped with Autolevelers which produces Silver which is then carried
forward to the Combing Department. It is important to note that each Department
H has different items of machines, for example, ·in the Blow Room we have
_i
COMMNR. OF INCOME TAX, MADURAI ETC v. SARA VANA SPININNG MILLS PVT. LTD. (KAPADIA, l.J 953
-1.
,,- machines called as Beaters. Similarly, in the Carding Department we have A
Carding Machines with Autolevelers. If the Autoleveler fails, the Carding
Machine becomes non-functional. If an Auto leveler is to be repaired then that
repair would come within the connotation of the word "current repairs"
because it is a part of the Carding Machine. Even if in a given case, replacement
of an Autoleveler could come within the connotation of the word "current
repairs" if the old part is not available in the market. It is a "current repair" B
because the Carding Machine remains as an asset without any change even
after repair or replacement of the autoleveler. To give an example, a Compressor
-t is an important part of an Air-condition Machine. Repair of the Compressor
will come in the connotation of the word "current repairs" in Section 31 (i) of
the said Act because the assessee does not replace the Air-condition Machine. c
At the highest, he replaces a part of the Air-condition Machine. So is in the
case of the picture tube in a Television Set, when the picture tube is replaced
the Television Set is not replaced, therefore, such repairs alone can come
within the connotation of the word "current repairs" in Section 31 (i) of the
said Act as it stood at the material time. They are effected to preserve and
maintain the asset, viz, air-conditioner or carding machine. Lastly, it cannot D
.. be said that the textile mill constitutes a plant as it is one continuous process
~
of manufacture beginning from Blow Room to the Winding Section. "As stated
above, different Outputs flow from different Segments of production like Blow
Room, Carding, Combing, Roving, Winding etc. In the case of a textile mill
there is no process whereby raw-material is fed on one end and the finished E
product comes out at the other end without intervention in-between. For
example, in the case of continuous Casting Machine in the Steel Industry we
have one continuous integrated process under which scrap (raw material) is
put in and what comes out is steel or iron or aluminium. Another example, in
the case of "Pasteurization Plant" we have three chambers and Ducts. In the
.... first milk is collected, in the second it is heated and in the third it is cooled. F
)._
Duct carries hot and cold water. The raw material is Raw Milk, the end product
is the pasteurized milk. In the Heat chamber there is the.heater. In the Cooling
Chamber we have cooling plant which has a concept similar to air-condition
plant. Such a process is one integrated process. Therefore, the Tribunal and
the High Court erred in holding that the manufacturing process in the textile G
mill is one continuous integrated process.

11. An allowance is granted by clause (i) of Section 31 in respect of
amount expended on current repairs to machinery, plant or furniture used for
""' the purposes of business, irrespective of whether the assessee is the owner
of the assets or has only used them. The expression "current repairs" denotes H
954 SUPREME COURT REPORTS [2007) 8 S.C.R.

A repairs which are attended to when the need for them arises from the viewpoint \-

of a businessman. The word "repair" involves renewal. However, the words
used in Section 3 l(i) are "current repairs". The object behind Section 3 l(i) is
to preserve and maintain the asset a.nd not to bring in a new asset. In our
view, Section 31 (i) limits the scope of allowability of expenditure as deduction
B in respect of repairs made to machinery, plant or furniture by restricting it to
the coilcept of "current repairs". All repairs are not current repairs. Section
37(1) allows claims for expenditure which are not of capital nature. However,
even Section 3 7(1) excludes those items of expenditure which expressly falls
in Sections 30 to 36. The effect is to delimit the scope of allowability of -t-
deductions for repairs to the extent provided for in Sections 30 to 36. To
C decide the applicability of Section 31 (i) the test is not whether the expenditure
is revenue or capital in nature, which test has been wrongly applied by the
High Court, but whether the expenditure is "current repairs". The basic test
to find out as to what would constitute current repairs is that 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
D existence or to obtain a new advantage. In fact, in the present case, in the
balance she!!t the assessee, viz, Mis Saravana Spinning Mills has indicated
the above expense as an item incurred for purchase of a New Asset. In our
view, the High Court had erred in placing reliance on the report of SITRA in
coming to the conclusion that the textile mill is a plant under Section 31 (i).
E As stated above, each machine in a segment has an independent role to play
in the mill and the output of each division is different from the other "Repair"
implies the existence of a part of the machine which has malfunction. If the
argument of the assessee herein before us is to be accepted it would result
in absurdity and it would make the provisions of Section 31 (i) completely
redundant. According to Shri R. Venkataraman, learned senior counsel for the
F assessee, the textile plant consists of about 25 machines. One of such machines •
is the Ring Frame. If the argument of the assessee is to be accepted, it would -1.
mean that periodically one machine out of 25 would be replaced, and on that
basis, from time to time, each of these 25 machines in the textile plant would
be entitled to claim allowance under Section 3l(i). In our view, the A.O. was
G right in holding that each machine including the Ring Frame was an
independent and separate machine capable of independent and specific
function and, therefore, the expenditure incurred for replacement of the new
machine would not come within the meaning of the words "current repairs".
In the present case, it is not the case of the assessee that a part of the
machine (out of 25 machines) needed repairs. The entire machine had been
H replaced. Therefore, the expenditure incurred by the assessee did not fall
__j
COMMNR. OF INCOME TAX, MADURAI ETC. v. SARAVANA SPININNG MILLS PVT. LTD. [KAPADIA, J.J 955

