This is a reference by the Income-tax Appellate Tribunal, Bombay, under section 66 (1) of the Indian Income-tax Act, 1922, hereinafter called the Act. Two questions of law are raised in the reference, one at the instance of the Commissioner of Income-tax, Madhya Pradesh and Bhopal, Nagpur, and the other, of the assessee.
2. The assessee is a registered firm and owns a textile mill styled R.B. Bansilal Abirchand Spinning and Weaving Mills, Hinganghat. It had also other sources of income both in British India states. For the assessment year 1948-49 its income from British India was computed by the Income-tax Officer as a loss amounting to Rs. 1,15,309. Its income from the Indian states was computed at Rs. 10,424. The total income was thus a loss of Rs. 1,04,885. The assessee contended that the income of Rs. 10,424. should not be set off against the loss of Rs. 1,15,309 and that the loss of Rs. 1,15,309 should be apportioned amongst the partners under the second proviso to section 24 (1) of the Act. The contention of the Department was that only the balance of the loss amounting to Rs. 1,04,885, after making a set-off of Rs. 10,424, was liable to be apportioned. The contention of the assessee was accepted by the Tribunal. The question of law that arises out of the order is : "Whether the loss to be apportioned amounts to Rs. 1,04,885 or Rs. 1,15,309 ?" 3. In the year of account relevant for the assessment year 1949-50 the assessee spent a sum of Rs. 9,330 on the replacement of a cylinder in a sizing machine of the mill and spent a sum of Rs. 15,000 on renovation of the wooden flooring of the spinning department of the mill. The assessee claimed these items as revenue expenditure, but the Tribunal, agreeing with the Income-tax Authorities, held that they represented capital expenditure. The question of law which arises out of the order is : "Whether the expenditure incurred by the assessee in replacing the cylinder and in renovating the wooden flooring is revenue expenditure or capital expenditure ?" 4. Taking up the question raised by the Department, the answer must be in favour of the assessee. Under section 16 (1) of the Act, the exempted sums are to be included only for the purpose of computing the total income of the assessee. The question of set-off under section 24 (1) arises only if there is taxable income, and not otherwise. That section entitles the assessee and not the Department to claim a set-off of loss against profits to determine the marginal taxable income. It does not, therefore, entitle the Income-tax Officer to minimise the loss by setting off the profits. The cases relied upon by the Department, namely Commissioner of Income-tax v. Murlidhar Mathurawalla Association, Mohanlal HiralalCommissioner of Income-tax, Commissioner of Income-tax v. C. P. Syndicate,Mishrimal Gulabchand of Beawar, In re and Commissioner of Income-tax v. Hira Mall Narain Dass only deal with the right of the assessee to set off loss against gains or profits and are not, therefore, applicable to the case before us. We hold that the loss to be apportioned amounts to Rs. 1,15,309.
5. The answer to the question raised by the assessee depends upon whether the expenditure can be held to be in respect of "current repairs" within the meaning of clause (v) of section 10 (2) of the Act.
The term "repairs" has to be understood in contradistinction to reconstruction. When the existing asset is only maintained or preserved, the case is one of repairs and not reconstruction : see Commissioners of Income-tax v. Darhbanga Sugar Co. Ltd. and New Shorrock Spinning and Manufacturing Co. Ltd. v. Commissioner of Income-tax. The work that was done in the instant case was only intended to preserve and maintain the existing machine and the building. The cylinder of the machine and the flooring of the building had worn out by use and needed replacement in the ordinary course. The question of the amount of expenditure does not count in such cases, for that does not change the nature of the expenditure. In Commissioner of Income-tax v. S. B. Ranjit Singh it was held that a sum can be allowed as the cost of repairs even though the expenditure in a particular year is heavy on account of the fact that it is undertaken to remedy the effect of several years of wear and tear or neglect and also in spite of the fact that such expenditure may not be necessary for several years to come after the repairs have been effected. As no new asset has been created by the replacement of these parts, the expenditure must be held to be in respect of current repairs. We hold that the expenditure is revenue and not capital expenditure.