Income Tax Appellate Tribunal - Pune
Assistant Commissioner Of Income-Tax vs Shree Datta Dairy on 13 February, 1998
Equivalent citations: [1998]67ITD357(PUNE)
ORDER
Shri K.C. Singhal (Judicial Member)
1. An interesting issue has been raised by the revenue in the present appeal. The assessee was the owner of a car which was being used for the purpose of business. During the year under consideration, the assessee substituted petrol engine of the car by diesel engine and incurred an expenditure of Rs. 32,350 which was claimed as deduction against the business income. The claim of the assessee was disallowed as according to the Assessing Officer the expenditure was capital in nature.
2. On appeal, the CIT(A) allowed the claim of the assessee by holding that the expenditure was of revenue nature after following the decision of the Kerala High Court in the case of CIT v. Noroth Oil Mill Co. Ltd. [1983] 140 ITR 173, decision of the Gujarat High Court in the case of Addl. CIT v. Desai Bros. [1977] 108 ITR 14 and the decision of the Bombay High Court in the case of CIT v. Polyolefins Industries Ltd. [1988] 169 ITR 538/[1987] 35 Tax man 76. Aggrieved by the same, the present appeal has been preferred by the revenue.
3. The learned departmental representative Mr. Manish Gupta has raised an interesting contention that nature of expenditure whether capital or revenue is irrelevant if the claim of the assessee falls within the provisions of sections 30 to 36 of the Act. Whether the expenditure is of revenue or capital in nature is relevant only where the claim of the assessee falls under section 37. In this connection, he relied on the decision of the Mysore High Courtin the case of Hanuman Motor Service v. CIT [1967] 66 ITR 88. He further expanded his argument by submitting that claim under section 37 can be considered only if such aclaim does not fall within the ambit of provisions of sections 30 to 36, as is apparent from the provisions of section 37 itself. According to him, the case of the assessee falls within the provisions of section 31 as it deals with repairs of 'plant or machinery'. It is his submission that replacement of petrol engine by diesel engine falls within the definition of word 'repair'and therefore, such claim cannot be allowed under section 37. He further elaborated his argument by submitting that claim under section 31 can be allowed only if such repair is current repair and not otherwise. Indirectly, it was his contention that repairs to the machinery other than the current repairs cannot be allowed either under section 31 or under section 37.
3.1 Proceeding further, it is argued by him that the word 'current repairs' has been considered by the Apex Court in the case of Ballimal Naval Kishore v. CIT [1997] 224 ITR 414/90 Taxman 402, wherein it has been held that where the purpose of repair is of preserving or maintaining an ordinary existing asset it will amount to current repair but where the purpose is to bring a new asset or advantage into existence, then such repair would not fall within the ambit of current repairs allowable under section 10(2) (v) of Indian Income-tax Act, 1922. In addition to this, he also relied on the decision of the Calcutta High Court in the case of Humayun Properties Ltd. v. CIT [1962] 44 ITR 73 and the decision of the Madras High Court in the case of C. R. Corera & Bros. v. CIT [1963] 49 ITR 188. According to Mr. Gupta, a new advantage has been created by the replacement of petrol engine by diesel engine as running of car would be much cheaper bv diesel engine than running the same by petrol engine.
3.2 He further submitted that provisions of section 10(2) (xv) of the 1922 Act were different from the provisions of section 37 of the 1961 Act, inasmuch as under the old Act, the provisions of section 10(2) (xv) were applicable if deduction was allowable under the preceding sub-clause of section 10(2) of the 1922 Act but under the 1961 Act section 37 does not speak of the allow ability of the expenditure under sections 30 to 36. According to him, section 37(1) speaks of the nature of expenditure mentioned in sections 30 to 36. Since the nature of expenditure under section 31 is repairs to plant and machinery, the same cannot be considered under section 37(1). The reference was made to the decision of the Supreme Court in the case of CITV. Kalyanii Maiji & Co. [1980] 122 ITR 49/3 Taxman 35 for the limited purpose of showing that the claim of the assessee was allowed under section 10(2) (xv) of the 1922 Act as the word 'allowance'was used by the legislature in the residuary clause.
