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Commissioner of Income-tax Vs. Noroth Oil Mill Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference Nos. 93 of 1978 and 115 of 1981
Judge
Reported in(1982)28CTR(Ker)299; [1983]140ITR173(Ker)
ActsIncome Tax Act, 1961 - Sections 31 and 37
AppellantCommissioner of Income-tax
RespondentNoroth Oil Mill Co. Ltd.
Appellant Advocate K.P. Ravindranatha Menon, Adv.
Respondent Advocate V.M. Kurien and; K.K. Gangadharan, Advs.
Cases ReferredBritish Insulated and Helsby Cables Ltd. v. Atherton
Excerpt:
direct taxation - capital expenditure - sections 31 and 37 of income tax act, 1961 - whether expenditure incurred by assessee in replacing engines fitted in boats of revenue nature in computing its business income - engines not required replacement at that time - more powerful engines increasing efficiency of boats replaced in place of old engines - enduring advantage to fixed assets brought by replacement - said expenditure to be regarded as capital expenditure. - - if the question is whether the boat has been repaired it may bepossible to say that it has been, provided certain other conditions are satisfied. the only fact which is evident is that those engines were discarded in favour of new and more powerful engines. clark [1935] ac 431 ;[1935] 3 itr 17: in general the distinction.....subramonian pott, actg. c.j.1. a problem quite familiar in income-tax law is before us in these cases. the problem is easily stated, but not so easily solved. whether the expenditure incurred by the assessce in the assessment year 1968-69 amounting to a sum of rs. 1,55,448 in the replacement of 40 h.p. engines fitted in the fishing boats with 60 h.p. engines is of revenue nature is the question that arises in i.t.r. no. 93/78. the commissioner of income-tax desired to have one more question referred, namely, whether the assessee has not obtained a benefit of an enduring nature by the replacement of the engines. that was not originally referred by the tribunal, but on a direction by this court, that too has been referred. the questions referred in the two cases are :in i.t.r. no. 93 of.....
Judgment:

Subramonian Pott, Actg. C.J.

1. A problem quite familiar in income-tax law is before us in these cases. The problem is easily stated, but not so easily solved. Whether the expenditure incurred by the assessce in the assessment year 1968-69 amounting to a sum of Rs. 1,55,448 in the replacement of 40 H.P. engines fitted in the fishing boats with 60 H.P. engines is of revenue nature is the question that arises in I.T.R. No. 93/78. The Commissioner of Income-tax desired to have one more question referred, namely, whether the assessee has not obtained a benefit of an enduring nature by the replacement of the engines. That was not originally referred by the Tribunal, but on a direction by this court, that too has been referred. The questions referred in the two cases are :

In I.T.R. No. 93 of 1978 :

'Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 1,55,448 incurred by the assessee in replacing 40 H.P. engines fitted in the boats with 60 H.P. engines is of revenue nature in computing its business income for the assessment year 1968-69 ?' In I.T.R. No. 115 of 1981 : 'Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the 'assessee has also not obtained a benefit of an enduring nature' and is not the above finding wrong and unreasonable in law and fact?'

2. For the assessment year 1968-69, corresponding to the previous year ending on December 31, 1967, the assessee, a limited company, filed a return disclosing an income of Rs. 5,51,220. Such income was after deducting a sum of Rs. 1,55,448, that being the expenditure incurred in the replacement of the 40 H.P. engines in the five fishing boats of the assessee with 60 H.P. engines. The assessee derives income from processing and export of canned and frozen sea foods. In 1963, five fishing boats were constructed by the assessee at a cost of Rs. 27,532. Each of them was fitted with a 40 H.P. Crossley engine imported from the U.K. under the export incentive licence granted to the assessee. By the time they were replaced during the accounting year ending on December 31, 1967, they had run for four years. 60 H.P. engines were purchased by the assessee from the GujaratFisheries Central Co-operative Association for Rs. 98,923, those having been imported from Yugoslavia. The total cost of replacement was Rs. 1,55,448.

