Commissioner of Income Tax vs Hindustan Pilkington Glass Works Ltd.

Ajit K. Sengupta, J.—In this reference u/s 256(1) of the income tax Act, 1961 (''the Act'') for the assessment year 1972-73, four questions of law have been referred to this Court. We shall first deal with the second, third and fourth questions.

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in admitting fresh evidence in the form of certificate from an actuary which was neither produced before the income tax Officer nor admitted by the Commissioner of income tax (Appeals) ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the assessee''s claim on account of liability for gratuity while the same was ascertained long after the completion of the assessment?

Whether, on the facts and in the circumstances of the case and having regard to the fact that the assessee-company had not created an approved gratuity fund the Tribunal was justified in allowing the assessee''s claim on account of its liability for gratuity?

The facts relating to these questions shortly stated are that the assessee did not provide any amount in its account for the assessment year under consideration, on account of its liability under the West Bengal Employees Payment of Compulsory Gratuity Act, 1971. In the original return no claim for liability on account of gratuity was also made by the assessee. In the revised return filed the assessee claimed a sum of Rs. 30 lakhs as deduction on account of its liability for gratuity. The ITO disallowed the claim on the ground that it was an ad hoc provision and not an ascertained liability inasmuch as the claim was not made on a scientific basis nor it was supported by a certificate from an actuary. The ITO also found that the gratuity fund of the assessee was not approved as required u/s 36(1) (v) of the Act.

Being aggrieved the assessee preferred an appeal before the Commissioner (Appeals) and filed before him a certificate dated 15-1-1979 from an actuary claiming liability on account of gratuity amounting to Rs. 11,89,943. As the liability was not ascertained at the time when the revised return was filed or during the assessment proceedings before the ITO, the Commissioner (Appeals) held that the assessee was not entitled to the deduction. Against the said order of the Commissioner (Appeals), the assessee filed a second appeal before the Tribunal and reliance was placed on the decision in the cases of Madho Mahesh Sugar Mills (P.) Ltd. v. CIT [1973] 92 ITR 503 (All), and India United Mills Ltd. Vs. Commissioner of Income Tax, Bombay City-I, . On behalf of the revenue, the order of the Commissioner (Appeals) was supported. The Tribunal decided the issue in favour of the assessee by observing as under:

We have heard the rival submissions. In our opinion the provision for payment of gratuity upto the assessment year 1972-73, if ascertained by actuarial calculation in which all contingencies are taken into consideration, is a liability ''in praesenti'' and, therefore, is an allowable business expenditure when the assessee is following mercantile system of accounting in view of the decisions cited above, as also the decision of the Supreme Court in the case of Metal Box Company of India Ltd. Vs. Their Workmen, .

The claim of the assessee for deduction on account of the liability for gratuity ascertained by actuarial valuation has to be allowed. In our view, the Tribunal was justified in admitting fresh evidence in form of certificate from an actuary which was not produced before the ITO. So long as it has not been disputed that the certificate issued was on the basis of actuarial valuation, there was no reason why the assessee should be deprived of deduction. In view of the decision of this court in the case of Commissioner of Income Tax (Central-I) Vs. Eastern Spinning Mills Ltd., , the third and fourth questions are answered in the affirmative and in favour of the assessee. In view of our answer to the third and fourth question in favour of the assessee, we answer the second question also in the affirmative and in favour of the assessee as we do not find any infirmity in the order of the Tribunal in allowing the certificate from the actuary where correctness has not been disputed at any stage of the proceeding.

The other question which has been referred to this court is as follows:

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenditure incurred by the assessee amounting to Rs. 40,65,910 for the reconstruction of its Sheet Glass, Furnace was a revenue expenditure?

The facts relating to the controversy raised in the aforesaid question are stated hereinafter.

The assessee-company was doing business of manufacturing of rolled plate glass initially installed plants and furnace at a total cost of Rs. 2.1 crore. During the year under reference it demolished the old furnace and reconstructed the sheet glass furnace at a cost of Rs. 40,65,910. This amount was capitalised in the assessee''s accounts and original return of income was filed without claiming the expenditure as revenue expenditure. Later on, the assessee thought it to be a revenue expenditure being in the nature of current repair, and claimed admissible deduction by filing a revised return. The ITO rejected this claim of the assessee as he found that the assessee itself capitalised the particular expenditure in its accounts.

Against the order of the ITO, the assessee appealed to the Commissioner (Appeals) and contended that the expenditure in question was allowable as deduction. However, the Commissioner (Appeals) confirmed the action of the ITO.

