QUESTIONS & ANSWERS
Replacement or repairs?
QUESTION: We are representing a number of manufacturing concerns which have to replace parts of machinery from time to time. Such replacements were being allowed earlier but after the decision of the Supreme Court in CIT v Saravana Spinning Mills P. Ltd. (2007) 293 ITR 201 (SC), it is being routinely disallowed. What is the correct position of law on the subject?
ANSWER: In many of the cases relating to replacements claimed as repairs, issues have arisen mainly because not all relevant facts had been placed by the taxpayers or their representatives at the earlier stages. After the decision of CIT v Saravana Spinning Mills P. Ltd. (2007) 293 ITR 201 (SC) disallowing the deduction under Sec. 31, the claim for deduction as revenue expenditure under Sec. 37 had been remanded by the Supreme Court in some cases as in CIT v Ramaraju Surgical Cotton Mills (2007) 294 ITR 328 (SC) and Shreyans Industries Ltd. v CIT (2009) 314 ITR 302 (SC). The claim for deduction would require consideration under Sec. 37, if not available under Sec. 31. It is for the taxpayers to satisfy any of the following conditions so as to merit deduction.
(1) What is replaced is only a part, so as to be deductible under Sec. 31 itself; (2) What is replaced had gone decrepit and old so as to require replacement to be deductible under Sec. 31 and alternatively under Sec. 37; (3) The replaced asset had to be sold either as junk or at nominal value or it remains unsold and unusable so as to prove the need for replacement and (4) There has been no significant increase in productive capacity after the replacement. Additional capacity is one of the vital tests for distinguishing revenue expenditure from capital expenditure. Where capacity is not increased it is not capital expenditure so that Sec. 37 will be applicable.
Where the assessee itself capitalises such outlay in its books, it becomes necessary to convince the assessing officer that it is not capital expenditure but only deferred revenue expenditure. The other alternative by way of depreciation should always be pressed to service where the deduction is sought to be disallowed.
S. RAJARATNAM
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