3. The ITO held that the expenditure by way of replacement of engines was an expenditure of a capital nature and, therefore, determined the total income treating the claim for deduction as inadmissible. In the appeal by the assessee before the AAC, it was contended by him that no new assets had been brought into existence and that the expenditure amounted only to expenditure on current repairs. Reliance was placed on the decision of the Mysore High Court in Hanuman Motor Service v. CIT : [1967]66ITR88(KAR) and that of the Supreme Court in CIT v. Mahalaxmi Textiles : [1967]66ITR710(SC) . The AAC found that there was nothing to show that the old engines were unserviceable and, therefore, there was a necessity to replace them. He held that the replacement of old engines with new engines could not be treated as current repair and the expenditure in question had been incurred to gain a new advantage of an enduring nature to the fishing boats. He, therefore, held that the expenditure was of a capital nature. The assessee preferred an appeal to the Income-tax Appellate Tribunal. The Tribunal held that the finding of the AAC that there was no evidence to show that the old engines had become useless was not acceptable. Considering the fact that the boats had been constructed in 1963 the Tribunal was of the view that they might have required repairs. The Tribunal also held that by the replacement of old engines with new engines though of higher horse power it could not be said that new assets had come into existence. Commercial assets, according to the Tribunal, continued to be the boats. For these reasons the Tribunal held that the expenditure was of a revenue nature and should be allowed The Tribunal also held that if any repair was done to any machinery or to any worn out part by replacing new parts there was a benefit to the assessee, but it cannot, therefore, be said that the assessee had obtained an enduring benefit as the term is ordinarily understood.

4. Before us the case of the assessee is that the claim for deduction would arise under Section 31 of the I.T. Act and alternatively it is an admissible deduction tinders. 37 of the Act. The income chargeable to income-tax under the head 'Profits and gains of business or profession' is to be computed in accordance with Sections 30 - 43 of the Act. Sections 30 - 36 deal with deductions under various heads while Section 37 is a general provision which enables any expenditure not being of the nature described in Sections 30 - 36 and not being of the nature of capital expenditure and personal expenditure of the assessee to be deducted in computing the income, provided such expenditure is laid out or expended wholly and exclusively for the purpose of the business or profession. That theexpenditure with which we are concerned in these cases is so laid out wholly for the purpose of the business is not in controversy. It is said that it is an expenditure falling within Section 31 and if it is found to be not so, then it must be found to fall within Section 37. That would be so if it is not in the nature of capital expenditure. Therefore, if we find that Section 31 will not apply to the case then we have to concern ourselves with the question whether the expenditure incurred in the replacement of the engines of the boats is of the nature of capital expenditure.

5. Section 31 allows deduction of the amount paid on account of current repairs to any machinery, plant or furniture used for the purposes of the business. Section 31 reads thus :

'31. In respect of repairs and insurance of machinery, plant or furniture used for the purposes of the business or profession, the following deductions shall be allowed-

(i) the amount paid on account of current repairs thereto ;

(ii) the amount of any premium paid in respect of insurance against risk of damage or destruction thereof.'

6. In order to attract the section it must be shown that the amount spent is for current repairs 'and it must also be shown that such repairs is to machinery, plant or furniture used for the purpose of the business. There is considerable controversy as to the scope of the term 'current repairs'. The Mysore High Court applied the test to find out whether as a result of the expenditure claimed for the repairs an already existing asset is preserved or maintained or, on the other hand, whether the object of such expenditure is to bring a new asset into existence or to obtain a new or fresh advantage. If it is the former then it is a repair, if it is the latter it should be considered as a replacement or renewal irrespective of whether the expenditure is of a capital nature or of a revenue nature if it would fall within the scope of expenditure for repairs. According to the Madras High Court in CIT v. Sri Rama Sugar Mills Ltd. : [1952]21ITR191(Mad) , it will qualify for deduction under Section 10(2)(v) of the Indian I.T. Act, 1922. In a case where a plant was found to need a change as a result of the stress and strain of production over a long period and the assessee was found to have replaced old parts by introducing the Casablanca conversion system, the High Court took the view that no new machinery or plant was installed, that the introduction of the system amounted to 'fitting of improved versions of certain minor parts' and the expenditure in that behalf was revenue expenditure. The matter came up before the Supreme Court in CIT v. Mahalakshmi Textile Mills Ltd. : [1967]66ITR710(SC) . The High Court's view was upheld by the Supreme Court. The view taken by the Mysore High Court in HanumanMotor Service v. CIT : [1967]66ITR88(KAR) , was adopted by the Gujarat High Court in Addl. CIT v. Desai Bros. : [1977]108ITR14(Guj) . Replacement of petrol engine by a diesel engine in a truck of a firm carrying on business in the manufacture and sale of beedies was considered as not bringing into existence a new asset and also not amounting to a substantial replacement or renovation of an existing asset. It was considered that the expenditure was incurred in preserving and maintaining an asset for purposes of its business, and, therefore, was held to be of revenue nature. That was for current repairs to the machinery of the assessee. A Full Bench of the Andhra Pradesh High Court in the decision in Nathmal Bankatlal Parikh & Co. v. CIT : [1980]122ITR168(AP) , considered a case for deduction with reference to Section 31 of the I.T. Act, 1961, of an expenditure incurred in replacing an old diesel engine by a new diesel engine. Rightly the Full Bench said that before examining the question of the applicability of Section 37(1) it was the duty of the assessing authority to see whether the claim of the assessee fell under any one of the items of deduction specified in Sections 30 - 36. In considering the claim under the above-said sections the question whether the expenditure was capital or revenue in nature was immaterial. If the claim fell under any one of the Sections 30 - 36, the assessee can claim deduction irrespective of the nature of the expenditure. On the facts of the case the Full Bench took the view that the replacement of the old diesel engine by a new engine did not bring any new asset into existence and hence the expenditure incurred therefor fell within the meaning of 'current repairs' and hence was admissible as deduction under Section 31 of the Act.

