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H. Mohmed and Company Vs. Commissioner of Income-tax, Gujarat-i - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax References Nos. 79 of 1970 and 37 of 1971
Judge
Reported in[1977]107ITR637(Guj)
ActsIncome Tax Act, 1961 - Sections 32, 32(1) and 34
AppellantH. Mohmed and Company
RespondentCommissioner of Income-tax, Gujarat-i
Appellant Advocate B.R. Shah, Adv.
Respondent Advocate K.H. Kaji, Adv.
Cases ReferredCorera and Brothers v. Commissioner of Income
Excerpt:
direct taxation - stock-in-trade - sections 32 and 34 of income tax act, 1961 - stock in trade means all goods or commodities in which assessee deals in sense of buying and selling in course of business activity - stock cannot include commodity for purpose of being let and hire. - - smithers [1907] 2 kb 684 (ca). as is well-known, under the partnership act, a partner of a trading firm has the implied authority to borrow money on behalf of the partnership firm and the question before the court of appeal was whether a firm of auctioneers, which was carrying on business of buying and selling old furniture can be said to be a trading firm so as to confer an implied authority on one of the partners of the firm to borrow money on behalf of the firm. it was held by the court of appeal that,.....divan, j.1. income-tax reference no. 79 of 1970 has been made by the tribunal at the instance of the assessee, but at the time of making that reference, the tribunal referred only one question and did not refer the particular question which the assessee wanted to be included in the reference. thereafter, the assessee applied to this court by income-tax application no. 44 of 1971, and in pursuance of the directions issued by this court in that application, another question relating to the same assessee and the same assessment year and the same assessment proceedings has been referred by the tribunal. since both these references deal with the same matter and arise out of the same order of the tribunal, we will dispose of both of them by this common judgment. 2. in income-tax reference no......
Judgment:

Divan, J.

1. Income-tax Reference No. 79 of 1970 has been made by the Tribunal at the instance of the assessee, but at the time of making that reference, the Tribunal referred only one question and did not refer the particular question which the assessee wanted to be included in the reference. Thereafter, the assessee applied to this court by Income-tax Application No. 44 of 1971, and in pursuance of the directions issued by this court in that application, another question relating to the same assessee and the same assessment year and the same assessment proceedings has been referred by the Tribunal. Since both these references deal with the same matter and arise out of the same order of the Tribunal, we will dispose of both of them by this common judgment.

2. In Income-tax Reference No. 79 of 1970, the question that has been referred to us i :

'Whether, on the facts and in the circumstances of the case, the furniture could have been taken as stock-in-trade of the business of the assessee ?'

3. In Income-tax Reference No. 37 of 1971, the question which is referred to us i :

'Whether, on the facts and circumstances of the case, the claim of the assessee to allow Rs. 25,127 as revenue expenditure was allowable under the Income-tax Act, 1961 ?'

4. The assessee is a partnership firm and the assessment year is 1962-63, the relevant accounting year being S. Y. 2017. The assessee-firm carries on business of hiring out furniture for marriage functions, circus shows and other public functions and derives income from this business. During the relevant accounting year, the assessee claimed a sum of Rs. 25,127, being the deficit in stock of furniture. The Income-tax Officer rejected the loss but allowed depreciation on furniture according to the normal rules. Against this decision of the Income-tax Officer, the assessee went in appeal to the Appellate Assistant Commissioner and there it was contended on behalf of the assessee that the claim of loss should have been allowed inasmuch as the furniture which was let out for various functions would get destroyed or spoiled and the depreciation under the normal rules was inadequate. The Appellate Assistant Commissioner thought that the assessee deserved some relief and he allowed the total allowance of Rs. 10,000 and since the Income-tax Officer had already allowed a sum of Rs. 6,204 as depreciation, the Appellate Assistant Commissioner allowed a further deduction of Rs. 3,796. Against this decision of the Appellate Assistant Commissioner, the assessee went in further appeal before the Tribunal and the same contentions which were urged before the Appellate Assistant Commissioner were reiterated before the Tribunal. The assessee also contended before the Tribunal that the furniture was stock-in-trade of the assessee and as such the loss of stock-in-trade as worked out by it should be allowed as a trading loss. Both these contentions were examined by the Tribunal and it held that the furniture could not be treated as stock-in-trade but it was a capital asset. So far as the claim for higher depreciation was concerned, the Tribunal held that the assessee was not entitled to more than what is admissible under the normal rules and the Tribunal also examined the provisions of section 32(1)(iii) of the Income-tax Act, 1961, and ultimately held that the assessee could not get the benefit of section 32(1)(iii) for the relevant period under consideration. Thereafter, at the instance of the assessee, the questions above set out have been referred to us, one by the Tribunal on the application of the assessee before it and the other in pursuance of the directions given by this court.

