Calcutta High Court
Commissioner Of Income-Tax vs Dewar'S Garage (India) Pvt. Ltd. on 23 July, 1992
Equivalent citations: [1993]204ITR763(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, the following question of law has been referred to this court :
"Whether, on the fact and in the circumstances of the case, the expenditure of Rs. 2,12,266 incurred for repairing the premises No. 4, Council House Street, Calcutta, was an allowable expenditure in computing the income of the assessee from business?"
2. Shortly staged, the facts are that the assessee is a company and the (reference relates tq the assessment year 1975-76, for which the previous year ended on June 30, 1974. The assessee-company claimed deduction of Rs. 2,12,266 as expenses for repairing of the business premises at No. 4, Council House Street, Calcutta. The Income-tax Officer disallowed this claim of the assessee as he was of the opinion that the assessee having been a tenant of the premises had no obligation to make extensive repairs to the rented building. According to the Income-tax Officer, the extensive repair and renovation of the existing building had resulted in a new advantage of enduring benefit and so it was a capital expenditure.
3. The assessee appealed to the Commissioner of Income-tax (Appeals) and contended that the building was in a dilapidated condition and, in 1963, the Calcutta Corporation served a notice for its demolition on Sri B.N. Jhunjhunwala, one of the partners of the assessee-firm. The assessee, on receipt of the demolition notice, took time from the Corporation authorities and undertook repairing works and for that it engaged an architect for the repairing work. The said architect submitted a report on April 11, 1973, to the effect that the premises have been thoroughly rapaired, that the cracks on most of the walls have been rectified, that the floors have been made secure, that the weak beams are changed and reinforced, that all corrosions of steel works have been removed and that the old parapets have been demolished and rebuilt. It was pointed out that, on the basis of the said report of the architect, the city civil court held that the insecurity of the building has been removed and so it dismissed the suit brought by the Calcutta Corporation for demolition of the assessee's business premises. It was, therefore, claimed that the amount of Rs. 2,12,266 was business expenses inasmuch as the amount had been spent for repairing the said premises.
4. The Commissioner of Income-tax (Appeals) found that the assessee had been paying yearly rent of Rs. 46,200 for the entire premises and that it was deriving rental income of Rs. 1,17,922 yearly by way of sub-letting a portion of the aforesaid premises. He found that the assessee was in occupation of the premises in question since 1963, and that it incurred huge expenditure for renovation of the premises. From the details of the expenses, the Commissioner of Income-tax (Appeals) found that the materials like cement and sand were required for replacement of the old beams by new beams. He, therefore, took the view that though the asses-see was not the owner of the premises, yet became the owner of the improvements made to the premises by incurring huge expenditure. He observed that the assessee carried out thorough repairing works for its own benefit as otherwise its source of income from sub-letting would have been extinguished. The Commissioner (Appeals) relied on the decision of the Allahabad High Court in the case of CIT v. Chandra Agro P. Ltd. [1979] 117 ITR 251, and held that the expenditure incurred by the assessee was a capital expenditure and so he confirmed the action of the Income-tax Officer.
5. The assessee preferred a second appeal before the Tribunal and it was contended on behalf of the assessee that thorough repairing was necessary to preserve and maintain the already existing income-earning asset and, by expending this amount, the assessee had not acquired any new asset. It was pointed out that the decision of the Allahabad High Court, as relied on by the Commissioner of Income-tax (Appeals), was different on facts inasmuch as, in that case, the assessee was a lessee-tenant whereas, in the present case, the assessee was a monthly tenant. It was urged that the relevant factor for consideration was the nature of the repairs and not the expenditure incurred. Reliance was placed on the decision in the case of CIT v. Kalyanji Mavji and Co. , and it was urged that, under similar circumstances, the Supreme Court held that the expenditure was revenue in nature. It was further urged that the expenditure in question was allowable under Section 37, if not under Section 50 of the Income-tax Act, 1961.