7. If we are to consider whether in these cases the expenditure incurred is on current repairs we will have necessarily to consider the nature of the work carried out by the assessee and the consequence thereof to the business of the assessee Section 31 of the I.T. Act is of limited application. It enables deduction only of the amount paid on account of current repairs 'thereto'. The reference is to the current repairs of the machinery, plant or furniture. The assessee has no case that the replacement expense is repair to a plant or furniture. His case is that it is a repair to a machinery. That alone we need examine here.

8. A repair can include replacement of parts. There may be worn out parts or parts working inefficiently. Substituting new parts for such parts would be a work of repair. In this case can it be said that the machinery has been repaired by replacing it It could be said that the fishing boats have been repaired by replacing one of their parts. The part so replaced is the engine. It would not be a case of the engine being repaired when the engine itself is taken away and another engine substituted in its place. If the question is whether the boat has been repaired it may bepossible to say that it has been, provided certain other conditions are satisfied. If what are repaired are the boats, current repairs to the boats would not qualify for deduction under Section 31. Boat is not a machinery. It is a vessel. It is not a plant or furniture. There has been replacement of a machinery in a vessel, and the repair, if any, on account of such replacement is to the boat and not to the machinery. Hence, Section 31 would be inapplicable.

9. We no doubt see that in the case before the Full Bench of the Andhra Pradesh High Court the claim was in regard to the expenditure incurred in replacing an engine in a truck and the assessee was found entitled to such deduction under Section 31. The case proceeded on a consideration of the question what exactly was the scope of the term 'repair' and whether the expenditure incurred in that case would qualify for claim under Section 31. The question whether a truck was a machinery, plant or furniture is not seen urged in that case nor considered by the Full Bench. Therefore, with great respect we do not think that on the basis of that decision we should hold that Section 31 of the Act would apply to these cases.

10. Now, the only question we have to consider is whether the deduction was permissible under Section 37 of the Act and that in turn calls for a consideration of the question whether the expenditure is one of a capital nature. Before we consider the law on this question, it is necessary to advert to the finding of the Tribunal in these cases. The Tribunal refers to the finding of the AAC on the need for replacement of the engines. The AAC, in the passage extracted in the order of the Tribunal, said :

'No evidence has been brought on record to show that the fishing boats which were fitted with 40 H.P. engines were uneconomic or that the engines had become useless. The only fact which is evident is that those engines were discarded in favour of new and more powerful engines. Thus there is nothing to show that the old engines were unserviceable and had to be replaced. Thus, prima facie, this is not a replacement but an addition of new machinery to the appellant's fishing fleet.'