3.3 He then raised an alternate plea that the diesel engine falls within the definition of the word 'machinery' as per the decision of the Supreme Court in the case of CIT v. Mir Mohammad Ali [1964] 53 ITR 165 and therefore, the assessee is entitled to depreciation under section 32. Consequently, section 37 cannot be invoked. In this connection, he also ref erred to the decision of the Bombay High Court in the case of Maneklal Vallabhdas Parekh v. CIT [1959] 37 ITR 142 and the decision of the Madras High Court in the case of Mir Mohd Ali v. CIT [1963] 38 ITR 413.
3.4 Lastly, he distinguished the Bombay High Court decision in the case of Polyolef ins Industries Ltd. (supra) relied upon by the CIT (A), inasmuch as in that case, the question referred to the High Court was not with reference to section 31 but was with reference to section 37. The only question was whether the replacement of petrol engine by diesel engine amounted to capital or revenue expenditure. Similar is the position with the latest case of the Bombay High Court in the case of CITV. Jalarbhai Akbarali &Bros. [1995] 211 ITR 496/78 Taxman 320.
4. The learned counsel for the assessee Mr. Pathak has vehemently opposed the contentions raised by the learned D.R. His submission is that various High Courts have held that replacement of petrol engine by diesel engine amounts to current repairs and therefore, the same can be allowed under section 31 itself. He relied on the decision of the Andhra Pradesh High Court in the case of Nathmal Bankatlal Parikh & Co. v. CIT [1980] 122 ITR 168 / 3 Taxman 97 (FB) which was also relied upon by the learned D. R. for different proposition. This decision has been rendered under 1961 Act. Besides this, he also relied on the decision of the Gujarat High Court in the case of Desai Bros. (supra), the decision of the Mysore High Court in the case of Hanuman Motor Service (supra), decision of the Punjab and Haryana High Court in the case of Bhuramal v. ITO [1971] 82 ITR 747, decision of the Bombay High Court in the case of Polyolefins Industries Ltd. (supra) and in the case of Jafarbhai Akbarali &Bros. (supra) and the decision of the Allahabad High Court in the case of Girdhari Dass & Sons v. CIT [1976] 105 ITR 339. According to him the Supreme Court in the case of Ballima / Naval Kishore (supra) did not consider the claim under section 10(2) (xv) of the 1922 Act and therefore, the said decision is distinguishable.
4.1 He then referred to the commentary of Sampath lyengar's Law of Income-tax (8th Edition) at page 1521, for the proposition that where the claim for repair could not be allowed under section 31, it can be allowed under section 37 if the expenditure is not of capital nature. The Bombay High Court has already held that such expenditure is revenue expenditure. In this connection, he also relied on the decision of the Allahabad High Court in the case of ITAT V. B. Hill & Co. (P.) Ltd. [1983] 142 ITR 185, Polyolefins Industries Ltd. (supra), which is referred to by the Bombay High Court in its decision in the case of New Shorrock Spg. & Mfg. Co. Ltd. v. CIT [1956] 30 ITR 338. It was further submitted by him that the testlaid down by the Bombay High Court in the case of New Shorrock Spg. & Mfg. Co. Ltd. (supra) has been approved by the Supreme Court in the case of Ballimal Naval Kishore (supra). Lastly, the decision of the Supreme Court in the case of CITV. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 was relied on where the expenditure on replacement of asset has been allowed as deduction under section 10(2) (v) of the 1922 Act corresponding to section 31 of the 1961 Act.
5. In reply, it was submitted by the learned departmental representative that the decision of the Bombay High Court in the case of Jalarbhai Akbarali & Bros. (supra) does not deal with the issue of current repairs under section 31. The question referred to the Court was with reference to deduction under section 37. According to him, the present case is covered by the Supreme Court decision in the case of Ballimal Naval Kishore (supra), in as much as a new advantage has been created in the present case. It was further submitted by him that the other decisions of High Courts relied upon by the assessee's counsel are in conflict with the decision of the Supreme Court.