5. The first question that arises for consideration is whether the furniture and different articles used by the assessee-firm in its business is the stock-in-trade or the capital asset of the assessee. It may be emphasized here that the assessee is not a dealer in furniture but hires out furniture for different functions.

6. On behalf of the assessee, Mr. Shah relied upon two decisions of the Madras High Court. The first of these decision is in Gemini Pictures Circuit Ltd., v. Commissioner of Income-tax : [1958]33ITR547(Mad) . There the assessee was carrying on business as producer, distributor and exhibitor of motion pictures; and one of the questions before the Madras High Court was whether the cinema films in which the assessee was dealing as producer, distributor and exhibitor were stock-in-trade of the assessee and, secondly, at what rate depreciation should be allowed. Rajagopala Ayyangar J., who delivered the judgment of the court, pointed out that the Central Board of Revenue had issued a circular and in that circular, cinema films were treated as stock-in-trade of producers, distributors and exhibitors; and, secondly, these films were to be valued at 40% of cost after one year, at 15% after two years and, thereafter, at nothing; with the result that at the end of the third year the value of this particular kind of stock-in-trade was to become nil. It is true that in the course of that decision and in another decision also of the Madras High Court, films were treated as stock-in-trade and special amortisation allowance mentioned in the notification of the Central Board of Revenue was allowed but, in our opinion, this decision of the Madras High Court cannot help us in deciding whether furniture items which the assessee before us hired out for different functions can or cannot be considered to be the stock-in-trade of the assessee. The Madras High Court has not laid down any principle while holding that the films are to be considered as stock-in-trade. It is possible that the decision of the Madras High Court to hold these films as stock-in-trade was governed by the directive of the Central Board of Revenue to treat these films as stock-in-trade.

7. In Commissioner of Income-tax v. Modern Theatres Ltd., : [1963]50ITR548(Mad) , again the directive of the Central Board of Revenue in connection with cinema films was referred to. At page 561 of the report, the circular of May 13, 1937, has been set out and according to that circular, films in the hands of the producer and of their purchaser were to be treated as stock-in-trade and it was pointed out that the film should be valued at 40% of its cost after one year, 15% of its cost after two years and, thereafter, at nothing. In another circular of January 4, 1951, the Central Board clarified that the general or the standard formula regarding amortisation of the cost of production of the film, at 60% in the first year, 25% in the second year and 15% in the third year should not be treated as inflexible and that it may be varied. The Madras High Court in that case considered the matter also from the point of view of whether in the hands of a producer and distributor a film was either a fixed capital or a circulating capital and the Madras High Court observed that, in any view of the matter, a film is not a capital asset but it resembles more a trading stock than a capital structure; and the department also did not treat it as capital.

8. Under these circumstances, in neither of these two decisions of the Madras High Court is there any discussion about the principles on which it was held that the films were the stock-in-trade of the different assessees before them in these two matters.

