Commissioner of Income Tax vs Jafarbhai Akbarali and Bros.

V.A. Mohta J.

At the instance of the Revenue, the following question is referred for the opinion of this court u/s 256(1) of the Income Tax Act, 1961 ("the Act") :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in allowing the expenditure of Rs. 20,908 incurred on replacement of body and diesel engine of the van as revenue expenditure?"

The basic facts leading to this reference are :

The assessee deals in the business of manufacturing and sale of fire crackers. It had an old petrol van which was used for the purposes of business. A sum of Rs. 20,908 was spent on the said vehicle. The old petrol engine was replaced by a new diesel engine and the old body by a new body. For the assessment year 1976-77, deduction of that amount was claimed under the head "Revenue expenditure". The Income Tax Officer disallowed the claim on the ground that the expenditure was of capital nature. The disallowance was maintained by the Commissioner of Income Tax. The Tribunal, however, in second appeal, upheld the deduction as revenue expenditure but referred the question since at that time there was a conflict of opinion between the Punjab High Court in Commissioner of Income Tax Vs. Khalsa Nirbhai Transport Co. (P.) Ltd., and the Andhra Pradesh High Court in R. B. SHREERAM and CO. (PRIVATE) LTD. Vs. COMMISSIONER OF Income Tax, A. P., .

Having regard to the aforesaid basic facts, it seems to us that the Tribunal has taken the correct view of the legal position. Whether a particular expenditure is a "revenue expenditure" or a "capital expenditure" will depends upon several facts. But there are certain basic tests which have been crystallised by judicial pronouncements made from time to time. If expenditure was incurred for acquiring and bringing into existence an asset for the enduring benefit of the business, it would normally be "capital expenditure" and if the expenditure was made for running the day-to-day business with a view to produce more income, it would be "revenue expenditure". This is normally a question of fact unless it is demonstrated that there is mis/non-application of basic principles. In the instant case, we do not see any mis/non-application of basic principles. The truck was old. It needed repairs. Repairs sometime means and include replacement. The extent of repairs depends upon several factors. Heavy spending may be necessitated because repairs may be delayed and, therefore, overdue. Judicial notice can be taken of the fact that diesel is much cheaper than petrol. No new assets had come into existence by incurring the expenditure. Incurring of such expenditure was necessitated to increase the profitability of the business. There is thus no scope to hold the said expenditure to be of capital nature. In a somewhat similar background expenditure incurred for replacing a petrol engine by a diesel engine was held to be of revenue nature by this court in the case of COMMISSIONER OF Income Tax, BOMBAY CITY-VI, BOMBAY Vs. POLYOLEFINS INDUSTRIES LTD., . We respectfully concur with the basic approach adopted in the above decision.

In this context, our attention was drawn by Shri Thakar, learned counsel for the assessee, to section 31 of the Income Tax Act, 1961, which lays down that the amount spent for current repairs to the machinery used for the purpose of business shall be deductible in computing the total income. As held by the Mysore High Court in the case of Hanuman Motor Service Vs. Commissioner of Income Tax, Mysore, , the question whether expenditure is of capital nature or of revenue nature is not relevant under the provision. Only the purpose of repairs would determine whether they are current repairs or not. If they are incurred in the continuous process of use or employment of machinery in the normal course and not with a view to bringing into existence a new asset or achieving the benefit of enduring nature, they would certainly fall u/s 31 of the Income Tax Act.

There is a long line of decisions which have taken a view on the lines taken by the Punjab High Court in the case of Commissioner of Income Tax Vs. Khalsa Nirbhai Transport Co. (P.) Ltd., , which has been followed by the Tribunal on the ground that it was later to the decision of the Andhra Pradesh High Court in the case of R. B. SHREERAM and CO. (PRIVATE) LTD. Vs. COMMISSIONER OF Income Tax, A. P., taking a contrary view. They are :

(i) Hanuman Motor Service Vs. Commissioner of Income Tax, Mysore, ,

(ii) Additional Commissioner of Income Tax, Gujarat Vs. Desai Bros., decided by the Gujarat High Court, and

(iii) Nathmal Bankatlal Parikh and Company Vs. Commissioner of Income Tax, decided by the Andhra Pradesh High Court.

Shri Chandurkar, learned counsel, for the Revenue, has relied upon the following three decisions in addition to the case of R. B. SHREERAM and CO. (PRIVATE) LTD. Vs. COMMISSIONER OF Income Tax, A. P., , in support of the proposition that the expenditure incurred in replacing the old body and old engine was of capital nature :

(i) Decision of the Supreme Court in the case of COMMISSIONER OF Income Tax, MADRAS Vs. MIR MOHAMMAD ALI. ARUNA MILLS LTD. : INTERVENER., ,

(ii) the decision of the Bombay High Court in the case of Maneklal Vallabhdas Parekh Vs. Commissioner of Income Tax, Bombay North, , and

(iii) the decision of the Madhya Pradesh High Court in the case of Ratlam Bone Mills Vs. Commissioner of Income Tax, .

The Supreme Court by a majority view has held that the assessee - a transport operator - was entitled to deduction of the extra depreciation allowances under the second paragraph of clause (vi) and clause (via) of section 10(2) of the old Income Tax Act, treating diesel engine as "machinery" and replacement as "installation" as contemplated under the scheme of section 10(2).

Almost to the same effect is the ratio of the Bombay High Court decision in the context of section 10(2)(vi) of the old Income Tax Act.

The context of the Madhya Pradesh decision is entirely different. It pertains to the amount of Rs. 40,245 spent over repairs to factory and godown immediately after its purchase for Rs. 20,000. Considering the nature of work carried out, its extent and the time, it was held that the expenditure was of capital nature.

We are unable to see how the ratio of any of these three decisions can have application to the matter at hand.

This takes us to the consideration of the case of R. B. SHREERAM and CO. (PRIVATE) LTD. Vs. COMMISSIONER OF Income Tax, A. P., on the basis of which the present reference has been made by the Tribunal. It is unnecessary to deal in detail with the said decision since it has been expressly overruled by a Full Bench of the Andhra Pradesh High Court in the case of Nathmal Bankatlal Parikh and Company Vs. Commissioner of Income Tax, .

Under the circumstances, the question is answered in the affirmative and in favour of the assessee. No order as to costs.