1981 PLP 32 (PTD)

The first aspect of the question, therefore, to which we must address ourselves determining whether the assessee was justified in claiming these expense as current repairs is‑are the expenses in question in the nature of capital expenses? Because, as observed by Chagla, C. J., as he then was, in New Shorrock Spinning and Manufacturing Co. Ltd. v. Commissioner of Income tax (1956) 30 I T R 338, it is clear that deduction which the Legislature has permitted under section 10(2)(v) (which is corresponding to section 31 of the 1961 Act), is a deduction where the expenditure is revenue expenditure and not capital expenditure. It was further observed that in giving the meaning to the expression "repair" the expenditure under clause (v) of section 10(2) must be an expenditure of a revenue nature and not of a capital nature. Various tests have been laid down by Courts in deciding the nature of expenses, whether they are of capital nature or of revenue nature. A Full Bench of the Lahore High Court In re: Benarsidas Jagannath (1947) 15 I T R 185 (Lah.) formulated three broad principles which emerged from the various decisions on the subject. The three principles are, (1) outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for substantial replacement of equipment; (2) expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, or of permanent character; in order that the advantage is of "enduring benefit "or" of a permanent character" it must be of substantial durability so as to be almost a capital asset ; and (3) whether for the purpose of the expenditure; any capital was with drawn. The Supreme Court in Assam Bengal Cement Co. Ltd. v. Commis sioner of Income‑tax (1955) 27 I T R 34 (S C) approved these principles laid down by the Pull Bench of the Lahore High Court in Benarsidas Jagannath's case. After referring to these three principles stated hereinabove, Mr. Justice Bhagwati, as he then was, speaking for the Court said‑‑[See (1955) 27 I T R 34, 45, 46 (S C)]: "The question, however, arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profit it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically: The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was‑‑part, of its circulating capital it would be of the nature of revenue expenditure. These tests are thus naturally exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has, therefore, got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the Whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductible allowance under section 10(2)(xv) of the Income‑tax Act. The question has all along been considered to be a. question of fact to be determined by the Income‑tax authorities on an application of the broad principles laid down above and the Courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles." In Tata Hydro‑Electric Agencies Ltd. v. Commissioner of Income‑tax (1) the Privy Council observed that what was the money wholly and exclusively laid out for the purposes of the trade was a question which must be determined upon the principles of ordinary commercial trading. It was necessary, accordingly, to attend to the true nature of the expenditure, and to ask oneself the question, was it a part of the company's working expenses? Was it expenditure laid out as part of the process of profit earning? The distinction there made was between the acquisition of an income‑earning asset and the process of the earning of the income, the former being of a. capital nature and the latter of a revenue nature. In Commissioner of Income‑tax v. Mahalakshmi Textile Mills Ltd. (2) the Supreme Court was concerned with a claim made on behalf of the assessee which was a textile mill for an amount of Rs.93,215 being the amount of expenses for introduction of the "casablanca conversion system" in its spinning plant, which involved replacement of certain roller stands and fluted rollers fitted with rubber aprons to the spinning machinery, removal of ring frames from certain parts, introduction, inter alga, of ball‑bearing jockey‑pulleys for converting existing the original band‑drivers to tape drivers and other additions and alterations in the drafting mechanism. The assessee claimed development rebate on the ground that introduction of the "casablanca conversion system" involved installation of new machinery, and for the first time before the Appellate Tribunal claimed in the alternative that the amount laid out was in any event expenditure for current repairs allowable under section 10(2)(v) of the Indian Income‑tax Act, 1922. The Tribunal held that though development rebate was not admissible the amount spent was admissible under section 10(2)(v) since as a result of the stress and strain of production over a long period there was need for change in the plant, and that the assessee had replaced old parts. The Supreme Court upheld the view of the Tribunal as in its opinion the Tribunal found on evidence before it from which it could be