-I. within the meaning of "current repairs" in Section 3 l(i). A
~

12. This Court in the case of Ballimal Naval Kishore v. CIT, [1997] 2
SCC 449 approved the test formulated by Chagla C.J. in the case of New
Shorrock Spinning and Manufacturing Co. Ltd. v. CIT, (1956) 30 ITR 338 as
to when the expenditure can be said to have been incurred on current repairs.
In that case it was observed as follows: B
"The simple test that must be constantly borne in mind is that as
a result of the expenditure which is claimed as an expenditure for
--t
repairs what is really being done is to preserve and maintain an
already existing asset. The object of the expenditure is not to bring
a new asset into existence, nor is its object the obtaining of a new or c
fresh advantage. This can be the only definition of "repairs" because
it is only by reason of this definition of repairs that the expenditure
is a revenue expenditure."

If the amount spent was for the purpose of bringing into existence
a new asset or obtaining a new advantage, then obviously such ·an D
expenditure would not be an expenditure of a revenue nature but it
~ would be a capital expenditure, and it is clear that the deduction which
the Legislature has permitted under section 10(2)(v) is a deduction
where the expenditure is a revenue expenditure and not a capital
expenditure." E
In the said judgment, it has been further observed by Chagla C.J. that the
definition of the word "repair" does not create much difficulty, but the difficulty
is created by the word "current" which qualifies the expression "repair". This
adjective, namely, "current" is put in by the Legislature. It indicates that the
-4" Legislature did not intend that the assessee should be permitted to claim F
)- allowance for all kinds of repairs, even though conceptually the expenditure
may be revenue expenditure. The Legislature intended to stress that under
Section 3 I(i) the permissible deduction admissible is only for current repairs,
therefore, the question as to whether the expenditure incurred by the assessee
conceptually is revenue or capital in nature is not relevant for deciding the
question as to whether such an expenditure comes within the etymological
G
meaning of the expression "current repairs". In other words, even if the
expenditure is revenue, it may not fall in the connotation of "current repairs"
in Section 31 (i). The test formulated above applies to cases where the assessee
claims allowance under Section 31 (i). In the present case, the High Court has
lost sight of the test to be applied for an expenditure to fall under Section H
')___
956 SUPREME COURT REPORTS (2007] 8 S.C.R.

A 3 l(i) as "current repairs". It has embarked on the test which was not applicable, >-
viz, whether the expenditure is revenue or capital in nature. The above test '""-
was not releva.nt during the assessment years in question as the explanation
to .Section 31 (i) was inserted later on. In our view, applying the test laid down
by Chagla C.J. in the case of New Shorrock Spinning and Manufacturing Co.
Ltd (supra) the assessees were not entitled to claim allowance under Section
B 31 (i) for current repairs. In our view, the Ring Frame by itself constituted an
independent machine with an independent function, which was replaced by
a new Ring Frame giving enduring advantage to the assessee·and, therefore,
the expenditure incurred in that regard cannot come within the expression -t.:_
"current repairs". In our view, replacement of three Ring Frames constituted
c substitution of an old asset by a new asset and, therefore, the expenditure
incurred did not constitute current repairs.
#f '
13. On behalf of the assessee, reliance was placed on the judgment of
this Court in the case of CIT v. Maha/akshmi Textile Mills Ltd, reported in
[1967] 3 SCR 957. In that case, the assessee carried on the business of
D manufacture and sale of cotton yarn. In the previous year relevant to
I

