Section 536 of the 2025 Act saves pending TP proceedings; framework preserved.
HISTORICAL CONTEXT
Section 31 is part of Chapter IV-C - PGBP — the profits and gains of business or profession framework of the Income-tax Act, 1961. The provision establishes operative rules within the comprehensive profits and gains of business or profession architecture.
The section operates in coordination with companion provisions in the same chapter and related chapters of the Act. Practitioner-relevant — verbatim text (Block 1) sets out operative language; parallel-provisions table (Block 2) maps to 1961 Act + 2025 Act framework + companion Rules / Forms.
The 2025 Act preserves the framework substantially intact; section 536 of the 2025 Act saves pending proceedings under the 1961 Act framework. Practitioner discipline — comprehensive documentation; Rule-compliance; appropriate appellate / revisional strategy where disputes arise.
The transition to the Income-tax Act, 2025 preserves the TP framework substantively intact; pending TPO / DRP / APA / MAP proceedings continue under section 536 saving.
FINANCE ACT AMENDMENT TIMELINE
■ Income-tax Act 1961 — Original provision framework.
■ Finance Act 1989 — Major restructuring across many chapters.
▸ Commissioner of Income-tax v. Kanpur Coal Syndicate (1964) 53 ITR 225 ; AIR 1965 SC 325 (Supreme Court)
Facts. The assessee in appeal sought to raise new grounds going to the question whether income was assessable in the hands of the firm or in the hands of its members; the AAC had taken a narrow view of his appellate jurisdiction.
Issue. Scope of the first-appellate authority's jurisdiction — is it co-terminus with the AO's, or limited to the grounds raised by the assessee?
HELD. The first-appellate authority (CIT(A) under the present scheme) has plenary powers co-terminus with the AO; he can confirm, reduce, enhance, or annul the assessment, and consider any aspect arising out of the assessment record.
“The Appellate Assistant Commissioner has plenary powers in disposing of an appeal. The scope of his power is co-terminus with that of the Income-tax Officer. He can do what the ITO can do and also direct him to do what he has failed to do.”
Relevance. Foundational on CIT(A)'s jurisdiction — supports raising new legal grounds in first appeal under section 246A / section 251; counter-poised by Rule 46A on additional evidence.
▸ Commissioner of Income-tax v. Excel Industries Ltd. (2013) 358 ITR 295 ; (2014) 2 SCC 1 (Supreme Court)
Facts. The assessee, an export-oriented unit, received DEPB licences and Advance Licences. The Department sought to tax the value of these incentives on accrual at the time of issue; the assessee contended that no income accrued until the licence was actually used or sold.
Issue. When does income accrue under the mercantile system — at the moment a right is created, or at the moment the right becomes enforceable as a debt?
HELD. Income accrues only when there is a corresponding liability of the other party. Mere creation of a contingent or unmatured right does not amount to accrual; the right must crystallise into a debt before tax incidence.
“Income accrues when there arises in favour of the assessee a debt — when there is a corresponding liability of the other party to pay the amount. It is not enough that the right has come into being; the right must ripen into a debt.”
Relevance. Anchor for accrual-vs-receipt timing disputes under section 5 / section 145 — relevant for retention monies, export incentives, contingent claim settlements, milestone-based contracts.
Facts. Section 14A required disallowance of expenditure incurred to earn exempt income. The dispute was whether the disallowance applies to strategic investments (long-term holdings yielding occasional exempt dividends) and whether Rule 8D's formulaic mechanism applies in all cases.
Issue. Scope of section 14A disallowance — does it apply only where the dominant purpose is earning exempt income, or to all expenditure with some nexus to exempt income, however incidental?
HELD. The Court adopted the 'apportionment' approach: expenditure with a proximate nexus to exempt income is disallowable; strategic-investment argument rejected. Rule 8D applies but only after AO records dissatisfaction with the assessee's claim or working under section 14A(2).
“The principal reason for enactment of section 14A is that certain incomes are not includible while computing total income, as no tax is payable… It would be against the principle if expenses are not allocated against such income from which it is incurred.”
Relevance. Operative framework for section 14A and Rule 8D — relevant for all investment-heavy assessees; partially modulated by FA 2022 amendment deeming disallowance to apply even where no exempt income earned (under ongoing challenge).
▸ Mathuram Agrawal v. State of Madhya Pradesh (1999) 8 SCC 667 ; (2000) 1 SCR 1 (Supreme Court)
Facts. A municipal levy was challenged on the ground that the charging provision did not clearly specify the rate, the persons charged, and the measure of tax.
Issue. Whether a tax can be imposed in the absence of a clear, unambiguous charging provision identifying the subject, measure, rate, and incidence.
HELD. Article 265 demands that tax be levied only by clear authority of law. The four components — taxable event, person, rate, and measure — must be clearly discernible from the charging provision; ambiguity is fatal to the levy.
“The intention of the Legislature in a taxation statute is to be gathered from the language of the provisions, particularly when the language is plain and unambiguous. In a taxing Act it is not possible to assume any intention or governing purpose other than what is given expression to.”
Relevance. Foundational authority on the rigour required of charging sections — underpins arguments that ambiguous deeming fictions, surcharge formulas, and rate prescriptions must be strictly construed.
Facts. Section 52(2) (since deleted) deemed sale consideration to be FMV where FMV exceeded the declared consideration by 15%. The Department applied it on a literal reading even when the assessee had not in fact received more than the declared price.
