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Allied Metal Products Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtPunjab and Haryana High Court
Decided On
Case NumberIncome-tax Reference No. 79 of 1976
Judge
Reported in(1981)25CTR(P& H)371; [1982]137ITR689(P& H)
ActsIncome Tax Act, 1961 - Sections 30 and 37; Transfer of Property Act, 1882
AppellantAllied Metal Products
RespondentCommissioner of Income-tax
Appellant Advocate D.K. Gupta, Adv.
Respondent Advocate D.N. Awasthy and; B.K. Jhingan, Advs.
Cases ReferredHighland Railway Co. v. Balderston
Excerpt:
.....extensive repairs were necessary. in this case, to carry out any repairs to keep the building by the lessee in a 'good condition, in the state in which he had taken it on lease',a specific agreement was not required at the time of the inception of the lease. if the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried ion more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. such a business, as the assessee was doing, cannot be advantageously carried out under a leaking roof and the assessee in the best interests of his business had to undertake it...........worth rs. 22,301 and claimed it as deduction from its taxable income, being an expenditure of revenue nature. the ito holding that it was an expenditure incurred on repairs of roofs and overhauling of the premises, for which there was no agreement with the landlord, disallowed the claim of the assessee and charged it as a capital expenditure. on an appeal by the assessee, the aac set aside the orders of the ito and allowed the deduction holding that in spite of the absence of any written undertaking for the repairs by the assessee, it could undertake the expenses in this case. in his view, the case was covered by section 30(a)(i) of the i.t. act, hereinafter referred to as 'the act'. the aac observed that, even otherwise, the case was covered by section 37 of the act as the expenses.....
Judgment:

K.S. Tiwana, J.

1. The assessee is a registered firm at Jagadhri engaged in the manufacture and sale of steel and aluminium utensils. It carries on the business in the premises taken on lease. The clauses of the lease deed dated 1st of September, 1968, which was produced before the Tribunal and accepted by it, relevant for the purpose of this case, are :

'(iii) To keep the machinery in said working condition and to get repairs effected whenever necessary. If, however, any part of machinery costing Rs. 500 or above (for example erection of the engine, flywheel or rolls of the rolling mills, frames of the machinery or other machinery of the presses) is damaged the lessee will be bound to replace the same with a new one.

(iv) To keep the building in good condition and get it white-washed at least once a year. If, however, any part of the building is damaged by any natural cause, the lessor will be responsible to get the same repaired.'

2. During the assessment year 1970-71, the lessee carried out repairs in those premises worth Rs. 22,301 and claimed it as deduction from its taxable income, being an expenditure of revenue nature. The ITO holding that it was an expenditure incurred on repairs of roofs and overhauling of the premises, for which there was no agreement with the landlord, disallowed the claim of the assessee and charged it as a capital expenditure. On an appeal by the assessee, the AAC set aside the orders of the ITO and allowed the deduction holding that in spite of the absence of any written undertaking for the repairs by the assessee, it could undertake the expenses in this case. In his view, the case was covered by Section 30(a)(i) of the I.T. Act, hereinafter referred to as 'the Act'. The AAC observed that, even otherwise, the case was covered by Section 37 of the Act as the expenses were undertaken wholly and exclusively for the purpose of the business. The Revenue went in appeal before the Income-tax Appellate Tribunal, hereinafter referred to as 'the Tribunal', which set aside the order of the AAC and restored that of the ITO holding that it was an expenditure of a capital nature. On the question of Section 30(a)(i), the Tribunal observed:

'The only clause in the lease deed which deals with the repairs to the building is Sub-clause (iv) of Clause 3 which simply states that the building is to be kept in good condition and it is to be white-washed once in a year. If the damage to the building is due to any natural cause, then the lessor will be responsible to get the same repaired. This clause does not lay down any undertaking on the part of the assessee to bear the cost of repairs to the premises. Beyond the lease deed, no written agreement was produced before us to show that there was any undertaking given by the assessee, as a lessee, to undertake the cost of repairs to the premises in question. For purposes of allowing any expenditure under Section 30(a)(i), it is necessary that the undertaking given by the lessee should be established. Since the undertaking has not been established, the amount in question cannot be allowed under Section 30(a)(i).'

3. On the question of Section 37, the finding of the Tribunal is :

'We may now consider whether the expenditure is admissible under Section 37. The expenditure under Section 37 can be allowed only if it is not capital expenditure and is laid out or expended wholly and exclusively for the purpose of the assessee's business. Since the assessee is not the owner of the demised premises, the expenditure can be said to have been laid out or expended wholly and exclusively for the purposes of the business. But the assessee has to further establish that the expenditure incurred was not capital expenditure.'

4. The Tribunal drew support for its decision from Kanpur Agencies Private Ltd. v CIT : [1968]70ITR337(All) and Silver Screen Enterprises v. CIT . On the application of the assessee the Tribunal has made a reference to this court formulating the following question:

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 22,301 incurred by the assessee on repairs to the building did not constitute an expenditure admissible either under Section 30(a)(i) or Section 37 of the Income-tax Act, 1961?'