6. Rival contentions of the parties and the case law referred to by them have been considered by us carefully. At the outset, we may mention that the Assessing Officer as well as the CIT (A) have considered the issue under section 37 inasmuch as the Assessing Officer has disallowed the claim of the assessee on the ground that the expenditure was of capital in nature and the CIT (A) has deleted the disallowance on the ground that it was of revenue in nature. There is no dispute that if section 37 is applicable then the present case would be covered in favour of the assessee by the decision of the Bombay High Court in the case of Polyolefins Industries Ltd. (supra) and in the case of Jafarbhai Akbarali & Bros. (supra). Faced with the situation, the learned D.R. has raised a new plea that section 37 is not applicable to the present case. Since the claim of the assessee falls within section 31 and the same cannot be allowed as it does not amount to 'current repairs'. The Tribunal has jurisdiction to allow new ground provided it is purely a legal one and does not involve investigation of the facts. Since new plea taken by the revenue is purely legal, we have allowed the same to be argued by the learned D.R. In the present case, there is no dispute about the genuineness of the expenditure. It is also not the case of the Assessing Officer that repair to the car was not required. Therefore, we proceed on the assumption that the expenditure in question was genuinely incurred by the assessee.
7. We have given our deep thoughts to the contentions raised by the learned D.R. Whether the expenditure amounts to 'current repairs'or not has been the subject-matter of consideration by various High Courts. The question posed before us is whether the expenditure incurred on the replacement of petrol engine of a car by diesel engine amounts to 'current repairs' or not.
7.1 Such a question came up for consideration for the first time before the Hon'ble Mysore High Court in the case of Hanuman Motor Service (supra). After considering the decision of the Bombay High Court in the case of New Shorrock Spg. & Mfg. Co. Ltd. (supra) decision of the Madras High Court in the case of CIT v. Sri Rama Sugar Mills Ltd. [1952] 21 ITR 191, it was held as under :
"In finding out whether a given case falls within the scope of clause (v) of section 10(2), the true test is whether, as a result of the expenditure which is claimed as expenditure for repairs, what is really being done is to preserve and maintain an already existing asset or whether the object of such expenditure was to bring a new asset into existence or to obtain a new or fresh advantage. If it is the former, then it is a 'repair'. If it is the latter, it should be considered as a replacement or renewal.' On the basis of the above test, it was held by the Hon'ble Court that it amounted to 'current repairs'allowable under section 10(2) (v) of the 1922 Act corresponding to section 31 of 1961 Act.
7.2 Similar question arose before Full Bench of the Hon'ble Andhra Pradesh High Court in the case of Nathmal Bankatlal Parikh & Co. (supra). The Hon'ble High Court has followed, the following observations of Justice Buckley L. in the case of Lurcott v. Wakely & Wheeler [1911] 1 KB 905, 923, 924 (CA) :
"'Repair' and 'renew' are not words expressive of a clear contrast. Repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal, as distinguished from repair, is reconstruction of the entirety, meaning by the entirety not necessarily the whole but substantially the whole subject-matter under discussion ... the question of repair is in every case one of degree, and the test is whether the act to be done is one which is substance is the renewal or replacement of defective parts, or the renewal or replacement of substantially the whole.' 7.3 After considering the various decisions of the High Court including the decision of the Bombay High Court in the case of New Shorrock Spg. & Mfg. Co. Ltd. (supra) and the decision of the Mysore High Court in the case of Hanuman Motor Service (supra) and the decision of the Hon'ble Supreme Court in the case of Mahalakshmi Textile Mills Ltd. (supra), it was held by the High Court that replacement of old engine by a new engine in a motor vehicle amounted to 'current repairs'and the same was allowable under section 31 of the Act.