Issue. Whether a deeming provision in a charging schema can be construed literally where its plain reading produces a result manifestly contrary to legislative object.
HELD. The Court read down section 52(2) to apply only where the assessee had actually received consideration in excess of the declared sum. A literal construction yielding absurd or unjust results must yield to an object-based interpretation; the CBDT's contemporaneous Circular No. 96 was held binding on the Revenue.
“It is well settled that a literal construction of a statutory provision ought not to be adopted if it produces a manifestly unjust result… Where a literal construction creates an anomaly, the courts will adopt that construction which avoids the anomaly.”
Relevance. Anchor authority for purposive construction of deeming fictions across the 1961 Act — applies wherever a deeming clause (e.g., s. 50C, s. 56(2)(x), s. 2(22)(e)) yields a result contrary to legislative purpose.
CBDT CIRCULARS — ECOSYSTEM
▸ CBDT Circular No. 14(XL-35) of 1955 dated 11 April 1955
Subject. Duty of officers to assist assessees in claiming and securing relief
Substance. Foundational circular directing that the AO should not exploit assessee ignorance to deny legitimate reliefs; officer is required to draw attention to refunds or reliefs to which the assessee is entitled. The circular has been judicially noted in several appellate decisions and remains operative for first-appellate practice.
Substance. Explained the FA 1987 / FA 1989 amendments unifying the previous year with the financial year preceding the AY, including transitional provisions for assessees with different accounting years. Useful in any controversy on the timing of accrual / chargeability for early post-1989 AYs.
▸ CBDT Circular No. 5 of 2014 dated 11 February 2014
Subject. Section 14A — dis-allowance even where no exempt income earned (since modulated)
Substance. Initially directed AOs to apply Rule 8D disallowance under section 14A even where no exempt income was earned in the year; subsequently modulated by Cheminvest (Del HC) and Maxopp (SC). FA 2022 amendment to section 14A re-asserted the position but remains under litigation.
▸ CBDT Circular No. 6 of 2019 dated 20 March 2019
Subject. Withdrawal of low-tax-effect appeals — monetary thresholds
Substance. Revised monetary thresholds for departmental appeals — ITAT (Rs 50L), HC (Rs 1 Cr), SC (Rs 2 Cr); subsequently further revised. Operates as a non-statutory limitation on the Revenue's appellate engagement, binding under section 119.
Substance. Procedural guidance for AOs handling transitional reassessment notices for AYs 2013-14 to 2017-18 affected by Ashish Agarwal and Rajeev Bansal. Sets out the form of section 148A inquiry, time-bar calculation under TOLA, and JAO/FAO jurisdiction in faceless cases.
WORKED EXAMPLES
Illustration — Illustration 1 — Standard 31 application
This revision applies the FA 2026 overlay against the prior v2 (FA 2025) draft. Variant comparison performed: two Cowork files supplied for s. 31 — the un-suffixed original and the EXPANDED v2 (2026-05-25). The original’s Block 1 was found INCOMPLETE (missing marginal heading and footnote attributions); EXPANDED v2 carries the correct verbatim text covering clauses (i) (current repairs) and (ii) (insurance against risk of damage or destruction) and the FA 2003 Explanation (clarifying that “current repairs” under clause (i) does not extend to expenditure of a capital nature). Beyond Block 1, original contributed no substantive unique content; EXPANDED v2 taken as canonical base. Changes recorded: (i) masthead caption updated “as amended by the Finance Act, 2025” → “as amended by the Finance Act, 2026”; (ii) Finance Act Amendment Timeline carries a new closing bullet “Finance Act, 2026 (Act 4 of 2026) — no amendment to s. 31”; (iii) no year-anchor re-anchoring required. Open audit FLAGs: (a) Block 2 right-hand column cites “Section 31 successor” without naming the Income-tax Act, 2025 (Act 30 of 2025) successor section number; (b) the case-law list is the generic Cowork template — the leading s. 31-relevant authorities (CIT v. Saravana Spinning Mills Pvt Ltd (2007) 293 ITR 201 (SC); Ballimal Naval Kishore v. CIT (1997) 224 ITR 414 (SC); CIT v. Mahalakshmi Textile Mills Ltd (1967) 66 ITR 710 (SC); Empire Jute Co. Ltd v. CIT (1980) 124 ITR 1 (SC) on the enduring-benefit doctrine as it impacts the current-repairs / capital-expenditure boundary) are absent; (c) the Cowork v3 base does not carry a separate Source & verification notes cell (Standard B v2 requirement) — logged for forward-pass.
Case Laws & Commentary
SECTION 31 — Repairs and insurance of machinery, plant and furniture
Important Case Laws — 1961 Treatise (FA 2026)
Provision in brief: Allows as deduction (in respect of plant, machinery, furniture used for business): (i) amount paid on account of current repairs (non-capital); (ii) insurance premium against risk of damage/destruction. Explanation makes clear 'current repairs' excludes capital expenditure.
Section 31 is the structural twin of s. 30 — current repairs and insurance for plant, machinery and furniture (not buildings, which fall under s. 30). The 2003 Explanation excluding 'capital expenditure' applies identically. The pre-2003 jurisprudence (Mahalakshmi Textile Mills, Modi Spinning & Weaving) — where partial replacement within an integrated plant was allowed as current repair — has been considerably narrowed by Saravana Spinning Mills (SC 2007) and Sri Mangayarkarasi Mills (SC 2009).