11. The Tribunal did not find that there was any evidence to show that the fishing boat had become uneconomic in operation or the engines were defective in their functioning. Nevertheless the Tribunal, after referring to the above extracted passage in the order of the AAC, observed thus:

'This finding is not acceptable to us. It is admitted that boats were constructed in 1963 and used thereafter. The relevant accounting year for this appeal is the financial year 1967. So these boats had been used for about four years. It follows from that fact that the boats 'might have required repairs.'.'

12. By the mere use of the boats for four years, the Tribunal could not have found that the boats 'might have required repairs' and even if it found that it 'might have required repairs' that is not the same as finding that the boat required repairs. There is no finding or basis for finding that the repairs the boats might require were of the engines. Much less is the finding of the Tribunal based upon any material, for, there was no data before the Tribunal that a Crossley engine would require replacement or repair after running for four years. There is no case that the -assessee had not maintained the engines as engines should normally be maintained. The High Court in reference, proceedings should not go behind the finding of fact by the Appellate Tribunal. But when the finding itself is unsupported by evidence the High Court has jurisdiction to intervene as the Supreme Court said in CIT v. S. P. Jain : [1973]87ITR370(SC) . The Supreme Court observed thus :

'In our view, the High Court and this court have always the jurisdiction to intervene if it appears that either the Tribunal has misunderstood the statutory language, because the proper construction of the statutory language is a matter of law, or it has arrived at a finding based on no evidence or where the finding is inconsistent with the evidence or contradictory of it, or it has acted on material partly relevant and partly irrelevant or where the Tribunal draws upon its own imagination, imports facts and circumstances not apparent from the record, or bases its conclusions on mere conjectures or surmises, or where no person judicially acting and properly instructed as to the relevant law could have come to the determination reached. In all such cases the findings arrived at arc vitiated.'

13. After so finding that the boats might have required repairs, the Appellate Tribunal proceeded to hold :

'If any repair is done to any machinery or any worn out part replaced by a new one there is bound to be some benefit to the assessee. Any repair extends the life of a machine. So just because of the installation of a new engine the assessee can use the fishing boats for a few more years, it cannot be said that the assessee had obtained an enduring benefit as is ordinarily understood.'

14. The AAC had found that the replacement of 40 H.P. engine by a 60 H.P. engine cannot be called current repairs and that it was an expenditure incurred 'in order to give a new advantage of enduring nature to the appellant's fishing boats, viz., speed and economy in operation'. Whether such advantage was not obtained was not considered by the Tribunal.

15. The situation in this case leads us to a discussion of the distinction between an expenditure of a capital nature and that of a revenue nature.

16. Lord Macmillan said this in Van Den Berghs Ltd. v. Clark [1935] AC 431 ; [1935] 3 ITR 17:

'In general the distinction is well recognised and easily applied, but from time to time cases arise where the item lies on the borderline...'

17. That the distinction between 'capital item' and 'revenue item' cannot always be quite evident was indicated by Scott L.J. in Bean (H. M. Inspector of Taxes) v. Doncaster Amalgamated Collieries Ltd. [1944] 27 TC 296 (CA). The learned judge said thus (p. 305):

'The truth is that it must of necessity happen very often that the line to be drawn between the two types of items, which is distinct in law, is made indistinct in the particular case by reason of some of the facts under investigation seeming to point the other way. Between pure white on the one side and jet black on the other side is a penumbra of grey, shading off gradually into white and black, respectively. Within this penumbra there must, of course, often lie cases where the decision is one of fact for the Commissioners ; but in others it will depend on the correct appreciation of the true character in law of some one or more of the facts. Where it is clear to the court that the Commissioners have misread that character, the decision in law rests with the court. Nearly all the cases I have cited are illustrations of this sort of legal discrimination. As Mr. Justice 0. W. Holmes said so often, it is the business of the courts to decide on which side of the line the particular case must be placed ; with the result that the penumbra is always shrinking in width as the law draws the line more and more clearly.'

18. We feel that the classic statement of the law by Lord Reid in Regent Oil Co. Ltd. v. Strick (Inspector of Taxes) [1966] AC 295 : [1969] 73 ITR 301, that the determination of what is capital and what is income must depend 'rather on commonsense than the strict application of any single legal principle' well sums up the situation.