7.4 The Hon'ble Gujarat High Court in the case of Desai Bros. (supra) considered similar issue i.e. replacement of petrol engine by diesel engine in a truck used for the purpose of business. It was held by the Court that the expenditure did not bring into existence a new asset nor was there a substantial replacement or renovation of the existing asset. Such expenditure was incurred in preserving and maintenance of asset for the purpose of business, and therefore, it was allowable as current repairs under section 31 as well as revenue expenditure under section 37. Incoming to this conclusion, it took into consideration the decision of the various High Courts including the decision of the Bombay High Court in the case of New Shorrock Spg. & Mfg, Co. Ltd. (supra), decision of the Mysore High Court in the casc of Hanuman Motor Services (supra) and the decision of the Supreme Court in the case of Mahalakshmi Textile Mills Ltd. (supra).
7.5 Similar question was considered by the Hon'ble Punjab and Haryana High Court in the case of CIT v. Khalsa Nirbhai Transport Co. (P.) Ltd. [1971] 82 ITR 741. In that case, the assessee was engaged in the transport business and incurred a sum of Rs. 35,895 on replacement of petrol eng ine of its buses by diesel engines. The Hon'ble High Court agreed with the view expressed by the Mysore High Court in the case of Hanuman Motor Services (supra) but dissented from the view expressed by the Andhra Pradesh High Court in the case of R. B. Shreeram & Co. Ltd. v. CIT [1968] 67 ITR 428, where in it was held that replacement of petrol engine by diesel engine was capital expenditure.
8. The perusal of the aforesaid decisions clearly shows that a uniform view has been taken by all the Courts that expenditure on replacement of petrol engine by diesel engine amounts to current repairs and therefore, is allowable under section 10(2) (v) of the 1922 Act and section 31 of the 1961 Act. The only decision which was rendered in favour of the revenue was of the Andhra Pradesh High Court in the case of R. B. Shreeram & Co. Ltd. (supra) where in it was held that replacement of petrol engine by diesel engine amounted to capital expenditure. But this decision has been over-ruled by the Full Bench decision of the Andhra Pradesh High Court in the case of Nathmal Bankatlal Parikh & Co. (supra).
8.1 The learned D.R. however, had argued before us that all these decisions are in conflict with the recent Supreme Court decision in the case of Ballima] Naval Kishore (supra). Let us go through the said decision. In that case, the assessee had purchased a building in 1937 for Rs. 17,000 which was being used as a Ginning Factory. In 1945, the assessee converted it into a cinema theatre and exhibited films therein. Subsequently, in 1960-61 extensive repairs of the theatre were carried out by the assessee. It spent amount of Rs. 16,002 on new machinery, Rs. 27,889 on new furniture, Rs. 5,225 on sanitary fittings and Rs. 13,604 on electrical wiring. In addition thereto a total sum of Rs. 62,977 was spent on extensive repairs to the walls, hall, flooring, roofing, doors, windows and to the stage sites. The theatre had to be closed during period of repairs. The question before the Court was whether the expenditure of Rs. 62,977 should be treated as current repairs within the meaning of section 10(2) (v) of the 1922 Act. It was held that it amounted to total renovation of the theatre and should not be treated as current repairs. In coming to this conclusion, the following test was laid down.
"Having regard to the content in which the expression 'current repairs' occurs in section 10(2) (v) of the Indian Income-tax Act, 1922, the expression 'current repairs' means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration but which is only for the purpose of preserving or maintaining an already existing asset and which does not bring a new asset into existence or does not give to the assessee a new or different advantage.' The Hon'ble Apex Court also approved the following test laid down by the Bombay High Court in the case of New Shorrock Spg. & Mfg. Co. Ltd (supra).
"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 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 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 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.'