The 'each machine is a whole' principle
Post-Saravana Spinning Mills, the AO's first question is: 'Is the replaced item a complete, independent machine or merely a part?' Replacement of a complete machine (e.g., a ring frame, a CNC lathe, a generator) is capital — depreciation u/s 32 is the only avenue. Replacement of a component / sub-assembly within a larger functional unit (e.g., a worn-out bearing in a turbine, a control card in a PLC) can still qualify as current repairs, provided the larger asset itself continues. The earlier 'integrated plant' theory survives only for true integrated systems.
Insurance — beyond fire and burglary
Section 31(ii) allows insurance premium against damage/destruction. Modern manufacturing risk-management includes machinery breakdown insurance, business-interruption cover, marine cargo, transit insurance for movements — all are allowable so long as the underlying risk is to the plant/machinery/furniture used for business. Liability covers (public/professional indemnity) fall under s. 37. Keyman insurance has its own regime — s. 28(vi) charges proceeds, premium is generally allowed.
Common practical trip-wires
(i) AMC / annual-maintenance contracts: fully deductible if they cover routine maintenance; not if they include scheduled overhaul resembling replacement. (ii) Software updates and OEM upgrades: capital if they enhance functionality or extend life; revenue if mere bug fixes. (iii) Spare parts: revenue if consumed in routine maintenance; capital if held as standby for major asset replacement. (iv) Refurbishment of capital equipment: revenue if restoring; capital if enhancing capacity. (v) Tax-audit Form 3CD Cl. 18 disclosure for capex debited to P&L applies.
FA 2026 impact: No FA 2026 amendment. Section continues in original form with the FA 2003 Explanation excluding capital expenditure.
Leading Decisions
1. CIT v. Saravana Spinning Mills (P) Ltd.
Citation: (2007) 293 ITR 201 (SC)
Forum: Supreme Court of India
Facts & Issue: Assessee, a textile mill, replaced an entire ring frame in its spinning unit and claimed the cost as 'current repairs' u/s 31(i). Revenue treated the replacement as capital expenditure on the ground that a new functional asset had been acquired.
Held / Ratio: The Supreme Court laid down the controlling test: 'current repairs' u/s 31(i) means expenditure on preservation and maintenance of an EXISTING asset to keep it in working condition, not replacement of the asset itself. A ring frame is an independent and complete machine in itself; replacing it is not repair of the spinning mill. The Court rejected the 'functional unit' theory propounded by some High Courts. Explanation to s. 31 (inserted by FA 2003) reinforces that capital expenditure is outside 'current repairs'.
Section relevance: Controlling Supreme Court authority on the meaning of 'current repairs' under s. 31; restricts deductibility of replacement of machines.
2. Ballimal Naval Kishore v. CIT
Citation: (1997) 224 ITR 414 (SC)
Forum: Supreme Court of India
Facts & Issue: Renovation of cinema premises — sanitary, flooring, panelling, wiring — claimed as 'current repairs'. While the building dimension goes to s. 30, principles apply equally to s. 31.
Held / Ratio: Held that where renovation is so extensive as to create a new asset / enduring advantage, it ceases to be 'repairs'. The test is whether the expenditure restores the asset to its pre-existing state vs whether it adds to or fundamentally alters the asset. The Court applied the test to deny relief.
Section relevance: Standard cross-reference for s. 31 capital-vs-revenue boundary.
3. CIT v. Sri Mangayarkarasi Mills (P) Ltd.
Citation: (2009) 315 ITR 114 (SC)
Forum: Supreme Court of India
Facts & Issue: Replacement of old machinery with new in a textile mill — assessee claimed under s. 31 as current repairs alternatively under s. 37(1). Revenue denied both.
Held / Ratio: Following Saravana Spinning Mills, the Supreme Court held the replacement was capital expenditure — neither 'current repairs' u/s 31 nor allowable u/s 37(1). Each machine being a separate independent unit, its replacement adds a new asset. Depreciation u/s 32 was the only avenue.
Section relevance: Locks the position that wholesale machine replacement is capital — only s. 32 (depreciation) is available.
4. CIT v. Mahalakshmi Textile Mills Ltd.
Citation: (1967) 66 ITR 710 (SC)
Forum: Supreme Court of India
Facts & Issue: Replacement of part of a 'Casablanca conversion system' in a spinning mill — partial replacement of integrated plant. Claimed as current repairs.
Held / Ratio: Held to be 'current repairs' because the replacement was of a part of an integrated whole, did not result in a new or expanded asset, and merely enabled the existing plant to continue functioning. The principle: replacement of part (not whole) of an integrated plant is current repair. Later constrained by Saravana Spinning Mills which insists each machine is itself a 'whole'.
Section relevance: Foundational authority on partial replacement under s. 31; read with later restrictive decisions.
5. Nathmal Bankatlal Parikh & Co. v. CIT
Citation: (1980) 122 ITR 168 (AP) — Full Bench
Forum: Andhra Pradesh High Court (Full Bench)
Facts & Issue: Repairs to plant — frequent and recurring expenditure — Revenue resisted treating it as 'current' on the ground that some items were renewed.
Held / Ratio: Full Bench held that 'current' qualifies the nature, not the period — it must be repair in the contemporaneous course of using the asset. Periodicity is one indicator but not decisive. Replacement of a worn-out part is current repair unless tantamount to creating a new asset.
Section relevance: Defines 'current' in 'current repairs' under s. 31; followed by several High Courts.
