Varghese Kalliath, J. - (1.)THIS is a reference at the instance of the Revenue. The reference is under Section 256(1) of the Income-tax Act, 1961. The questions are these :
"1. Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 9,69,563 incurred by the assessee on modernising its machinery is a revenue expenditure ?

2. Whether, on the facts and in the circumstances of the case and in view of Section 56(1)(ii), the assessee is entitled to claim deduction of the bonus in excess of the statutory limit ?"

(2.)THE assessee is a textile manufacturing company. THE assessee/company claimed expenditure of Rs. 9,69,563 incurred by it on modernising its machinery. THE Income-tax Officer was of the view that this amount having been incurred by the assessee for installation of new machinery was of capital nature. He disallowed the claim. On appeal, the Commissioner of Income-tax (Appeals) did not agree with the Income-tax Officer and held that the expenditure incurred by the assessee on modernising its machinery was allowable as revenue expenditure. He allowed the claim. THE Revenue filed an appeal before the Appellate Tribunal.
The Appellate Tribunal found that the expenses incurred by the assessee-company were for renovating and replacing the old and worn out machinery and were of a revenue nature. Further, the Tribunal said that, in view of the fiercely competitive nature of the present business, the need for modernisation of the machinery cannot be overemphasised and that the expenditure incurred by the assessee-company on modernising its machinery by replacing the old, worn out and unserviceable parts, in order to run its business smoothly, efficiently and profitably is allowable as revenue expenditure.

The question whether an expenditure incurred by the assessee is a revenue expenditure or an expenditure in the nature of capital expenditure is really a question of law. It depends upon the nature of the expenditure. We had occasion to consider this aspect of the matter a little elaborately in Income-tax References Nos. 105 and 106 of 1989. The facts and the nature of expenditure in those income-tax references are similar to these herein. We were considering a case of modernising the machinery of a textile mill by renovation and replacement of worn out machinery. In considering those two income-tax references, we have referred to certain cases of the Supreme Court, including Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257 and Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377, and held that the question whether, in similar circumstances, the expenditure incurred in this case on the basis that the expenditure in question incurred by the assessee was for the better conduct and improvement of the existing business on a scheme of modernisation and not for a fresh and new venture and the object of modernisation was for facilitating the assessee's trading operations and the conduct of the assessee's business to be carried on more efficiently and to update the facilities on the line of the modern trends in the business and should therefore be held to be revenue expenditure. This case, Income-tax Reference No. 168 of 1986, was also heard along with the batch of cases, Income-tax References Nos. 105 and 106 of 1989, etc. The general question involved in those batch of cases was identical to the first question in this case. We are appending a copy of the judgment in Income-tax References Nos. 105 and 106 of 1989, etc., as part of this judgment.

(3.)WE may also refer to CIT v. Madras Spinners Ltd. [1989] 177 ITR 495 (Ker). This case was in respect of the same assessee for the assessment years 1974-75, 1978-79 and 1979-80. The nature of expenditure incurred was identical to the expenditure incurred in the case at hand. This court held that the expenditure incurred by the assessee is just to replace the old and worn out parts in order to make the unit function more effectively, that no new machinery or plant was installed and no new asset came into existence, and further found that the conclusion is inescapable that the expenditure incurred by the respondent assessee for modernising its machinery by replacing old, worn out and unserviceable parts in order to run its business smoothly and efficiently is only revenue expenditure. Further, the court said that the conclusion of the Tribunal is in accord with the decision of the Supreme Court in CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710. Finally, the Division Bench observed that no referable question of law arises out of the order of the Appellate Tribunal. Of course, the case decided by the Division Bench is an original petition for compelling a reference.
In the result, we hold that the first question referred has to be answered in the affirmative, in favour of the assessee and against the Revenue.

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