Patna High Court
Commissioner Of Income-Tax vs Seraikella Glass Works (P.) Ltd. on 15 March, 1985
Equivalent citations: [1986]157ITR584(PATNA)
JUDGMENT
1. This is a reference under Section 256(1) of the Income-tax Act, 1961. The following question has been referred to this court for our opinion:
" Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that the expenditure incurred on the repairs and renovations of the furnace in 1964-65, 1966-67 and 1968-69 was of the nature of current repairs and, therefore, of revenue nature and so deductible ? "
2. In this reference, we are concerned with the assessment years 1964-65, 1966-67 and 1968-69. In regard to the assessments for these years, deductions were claimed by the assessee, a private limited company, on account of repairs and renovation to the furnace. For the year 1964-65, the expense incurred over repairs and renovations was to the tune of Rs. 4,26,427, for the year 1966-67 it was Rs. 4,05,971 and for 1968-69, it was Rs. 5,02,654. The Income-tax Officer rejected the claim of the asses-see holding that the repairs did not fall within the meaning of current repairs and thus those expenses did not fall within the category of amounts paid on account of current repairs to the factory as laid down under Section 31 of the Act. In coming to this conclusion, the Income-tax Officer took into account two factors. The first factor which weighed with the Income-tax Officer was that the sum spent was on the high side. The second ground for rejecting the claim was that in the directors' report of 1962-63, it was mentioned as follows :
" You will be happy to know that your technical director has renovated the furnace and made many technical changes during the cold repairs. We expect that this will result in higher production and longer life to the furnace."
3. For these two reasons, the Income-tax Officer was of the view that the changes were of enduring value and, therefore, could not be said to be expenses incurred on account of current repairs. The assessee being aggrieved by the order of the Income-tax Officer filed appeal. The Appellate Assistant Commissioner (AAC) applied his mind to the facts of the case and took a different view of the matter. In a well-discussed order, the Appellate Assistant Commissioner held that all the observations of the Income-tax Officer were incorrect. He found that the furnace in the glass factory worked under constant temparature of 2400 degrees for 16 to 18 months and was, therefore, liable to severe wear and tear inside it. In his view, therefore, the repairs were such as were required to be done regularly year after year. In fact, the company has been repairing it every year and cost of repairs and renovation has been allowed every year. The learned Appellate Assistant Commissioner also found that the sums claimed were not excessive. He observed that in glass factories in the country, the percentage allowed for repairs to furnaces varied between 3 per cent. to 3.8 per cent. The expenses incurred by the assessee were in the vicinity of 3.4 per cent. in the various years. The order of the Appellate Assistant Commissioner, which is annexure B series to the statement of facts, shows that the furnace is to undergo cold repair every year. The Appellate Assistant Commissioner, therefore, held that the renovations were not of capital nature but of revenue nature. The Revenue filed an appeal before the Appellate Tribunal. The Tribunal, in agreement with the Appellate Assistant Commissioner, also held that the expenses claimed by the assessee were of revenue nature. In paragraph 5 of the order, the Appellate Tribunal held categorically that the expenditure in question had been incurred to replace and repair the damaged parts of the furnace. Even applying the test of expenses by quantification, the Tribunal was of the view that the repairs were not of enduring benefit. The appeals thus filed by the Revenue did not find favour with the Tribunal and were dismissed in regard to the claim on account of repairs and renovations. The Revenue not being satisfied with the concurrent findings of the Appellate Assistant Commissioner and the Appellate Tribunal, filed an application under Section 256(1) of the Income-tax Act for the opinion of this court. The Tribunal being of the view that a question of law did arise, has referred the matter for our opinion on the question mentioned earlier.
