M. M. PUNCHHI J. - At the instance of the assessee the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh, has referred to us the following two questions of law :
'(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right, in law, in holding that the amount of Rs. 24,509 (out of the sum of Rs. 24,259) incurred by the assessee on the improvement of the vacuum filter does not constitute and allowable deduction under any of the sections, viz., ss. 31, 32(1)(iii), 35 and 37 of the Income-tax Act, 1961 ?
(ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right, in law, in holding that the sum of Rs. 3,138 (out of the expenditure of Rs. 3,659 representing the cost of tools and implements, laboratory equipments and furniture and fixture) is not an allowed deduction either under the proviso to section 32(1)(ii) or under section 37 of the Income-tax Act, 1961 ?'
The facts as set out are these : The assessee, a public limited company, carries on business of manufacture and sale of sugar and machinery for sugar mills and other industries. The 'previous year' for the assessment for 1967-68 ended on August 31, 1966. During the previous year relevant to the assessment year 1966-67, the assessee had installed one vacuum filter to explore the possibilities of filtering first carbonated juice on a more economical basis. The cost of this filter installed during the said year amounted to Rs. 78,997. Before the installation of the vacuum filter, the assessee was using the batch type system for the purpose of filtration and every time the press got filled up with mud, it had to be stopped, cleaned and redressed. With the vacuum filter, the filtration was to be continuous and such systems were said to be in use in foreign countries in beet sugar factory and cane factories adopting sulphitation process for clarification. On such installation, the assessee was allowed depreciation to the extent of Rs. 5,498 during the assessment year 1966-67, and thus the written down value of the said filter for the year under consideration was brought down to Rs. 73,499. During the previous year, the assessee-company spent Rs. 25,259 on the aforesaid filter in order to improve it. Despite such expenses, no improvement was brought about in the working result and the filter had to be discarded. After taking credit for its scrap value for Rs. 7,500 the balance of Rs. 91,258 was written off in the books of account and was claimed by the assessee as revenue expenditure. The ITO, vide his order dated February 27, 1970, allowed deduction of Rs. 65,999 (written down value of the filter Rs. 73,499 less scrap value estimated at Rs. 7,500) under s. 32(1)(iii) of the I.T. Act, 1961. The sum of Rs. 25,259 was not allowed on the ground that this amount represented capital expenditure and since the machinery brought into use by expending this amount was discard during the previous year itself, the assessees claim was not admissible. The appeal of the assessee to the AAC failed, but partial relief of Rs. 750 was allowed under the proviso to s. 32(1)(iii) and thereby the addition was restricted to Rs. 24,999 (miscalculated for Rs. 24,509). The second appeal by the assessee before the Tribunal also failed. The Tribunal came to the conclusion that even the amount of Rs. 750 allowed by the AAC was incorrect but since it had no cross-appeal before it, it left the matter at rest. The assessees claim that the sum of Rs. 24,509 should be allowed as a deduction under any of the sections, viz., ss. 31, 32(1)(iii), 35 and 37 of the Act, as the said amount had been spent on the improvement of the vacuum filter, was negatived by the Tribunal. On these premises, question No. 1 has been referred.
The assessee also claimed deductions under s. 32(1)(iii) for assets sold and/or discarded during the previous year. Allowance was claimed under three heads, namely, 'Tools and implements purchased and discarded', 'Laboratory equipments purchased and discarded' and 'Furniture and fixture purchased and discarded'. Out of the deductions claimed, disallowance was made under the respective heads to be of Rs. 2,397, Rs. 778 and Rs. 484, totalling Rs. 3,659, on the ground that the items had been purchased and discarded during the previous year itself. The details of those items are a part of the statement of the case. The Tribunal, on appeal, reduced the amount of Rs. 3,659 by Rs. 464 and Rs. 57 incurred on bolts and taps. But under the head 'Tools and implements' the balance amount of Rs. 3,138 was held not to be allowable as the amount was incurred as capital expenditure on assets written off in the previous year itself. The claim of the assessee that the deduction was allowable under s. 32(1)(iii) or s. 37 of the Act was negatived. That is the scope of question No. 2.
With regard to both the questions, it is noteworthy that the stand of the Revenue before the Tribunal as also here was that the expenditure incurred was capital in nature and did not attract allowable deductions. That the sums had to be spent in the course of the business of the assessee cannot and has never been disputed. Now, the expenditure would be a revenue expenditure if it does not fall within the ambit of capital expenditure as has been explained and understood in judicial precedents, in the light of which these questions can be answered.
There is a catena of precedents giving guidelines as to what expenditure would fall within capital or revenue. One of the guidelines is that if the expenditure is incurred for obtaining an advantage of enduring benefit it would be capital expenditure but the test of enduring benefit is not a certain or conclusive test and it cannot be applied blindly and mechanically with regard to the particular facts and circumstances of a given case. It is not every advantage of enduring nature acquired by an assessee that would bring his case within the said concept. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is on the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessees trading operations or enabling the management and conduct of the assessees business to be cattied on 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.