9. It appears to us that the question has to be considered from the point of view of general commercial practice of the market. To put it in a proper compass, a stock-in-trade is something in which a trader or a businessman deals; whereas his capital asset is something with which he deals. It is possible that one and the same commodity may in the case of one assessee be his stock-in-trade, whereas in the case of another assessee it may be his capital asset. For example, in the case of an assessee who carries on the business of buying and selling land, land may be his stock-in-trade but in the case of an assessee who has invested his savings in land and gets income from the land or the structures put up on the land, the land is his capital asset. Therefore, one of the indications for deciding as to what is stock-in-trade is whether a particular assessee is buying or selling the commodity or whether he has merely invested his amount with a view to earn further income or with a view to carry on his other business. It may be pointed out that 'trade' means that particular business activity where the person engaged in the profession buys or sells. All businesses may be carried on for the purpose of earning a profit but that particular kind of business where the businessman buys and sells a commodity can only be designated as 'trade'. This conclusion of ours is fortified by the decision of the Court of Appeal in England in Wheatley v. Smithers [1907] 2 KB 684 (CA). As is well-known, under the Partnership Act, a partner of a trading firm has the implied authority to borrow money on behalf of the partnership firm and the question before the Court of Appeal was whether a firm of auctioneers, which was carrying on business of buying and selling old furniture can be said to be a trading firm so as to confer an implied authority on one of the partners of the firm to borrow money on behalf of the firm. It was held by the Court of Appeal that, upon a careful perusal of the partnership deed, it clearly appeared that it contemplated the purchase and sale of goods and property as part of the business of the partnership, and that the partnership was, in that respect, a trading partnership. It is true that the concept of the implied authority of the partner of a trading firm top borrow money on behalf of the firm has to be considered in the context of the provisions pertaining to the law of partnership, but as to what is the concept of a trading firm the principle is illustrated by the test applied by the Court of Appeal, viz., that the particular partnership was buying and selling goods as part of the business of the firm.

10. On behalf of the assessee reliance was placed by Mr. B R Shah on the following passage from Stroud's Judicial Dictionary, 3rd edition, volume 4, at page 286 :

'Stock-in-trade. - (1) It is submitted that this phrase comprises all such chattels as are acquired for the purpose of being sold, or let to hire, in a person's trade; but, probably, utensils in trade are also included in the phrase.'

11. In this context he emphasized that, according to this definition, stock-in-trade would also include all movable properties as are acquired for the purpose of being let to hire in a person's trade. In our opinion, this definition in Stroud's Judicial Dictionary cannot help the assessee because, according to the word 'trade', in all trading activity there must be buying and selling in the course of the business of the trader. Barring this solitary reference to let to hire in Stroud's Judicial Dictionary, nothing else has been pointed out to us which would throw light on the meaning of the phrase 'stock-in-trade'. In view of the generally understood meaning of the words 'stock-in-trade' in the commercial world, it is obvious that this phrase 'stock-in-trade' means all those goods or commodities in which the particular individual deals in the sense of buying and selling in the course of his business activity and it cannot be said to include a commodity which is acquired for the purpose of being let to hire'. To give two illustrations of comparable activities, if a person keeps with him a number of motor-cars which are let to the intending customers with drivers or without drivers in what are known as 'hire a car' companies, there is no buying and selling but the motor-cars are hired out to intending customers. In such a case, it is very difficult to say that the motor-cars in question are the stock-in-trade of that particular individual. The income which he would derive from letting out the motor-cars would be from the exploitation of his capital assets, viz., the motor-cars, and not from turnover of his stock-in-trade in the course of his business activities. A similar case in point, in our opinion, is also the case of a person who carries on the business of a circulating library. In the case of such a library, the books are bought and hired out to different persons on some fee or charge. It is possible that in the course of the business some books are worn out and have to be replaced but it is very difficult to envisage these books which are kept by the circulating library as the stock-in-trade of the library. No books are traded in. They are merely hired out and, in our opinion, these two illustrations of the circulating library and the car-hiring business clearly go to show the essential characteristics of stock-in-trade, viz., that it must be a commodity in which there is a dealing, i.e., which is bought and sold as distinguished from a commodity with which the business is carried on, viz., from the exploitation of which the income is derived. The distinction is between selling outright in the course of the business activity as distinguished from deriving income from exploitation of one's assets. It is, therefore, clear that the contention on behalf of the assessee that the furniture constituted his stock-in-trade must be rejected.