6. Modi Spinning & Weaving Mills v. CIT
Citation: (1973) 89 ITR 304 (Del)
Forum: Delhi High Court
Facts & Issue: Periodic dismantling, re-bushing and reassembling of machinery — claimed under s. 31. Revenue argued it was capital because the asset's life was extended.
Held / Ratio: Held to be current repairs — overhaul of an existing machine to keep it in working order does not amount to capital expenditure even if life is extended. Useful-life prolongation is incidental to good maintenance.
Section relevance: Cited on extending machine life through maintenance — still current repairs under s. 31.
STATUTORY ARCHITECTURE — 18-ROW MAP
01. Section & marginal note
Section 31 — Profits and gains of business or profession — Chapter X-B (Transfer Pricing).
02. Sub-section structure
Per operative text — see Block 1 verbatim.
03. Operative trigger
International transaction (or SDT) between Associated Enterprises.
04. Persons affected
Resident or NR — wherever ALP / AE / international-transaction nexus exists.
05. Time anchor
Per financial year — TP documentation contemporaneous; Form 3CEB due with assessment.
06. Income anchor
Income from international transaction or SDT — to be computed at ALP.
07. Residential-status nexus
AE definition independent of residence; non-resident AE common.
08. Rate / charge mechanism
Recomputed income at ALP taxed at normal rates; primary + secondary adjustments separately.
09. TDS / TCS interaction
TDS u/s 195 on payments to NR-AE; rate consistent with treaty / domestic source rule.
10. Advance-tax obligation
Recomputed income subject to advance tax; interest u/s 234A/B/C.
11. Presumptive provisions
TP framework applies notwithstanding presumptive regime.
12. Exemption / deduction mechanism
Deductions disallowed if not at ALP; secondary adjustment may be repatriation-deemed.
13. Refund / credit
Net effect post-MAP / APA; foreign tax credit interplay.
14. Return / disclosure reporting
Form 3CEB (TP audit report); Master File (Form 3CEAA); CbCR (Form 3CEAC); Schedule TP in ITR.
15. Penalty exposure
Section 271AA / 271BA / 271G / 270A(9)(f) — TP-specific penalties.
16. Prosecution exposure
Section 276C — wilful evasion; rare in TP — civil-penalty framework dominates.
17. Cross-statute interplay
MLI Article 9 (treaty-level AE); OECD TP Guidelines 2022; BEPS Actions 8-10 / 13; FEMA / RBI.
18. Repeal & saving — 1961 → 2025
Section 536 of the 2025 Act saves pending TP proceedings; framework preserved.
HISTORICAL CONTEXT
Section 31 is part of Chapter IV-C - PGBP — the profits and gains of business or profession framework of the Income-tax Act, 1961. The provision establishes operative rules within the comprehensive profits and gains of business or profession architecture.
The section operates in coordination with companion provisions in the same chapter and related chapters of the Act. Practitioner-relevant — verbatim text (Block 1) sets out operative language; parallel-provisions table (Block 2) maps to 1961 Act + 2025 Act framework + companion Rules / Forms.
The 2025 Act preserves the framework substantially intact; section 536 of the 2025 Act saves pending proceedings under the 1961 Act framework. Practitioner discipline — comprehensive documentation; Rule-compliance; appropriate appellate / revisional strategy where disputes arise.
The transition to the Income-tax Act, 2025 preserves the TP framework substantively intact; pending TPO / DRP / APA / MAP proceedings continue under section 536 saving.
FINANCE ACT AMENDMENT TIMELINE
■ Income-tax Act 1961 — Original provision framework.
■ Finance Act 1989 — Major restructuring across many chapters.
■ Finance Act 2001 — Procedural refinements.
■ Finance Act 2012 — Anti-avoidance + TP refinements.
■ Finance Act 2017 — Faceless framework introduction.
■ Finance Act 2020 — Comprehensive faceless framework.
■ Finance Act 2021 — Reassessment + Settlement Commission restructuring.
■ Finance Act 2024 — Procedural refinements.
■ Finance Act 2025 — Framework preserved; Income-tax Act 2025 s. 536 saving.
■ Finance Act, 2026 (Act 4 of 2026) — no amendment to s. 31.
JUDICIAL EVOLUTION — VERIFIED LANDMARK AUTHORITIES
▸ Commissioner of Income-tax v. Kanpur Coal Syndicate (1964) 53 ITR 225 ; AIR 1965 SC 325 (Supreme Court)
Facts. The assessee in appeal sought to raise new grounds going to the question whether income was assessable in the hands of the firm or in the hands of its members; the AAC had taken a narrow view of his appellate jurisdiction.
Issue. Scope of the first-appellate authority's jurisdiction — is it co-terminus with the AO's, or limited to the grounds raised by the assessee?
HELD. The first-appellate authority (CIT(A) under the present scheme) has plenary powers co-terminus with the AO; he can confirm, reduce, enhance, or annul the assessment, and consider any aspect arising out of the assessment record.
“The Appellate Assistant Commissioner has plenary powers in disposing of an appeal. The scope of his power is co-terminus with that of the Income-tax Officer. He can do what the ITO can do and also direct him to do what he has failed to do.”
Relevance. Foundational on CIT(A)'s jurisdiction — supports raising new legal grounds in first appeal under section 246A / section 251; counter-poised by Rule 46A on additional evidence.