6. On behalf of the Revenue, it was contended that the assessee was occupying the premises in terms of a lease for 15 years, and, therefore, the decision in the case of Chandra Agro P. Ltd, , was clearly applicable in this case. Reference was made to the report of the architect and it pointed out that the expenditure was mainly incurred for replacement of beams and parapets and so it was capital expenditure in view of the decision in the case of Humayun Properties Ltd. v. CIT [1962] 44 ITR 73 (Cal) and Addl CIT v. Lawlys Enterprises (P.) Ltd. [1975] 100 ITR 369 (Patna). The Tribunal, in its original order, held that the lower authorities were justified in disallowing the deduction of Rs. 2,12,266 claimed by the assessee as revenue expenditure by observing as under :
"We have heard the rival submissions and considered the facts on record. The case of the assessee is that the expenditure was incurred for current repairs to the building which was not owned by it and so this was a revenue expenditure. There is no dispute that an expenditure on current repairs is allowable as a revenue expenditure. But it is necessary to understand what the expression 'current repairs' means. The Calcutta High Court in the case of Humayun Properties Ltd. [1962] 44 ITR 73, has held that 'current repairs' can be only such repairs which have periodicity implicit in them. The periodicity may refer to a month, six months or still longer intervals. The idea of 'recurrency' is imbedded in 'current repairs'. Again, 'current repairs' mean not luxury repairs or repairs which wait upon the whims or choice of the assessee. It may be noted that in the immediately preceding year, the assessee spent Rs. 1,04,417 for repairing this very building which had been allowed as current repairs. During the year under appeal the assessee again claimed to have incurred an expenditure of Rs. 2,12,266 for current repairs. It would be seen from the order of the Commissioner of Income-tax (Appeals) that a large amount was spent this year for replacement of old beams by new ones. From the details of the expenses, the Commissioner of Income-tax (Appeals) found that this was a case of renovation and not ordinary repairs. It is well-settled that the sum expended for replacement or renovation of a building cannot be regarded as a revenue expenditure. On a consideration of these facts, it has to be held that the big amount spent on extensive renovation to the building represented capital expenditure and that though the assessee was not the owner of the building, yet it became the owner of the improvement that was made by it to the building by spending the amount of Rs. 2,12,266. We have considered the decision of the Supreme Court in the case of Kalyanji Mavji and Co. [1980] 122 ITR 49, and found that the facts of that case were different from those of the case before us. In that case, the disputed amount was spent on the staff and labour by way of salary and wages and stores, machinery repairs, etc., for the purpose of putting the machinery in working order and bringing the colliery to a state where the mining operations could be resumed. But in the case before us, the amount was spent for replacement of beams and parapets and thorough renovation of the building. In view of what we have discussed above, we hold that the lower authorities were justified in disallowing the deduction of Rs. 2,12,266 claimed by the assessee as a revenue expenditure."
7. The assessee filed a miscellaneous application before the Tribunal requesting for rectification of some mistakes which were said to have crept into the order of the Tribunal dated December 4, 1980. It was pointed out that there was a factual mistake in the aforesaid order of the Tribunal Inasmuch as the Tribunal observed that the Corporation of Calcutta served a demolition notice In respect of premises, No. 4, Council House Street, Calcutta, on Shri B.N. Jhunjhunwala, a partner of the assessee-firm, though, in fact, such notice was served on Shri B.N. Jhunjhunwala, care of Messrs. Dewar's Garage, which is a private limited company. It was further pointed out that the Tribunal had not considered the important submission that was made before it at the time of hearing of the appeal to the effect that the expenditure in question was fully allowable as deduction under Section 30 and/or under Section 37 of the Income-tax Act, 1961, as this was an accumulated arrears of repair for several years. It was also pointed out that the Tribunal failed to consider the principle laid down in the case of CIT v. L.G. Ramamurthi , cited before it. At the time of hearing of the miscellaneous application, it was pointed out that the paper book that was submitted before the Tribunal at the time of hearing the appeal contained various papers to support the contention to the effect that the expenditure was allowable either under Section 30 and/or under Section 37 of the Income-tax Act, 1961, was raised on behalf of the assessee before the Tribunal. It was, therefore, submitted that the order of the Tribunal should be modified accordingly. It was, however, contended on behalf of the Revenue that the first mistake, as pointed out in the miscellaneous application, was an apparent mistake; but the second mistake sought to be rectified was not a mistake apparent from the record as the Tribunal, while deciding the issue against the assessee, had taken into consideration all the relevant facts. It was, therefore, submitted that the mistake did not require any change or modification. The Tribunal, after going through the records, found that the mistakes sought to be rectified were apparent and, accordingly, it amended its order on both counts. The Tribunal, therefore, rectified its order dated December 4, 1980, by observing as under :
"Having heard the rival contentions and after going through the materials on record, we are of the opinion that the mistakes pointed out by the assessee in the aforesaid order of the Tribunal are apparent from record. Evidence on record shows that the Calcutta Corporation served a notice of demolition on Sri B. N. Jhunjhunwala, care of Messrs. Dewar's Garage, Calcutta. The first mistake, as mentioned above, is therefore, rectified."