12. Proceeding, therefore, on the basis that the furniture which has been acquired by the assessee-firm for the purposes of its business is not its stock-in-trade but its capital asset, the next question that we have to consider is whether the assessee was entitled to any depreciation or loss on his stock-in-trade. In the order of the Income-tax Appellate Tribunal dated January 22, 1970, the figures of what the assessee claimed as the trading loss have been set out. In the first place, the opening stock at the commencement of the year of account is shown as Rs. 26,657. The cost of new purchases and other incidental charges in connection with these new purchases or replacements aggregating to Rs. 38,286 are added so as to reach the figure of Rs. 64,943, this being the aggregate of the value of the opening stock and new stock added or acquired or acquired in the course of the year. It seems that in the course of the assessment year used or old furniture was sold and the sale proceeds came to Rs. 3,355. This figure was deducted from the aggregate amount of Rs. 64,943, disclosing the figure of Rs. 61,588. The closing stock was valued at Rs. 36,461 and deducting this from the aggregate of the opening stock plus new acquisitions less the sales, a figure of Rs. 25,127 has been reached and this sum which is purely on the footing of a trading loss was claimed by way of deduction by the assessee. It is clear that this method of arriving at the trading loss which seems to have been followed by the assessee in the previous assessment year, is on the footing that the furniture was the stock-in-trade of the business of the assessee. This working out of the figures does not disclose as to how much amount was spent for repairing existing furniture and how much was spent by the assessee for acquiring new items of furniture. It is, therefore, clear that if the furniture acquired by the assessee for the purpose of carrying on his business of hiring out furniture is not treated as the stock-in-trade, the amount of Rs. 25,127 claimed by the assessee as trading loss on its stock-in-trade cannot be allowed as a deduction. This does not mean that the assessee is not entitled to any deduction for replacement, repairs or revenue expenditure but we merely want to emphasize at this stage that the amount of Rs. 25,127 has not been correctly arrived at by the assessee for the purposes of claiming the deduction.

13. On the second aspect of the case of revenue expenditure and replacement, on behalf of the assessee reliance was placed on severed decided cases. The first decision on this part of the argument is the decision of the Court of Session, Scotland (First Division), in Hyam v. Commissioners of Inland Revenue [1929] 14 TC 479 (C Sess). Reliance was particularly placed on the following passage from the opinion of Lord President Clyde, at page 48 :

'The propriety, and the practice, of charging the cost of supplying 'implements, utensils, or articles employed for the purposes of the trade' to revenue must vary according to the character of the trade, and-partly perhaps-according to the financial circumstances of the trader. Trading implements, utensils and similar articles-taking these descriptions in their ordinary connotation-have to be supplied, repaired and altered from time to time, in order to enable the trade to be carried on and profits to be earned; and in many businesses, expenditure on these things is a usual incident of their conduct and properly recurs in every year, or at least in most ordinary years, as a debt against revenue account. Take the case of a hotel or restaurant business-much table-furniture, linen, crockery, pots and pans have to be provided, and the supply of such things is a usual incident of the trade. Accordingly, I think that, in a business of the kind supposed, the costs of such supply are a proper charge against revenue in the books, and a proper deduction from gross profits in terms of sub-head (d) of rule 3 for purposes of income tax.'