Being aggrieved, the assessee carried the matter in further appeal before the Tribunal and it was urged on behalf of the assessee that the expenditure being in the nature of overhauling the existing asset, it could not be said to be a capital expenditure in view of the decision of the Supreme Court in the case of Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., . It was urged that the fact that in the earlier assessment year such expenditure was treated by the assessee as capital expenditure should not have been a reason for coming to hold a revenue expenditure as a capital expenditure; more so when res judicata had no application in income tax cases. On behalf of the revenue, the order of the Commissioner (Appeals) was supported. The Tribunal deleted the disallowance of Rs. 40,65,910 holding that the expenditure incurred by the assessee for reconstruction of sheet glass furnace is a revenue expenditure.

Before us, the contention raised before the Tribunal has been reiterated. As indicated earlier, the assessee claimed Rs. 40,65,910 as and by way of current repairs. It was explained by the assessee that during the previous year the assessee demolished the old furnace and reconstructed the sheet glass furnace at a cost of Rs. 40,65,910. In the books of account the entire amount was capitalised and in the original return filed, depreciation was claimed on the capitalised amount of Rs. 40,65,910. Subsequently a revised return was filed on 13-12-1974 disclosing loss of Rs. 1,00,71,656 which included the claim of Rs. 40,65,910 as repairs incurred on re-construction of the furnace. The facts relating to the construction of the furnace would appear from the orders of the lower authorities which are summarised hereafter.

The company was incorporated on 17-6-1951. A sheet and rolled glass manufacturing unit was set up at Asansol under the technical supervision of its holding-company Pilkington Bros. Ltd., London. The directors'' report for the year ending 31-10-1954 reveals that the furnace was actually lit about the middle of May 1954 and the first sheet glass was drawn in the second week of June 1954. The original cost of the furnace supplied by the holding-company was Rs. 25,78,896. No break-up of the cost allocated between sheet glass and rolled glass units is available either with the assessee or from the records. The written down value of the furnace so installed in 1954 at the beginning of the relevant accounting year was Rs. 1,40,496. The directors recommended expansion of the factory to cope with the increased demand of sheet glass during the second five year plan period and proposed in the report for the year ending 31-10-1959 to introduce PPG process in order to increase the production capacity by about 70 per cent. The expansion project was undertaken in 1959 and in the report for the year ending 31-10-1960 it has been mentioned that ''the total cost of the project will be in the region of Rs. 80 lakhs of which foreign exchange for import of plant and machinery is estimated at Rs. 26 lakhs''. The company issued preference shares to the extent of Rs. 32 lakhs out of which the holding company subscribed Rs. 26 lakhs to meet the foreign exchange cost of the project. The total expenses incurred in the company''s expansion project amount to Rs. 80,00,301 which was capitalised and allocated in the accounts relevant for assessment year 1963-64 as under:

Rs.

Process Plants

33,64,489

Furnace

34,67,977

Other plants & equipments

11,77,835

80,00,301

The sheet furnace was overhauled and reconstructed twice once in 1962 and once in 1970. In the directors'' report for the year ending 31-10-1962 it has been mentioned thus:

During the year under review the company''s works at Asansol were completely reoriented to improve the capacity and technique of production, the most significant feature of the change being the conversion of the production method from the old ''Fourcault'' to the more modern and efficacious ''PPG'' process of glass manufacture.... However, consequent to the introduction of the new PPG technique that has increased the factory''s productive capacity from 34 million s. ft. to 54 million s. ft. of sheet glass per year, the position is likely to be recouped within a short period.

The furnace was not overhauled for a long period. A thorough overhauling of the sheet furnace was contemplated in the calendar year 1970 as will be evident from the directors'' report for the year ending 31-12-1970 which reads as under:

Towards the end of the year the sheet furnace of its factory had to be subjected to a major overhauling. This involved a thorough reconstruction of the sheet furnace which was undertaken about the middle of September and could not be completed as anticipated by 31-12-1970. The sheet plant was, thus, out of commission for about 3 months and a half and actual sample production was resumed from January this year. The loss of production over the period is, however, redeemed by the fact that on the completion of the present re-construction the sheet tank has been brought to a position of turning out glass sheets of much superior quality compared with past production being acclaimed as such in both domestic and export markets.

There was further substantial improvement in the production of sheet glass as in assessment year 1972-73 corresponding to the calendar year 1971. There was a production of 5.76 million s. mts of sheet glass. The rolled plate glass unit, however, was out of commission throughout the year and there was no production during the calendar year 1971 from this unit. The assessee was asked to produce necessary vouchers and the adjustment entries passed in the books in respect of the addition to the plant account of a sum of Rs. 40,65,910. Journal entries passed in the books are on account of the following items of expenditure:

Rs.