5. According to Section 30(a)(i) of the Act, the lessee is entitled to the deduction on the repairs he carries out in the tenanted premises, if he has undertaken to bear the cost of the repairs. It was on this account that the Tribunal found against the assessee in the absence of proof, on its part, of any such agreement with the landlord. We do not feel that such an interpretation could be put on Clause (iv) of the lease deed extracted above, which imposed an obligation on the assessee in view of the statutory provisions governing leases under the Transfer of Property Act. Under Section 108(m) of the Transfer of Property Act, 'the lessee is bound to keep, and on the termination of the lease to restore, the property in as good a condition as it was in at the time when he was put in possession'. In view of this statutory provision, the lessee (vide Clause (iv) of the agreement) bound himself to keep the building in a 'good condition'. This 'good condition' is to be seen in relevance to the purpose for which the lessee took the buildings on lease. Whiter-washing is not the only step to keep the building in a good condition. Some other steps are also necessary, according to the condition of the building for its upkeep and maintenance in that condition. The building has to be kept in a worthy condition in which the business, for which it was taken, can be run. The lease commenced on the 1st of September, 1968, but the repairs were not started immediately but after more than six months. The assessment order, annex. B, shows that materials like cement etc., were procured in April, 1969. The AAC found that the roofs of the building were leaky. In that situation, for keeping the building in a good condition during the term of the lease, which was for five years, extensive repairs were necessary. The leaks had to be stopped against dust and rain water satisfactorily. If that was not possible, then necessarily roofs had to be replaced. This, in the peculiar circumstances of the case, cannot be treated as a construction but has to be taken as a case of extensive repairs. In this case, to carry out any repairs to keep the building by the lessee in a 'good condition, in the state in which he had taken it on lease', a specific agreement was not required at the time of the inception of the lease. The interpretation which we are placing is not only factual but legal, as the Tribunal overlooked to consider this aspect in the light of the provisions of the Transfer of Property Act.

6. The amount so spent on repairs to a leased premises by the lessee would be covered as repairs under Section 30(a)(i) and the remainder out of the extensive repairs conducted in the interest of his business, for which he has taken the lease, is an expense of a revenue nature. The amount of Rs. 22,301 expended by the lessee on these kinds of repairs has to be excluded from his taxable income on this account, especially in view of what we are to hold under Section 37 of the Act.

7. The other limb of the reference concerns Section 37 of the Act. Under this provision the assessee can claim deduction only if the amount laid out or expended is wholly and exclusively for the purpose of business. On behalf of the Revenue it was argued that the work carried out by the assessee was not a simple repair but was a replacement of the roof and the premises were overhauled. On that basis, it was urged that it was a benefit of an enduring nature and the amount expended amounted to a capital expenditure. Reliance was placed on Kanpur Agencies Private Ltd. v. CIT : [1968]70ITR337(All) . In that case, the assessee who was a tenant, had replaced manual latrines with flush latrines and had replaced the tiled roofs of the labour quarters with cement roofs. On the facts of that case, placing reliance on Highland Railway Co. v. Balderston [1889] 2 TC 485, it was held ;

'This is not a case where repairs were effected for the purpose of restoring the property to its original condition. It is a case where there was a substantial improvement in the property and a material change was brought about in the property. The manual latrines were replaced by flush latrines and the tiled roofs were replaced by cement roofs. We are unable to hold that the alterations effected by the assessee were made merely to bring about the reinstatement of the property to its original condition.'

8. The other case relied upon on behalf of the Revenue is from this court and is Silver Screen Enterprises v. CIT . In this case, the lessee of a cinema, in order to modernise and attract more clientele, replaced the wooden chairs with iron chairs and made other improvements. He claimed exemption for the amount so spent on these things. In that case, on facts, it was held to be an improvement. It was observed (p. 584):

'Undoubtedly, it was an improvement. The wooden chairs were replaced. No evidence has been led that the wooden chairs had become useless and could not be used for seating the cinema-goers. On the other hand, the stand taken is that the whole object was to modernise the cinema house to bring it in line with the modern show-business. Therefore, whatever was done, so far as certain permanent fixtures were concerned, was done with that object in view. The replacement was an improvement of an enduring nature and not mere replacement.'

9. Whether an expenditure is capital or revenue is to be decided on the facts of each case. It has to be determined in the environments of the business involved and its circumstances. Decided cases may not always be taken as binding precedents on the point involved in such cases on factual data. This difficulty was identified in Silver Screen case and the Bench observed (p. 580):

'There is no dearth of decided cases wherein the controversy whether certain expenditure is capital or revenue fell for determination. Some of these decisions have tried to lay down certain principles which are merely aids to the determination of such controversy. Yet, it must be recognised that those tests are not the conclusive tests. It is difficult to formulate a test which will always suffice to discriminate between expenditure which is not capital and expenditure which is capital. As a working rule, what has to be seen is whether the expense incurred brings into existence an asset, not necessarily a tangible asset, for the enduring benefit of trade. But 'enduring' cannot be termed as 'everlasting'. It is also risky to decide one case on the analogy of another. The correct rule is to examine closely the facts of a given case and, then, keeping in view the thin dividing line between capital and revenue, a solution has to be found whether the expense claimed is capital or revenue. The decided cases are only useful for they help one to clear one's mind. It may be that sometimes they also tend to confuse the issue.'