19. In considering the distinction between a capital item and a revenue item Indian courts have drawn largely on English cases. One of the earliest authoritative statements of the English courts on this question is by Lord Dunedin in Vallambrosa Rubber Co, Ltd. v. Farmer [1910] 5 TC 529. The rule was stated thus by Lord Dunedin (p. 536):

'I ddn't say that this consideration is absolutely final or determinative, but in a rough way I think it is not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year.'

20. As Lord Dunedin himself said this was only a rough test and would serve only as somewhat of a criterion. In fact none of the decisions to which we advert here should be taken to have found an exhaustive definitionor drawn any clear and rigidly formulated distinctions. They should be taken only to have laid down useful guidelines. The test of 'once and for all' referred to in Vallambrosa's case [1910] 5 TC 529 failed many often as there were cases of expenditure of a capital nature not incurred once and for all and there were cases of expenditure of a revenue nature incurred once and for all, though in the majority of cases the test may, perhaps, give more or less an idea as to whether an expenditure is of revenue or capital nature. Lord Viscount Cave L.C. in British Insulated and Helsby Cables Ltd. v. Atherton [1926] AC 205 : 10 TC 155 (HL), a case which has been time and again cited by English courts and courts elsewhere as furnishing a very clear guideline, pointed out that the test suggested by Lord Dunedin is not a decisive one in every case. Illustrative instances have been cited in the speech by the Lord Chancellor. Said the learned judge (p. 192 of 10 TC):

'Now, in Vallambrosa Rubber Company v. Farmer [1910] SC 519 : 5 TC 529, Lord Dunedin, as Lord President of the Court of Session, expressed the opinion that 'in a rough way' it was 'not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all and income expenditure is a thing which is going to recur every year'; and no doubt this is often a material consideration. But the criterion suggested is not, and was obviously not intended by Lord Dunedin to be, a decisive one in every case; for it is easy to imagine many cases in which a payment, though made 'once and for all', would be properly chargeable against the receipts for the year. Instances of such payments may be found in the gratuity of 1,500 paid to a reporter on his retirement which was the subject of the decision in Smith v. Incorporated Council of Law Reporting [1914] 3 KB 674, and in the expenditure of 4,994 in the purchase of an annuity for the benefit of an actuary who had retired which, in Hancock v. General Reversionary and Investment Co. Ltd. [1919] I KB 25, was allowed, and I think rightly allowed, to be deducted from profits. But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. For this view there is already considerable authority. Thus, moneys expended by a brewing firm with a view to the acquisition of new licensed premises (Southwell v. Savill Brothers [1901] 2 KB 349); 'flitting expenses' incurred in transferring a manufacturing business to new premises (Granite Supply Association v. Kitton [1905] 8 F 55 : 5 TC 168); costs incurre4 in promoting a Bill which was dropped on the desired facilitiesbeing obtained by agreement (A, G. Moore and Company v. Hare [1914] 6 TC 572; and expenditure incurred by a ship-building firm in deepening a channel and creating a deep water berth (not on their own property) to enable vessels constructed by them to put out to sea (Ounsworth v. Vickers Ltd. [1915] 3 KB 267), have been held to be in the nature of capital expenditure and not to be deductible under the Income Tax Acts; and Rowntree and Company Ltd, v. Curtis [1925] 1 KB 328, is to the same effect. I think that the principle to be deduced from this series of authorities rests on sound foundations and may properly be adopted by this House.' (Emphasis* supplied)

21. Courts have uniformly adopted the rule that even though the payment is not 'once and for all' an expenditure may be capital expenditure if it has brought into existence an asset or it has brought into existence an addition for the enduring benefit of a trade.

22. The rule of enduring benefit was applied in Bradbury (H. M. Inspector of Taxes) v. United Glass Bottle . [1959] 38 TC 369 (CA). A company carrying on the trade of glassware manufacture agreed to pay to the National Coal Board a sum of 40,000 in five equal instalments when the National Coal Board began to extract coal near its main factory. Such payment was agreed to in order to guard against the dangers to its work people and to its trade that would result from subsidence on the factory site. In return for the 40,000 the National Coal Board undertook not to work coal in any seam lying in or under the site of the factory. The company claimed that in the assessment year 1955-56, the sum paid as first instalment under the agreement should be deducted in computing its profits for the year. The Special Commissioners accepted the case of the company that the payment was revenue expense laid out wholly and exclusively for the purposes of the company's trade. The Court of Appeal followed the decision in British Insulated and Helsby Cables Ltd. v. Atherton [1926] AC 205 : [1925] 10 TC 155 (HL), and held that the company became possessed of a works seated on a sure foundation and immune from subsidence instead of a works liable to subside, and that the company had thus acquired a substantial and permanent asset just as much as if before the days of the nationalisation of minerals, it had itself acquired the subjacent coal. The question posed was, what did the company get for its expenditure. If the answer was that it was something of an enduring character, in the sense in which the term was used in Atherton's case [1925] 10 TC 155 (HL), then the expenditure was capital expenditure.