concluded that by introduction of "casablanca conversion system" the assessee made current repairs to the machinery and plant and the sum of Rs. 93,215 was allowable as an expenditure incurred for current repairs under section 10(2)(v) of the Act. In Commissioners of Inland Revenue v. Granite City Steamship Company Ltd. (1927) 13 Tax Cas. 1 it was held that if the necessity for the expenditure in question has not arisen out of the use of the capital asset in earning the profits, the expenditure would be capital expenditure. In Sun Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 C L R 337, it was held that the real difference between capital and revenue expenditure is the purchase or acquisition of the apparatus or the instrument for earning profits as distinguished from the expenditure incurred in the continual process of its use or employment for that purpose. In Jansatta Karyalaya v. Commissioner of Income‑tax (1964) 54 I T R 792 (Guj.) the Division Bench consisting of J. M. Shelat, C. J. and Bhagwati, J., as they then were, was concerned with a claim made on behalf of the assessee in respect of expenditure incurred by the assessee in purchase of printing types during the first year of its existence for its business of printing. After reviewing the case law on the subject the Court held (page 799): "On the facts and circumstances of the present case, the real test would be the one laid down by the Supreme Court, namely, what was the aim and object of the expenditure. Was it for running the business or was it one concerning the instrument for earning profits?" Income‑tax Reference No. 79 of 1970 and Income‑tax Reference No. 37 of 1971 H. Mohmed & Co. v. Commissioner of Income‑tax (1977) 107 I T R 637 (Guj.) a Division Bench of this Court consisting of P. N. Bhagwati, C. J., and B. J. Divan, J. (as they then were) again reviewed the case law on the subject and observed (page 651, 652) "We have referred to these different decisions for the purpose of pointing out as to, under what circumstances, different Courts have allowed deduction for repairs or replacement to the existing capital assets of the assessee concerned. In our opinion, if there is a substantial replacement, there cannot be any question of expenditure for such replacement being allowed as a deduction for repairs or replacement. Secondly, it is also clear that if the replacement is of parts only, the expenditure for such replacement can be held to be deductible but if the replacement is of the whole such as distinguished from replacement of parts with a view to bring in new assets into existence, the expenditure again will not be deductible and will not be allowed to be treated as revenue expenditure. It is clear from a discussion of the authorities cited above that the parts of capital assets are required to be changed fairly frequently the theory of normal depreciation would not be adequate from the point of view of commercial practice and hence the concept of replacement of parts of the capital assets has been introduced and such expenditure for replacement of parts is also to be treated as revenue expenditure as distinguished from capital expenditure." In view of the above decision, therefore, we have to consider the rival contentions urged by the parties. On behalf of the revenue, it has been contended that if the Court agrees with the contention of the revenue‑that the expenses in question were of capital nature, no further question would arise for considering the claim of the assessee under section 31 of the 1961 Act, In the submission of Mr. Kaji, the learned Advocate on behalf of the revenue, the expenses laid out by the assessee in replacement of diesel engine in place of petrol engine were necessarily in the nature of capital expenditure as, by this replacement a benefit of permanent nature to the business of the firm has been brought into existence. In support of his contention. Mr. Kaji relied on the derision of the Supreme Court in Com missioner of Income‑tax v. Mir Muhammad Ali (1964) 53 I T R 165 (S C). In that case, during the accounting year ending March 31, 1950, the assessee, a transport operator, replaced the petrol engines in two of his buses by diesel engines, incurring an expenditure of Rs. 18,