9. A close scrutiny of the test laid down by the jurisdictional High Court in the case of New Shorrock Spg. & Mfg. Co. Ltd. (supra) approved by the Apex Court clearly shows that even the expenditure under section 10(2) (v) of the 1922 Act is allowable if it is of revenue character and not where it is capital expenditure. That means the test for claiming the deduction under sections 10(2) (v) and 10(2) (xv) is almost the same. It has been clearly mentioned in the test that if the expenditure is incurred with a view to preserve and maintain an already existing asset, it will be allowable under section 31 but if the expenditure is incurred with a view to bring into existence a new asset or new or fresh advantage, it will be disallowed. Same is the requirement of law for allowing deduction under section 37. The Hon'ble Supreme Court had confirmed the disallowance on facts of the case as expenditure incurred by assessee amounted to total renovation of the theatre. But the principles laid down by the Court are rather favourable to assessee.
10. All the High Courts, to which we have made reference have held that by replacing the petrol engine by diesel engine, the asset remains the same and no new asset is brought into existence. The learned D.R. has stressed that fresh advantage is obtained by the assessee and this concept has not been considered by any of the High Court and therefore, the decision of the Supreme Court is contrary to the High Court decision relied on by the assessee. But in our opinion, that is not the case. In the first decision in the case of Hanuman Motor Service (supra), the Mysore High Court has considered the above test as laid down by the Bombay High Court in the case of New Shorrock Spg. & Mfg. Co. Ltd. (,,; upra) which has been approved by the Hon'ble Supreme Court and decided the issue in favour of the assessee. Besides this, we are of the view that fresh advantage as mentioned in the above test must be in the capital field as the Hon'ble Supreme Court and the Bombay High Court has emphasised on the fact that expenditure must be on revenue side. It is not every advantage which will take out the case from the provisions of section 31. It must be of enduring advantage. The Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 had to consider such issue though under section 37. It was held therein as under :
"What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account.' If the above test is applied then it cannot be said that the advantage in the capital field is obtained by the assessee by replacing the petrol engine by diesel engine. This expenditure merely facilitates the day-to-day running of the business without creating a new asset. Therefore, we are of the considered view that the expenditure incurred by the assessee in the present case falls within the definition of current repairs and is allowable under section 31 of the 1961 Act.
11. Even assuming that expenditure on replacement of engine does not amount to current repairs, we are unable to agree with the contention of Mr. Manish Gupta that the same cannot be allowed under section 37. It is settled position of law that charging provisions are to be construed strictly but the machinery provisions are to be construed liberally and reasonably so as to achieve the object of the enactment. The provisions for computation of income being machinery provisions, has to be construed reasonably and liberally, that is what the Bombay High Court has also observed in New Shorrock Spg. & Mfg. Co. Ltd. (supra). The relevant observations are as under :
"Dictum : In view of the very strict limitations placed by the Legislature upon a deduction failing under section 10(2) (xv), it is necessary and desirable that as liberal an interpretation should be put upon the right of an assessee to claim deductions under sections 10(2) (t) to section 10(2) (xiv)."
The purpose of the enactment is to ascertain the correct profits of the business. Any construction of the statute which frustrates the object of the Act has to be avoided. If so construed then reasonable construction of sections 31 and 37 would that expenditure which are not deductible under sections 30 to 36 can be allowed as deduction under section 37 subject to the conditions mentioned therein. In our opinion, the contention of Mr. Manish Gupta that all repairs other than the current repairs cannot be allowed either under section 31 or section 37 would be too technical and contrary to the spirit of the enactment. The repairs to the plant and machinery not in the capital field is permissible deduction against the business profits even according to the settled principles of accountancy. If the contention of Mr. Manish Gupta is accepted, that would, in our opinion, frustrate the object of the Act, since it would amount to taxing which is not the income at all. Therefore, we are of the considered view that any repairs which does not fall within the ambit of section 31 would be allowable under section 37, if it is of revenue nature. The Bombay High Court in the case of Polyolefins Industries Ltd. (supra) and in the case of Jafarbhai Akbarali & Bros. (supra) has already held that replacement of petrol engine by diesel engine is revenue expenditure.
12. In view of the above, we uphold the order of the CIT (A) and dismiss the appeal of the revenue.