Now, on the facts stated before us, no new asset was created but improvements were made to the already created asset. There was no addition or expansion made of the profit-making apparatus of the assessee. The expenditure was incurred for the purpose of making the vacuum filter work advantageously and thus the expenditure laid out was a part of the profit earning. The Tribunal had detailed Rs. 15,397 towards cost of fabricated material, Rs. 215 as contractors bill of fabrication/fitting and Rs. 9,547 toward cost of stores consumed, totalling Rs. 25,259. Here, the Revenue has not contended that the sum of Rs. 25,259 was not laid out wholly and exclusively for the purpose of the assessees business. The argument is only confined to whether it represents capital expenditure and hence not deductible under the residuary s. 37, besides its assertion that the expenditure does not squarely fall under any of the sections, viz., ss. 31, 32(1)(iii), 35.
In CIT v. Kalyanji Mavji & Co. : 122ITR49(SC) , an argument was raised before their Lordships of the Supreme Court that the claim of the assessee must be considered with regard to the relevant section under which specifically the deductions were being claimed as an allowable expenditure, and if the assessee failed under the specific section, resort ought not to be had to the residuary section. There, expenditure incurred for renovating building, reconditioning machinery and clearing debris was being claimed under s. 10(2)(v) of the 1922 Act. Since the finding recorded by the Tribunal in that case was that these repairs were not 'current repairs', an argument was built that the Act limited allowable deductions to the 'current repairs' and none other, and so resort could not be had to the general provisions of s. 10(2)(xv). Their Lordships negatived the plea. Certain portions of the judgment are extracted below (p. 53) :
'Now, the is contention rests on the principle that if a special provision covers the case, resort cannot be had to a general provision. It seems to us that if the renovation of the building, the reconditioning of machinery and the removal of debris cannot be described as current repairs and we assume that to be so - the case would be entitled to consideration under s. 1(92)(xv). Section 10(2)(v) deals with current repairs only. The subject-matter of s. 10(2)(v) is current repairs and it appears difficult to agree that repairs which are not current repairs should not be considered for deduction on general principles or under s. 10(2)(xv). There must be very strong evidence that in the case of such repairs, the Legislature intended a departure from the principle that an expenditure, laid out or expended wholly and exclusively for the purposes of the business, and which expenditure is not capital in nature, should not be allowed in computing the income from business. There is nothing in the language of s. 10(2)(v) which declares or necessarily implies that repairs, other than current repairs, will not qualify for the benefit of that principle. We must remember that on accepted commercial practice and trading principles an item of business expenditure must be deducted in order to arrive at the true figure of profits and gains for tax purposes. The rule was held by the Privy Council in CIT v. Chitnavis , to be applicable in the case of losses, and it has been applied by the courts in India to business expenditure incurred by an assessee : Motipur Sugar Factory Ltd. v. CIT : 28ITR128(Patna) and Devi Films P. Ltd. v. CIT : 75ITR301(Mad) . The principle found favour with this court in Badridas Daga v. CIT : 34ITR10(SC) and Calcutta Co. Ltd. v. CIT : 37ITR1(SC) . If the contents of that rule be true on general principle, there is good reason why the scope of s. 10(2)(xv) should be construed liberally. In our opinion, even if the expenditure made by the assessee in the present case cannot be described as 'current repairs', he is entitled to invoke the benefit of s. 10(2)(xv). We may mention that in Law Shipping Co. Ltd. v. IRC  12 TC 621, it has been been held that accumulated arrears for repairs are none the less repairs necessary to earn profits. although they have been allowed to accumulate.
The question then is whether s. 10(2)(xv) is attracted. There can be little doubt that the expenditure incurred is incidental to the business of the assessee. It was involved in renovating the buildings, reconditioning the machinery and clearing the debris from the land. All the work done was for the purpose of resuming the operation of the colliery. The expenditure was laid out wholly and exclusively for the purposes of the business. We do not think that there can be any dispute as to that... As soon as the property was derequisitioned, the assessee took measures to resume production of coal. It was necessary to remove the impediments which had come in the way by reason of the temporary suspension of work. The buildings were renovated, the machinery reconditioned and the accumulated divers removed from the land. The colliery was, in a word, reinstated to the condition necessary for ensuring production. No new asset was brought into existence; no advantage for the enduring benefit of the business was acquired. An activity which was continuously in operation but had been temporarily suspended was to be resumed.'