544. The question was whether in addition to normal depreciation the assessee was entitled to the extra depreciation allowance under the second paragraph of clause (vi) and clause (vi‑a) of section 10(2) of the Indian Income‑tax Act, 1922. The majority Court held that the same meaning ought to be given to the word "machinery" in all the clauses, namely, clause (iv), (v), (vi) and (vi‑a) of section 10(2) of the Indian Income‑tax Act, 1922, and having regard to the definition of the term "machinery" adopted by the Privy Council in Corporation of Calcutta v. Chairman, Cossipore and Chitpore Municipality A I R 1922 P C 27, where it‑‑has been hold that "machinery" would mean some mechanical contrivances which by themselves or in combination with one or more contrivances by the joint movement and interdependent operation of their respective parts generate power or evoke, modify,, apply direct natural forces with the object in each case of effecting' : so definite and specific a result, that definition should also prevail under the Income‑tax Act, though it was not given in a tax case. The Supreme Court, therefore, held by majority that according to the said definition a diesel engine was clearly machinery and the engine being installed engine, the assessee was entitled to deduction of extra depreciation allowance under the second paragraph of clause (vi) and clause (vi‑a) of section 10(2). Now, in the first instance, we have not been able to appreciate how this decision of the Supreme Court in Mir Muhammad Ali's case can take the case of the revenue any further. It appears that Mr. Muhammad Ali was a bus owner and a transport operator at Vellore, North Arcot District. He had a fleet of buses, and during the year of account ending with March 31, 1950, he replaced the petrol engines in two of his buses by new diesel engines, incurring an expenditure of Rs. 18,544 in this connection. Before the Income‑tax Officer apart from claiming normal depreciation under the first paragraph of clause (vi) of section 10(2), he also claimed depreciation under the second paragraph of clause (vi) and clause (vi‑a) of the Indian Income‑tax Arc. 1922. The Income‑tax Officer only allowed 25 per cent depreciation under the this paragraph of clause (vi). The assessee carried the matter in appeal which was rejected. On further appeal, the Appellate Tribunal held that the assessee was not entitled to extra depreciation under section 10(2)(vi) or (vi-a) however important the engine might be for running of a motor, .it is after all part of an equipment and it carve at by itself become "machinery" for the purpose of claiming extra depreciation, as envisaged in the said subsection. The Tribunal held that the installation of the new engines was only a capital addition; and refused the claim of the assessee for extra depreciation allowance. The question of law referred to the Madras High Court as arising from the order of the Tribunal was whether extra depreciation was admissible under the provisions of section 10(2)(vi‑a) of the Indian Income‑tax Act, 1922, in respect of diesel oil engine fitted to a motor vehicle in replacement of the existing engine. The High Court was of opinion that there was some inadvertent error in framing the question and, therefore, it amended the question as under: ‑ "Whether extra depreciation is admissible under the provisions of section 10(2)(vi) and section 10(2)(vi‑a) of the Income‑tax Act in respect of the diesel oil engines fitted to the motor vehicles in replacement of the existing engines?" The High Court answered the question in the affirmative, in favour of the assessee. The revenue, therefore, took the matter in appeal to the Supreme Court. Now, the only question with which the High Court was concerned and, consequently the Supreme Court was concerned, was in respect of the claim of depreciation allowance as claimed by the assessee arising out of the order of the Tribunal which held that the replacement of engirt was merely a capital addition and, therefore, the claim of extra depreciation allowance was not tenable. The decision of the Supreme Court in Mir Muhammad Ali s case, therefore, is to be read in the context of the question with which it was concerned. As the question was in relation to depreciation allowance claimed by the assessee under section 10 (2) (vi) and section 10 (2) (vi‑a), the Supreme Court could not have considered the question, whether expenses made by the assessee in that case were in the nature of current repairs to the machinery. Mr. Kaji, however, contended on behalf of the revenue that if the Supreme Court held in Mir Muhammad Ali's case that the assessee was entitled to claim depreciation allowance on the expenses made in. respect of replacement of diesel engine in place of petrol engine, it clearly follows that expenses were in the nature of capital expenses. We are afraid we cannot accept this broad submission of Mr. Kaji because, as stated by us earlier, whether the expenses incurred by the assessee in replacement in that case were in the nature of current repairs and, therefore, revenue expenditure, was not at all considered, and, in fact, there was no scope for consideration of such a question before the Supreme Court. Mr. K. C. Patel, however, on behalf of the assessee urged that expenses on account of current repairs to building, plant or machinery can be of capital nature also. We do not propose to go into this question in this reference, in the view which we are taking about the nature of expenses in this reference, viz. that they were of revenue nature. The real question which poses before this Court is, what is the aim and objective of these expenses. Was