8. Coming to the other mistakes as stated in the miscellaneous application, the Tribunal found that the submission made by the assessee's counsel that the expenditure in question was deductible under Section 30, and if not, the same was deductible under Section 37 of the Income-tax Act, 1961, had not been considered by the Tribunal. The Tribunal concluded that the heavy expenditure having been incurred for renovation of the building could not be said to be an expenditure for current repairs and hence it was not a revenue expenditure. Since this important aspect of the matter was overlooked, the Tribunal was of the view that this was a mistake apparent from the record. The Tribunal, therefore, modified this part of its order and, accordingly, paragraph 7 of the aforesaid order of the Tribunal was substituted by the following paragraph :
"We have heard the submissions of both the parties and considered the facts of the case. The undisputed fact is that the expenditure of Rs. 2,12,266 was incurred for thorough repair and renovation of the building in question which was in the use of the assessee for the purpose of its business. The fact that the Calcutta Corporation served on Sri Jhunjhunwala, c/o. Messrs. Dewar's Garage a notice of demolition would go to suggest that for several years in the past no repairing work was undertaken either by the owner or by the tenant in respect of this building. Therefore, the thorough repair and renovation that was undertaken by the assessee was to remedy the effect of several years' wear and tear or neglect. It has been held by the various High Courts in several cases that a sum can be allowed as cost of repairs even though the expenditure incurred in the year of account is heavy on account of the fact that it was undertaken to remedy the effect of several years' wear and tear or neglect. See the decision in the cases of Liberty Cinema v. CIT [1964] 52 ITR 153 (Cal), R.B. Bansilal Abirchand Spg. and Wvg. Mills v. CIT [1957] 31 ITR 427 (Nag) and Gulamhussein Ebrahim Matcheswalla v. CIT [1974] 97 ITR 24 (Bom). There is also authority for the proposition that in the case of a lessee-tenant, the cost of all types of repairs which he had undertaken in the leasehold premises is allowable as deduction. See the decision in the case of CIT v. Goyal Oil Mills . The fact that the assessee was a lessee-tenant and that it had undertaken to effect the repairs to the building in question are borne out by evidence on record. Having regard to the entirety of the circumstances, we are of the opinion that the assessee was entitled to deduction of Rs. 2,12,266 and so we direct that the disallowance of Rs. 2,12,266 be deleted."
9. Before us, learned counsel for the parties reiterated the contentions urged before the Tribunal. The fundamental contention on behalf of the assessee is that the expenditure in the case represents repairs to keep the premises in a serviceable condition and such repairs were necessitated by ordinary wear and tear as opposed to accidental or any other unusual causes and that any sum of money spent for repairs in a particular year may be allowed even though it is undertaken to remedy the effect of several years' wear and tear not attended to due to negligence, Even if the repairs could not be strictly taken as current repairs, It is revenue, expenditure allowable under Section 37, and if not, under Section 30 of the Act. A number of decisions have been cited in support of this contention.