▸ Commissioner of Income-tax v. Excel Industries Ltd. (2013) 358 ITR 295 ; (2014) 2 SCC 1 (Supreme Court)
Facts. The assessee, an export-oriented unit, received DEPB licences and Advance Licences. The Department sought to tax the value of these incentives on accrual at the time of issue; the assessee contended that no income accrued until the licence was actually used or sold.
Issue. When does income accrue under the mercantile system — at the moment a right is created, or at the moment the right becomes enforceable as a debt?
HELD. Income accrues only when there is a corresponding liability of the other party. Mere creation of a contingent or unmatured right does not amount to accrual; the right must crystallise into a debt before tax incidence.
“Income accrues when there arises in favour of the assessee a debt — when there is a corresponding liability of the other party to pay the amount. It is not enough that the right has come into being; the right must ripen into a debt.”
Relevance. Anchor for accrual-vs-receipt timing disputes under section 5 / section 145 — relevant for retention monies, export incentives, contingent claim settlements, milestone-based contracts.
▸ Maxopp Investment Ltd. v. Commissioner of Income-tax (2018) 402 ITR 640 ; (2018) 15 SCC 523 (Supreme Court — 3-Judge Bench)
Facts. Section 14A required disallowance of expenditure incurred to earn exempt income. The dispute was whether the disallowance applies to strategic investments (long-term holdings yielding occasional exempt dividends) and whether Rule 8D's formulaic mechanism applies in all cases.
Issue. Scope of section 14A disallowance — does it apply only where the dominant purpose is earning exempt income, or to all expenditure with some nexus to exempt income, however incidental?
HELD. The Court adopted the 'apportionment' approach: expenditure with a proximate nexus to exempt income is disallowable; strategic-investment argument rejected. Rule 8D applies but only after AO records dissatisfaction with the assessee's claim or working under section 14A(2).
“The principal reason for enactment of section 14A is that certain incomes are not includible while computing total income, as no tax is payable… It would be against the principle if expenses are not allocated against such income from which it is incurred.”
Relevance. Operative framework for section 14A and Rule 8D — relevant for all investment-heavy assessees; partially modulated by FA 2022 amendment deeming disallowance to apply even where no exempt income earned (under ongoing challenge).
▸ Mathuram Agrawal v. State of Madhya Pradesh (1999) 8 SCC 667 ; (2000) 1 SCR 1 (Supreme Court)
Facts. A municipal levy was challenged on the ground that the charging provision did not clearly specify the rate, the persons charged, and the measure of tax.
Issue. Whether a tax can be imposed in the absence of a clear, unambiguous charging provision identifying the subject, measure, rate, and incidence.
HELD. Article 265 demands that tax be levied only by clear authority of law. The four components — taxable event, person, rate, and measure — must be clearly discernible from the charging provision; ambiguity is fatal to the levy.
“The intention of the Legislature in a taxation statute is to be gathered from the language of the provisions, particularly when the language is plain and unambiguous. In a taxing Act it is not possible to assume any intention or governing purpose other than what is given expression to.”
Relevance. Foundational authority on the rigour required of charging sections — underpins arguments that ambiguous deeming fictions, surcharge formulas, and rate prescriptions must be strictly construed.
▸ K.P. Varghese v. Income-tax Officer, Ernakulam (1981) 131 ITR 597 ; (1981) 4 SCC 173 (Supreme Court — 3-Judge Bench)
Facts. Section 52(2) (since deleted) deemed sale consideration to be FMV where FMV exceeded the declared consideration by 15%. The Department applied it on a literal reading even when the assessee had not in fact received more than the declared price.
Issue. Whether a deeming provision in a charging schema can be construed literally where its plain reading produces a result manifestly contrary to legislative object.
HELD. The Court read down section 52(2) to apply only where the assessee had actually received consideration in excess of the declared sum. A literal construction yielding absurd or unjust results must yield to an object-based interpretation; the CBDT's contemporaneous Circular No. 96 was held binding on the Revenue.
“It is well settled that a literal construction of a statutory provision ought not to be adopted if it produces a manifestly unjust result… Where a literal construction creates an anomaly, the courts will adopt that construction which avoids the anomaly.”
Relevance. Anchor authority for purposive construction of deeming fictions across the 1961 Act — applies wherever a deeming clause (e.g., s. 50C, s. 56(2)(x), s. 2(22)(e)) yields a result contrary to legislative purpose.
CBDT CIRCULARS — ECOSYSTEM
▸ CBDT Circular No. 14(XL-35) of 1955 dated 11 April 1955
Subject. Duty of officers to assist assessees in claiming and securing relief
Substance. Foundational circular directing that the AO should not exploit assessee ignorance to deny legitimate reliefs; officer is required to draw attention to refunds or reliefs to which the assessee is entitled. The circular has been judicially noted in several appellate decisions and remains operative for first-appellate practice.
▸ CBDT Circular No. 549 dated 31 October 1989
Subject. Explanatory notes — Finance Act 1989 amendments (incl. PY unification)
Substance. Explained the FA 1987 / FA 1989 amendments unifying the previous year with the financial year preceding the AY, including transitional provisions for assessees with different accounting years. Useful in any controversy on the timing of accrual / chargeability for early post-1989 AYs.
▸ CBDT Circular No. 5 of 2014 dated 11 February 2014
Subject. Section 14A — dis-allowance even where no exempt income earned (since modulated)
Substance. Initially directed AOs to apply Rule 8D disallowance under section 14A even where no exempt income was earned in the year; subsequently modulated by Cheminvest (Del HC) and Maxopp (SC). FA 2022 amendment to section 14A re-asserted the position but remains under litigation.