it, as contended by the revenue, or purposes of permanent endurance to ‑the business of the assessee‑firm, or was it for purposes of repairing the truck which was in continuous use of the business. In other words, the real test, which we should apply in the facts and circumstances of this case, as laid down, by the Supreme Court, is what was the aim and object of the expenses. Was it for run ning the business, or was it for acquisition of instrument, apparatus or machinery, or earning profits. As has been pointed out by Dixon, J. in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 61 C L R 337, the important point of distinction, which one has to bear in mind in determining the question about the nature of expenses, is whether purchase or acquisition of the apparatus or instrument machinery or plant was for earning profits as distinguished from the expenditure incurred in the continual process of its use or employment for that purpose. The pertinent question as posed in Commissioner of Inland Revenue v. Granite City Steamship Co. Ltd. (1927) 13 Tax Cas, 1 (C Sess) is: did the necessity for the expenditure iii question arise out of the use of the capital assets in earning profits? If the necessity has not arisen out of the use of capital assets in earning profits, the expenditure would be capital expenditure. In the instant case before us, the necessity for the expenditure in question has arisen out of the use of capital assets in earning profits and, therefore, the expenses must be held to be correctly attributable to revenue. It cannot be said on the finding made by the Appellate Assistant Commis sioner as confirmed by the Tribunal, that the replacement of diesel engine was not necessary. As a matter of fact, as found by the Appellate Assistant Commissioner, the necessity for replacement had arisen because the petrol engine in question in the vehicle of the assessee was in unserviceable condition. Whenever a repair is made in a machinery or in an apparatus or in an instrument, which is being used in business, there is bound to be corresponding benefit to the person making such repair. Consequently, there would be also advantage to the assessee and that advantage or benefit may be, in given cases, of considerable duration. But from that fact alone, it cannot be urged successfully, as is sought to be done by the revenue in this case, that that benefit or advantage is of permanent endurance to the business of the assessee‑firm. In Jansatta Karyalaya v. Commissioner of Income‑tax (1964) 54 I T R 792 (Guj.), while negativing the con tention urged on behalf of the assessee that the expenditure incurred by the assessee in purchasing types was not for something of an enduring benefit to the business because the types have not sufficient durability to give them the character of a capital asset, Chief Justice Shelat, as he then was, speaking for the Court, observed (page 799): "The test of durability, however, would be applicable in the case of acquisition of a capital asset and would be a relative and not an inflexible one, depending upon the nature and character of the asset as the instrument of making profit of the business. One such instrument may endure for a longer period than the other depending upon its inherent durability. But the question would be, is it a recurrent expenditure in running the business and in making profits of such business." The very fact that the assessee was required to replace the unservice able petrol engine was by itself a clear indication as to the nature of expenses. The unserviceable state of the petrol engine could be the result of continuous use of the truck in the business and the necessity for replacing such an unserviceable petrol engine had arisen out of the continuous use of the asset, namely, the trick in question. In that view of the matter, we are, therefore, not inclined to accept the submission of Mr. Kaji on behalf of the revenue that replacement of diesel engine would achieve an advantage of permanent endurance to the business of the assessee‑firm in the sense of bringing into existence a capital asset. Mr. Kaji relied on the decision of the Andhra Pradesh High Court in R. B. Shreeram & Co. (P.) Ltd. v. Commissioner of Income‑tax (1968) 67 I T R 482 (A P) where the Court held that expenditure incurred in replacing petrol engine of a truck by diesel engine is capital expenditure, inasmuch as it is incurred for the creation of an advantage of an enduring benefit and forms part of the assets of the undertaking, and the assessee was, therefore, entitled to development rebate under section 10(2) (vi‑6) of the Indian Income‑tax Act, 1922, on the cost of diesel engine. The Andhra Pradesh High Court has followed the decision of the Supreme Court in Commissioner of Income‑tax v. Mir Muhammad Ali (1964) 53 I T R 165 (S C) and held that not only diesel engines have been held to be machinery but also the expression "installations" would include and apply when