10. This view has been taken by this court in Liberty Cinema v. CIT [1964] 52 ITR 153. It was held in that case that even if the repairs are so extensive that similar repairs may not be necessary for several years in the future after the repairs had been effected, the position is not altered as to the revenue character of the expenditure.
11. The decisive fact in the case as stated by the Tribunal is that the Corporation of Calcutta had served a demolition notice on the assessee in respect of the business premises in question to which the repairs were effected to remove the risk and hazard which the further use of the building posed. Thus, the entire expenditure was incurred to secure the safety of the structure and continued usability as business premises.
12. The only question that arises in this connection is whether the fact that the assessee is merely a monthly tenant of the building and not the owner lends to the expenditure any different complexion. The position of law is that, if the assessee is the tenant of the premises used by him for the purpose of his business or profession, Section 30(a)(i) entitles him to a deduction of any amount expended by him on repairs if the terms of tenancy require him to execute the repairs.
13. In this case, it is not controverted that the assessee had undertaken to bear the cost of repairs in his capacity as the tenant. The only controversy is with regard to the question whether replacement of beams and parapets can fall within "repairs". That being the position, the amounts spent by the assessee on repairs to keep the premises serviceable and to remedy and rectify the defects which condemn the building as unfit for human habitation are allowable, because the use of the premises is instrumental to the carrying on of the assessee's business or profession, as the case may be, and is part of his income-earning apparatus. So, if a tenant has undertaken to bear the cost of repairs, the amount spent on such repairs has to be allowed in respect of all types of repairs. The fact that the repairs give the building a fresh lease of useful life would be irrelevant or immaterial. This has been held in CIT v. Goyal Oil Mills and CIT v. Rama Krishna Steel Rolling Mills .
14. The position might have been different if the repairs had included such repairs as resulting in improving upon the existing building.
15. It is necessary that the amount spent by the tenant on repairs is connected though not directly with the carrying on of the business but somewhat indirectly as happened in CIT v. Rama Krishna Steel Rolling Mills . In that case, the tenant carried out repairs at his cost to the roof of the premises in order to protect the machinery from rain and wind. It was held that the expenditure was allowable. The assessee in the instant reference has a stronger case. The assessee earns income by sub-letting the building. The building per se is the income-earning apparatus.
16. The admitted position is that the assessee did not improve the property, but merely carried out certain repairs which included replacement of some beams and other vital supporting parts of the structure to make it secure and safe to remove the threat of demolition by the Municipal authorities as an unsafe structure. Thereby, the assessee merely restored the building to its serviceable condition and preserved its income-earning apparatus.
17. It can be argued that when the notice of demolition is served, the presumption is that the structure is declared unfit for human habitation and has exhausted its longevity. Therefore, what takes place in the name of repairs is indeed regeneration of the useful life of the building--an incident that falls in the capital field. But, such a view would not be fair in the circumstances of the case. The provisions of Section 495 of the Calcutta Municipal Act have no such presumption. The notice of demolition may be served for reasons other than complete dilapidation. Subsection (1) of Section 495 of the said Act is in the following terms :
"Power to prohibit use of buildings or rooms in buildings unfit for human habitation. If, for any reason, it appears to the Municipal Commissioner that any building or any rooms in a building intended for or used as a dwelling is unfit for human habitation, he shall give to the owner or occupier of such building notice in writing stating such reason and signifying his intention to prohibit further use of the building or the room, as the case may be, as a dwelling and shall by such notice call upon the owner or occupier as aforesaid to state in writing any objection thereto within thirty days after the receipt of such notice, and, if no objection is raised by such owner or occupier within such period as aforesaid or if any objection raised by such owner or occupier within such period appears to the Municipal Commissioner invalid or insufficient, he may, with the previous approval of the Mayor-in-Council and by an order in writing, prohibit further use of such building or room as a dwelling :"
18. The provision clearly indicates that even a new building can be declared unfit for human habitation, if it is so considered by the Municipal authorities for any technical reason or otherwise. Therefore, it is not that the Municipal authorities serve the demolition notice only in cases of total dilapidation of the building. Any cause for the building being unsafe as a dwelling may warrant the service of a demolition notice, irrespective whether the structure is old and decrepit or new and strong. Multiple considerations weigh with the Municipal authorities in declaring a dwelling unsafe. Of course, in the present case, the demolition notice was for the dilapidated condition, but the condition was not beyond cure as is self-evident from the fact that subsequent alterations reinstated it to a usable condition. As a matter of fact, Sub-section (3) of Section 495 of the said Act provides that the Municipal authorities, as a mandatory requirement, are to notify what alterations and modifications can avert the demolition.