23. It is interesting to notice the further development of the law as a result of a closer examination of the concept of 'advantage of an enduring nature'. Money spent on repairs may be money which has to bespent at recurring periods for proper maintenance but all the same such money spent on durable repairs may yield an enduring advantage. That by itself need not render it an expenditure of a capital nature. Lord Reid explained the concept of enduring advantage stated in the House of Lords case in IRC v. Carron Company [1968] 45 TC 18. The Carron Company which carried on the business of ironfounders was incorporated by Charter in 1773. Till 1963, its constitution remained virtually unaltered and many of its features had become archaic and unsuited to modern conditions. The company's commercial performance was said to be suffering a progressive decline. There were disadvantages in the matter of functioning of the company due to restrictions on the company's borrowing power such as limitation of borrowing powers to 25,000, restrictions on the issue and transfer of shares and the restrictions of voting rights to members holding at least ten 250 shares, all of which prevented proper functioning. The post of managing director had not the proper status to attract a suitable person. Therefore the company decided to petition for a supplementary charter which would take away the limitation on the borrowing powers, which would enlarge the powers of management and which would make other necessary alterations to make the company more efficient in its functioning. But a shareholder fought the company in its attempt to obtain the supplementary charter. By reason of her action it became necessary to get her round to facilitate obtaining the supplementary charter. Consequently the company settled the action by the shareholder by paying her the costs in the action and buying a part of her holding as also the whole holding of another shareholder, her nephew, with a condition that she and her nephew should desist from further obstruction and she should never again acquire shares in the company. The expenses incurred for defending the action and for paying the dissenting shareholders in respect of their shares and also expenses for the action and for obtaining the supplementary charter were sought to be deducted as revenue items. The question was whether these expenses were of a revenue nature so as to be deducted in determining the profits of the company. That all the aforesaid items stood on the same footing was agreed. In his address to the House of Lords, Lord Reid said thus (p. 68):

'The main argument for the Crown was that by obtaining the new charter the company obtained an enduring advantage in the shape of a better administrative structure. Of course they obtained an advantage : companies do not spend money either on capital or income account unless they expect to obtain an advantage. And money spent on income account, for example, on durable repairs, may often yield an enduring advantage. In a case of this kind what matters is the nature of the advantage for which the money was spent. This money was spent to remove antiquatedrestrictions which were preventing profits from being earned. It created no new asset. It did not even open new fields of trading which had previously been closed to the company. Its true purpose was to facilitate trading by enabling the company to engage a more competent manager and to borrow money required to finance the company's traditional trading operations under modern conditions. None of the authorities cited is directly in point, and I think that the most apposite general statement in those authorities is that of Lawrence L.J. in Anglo-Persian Oil Co. Ltd, v. Dale [1932] 1 KB 124 : [1931] 16 TC 253 (CA). It 'merely effected a change in its business methods and internal organisation, leaving its fixed capital untouched '. '

24. There is a good volume of case law of the Indian courts on the question before us but it may not be necessary to refer to them in detail, for, the principles to which we have adverted have been applied in these cases. Ultimately the decision must turn on the facts of the case. As observed by the Supreme Court in Lakshmiji Sugar Mills Co. P. Ltd. v. CIT : [1971]82ITR376(SC) :

'...in the diverse nature of business operations it is difficult to lay down a test which would apply to all situations. The criteria has to be applied from the business point of view and on a fair appreciation of the whole situation.'