machinery is inducted or introduced. This decision of the Andhra Pradesh High Court, therefore, for the same reasons on which we have held about the non‑application of the decision of the Supreme Court in Mfr Muhammad Ali's case would not be of any assistance to the revenue. Mr. Kaji, therefore, attempted to persuade us that this was a case of substantial replacement and, therefore, would not come within the terms of section 31 (1) where only expenses incurred in connection with current repairs can be allowed as deduction. In New Shorrock Spinning and Manufacturing Co. Ltd. v. Commissioner of Income‑tax (1956) 30 I T R 338 (Bom.) the Bombay High Court considered what is the difference between repairs and renewal and quoted with approval the following observation of Lord Justice Buckley in Lurcott v. Wakely and Wheeter (1911) I K B 905 (C A). "Repair' and `renew' are not words expressive of a clear contrast. Repair always involves renewal; renewal of a part ; of a subordinate part . . . . . 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. " Chief Justice Chagla, as he then was, referred to the two advertent trends amongst different High Courts and preferred to adopt the view pronounced by the Patna High Court in Commissioner of Income‑tax v. Darbhanga Sugar Company Ltd. (1956) 29 I T R 21 (Pat.) and by the Madras High Court in Commissioner of Income‑tax v. Sri Ram Sugar Mills Ltd. (1952) 21 I T R 191 (Mad.). The fact in New Shorrock Spinning and Manufacturing Mor Ltd.'s case were illustrative where the assessee‑Company which was a textile Company spent a sum of Rs. 30,557 for replacing certain parts in 646 looms and claimed the amount of expenditure for current repairs under section 10(2)(v). The parts which were replaced were lighter in weight and were such as could be easily lifted and conformed to the international labour standard and were superior to the old device. These parts were replaced after a period of 60 years. The Court followed the well‑established canon of construction of all taxing statutes, the charge should be made less heavy against the assessee if a reasonable interpretation of the language used by the legislature leads to that conclusion. In the opinion of the Court, the expression, 'current repairs' need in section 10(2)(v) means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration which is only for the purpose of preserving or maintaining an already existing asset, which does not bring a new asset into existence or does not give to the assessee a new or different advantage, and they must be repairs which are attended to as and when the need for them arises. The Bombay High Court in the said case also emphasised the question as to when a building, machinery, plant or furniture requires repairs and when the need arises that question must be decided not by any academic or theoretical test but must be decided by the test of commercial expediency. In cannot be said, therefore, that when the assessee replaced the unserviceable petrol engine with a diesel engine it was intending to bring into existence either a new asset or to achieve advantage or benefit to itself for permanent endurance, nor can it be said that it was substantially replacing the machinery. It is no doubt true that there was no material on the record before the Tribunal as to what would be the price or cost of a new truck. But, none theless, the assessee could not have been able to purchase a new truck from the amount which it spent in replacement: This very question arose before the Mysore High Court in Hanuman Motor Service v. Commissioner of Income‑tax where a transport operator claimed the expenses incurred by him in replacement of a petrol engine with diesel engine as current repairs under section 10 (2)(v). The Court held in that case that what was really being done was to preserve and maintain an already existing asset and the expenses were not incurred to bring a new asset into existence or to obtain a new or a fresh advantage to the business of the assessee. In that view of the matter, therefore, we do not think that the object of the assessee in incurring the expenses in replacement was with a view to bringing into existence a new asset or was with a view to have a substantial replacement or renovation, but it appears that the assessee was motivated in making the expenses by the object of preserving and maintaining the asset for the purpose of use in the business. We are, therefore, of the opinion that, in the facts and circumstances of the case, the Tribunal was right in holding that the expenditure incurred for replacing the' petrol engine by diesel engine was in the nature of revenue expenditure for current repairs to the machinery of the assessee. In that view of the matter, therefore, we answer the question referred to us in the affirmative and against the revenue. The Commissioner of Income‑tax will pay costs of this reference to the assessee. Question answered in the affirmative.