Refractory

18,93,737

Wooden centering

98,418

Salary, wages & expenses of Pilkington Bros. Ltd., London

4,04,816

Arial Run expenses

12,20,022

36,16,995 (sic)

Expenses incurred in rolled plate furnace unit as per assessee''s statement

4,48,915

40,65,910

The supporting vouchers in regard to the first entry of Rs. 18,93,737 have been looked into by the lower authorities and it has been found that the aforesaid amount includes two items of Rs. 42,572.85 on account of customs duty paid in December 1970 and Rs. 8,09,643 on account of rolled plate utilised in the furnace. The assessee has not been able to state the materials imported for which customs duty of Rs. 42,572.85 was paid. Bifurcation of expenses regarding rolled plate furnace could also not be furnished as, according to the learned counsel, it was not possible to furnish details of expenses as it comprised of so many items. It has been pointed out that originally all these expenses were debited under - different heads but finally these were pooled and capitalised by passing journal entries.

It is, thus, clear from the number of facts found that the sheet furnace was overhauled and reconstructed twice, once in 1962 and later on in 1970. In both the cases the entire expenses have been captialised in the books. The assessee, however, claimed in its revised return for the assessment year under appeal that the reconstruction expenses amounting to Rs. 40,65,910 should be allowed as a revenue expenditure being in the nature of current repairs. Originally the furnace was imported when the factory was set up in 1954. In 1962 also when there was a major reconstruction the entire components were supplied by the assessee''s holding company, viz., Pilkington Bros., London. During the year under appeal some of the components have been imported as is evident from the fact that the customs duty was paid and debited in the refractory account. The reconstruction was under the supervision of the assessee''s holding company. There is no denying the fact that there has been considerable improvement in the production of sheet glass after the furnace was reconstructed in 1970.

Section 31 of the Act provides for deduction of certain types of expenditure in respect of the machinery, plant or furniture used by the assessee for the purposes of his business or profession. The expenditure deductible under this section must be the amount actually spent or incurred, inter alia, in respect of current repairs. The amounts spent for repairs cannot be allowed if they are of a capital nature. It is, therefore, relevant to enquire whether the expenditure is revenue or capital in determining the allowability of such expenditure on account of current repairs. The words ''current repairs'' have not been defined, but they have been judicially interpreted. It appears that there is divergence of judicial opinion. One view is that expression ''current repairs'' must be confined to petty repairs and other view is that expenditure on current repairs is such expenditure which is not for the purpose of renewal or restoration but for the purpose of preserving or maintaining an already existing asset which does not bring into being a new asset or does not give to the assessee a new or different advantage.

This Court in HUMAYUN PROPERTIES LTD. Vs. COMMISSIONER OF Income Tax, CALCUTTA., , held that the current repairs are necessary repairs which are needed for the maintenance of the building and machinery, etc. They are not luxury repairs, the element of need being implicit in the expression. As they must be such as are needed periodically, the accumulation of repairs will not ordinarily satisfy the test. Further, the need for such repairs must have arisen in order to make the repairs current repairs.

Secondly, inasmuch as the idea latent in current repairs is periodicity and recurrence, when the expenditure is incurred to bring into existence a new asset or an advantage of an enduring nature, it cannot be regarded as an expenditure on current repairs.

Thirdly, the degree of improvement brought about and change effected in the identity of existing asset as a result of the expenditure incurred would afford a test in order to determine whether the asset has become a new or substantially a new asset.

It was held in that case that the big amount spent on extensive renovation of two show houses in order to make them more attractive, comfortable and specious represented expenses of capital improvement in nature and was not allowable as on current repairs.

In our view the current repairs must mean only such repairs as are necessitated by the day-to-day wear and tear during the relevant previous year only. But each case has to depend on its own facts and circumstances. The nature of the expenditure on any repairs claimed to have been effected has to be viewed as a whole and in the proper perspective. On the facts and circumstances of the case, which we have already stated hereinbefore, it would be evident that in this case the furnace has been reconstructed and the expenditure did not merely extend to current repairs. It cannot be disputed that by reconstruction of furnace enduring benefit and advantage have been obtained. In fact the assessee demolished the old furnace and reconstructed the sheet glass furnace, which the assessee claimed as current repairs. By this reconstruction the assessee started production and better result was also obtained.

The very fact that the assessee demolished the old furnace and had a new furnace reconstructed in its place takes out the case from the pale of repairs. The word ''repairs'' necessarily postulates the existence of the asset that is subjected to repairs and cannot cover a case where the derelict asset that has outlived its longevity is replaced by altogether a new assset. It is not a case of mending the existing asset or restoring it to sound or good condition to make up for part damage injury or decay.

In our view this expenditure cannot be allowed as current repairs. It is no doubt true even if in a case the costs of repairs or current repairs are not allowable u/s 31, section 37(1) of the Act may be attracted if the conditions laid therein are satisfied. The nature of expenditure laid out and incurred in this case is capital and, therefore, the question of deduction of such expenditure u/s 37 would not arise.

For the reasons aforesaid we are of the view that the Tribunal was not justified on the facts of this case in allowing the expenditure on reconstruction of the furnace as expenditure on current repairs or as revenue expenditure. We, therefore, answer the first question in the negative and in favour of the revenue.

There will be no order as to costs.

Banerjee, J.

I agree.