25. In that case a company which made a contribution for the development of roads between the various sugarcane producing centres and the sugar factories to facilitate the transportationof cane from the cane producing centres to the premises of the factory, an obligation which it had to undertake statutorily, was held to have incurred an expenditure for running the business without the assessee getting an advantage of enduring benefit to itself. The Supreme Court in the decision in Assam Bengal Cement Co. Ltd. v. CIT : [1955]27ITR34(SC) adopted the principle enunciated by Viscount Cave L.C. in Atherton's case [1925] 10 TC 155 (HL). Broadly that would be the principle which should be of application in cases arising under the I.T. Act.

26. Now we come to the facts of the case. The assessee's boats were constructed in 1963 and imported engines were fitted to them. There is no case that the normal life of the engine is only 4 years. There is no case that the condition of the engines was such that they had to be replaced. There is no specific finding by the Tribunal on these questions. Though the Tribunal finds that the boats 'might have required repairs' that is a finding not supported by any material and that is a finding, which may perhaps be understood as reversing the finding of the AAC, which pointed out that there was no material to hold that the engines were in a useless condition. The mere fact that 4 years have passed sincethe engines were set up on the boats would not justify the assumption that the boats required repairs particularly when there was not even a case that they were not attended to from time to time. That apart, the Appellate Tribunal has not found that the engines required replacement or that the repairs which the engines 'might have required' were of such a nature as would require replacement. The replacement was not by the engines of the same power but engines of 60 H.P. in place of 40 H.P. More powerful engines would increase the efficiency of the boats as found by the AAC, a finding which has not been reversed by the Tribunal. It would be more economic to operate with an engine of higher horse power. Therefore, though no new asset has been brought into existence --the asset continues to be the boats--it is apparent that an enduring advantage to the fixed assets has been brought about by the replacement. 'Enduring' in this context does not mean that it will endure for all time. The advantage will endure for a reasonable period. In these cases the payment is 'once and for all'. That by itself may not be sufficient to characterise the expenditure as capital. But there is the further fact that it is not the running costs that have been met by the expenditure. It is not the replacement of a machinery which required replacement in the usual course bringing in no advantage to the fixed assets of the assessee. If the machinery had been worn out and it had to be replaced and it was so replaced, it would be a routine work of maintaining a business asset in the same condition. Here, the two factors which had to be noticed were that the engines were not shown to have required replacement at that time, and further the engines were of a different character, namely, more powerful than those which were in the boats prior to replacement. The consequence is that the efficiency of the boats was considerably increased and there was an enduring advantage to the assessee by reason of more efficient operation of the boats on the replacement with such 60 H.P. engines. Hence, according to us, the expenditure incurred on replacement would be expenditure incurred on a benefit of an enduring nature and consequently the expenditure must be taken to be a capital expenditure.

27. Before parting with the case, we should refer to the decisions of the Madras High Court in C. R. Corerct and Brothers v. CIT : [1963]49ITR188(Mad) and CIT v. Mahalakshmi Textile Mills Ltd. : [1965]56ITR256(Mad) , brought to our notice. In the former case the question posed was whether the work done was only to restore the machinery to its original condition or whether that introduced an additional advantage. The expenditure was incurred in repairing a cargo boat. As a result of the repair the boat was not structurally altered nor was there any improvement in its loading capacity, performance or other features. It was under such circumstances thatthe court took the view that the expenditure was allowable under Section 10(2)(v) of the 1922 Act. In the latter case, the court'was concerned with the. replacement of parts of a composite piece of machinery. The court noticed that the nature of the expenditure must be viewed not in the light of the quantum of the Sum involved but as a whole in order to see whether the repairs effected only restored the machinery to its original condition or whether by reason of the repairs additional advantages or features which improved its income-earning capacity were introduced. The very, distinction sought to be. made out in those two cases is relevant in the case, before us and that ' is why we answer the question in favour of the Revenue. We may also advert to the decision of the High Court of Bombay in CIT v. Associated Cement Companies Ltd. : [1974]96ITR650(Bom) . That dealt with a payment made to provide certain amenities to the town including the provision of water supply and the payment was held to be such as not to secure an enduring advantage. That again, as we said, is a decision on the facts of that case.

28. In the light of what we have said here, it follows that both the questions raised have to be answered in the negative, that is, in favour of the Department and against the assessee.

29. A copy of this judgment under the seal of the High Court and signature of the Registrar will be sent to the Income-tax Appellate Tribunal, Cochin Bench, as required under Section 260(1) of the Act.


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