In L. H. Sugar Factory and Oil Mills (P.) Ltd. v. CIT : 125ITR293(SC) , their Lordships of the Supreme Court termed the contribution made towards cost of construction of roads in an area around factory, wholly and exclusively laid out for business, not as a capital expenditure and treated it as an allowable deduction under the residuary provision. Their Lordships observed as follows (headnote) :
'(ii) That the sum of Rs. 50,000 contributed under the sugarcane development scheme was deductible expenditure under s. 10(2)(xv). The roads under the scheme were undoubtedly advantageous to the business of the assessee as they facilitated the transport of sugarcane to the factory and the outflow of manufactured sugar from the factory to the market centers. The construction of these roads facilitated the business operations of the assessee and enabled the management and conduct of the assessees business to be carried on more efficiently and profitably. It was true that the advantage secured for the business of the assessee was of long duration inasmuch as it would last so long as the roads continued to be in motorable condition, but it was not an advantage in the capital field, because no tangible or intangible asset was acquired by the assessee nor was there any addition to or expansion of the profit-making apparatus of the assessee. The amount of Rs. 50,000 was contributed by the assessee for the purpose of facilitating the conduct of the business of the assessee and making it more efficient and profitable without the assessee getting an advantage of an enduring benefit to itself and was an expenditure on revenue account; and was laid out wholly and exclusively for the purpose of the assessees business.
In Empire Jute Co. Ltd. v. CIT : 124ITR1(SC) , their Lordships of the Supreme Court, while dealing with the test on fixed and circulating capital to distinguish between revenue and capital expenditure, observed that this test also sometimes broke down and was not of a universal application. In particular, it was distinguished as follows (p. 11) :
'Moreover, there may be cases where expenditure, though referable to or in connection with fixed capital, is nevertheless allowable as revenue expenditure. An illustrative example would be of expenditure incurred in preserving or maintaining capital assets.'
Applying the above-said observations to the case in hand, expenses incurred for the improvement of the vacuum filter would be an expenditure incurred not only in preserving but also in maintaining the capital asset. The vacuum filter in order to remain a profit-making apparatus had indeed to be improved upon, so as to carry on the business more efficiently or profitably. The expenditure would be on revenue account even if the advantage may turn to be for an indefinite future.
It would be also advantageous to notice the decision rendered by this court in CIT v. Bharat Cinema , wherein urgent repairs carried out on the ceiling of the cinema inclusive of replacements were held as revenue expenditure because they had been carried out under the danger of the assessees licence being not renewed beyond a particular period, and necessitated by the executive engineers pointed attention for rectification. Equally, in another decision of this court in CIT v. Bhagat Industries Corporation Ltd. , repairs carried out to a building of the branch office of the assessee, made of durable nature, were opined as allowable as business expenditure and not capital expenditure.
From the aforesaid precedents, it seems to us that a capital asset of the nature involved in the instant case, if repaired or improved upon, as part of business exigencies, would entitle the assessee to claim the expenditure incurred thereon as business expenditure. And even if he is not capable of squarely putting his case under any specific head to claim deduction, the residuary s. 37 would be available to him subject to other conditions fulfilling. It would be purely academic for our purpose whether the improvements made on the plant squarely fall within 'repairs' as known to s. 31 or is a depreciation as known to s. 32(1)(iii) or of expenditure on scientific research as known to s. 35 of the Act. The first question referred on the finding of the Tribunal under specific head s can appropriately be and is hereby answered in the negative, i.e., in favour of the assessee and against the Revenue by holding that the improvement of the vacuum filter constitutes an allowable deduction under s. 37 of the I.T. Act, 1961.
While dealing with question No. 2, it would be advantageous to take note of the inclusive definition of the word 'plant' given in s. 43(3) of the Act. For the purpose of s. 32, plant could include even scientific apparatus used for the purpose of business or profession. It is only on the plant which is used for the purpose of business or profession and is owned by the assessee that the depreciation would be claimable. Under the proviso to cl. (1)(ii) thereof, if the actual cost of any plant or machinery does not exceed Rs. 750, the actual cost thereof would be allowed as deduction in respect of the previous year in which certain machinery or plant is first put to use by the assessee for the purpose of his business or profession. From the list given in the statement of case, none of the items is worth more than Rs. 750. The items are, tools and implements, laboratory equipments, and furniture and fixtures. These were purchased and discarded during the previous year of the year of assessment and this was the reason why disallowance was made under the above-mentioned three heads as their value was written off. The learned counsel for the Revenue pointed out that then cent. per cent. depreciation claimable under s. 32(1)(ii) was subject to the provisions, of s. 34. And under sub-s. 2(ii) of the latter section, no such allowance was permissible in respect of any building, machinery, plant or furniture, sold, discarded, demolished or destroyed in the same year. According to him, if the items of purchase had been discarded in the previous year itself, depreciation under s. 32(1)(iii) was not claimable. It would be academic to go into this question. For, if depreciation is not claimable under s. 32 as put forth by the counsel for the Revenue and we assume that to be so, the deduction claimed would still be revenue expenditure contradict distinct to capital expenditure, expended wholly and exclusively for the purpose of business. Tools and implements, laboratory equipments, and furniture and fixtures, of the kind enumerated in the list were required to carry on the assessees business more efficiently and profitably in the companys two units known as Isgec Unit and Sugar Mills Unit. Thus, question No. 2, has also to be answered in the negative, that is, in favour of the assessee and against the Revenue holding that the expenditure representing the cost of tools and implements, laboratory equipments, and furniture and fixtures, of the kind mentioned in the statement of the case is an allowable deduction under s. 37 of the Act.
Both the questions are answered in favour of the assessee in the light of the observations made above. No costs.