19. The reliance by the Revenue on the decision of this court on Humayun Properties Ltd. v. CIT [1962] 44 ITR 73, is misplaced because of the difference in facts. That case was decided on considerations of an altogether different kind. The repair work carried out was not merely for restoration of the serviceability of the property but for renovation meant to make the property, as a cinema hall, more attractive and comfortable than before to its patrons. The expenditure included certain luxury elements not present in the original structure. The decision of the Calcutta High Court against the allowance of such expenditure was principally on the ground that allowable repairs cannot include luxury repairs. A similar view has been taken by the Allahabad High Court in Kanpur Agencies Pvt. Ltd. v. CIT [1968] 70 ITR 337. In that case, it has been held that repairs in the shape of putting of flush-out latrines, cement concrete roof in place of tiled roof would not partake of the nature of repairs but represented capital expenditure.
20. But, wherever repairs are carried out just for the sake of maintenance and preservation of the premises, the expenditure on that account is allowable. It will not matter if, in the process, some steps have been taken merely for better maintenance and preservation of the property than before. Suppose, in the course of repairs of an industrial building, a few iron girders are replaced and new cement sheets are put for the roofing or the walls which had collapsed due to heavy rain are rebuilt, it cannot be said that the expenditure is not for maintenance of the existing building. See Guntur Merchants Cotton Press Co. Ltd. v. ITO . Similarly, if the corrugated iron sheets, which had worn out are replaced by asbestos cement sheets, it cannot be said that such minor alteration results in a new and fresh addition or material alteration or improvement and, therefore, the expenditure is of a capital nature : see Gulamhussein Ebrahim Matcheswala v. CIT [1974] 97 ITR 24 (Bom).
21. We are of the view that since, by virtue of carrying out the repairs in question, the assessee was able to avoid the statutory notice for demolition issued by the Municipal authorities and enabled itself to maintain the structure and to continue its use as an income-earning apparatus, the expenditure, howsoever large, cannot but be allowed as revenue expenditure. If new beams replace old beams that have lost supporting strength, it cannot be said that the replacement pertains to the capital field. Even if it is called renovation, its purpose was to ensure continuity of its use as a source of revenue. It amounts to maintaining a productive asset.
22. We principally rely on the test laid down by the Supreme Court in CIT v. Kalyanji Mavji and Co. . According to it, where the renovation or reconditioning is for maintaining the continuity of the businesses, the cost thereof shall be a permissible deduction. The facts as well as the principle applicable have been set forth by the Supreme Court in the following words (at page 54) :
"The business of the assessee was coal mining, and it was carried on by the operation of a network of collieries. Each colliery is a unit of production, while the several units of production continued to be employed and the business continued to be carried on on one alone of the units, the South Samla Colliery was compelled to suspend production. The suspension was expected to be of temporary duration, because the property was merely requisitioned for military use, it was not acquired. As soon as the property was derequisitioned, the assessee took measures to resume production of coal. It was necessary to remove the impediments which had come in the way by reason of the temporary suspension of work. The buildings were renovated, the machinery reconditioned and the accumulated debris removed from the land. The colliery was, in a word, reinstated to the condition necessary for ensuring production. No new asset was brought into existence; no advantage for the enduring benefit of the business was acquired."
23. The case before us has fundamental parity with the facts of that case. In both the cases, the expenditure is for reinstatement of the source of income in continued usability.
24. We, therefore, answer the question in the affirmative and in favour of the assessee.
25. There will be no order as to costs.
K.M. Yusuf, J.
26. I agree.