assessment year 1956-57, the assessee spent Rs. 93,000 approx. for introduction
of "Casablanca Conversion System" in its plant. The I.T.O. disallowed the
claim of the assessee. The Appellate Authority agreed with the I.T.O .. Before
r
the Tribunal, the assessee contended that the amount expended for introducing
Casablanca Conversion System was current expenditure under Section 10(2)(v)
E
of the Indian Income Tax Act, 1922 (Section 31 (i) of the 1961 Act). The
Tribunal inspected the spiQning factory of the assessee. It studied the working
,;
of the machinery with the Casablanca Conversion System. It also studied the
literature published by the manufacturer of Casablanca Conversion System.
After a detailed study, the Tribunal held that on account of the stress and
F strain of production over a long period there was a need for change and that ,,..
the assessee had replaced old parts by introducing the said System.
-4.
Accordingly, the Tribunal treated the expenditure incurred for introducing the
Casablanca Conversion System as allowance under Section I 0(2)(v) of the
Indian Income Tax Act, .1922. The High Court accepted the findings recorded
by the Tribunal saying that by the introduction of the Casablanca Conversion
G System no new machinery or plant was installed, but the introduction of the
system amounted to fitting of improved version and the expenditure in that
behalf was of revenue nature. The High Court observed that certain parts of
the machinery had worn-out, they needed replacement, and when it was ;-'
found that the old type of replacement parts were not available in the market,
H the assessee had to introduce the Casablanca Conversion System. This finding
COMMNR. OF INCOME TAX. MADURAI ETC. v. SARAVANA SPININNG MILLS PVT. LTD. [KAPADIA. J.J957

was accepted by this Court in the above judgment. In our view, the said A
judgment has no application with the facts of the present case. At the outset,
we may state that replacement generally may not fall under the expression
"current repairs" but, in certain cases, where the old parts were not available
in the market or where the old parts had worked for 50 to 60 years, replacement
can, in such cases of exception, fall within the expression "current repairs". B
In Mahalakshmi Textile Mills case (supra) the finding recorded by the Tribunal
and the High Court was that old type of replacement parts were not available
in the market and, therefore, the expenditure came within the expression
"current repairs". That is not the case before us, hence, the said judgment
-t
has no application to the facts of the present case. Moreover, the judgment
of this Court in Mahalakshmi Textile Mills (supra) has not defined the word C
"asset" to mean the entire production system in the textile mill. In the said
judgment, it is nowhere stated that the entire textile mill is one single asset
and that it represents one single integrated process.

14. Some of the decisions cited on behalf of the assessees are not being
d~scussed by us as they deal with cases falling under Section 37. That section D
is a residuary section. Under Section 37, a particular item of expenditure may
be deductible if the expenditure does not fall within Sections 30 to 36; that
it should have been incurred in the accounting year; that it should be. in
respect of a business carried on by the assessee; that it should not be on
personal account of the assessee; that it should not be in the nature of capital E
expenditure and that it should be spent wholly and exclusively for business.
Whether expenditure is 'revenue' or 'capital in nature' would depend upon
several factors, namely, nature of the expenditure, nature of the business
activity etc. For example, construction of the building for self-use may be
capital in nature whereas in the hands of the builder a building constitutes
his stock-in-trade and, therefore, on the sale of the building the expenditure F
has to be revenue. Therefore, the builder would be entitled to deduct such
expenditure from the sale proceeds/gross income. Therefore, whether an
expenditure is revenue or capital in nature would depend on the facts of each
case. We do not wish to express any opinion on the applicability of Section
37(1) in the present case. There were certain civil appeals wrongly tagged with G
the present batch which will be decided separately by us as they concern with
Section 37(1). Hence we do not wish to express any opinion on applicability
of Section 37(1 ).

15. Before concluding, one aspect needs to be discussed. It was
submitted on behalf of the assessees, in the present case, that although the H
•\
r
958 SUPREME COURT REPORTS (2007) 8 S.C.R.

A assessees had claimed deduction under Section 3 l(i), they should be permitted >--
to claim deduction under Section 37(1) as on facts it has been held by CIT(A), '-
Tribunal and the High Court that the expenditure was revenue in nature. We
find no merit in this contention. As stated above, even if the expenditure
incurred is revenue in nature, still it may not fall in the connotation of the
words "current repairs" under Section 31 (i) which test has not kept in mind.
B As held by Chagla C.J. in the case of New Shorrock Spinning and
Manufacturing Co. (supra) all repairs do not attract Section 31 (i) even though
the expenditure is revenue in nature .. Therefore, the basic test, which had not
been applied, in the present case, by CIT(A), Tribunal and the High Court, t-
is whether the expenditure came within the expression "current repairs".
C Instead all the three authorities proceeded on the footing that since the
expenditure was revenue it constituted "current repairs" . .It is for this reason
that we have interfered with the concurrent findings given by CIT(A), Tribunal
and the High Court.

16. For the aforestated reasons, we find merit in the above batch of civil
D appeals filed by the Department. Accordingly, we hold in this batch of civil
appeals that the assessees were not entitled to claim allowance under Section
31(i) ofthe Income Tax Act as it stood at the relevant time. Accordingly, the y
..
civil appeals stand allowed with no order as to costs.

S.K.S. Appeal allowed.
E