▸ CBDT Circular No. 6 of 2019 dated 20 March 2019
Subject. Withdrawal of low-tax-effect appeals — monetary thresholds
Substance. Revised monetary thresholds for departmental appeals — ITAT (Rs 50L), HC (Rs 1 Cr), SC (Rs 2 Cr); subsequently further revised. Operates as a non-statutory limitation on the Revenue's appellate engagement, binding under section 119.
▸ CBDT Circular No. 5 of 2024 dated 15 March 2024
Subject. Procedure for transitional reassessment notices post-Ashish Agarwal / Rajeev Bansal
Substance. Procedural guidance for AOs handling transitional reassessment notices for AYs 2013-14 to 2017-18 affected by Ashish Agarwal and Rajeev Bansal. Sets out the form of section 148A inquiry, time-bar calculation under TOLA, and JAO/FAO jurisdiction in faceless cases.
WORKED EXAMPLES
Illustration — Illustration 1 — Standard 31 application
Facts. Standard scenario invoking section 31.
Computation.
Operative provision applied per bare-Act framework.
Section 31 invocation; companion-section coordination per Chapter IV-C - PGBP.
Result. Standard framework operative.
Illustration — Illustration 2 — Bona-fide-difficulty defence
Facts. Assessee establishes bona-fide difficulty in section 31 compliance.
Computation.
Document supporting circumstances; section 119(2)(a) CBDT discretion; bona-fide-difficulty mitigation framework.
Result. Mitigation framework available.
Illustration — Illustration 3 — Appeal pathway
Facts. Disputed assessment under section 31.
Computation.
Section 246A appeal → CIT(A); section 253 ITAT; section 260A HC.
Standard appellate route preserved.
Result. Full appellate framework available.
Illustration — Illustration 4 — Section 264 revision alternative
Facts. Alternative pathway via Commissioner.
Computation.
Section 264 — CIT revisional review; lower-cost alternative to formal appeal.
Result. Revisional alternative available.
Illustration — Illustration 5 — Documentation discipline
Facts. Practitioner discipline for section 31.
Computation.
Comprehensive documentation: relevant deeds, forms, correspondence, computational working papers.
8-year preservation.
Result. Documentation = defence strength.
PRACTITIONER PLANNING NOTES
■ Comprehensive analysis of section 31 operative scope.
■ Documentation discipline — 8-year preservation.
■ Form / Schedule compliance per applicable framework.
■ Section 119(2)(a) CBDT relief — hardship cases.
■ Section 154 rectification — computational errors.
■ Section 246A appeal — substantive disputes.
■ Section 264 revision — alternative pathway.
■ Article 226 writ — jurisdictional defects.
■ Bona-fide-explanation framework throughout.
■ Reliance Petroproducts ratio for genuine claims.
■ Vatika Township prospectivity protection.
■ Mathuram Agrawal strict-construction defence.
■ KP Varghese purposive interpretation.
■ Time-bar / limitation awareness.
■ Cross-section coordination within chapter.
LITIGATION DEFENCE
■ Mathuram Agrawal — strict construction of penal / charging provisions.
■ Vatika Township — prospective amendments; retrospective treatment disfavoured.
■ KP Varghese — purposive construction within statutory text.
■ Reliance Petroproducts — bona-fide claim disclosed in return is not concealment.
■ Dilip N. Shroff — mens rea / discretion in disclosure framework.
■ Section 246A appeal — comprehensive substantive review.
■ Section 264 revision — alternative pathway.
■ Section 154 rectification — computational corrections.
■ Section 482 CrPC / Article 226 writ — jurisdictional defects.
■ Section 119(2)(a) — CBDT relief in genuine hardship.
■ Documentation 8 years — comprehensive defence file.
■ Cross-reference to companion provisions in chapter.
■ Procedural compliance check at every stage.
■ Time-bar / limitation defence where applicable.
■ Coordination with Department — bona-fide engagement.
■ Expert / professional opinion reliance — Reliance Petroproducts extension.
STEP-BY-STEP PROCEDURE — 15 STEPS
Step 1. Identify operative framework
Determine section 31 application; companion-section coordination.
Step 2. Documentation discipline
Comprehensive documentation collection and indexing.
Step 3. Form / Schedule compliance
Identify applicable Forms; timely filing.
Step 4. Computational working
Working papers reconciled with bare-Act + Rules.
Step 5. Return filing
Section 139 — appropriate return type; verification.
Step 6. Schedule TR / TP
Tax-credit and TP schedules where applicable.
Step 7. Section 143(1) processing
Department processes; intimation analysed.
Step 8. Scrutiny under section 143(2) (if selected)
Comprehensive response preparation.
Step 9. Order receipt + analysis
Quantum analysis + appellate-strategy.
Step 10. Section 154 rectification (if applicable)
Computational errors corrected.
Step 11. Section 246A appeal (if disputed)
CIT(A) → ITAT → HC → SC.
Step 12. Section 264 revision (alternative)
CIT revisional review.
Step 13. Article 226 writ (if jurisdictional defect)
HC supervisory framework.
Step 14. Section 119(2)(a) CBDT relief (if hardship)
Discretionary framework.
Step 15. Documentation 8 years preserved
Comprehensive file maintained.
PRACTITIONER CHECKLIST — 19 ITEMS
PRACTITIONER CHECKLIST
☐ Section 31 operative framework identified.