10. Similar observations were made by the Supreme Court in Empire Jute Co. Ltd. v. CIT : [1980]124ITR1(SC) :

'The decided cases have, from time to time, evolved various tests for distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all-embracing formula which can provide a ready solution to the problem ; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred.'

11. Each case, therefore, has to be viewed on its own facts, background and the data brought on the record. Help and guidance can always be sought and derived from precedents involving the determination of a point, which is close to the one involved in the case to be decided. Kanpur Agencies' case : [1968]70ITR337(All) and Silver Screen case were decided on the basis of facts which were peculiar to those. They cannot be stretched for application to the case in hand to determine whether the expenditure incurred was of a capital or a revenue nature.

12. The Tribunal seems to be mainly influenced by the enduring nature of the benefit to return a finding against the assessee. The enduring nature, which does not mean the everlasting nature of the benefit, is not the sole test to scoop the expenditure out of the ambit of a revenue expense. In the Empire Jute Company's case : [1980]124ITR1(SC) , the Supreme Court examined this aspect in particular and observed (p. 10) :

'There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the 'advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be dis-allowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried ion more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.'

13. In L.H. Sugar Factory and Oil Mills (P.) Ltd. v. CIT : [1980]125ITR293(SC) , the assessee, a sugar factory contributed Rs. 50,000 for the construction of a road in the area around the factory. It was found that the construction of the road in the area around the factory was considered advantageous to the business of the assessee because it facilitated the running of motor vehicles for transportation of the sugarcane necessary for the manufacture of sugar. The argument of the Revenue, which did not contest seriously the purpose of the road being advantageous to the business of the assessee that the expenditure was capital in nature, since it was incurred for the purpose of bringing into existence an advantage for the enduring benefit of the assessee's business, was negatived, by a reference to the above-quoted passage from Empire Jute Company's case : [1980]124ITR1(SC) . It was held in L. H. Sugar Factory's case : [1980]125ITR293(SC) :

'But, so far as the expenditure of the sum of Rs. 50,000 is concerned, we hold that it was in the nature of revenue expenditure laid out wholly and exclusively for the purpose of the assessee's business and was, therefore, allowable as a deduction under Section 10(2Xxv) of the Act.'

14. Section 10(2)(xv) of the old Act was equivalent to Section 37 of the new Act. The facts of L.H. Sugar Factory's case : [1980]125ITR293(SC) are very close to the case in hand and guide us to hold that such an expenditure is for the purpose of the business in spite of the enduring nature of the benefit.

15. In CIT v. Bharat Cinema , Rs. 24,000 were spent by the lessee, after a notice was given by the executive engineer to repair the sagging ceiling of a cinema. A Bench of this court held the amount spent on the repair to be a revenue expense. This court again in CIT v. Bhagat Industries Corporation , allowed an expenditure of Rs. 75,702 on account of the repair to a tenanted premises used by the assessee as a branch office in Darya Ganj, Delhi, as revenue expense holding ' The mere fact that the repairs made are of a durable nature, would not make the expenditure under consideration a capital 'expenditure'.'

16. In the case in hand, the assessee was not the owner of the premises, but was only a lessee for a period of five years. Even if the repairs of the roof be taken as an accretion of an enduring nature, it did not acquire any interest of a permanent nature in it. The AAC found that the roof was leaky. The landlord, for the meagreness or insufficiency of the rate of rent, did not seem to be in favour of investing a sizeable amount of nearly Rs. 23,000 on the repairs. Such a business, as the assessee was doing, cannot be advantageously carried out under a leaking roof and the assessee in the best interests of his business had to undertake it. Business is always done for the best and the maximum attainment of profits. A lessee, the period of whose lease is limited, has to strive to get the maximum profit during the continuance of his lease in the premises. The assessee in this case, therefore, had two options open to it, either to carry out the repairs and get the maximum return or remain content with the disadvantageous condition of the premises. The interest of the business being paramount, the assessee went in to invest the amount for the repairs and incurred this expenditure, which was wholly and exclusively for the purpose of its business. In view of the decision of the Supreme Court in Empire Jute Company's case : [1980]124ITR1(SC) and L. H. Sugar Factory's case : [1980]125ITR293(SC) , and the decisions of this court in Bharat Cinema and Bhagat Industries Corporation , the benefit even if it is taken to be of an enduring nature, though it was not, does not fall within the realm of capital expenditure for taxation. It was revenue expenditure wholly and exclusively spent for the business of the assessee and is thus an expenditure of revenue nature. The assessee was entitled to claim its exemption and the decision of the Tribunal was not correct.

17. For the foregoing reasons, the reference is answered in favour of the assessee and against the Revenue.


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