4. The moot question falling for consideration is whether the expenses can be put in the category of " Current repairs ". It must be appreciated that the quantum of expenses is not of much assistance in ascertaining whether the repairs are of current nature or not. It is the nature of alterations, renovations, repairs, etc., which is relevant. The quantum of expenditure may be only a rough and ready guide thereto but that is not the crux of the matter. The question whether a repair is in the nature of current repairs or not fell for consideration before a Bench of this court in CIT v. Darbhanga Sugar Co. Ltd. [1956] 29 ITR 21. That case related to Section I0(2)(v) of the Indian Income-tax Act, 1922, which is equivalent to Section 31(1) of the 1961 Act. In that case, the allowance claimed by the assessee had been rejected on the ground that the repairs were not of petty nature and were thus capital in nature. In that situation, Ramaswami and Imam JJ. observed (at p. 23) that the word "current " in the context of the Act merely meant something which arose in the course of ordinary use of machinery, i.e., during the currency of the life of the machinery. In their view, the true distinction would be between replacement of a subsidiary part which becomes worn out by use at shorter or longer intervals and of a main part which may, with ordinary attention, be expected to last for the lifetime of the machine. On those facts, their Lordships held that the expenses, whatever be their quantum, were of current nature.
5. Learned counsel for the Department placed reliance upon the case of Sitalpur Sugar Works Ltd. v. 77 [1963] 49 ITR (SC) 160, That was a case where the assessee, a company manufacturing sugar, shifted its factory from Sitalpur to Garaul. The shifting entailed considerable expense. The Supreme Court observed that the expenditure incurred in dismantling and refitting the existing plant at a better site produced an advantage which enabled the trade to prosper and which could be expected to last for ever and was, therefore, capital expenditure. This case was decided entirely on a different set of facts. There can be no quarrel with the law laid down by the Supreme Court in this case.
6. The case before us, however, stands entirely on a different footing. The assessee had repaired the furnace. The furnace itself had not been replaced while it had been repaired. In paragraph 4 of the statement of the case, the Tribunal has observed as follows:
" We have heard the contentions of both the parties and have considered the facts on record. Considering the expenses under this head Over the past years and all other facts and circumstances of the case, we are of the opinion that the expenditure in question was incurred essentially to replace and repair the damaged parts of the furnace. Looking at the expenditure under this head in the subsequent years, we do not find any enduring benefit resulting from the expenditure in question. We agree with the Appellate Assistant Commissioner that the reasons given by the Income-tax Officer were not enough to come to the conclusion that the expenses under consideration were capital in nature in view of the decisions cited by him. We, therefore, see no reason to interfere with his findings."
7. From the above, it will be seen that the expenditure was essential to replace and repair the damaged parts. The parts had been damaged. Therefore, they were replaced. This certainly must be held to be current repair. In the very nature of the industry, it had to work at high temperature and, therefore, the furnace has to be refurbished every year. Therefore, it has to be closed down for certain periods and cold repairs have to be undertaken. These repairs have got to be regularly done year after year. The Income-tax Officer did not state in his order what alterations had been made and whether the alterations would be of enduring nature lasting for several years or not. The Income-tax Officer, therefore, had not done his exercise properly. He merely went upon the fact that the expenses appeared to be on the high side and that the directors' report showed that the technical director had made some renovation which would increase production and result in longer life to the furnace. It is well-known that " A stitch in time saves nine ". If the furnace is attended to regularly, it is bound to give longer life. The production may, therefore, be higher. But that does not imply that renovations which have got to be regularly done year after year must be held to be of enduring benefit. If they were of enduring benefit, that would not be needed year after year. Even if we go by the yardstick of quantum of expenses, the Appellate Assistant Commissioner gave the figures of expenses incurred over various years which had been allowed by the Revenue without demur. Even the Appellate Assistant Commissioner also went into the exercise of comparing percentage of expenses on account of repairs and renovations. This analysis shows clearly that the expenses over renovation and replacement were not on the high side.
8. In view of the facts mentioned in the order of the Appellate Assistant Commissioner and affirmed by the Appellate Tribunal, we have no difficulty in holding that the expenses on account of repairs and renovation to the furnace of the assessee must be held to be current repairs within the meaning of Section 31(1) of the Act. They cannot be dubbed as capital in nature.
9. For the reasons stated above, it is obvious that the Tribunal was fully justified in law in holding that the expenditure incurred on repairs and renovations were of the nature of current repairs and thus revenue in nature. The reference is, therefore, answered in favour of the assessee and against the Department. There shall, however, be no order as to costs.