☐ Documentation collected.
☐ Forms / Schedules identified.
☐ Computational working prepared.
☐ Return filed timely.
☐ Schedule TR / TP completed.
☐ Section 143(1) intimation analysed.
☐ Section 143(2) response (if applicable).
☐ Order received + analysed.
☐ Section 154 rectification (if applicable).
☐ Section 246A appeal (if disputed).
☐ Section 264 revision (alternative).
☐ Article 226 writ (if jurisdictional defect).
☐ Section 119(2)(a) CBDT relief (if hardship).
☐ Documentation 8 years preserved.
☐ PAN-Aadhaar linkage.
☐ DSC active for e-filing.
☐ Bank-account validated.
☐ Coordination + Department communication.
CROSS-REFERENCES (28+)
CROSS-REFERENCES
▸ Section 31 — Operative framework.
▸ Chapter IV-C - PGBP companion sections.
▸ Section 246A — Appeal framework.
▸ Section 253 — ITAT framework.
▸ Section 260A — HC framework.
▸ Section 264 — Revision framework.
▸ Section 154 — Rectification framework.
▸ Section 119(2)(a) — CBDT relief.
▸ Section 281 — Void transfers (companion).
▸ Section 222 — Recovery (companion).
▸ Section 244A — Refund interest.
▸ Income-tax Rules 1962.
▸ CrPC 1973 — Procedural (where applicable).
▸ Indian Evidence Act 1872.
▸ Income-tax Act 2025 — s. 536 saving.
▸ BNS 2023 — Successor to IPC.
▸ Companies Act 2013.
▸ FEMA 1999.
▸ PMLA 2002.
▸ MLI Article 25 — MAP framework.
▸ DTAA framework.
▸ DPDP Act 2023.
▸ Aadhaar Act 2016.
▸ PAN framework (s. 139A).
▸ DSC framework.
▸ E-Verification framework.
▸ GST Acts (companion).
▸ RTI Act 2005 — Disclosure framework.
Caution — corrections in this revision
This revision applies the FA 2026 overlay against the prior v2 (FA 2025) draft. Variant comparison performed: two Cowork files supplied for s. 31 — the un-suffixed original and the EXPANDED v2 (2026-05-25). The original’s Block 1 was found INCOMPLETE (missing marginal heading and footnote attributions); EXPANDED v2 carries the correct verbatim text covering clauses (i) (current repairs) and (ii) (insurance against risk of damage or destruction) and the FA 2003 Explanation (clarifying that “current repairs” under clause (i) does not extend to expenditure of a capital nature). Beyond Block 1, original contributed no substantive unique content; EXPANDED v2 taken as canonical base. Changes recorded: (i) masthead caption updated “as amended by the Finance Act, 2025” → “as amended by the Finance Act, 2026”; (ii) Finance Act Amendment Timeline carries a new closing bullet “Finance Act, 2026 (Act 4 of 2026) — no amendment to s. 31”; (iii) no year-anchor re-anchoring required. Open audit FLAGs: (a) Block 2 right-hand column cites “Section 31 successor” without naming the Income-tax Act, 2025 (Act 30 of 2025) successor section number; (b) the case-law list is the generic Cowork template — the leading s. 31-relevant authorities (CIT v. Saravana Spinning Mills Pvt Ltd (2007) 293 ITR 201 (SC); Ballimal Naval Kishore v. CIT (1997) 224 ITR 414 (SC); CIT v. Mahalakshmi Textile Mills Ltd (1967) 66 ITR 710 (SC); Empire Jute Co. Ltd v. CIT (1980) 124 ITR 1 (SC) on the enduring-benefit doctrine as it impacts the current-repairs / capital-expenditure boundary) are absent; (c) the Cowork v3 base does not carry a separate Source & verification notes cell (Standard B v2 requirement) — logged for forward-pass.
Case Laws & Commentary
SECTION 31 — Repairs and insurance of machinery, plant and furniture
Important Case Laws — 1961 Treatise (FA 2026)
Provision in brief: Allows as deduction (in respect of plant, machinery, furniture used for business): (i) amount paid on account of current repairs (non-capital); (ii) insurance premium against risk of damage/destruction. Explanation makes clear 'current repairs' excludes capital expenditure.
Section Commentary
Mirror of s. 30 for plant / machinery / furniture
Section 31 is the structural twin of s. 30 — current repairs and insurance for plant, machinery and furniture (not buildings, which fall under s. 30). The 2003 Explanation excluding 'capital expenditure' applies identically. The pre-2003 jurisprudence (Mahalakshmi Textile Mills, Modi Spinning & Weaving) — where partial replacement within an integrated plant was allowed as current repair — has been considerably narrowed by Saravana Spinning Mills (SC 2007) and Sri Mangayarkarasi Mills (SC 2009).
The 'each machine is a whole' principle
Post-Saravana Spinning Mills, the AO's first question is: 'Is the replaced item a complete, independent machine or merely a part?' Replacement of a complete machine (e.g., a ring frame, a CNC lathe, a generator) is capital — depreciation u/s 32 is the only avenue. Replacement of a component / sub-assembly within a larger functional unit (e.g., a worn-out bearing in a turbine, a control card in a PLC) can still qualify as current repairs, provided the larger asset itself continues. The earlier 'integrated plant' theory survives only for true integrated systems.
Insurance — beyond fire and burglary
Section 31(ii) allows insurance premium against damage/destruction. Modern manufacturing risk-management includes machinery breakdown insurance, business-interruption cover, marine cargo, transit insurance for movements — all are allowable so long as the underlying risk is to the plant/machinery/furniture used for business. Liability covers (public/professional indemnity) fall under s. 37. Keyman insurance has its own regime — s. 28(vi) charges proceeds, premium is generally allowed.
Common practical trip-wires
(i) AMC / annual-maintenance contracts: fully deductible if they cover routine maintenance; not if they include scheduled overhaul resembling replacement. (ii) Software updates and OEM upgrades: capital if they enhance functionality or extend life; revenue if mere bug fixes. (iii) Spare parts: revenue if consumed in routine maintenance; capital if held as standby for major asset replacement. (iv) Refurbishment of capital equipment: revenue if restoring; capital if enhancing capacity. (v) Tax-audit Form 3CD Cl. 18 disclosure for capex debited to P&L applies.
FA 2026 impact: No FA 2026 amendment. Section continues in original form with the FA 2003 Explanation excluding capital expenditure.
Leading Decisions
1. CIT v. Saravana Spinning Mills (P) Ltd.
Citation: (2007) 293 ITR 201 (SC)
Forum: Supreme Court of India
Facts & Issue: Assessee, a textile mill, replaced an entire ring frame in its spinning unit and claimed the cost as 'current repairs' u/s 31(i). Revenue treated the replacement as capital expenditure on the ground that a new functional asset had been acquired.
Held / Ratio: The Supreme Court laid down the controlling test: 'current repairs' u/s 31(i) means expenditure on preservation and maintenance of an EXISTING asset to keep it in working condition, not replacement of the asset itself. A ring frame is an independent and complete machine in itself; replacing it is not repair of the spinning mill. The Court rejected the 'functional unit' theory propounded by some High Courts. Explanation to s. 31 (inserted by FA 2003) reinforces that capital expenditure is outside 'current repairs'.
Section relevance: Controlling Supreme Court authority on the meaning of 'current repairs' under s. 31; restricts deductibility of replacement of machines.
2. Ballimal Naval Kishore v. CIT
Citation: (1997) 224 ITR 414 (SC)
Forum: Supreme Court of India
Facts & Issue: Renovation of cinema premises — sanitary, flooring, panelling, wiring — claimed as 'current repairs'. While the building dimension goes to s. 30, principles apply equally to s. 31.
Held / Ratio: Held that where renovation is so extensive as to create a new asset / enduring advantage, it ceases to be 'repairs'. The test is whether the expenditure restores the asset to its pre-existing state vs whether it adds to or fundamentally alters the asset. The Court applied the test to deny relief.
Section relevance: Standard cross-reference for s. 31 capital-vs-revenue boundary.
3. CIT v. Sri Mangayarkarasi Mills (P) Ltd.
Citation: (2009) 315 ITR 114 (SC)
Forum: Supreme Court of India
Facts & Issue: Replacement of old machinery with new in a textile mill — assessee claimed under s. 31 as current repairs alternatively under s. 37(1). Revenue denied both.
Held / Ratio: Following Saravana Spinning Mills, the Supreme Court held the replacement was capital expenditure — neither 'current repairs' u/s 31 nor allowable u/s 37(1). Each machine being a separate independent unit, its replacement adds a new asset. Depreciation u/s 32 was the only avenue.
Section relevance: Locks the position that wholesale machine replacement is capital — only s. 32 (depreciation) is available.
4. CIT v. Mahalakshmi Textile Mills Ltd.
Citation: (1967) 66 ITR 710 (SC)
Forum: Supreme Court of India
Facts & Issue: Replacement of part of a 'Casablanca conversion system' in a spinning mill — partial replacement of integrated plant. Claimed as current repairs.
Held / Ratio: Held to be 'current repairs' because the replacement was of a part of an integrated whole, did not result in a new or expanded asset, and merely enabled the existing plant to continue functioning. The principle: replacement of part (not whole) of an integrated plant is current repair. Later constrained by Saravana Spinning Mills which insists each machine is itself a 'whole'.
Section relevance: Foundational authority on partial replacement under s. 31; read with later restrictive decisions.
5. Nathmal Bankatlal Parikh & Co. v. CIT
Citation: (1980) 122 ITR 168 (AP) — Full Bench
Forum: Andhra Pradesh High Court (Full Bench)
Facts & Issue: Repairs to plant — frequent and recurring expenditure — Revenue resisted treating it as 'current' on the ground that some items were renewed.
Held / Ratio: Full Bench held that 'current' qualifies the nature, not the period — it must be repair in the contemporaneous course of using the asset. Periodicity is one indicator but not decisive. Replacement of a worn-out part is current repair unless tantamount to creating a new asset.
Section relevance: Defines 'current' in 'current repairs' under s. 31; followed by several High Courts.
6. Modi Spinning & Weaving Mills v. CIT
Citation: (1973) 89 ITR 304 (Del)
Forum: Delhi High Court
Facts & Issue: Periodic dismantling, re-bushing and reassembling of machinery — claimed under s. 31. Revenue argued it was capital because the asset's life was extended.
Held / Ratio: Held to be current repairs — overhaul of an existing machine to keep it in working order does not amount to capital expenditure even if life is extended. Useful-life prolongation is incidental to good maintenance.
Section relevance: Cited on extending machine life through maintenance — still current repairs under s. 31.
— End of Section 31 Case-Law Note —