14. We may point out that in that case the Court of Session was concerned with the phraseology of sub-head (d) of rule 3 of the Schedule of the Income Tax Act in the United Kingdom. The rule in question permitted a deduction of sums expended for the supply, repairs or alterations of any implements, utensils or articles employed for the purposes of the trade to the extent of the sum usually expended for those purposes. It is clear, therefore, that the emphasis on the words 'usually expended for the purposes of the business' in the passage which we have just now quoted, clearly was in the light of the wording of rule 3, clause (d). Under these circumstances, this decision of the Court of Session is not of much assistance to us in considering the question as to whether any amount should or should not be allowed to be deducted for the purposes of repairs of the furniture which is capital asset of the business of the assessee.

15. In Jansatta Karyalaya v. Commissioner of Income-tax : [1964]54ITR792(Guj) , a Division Bench of this court considered the question of replacement and also considered the tests for determining whether an expenditure is of a capital or of a revenue nature. Commencing from page 794 of the report, there is an extensive description of the different tests laid down by the different authorities for the purposes of determining whether a particular expenditure is capital expenditure or revenue expenditure. The passage beings (page 794 :

'As has been often remarked in various decisions, the line of demarcation between capital expenditure and revenue expenditure is a very thin one and, therefore, courts of law have refrained from attempting to define or lay down any precise definition and have been content to set out only broad tests. These broad tests are, however, only workable guides and ultimately the question always depends upon the facts and circumstances of each case.'

16. It was pointed out by the Division Bench that Bowen L J in City of London Contract Corporation Ltd., v. Styles [1887] 2 TC 239 (CA), explained the difference between the two types of expenditure by observing that the expenditure in the acquisition of the concern would be capital expenditure and the expenditure in carrying on the concern would be revenue expenditure. Commenting on this dictum, Lord Dunedin in Vallambrosa Rubber Co. Ltd., v. Farmer [1910] 5 TC 529 thought that the dictum laid down by Bowen L J was not absolutely final or determinative. He believed that it was not a bad criterion of what was capital expenditure as against what was income expenditure to say that capital expenditure was a thing that was going to be spent once and for all, and income expenditure was a thing that was going to recur every year. According to Rowlatt J. in Ounsworth v. Vickers Ltd., [1915] 6 TC 671 (KB), the real test was between the expenditure which was made to meet a continuous demand for expenditure as opposed to an expenditure which was made once and for all. Another test was also suggested by Rowlatt J. and that was whether a particular expenditure could be put against any particular work or whether it was to be regarded as an enduring expenditure to serve the business as a whole. The dictum of Viscount Cave L. C. in Atherton v. British Insulated and Helsby Cables Ltd., [1925] 10 TC 155 (HL) was that 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, there was 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. Yet another test which was applied by the Privy Council in Tata Hydro-Electric Agencies Ltd., v. Commissioner of Income-tax [1937] 5 ITR 202 was that the expenditure in the acquisition of an income-earning asset was a capital expenditure and the expenditure in the process of the earning of the profits was revenue expenditure. Dixon J. in Sun Newspapers Ltd., and Associated Newspapers Ltd., v. Federal Commissioner of Taxation [1938] 61 CLR 337 360 observed;

'But in spite of the entirely different forms, material and immaterial, in which it may be expressed, such sources of income contain or consist in what has been called a 'profit-yielding subject', the phrase of Lord Blackburn in United Collieries Ltd., v. Inland Revenue Commissioner [1929] 12 TC 1248 (Sess). As general conceptions it may not be difficult to distinguish between the profit-yielding subject and the process of operating it. In the same way expenditure and outlay upon establishing, replacing and enlarging the profit-yielding subject may in a general way appear to be of a nature entirely different from the continual flow of working expenses which are or ought to be supplied continually out of the returns or revenue. The latter can be considered, estimated and determined only in relation to a period or interval of time, the former as a point of time, for the one concerns the instrument for earning profits and the other the continuous process of its use or employment for that purpose.'

17. It was pointed out relying upon the decision on Commissioners of Inland Revenue v. Granite City Steamship Company Ltd., [1927] 13 TC 1 (Sess), that, broadly speaking, the outlay would be deemed to be capital when it was made for the initiation of a business, for the extension of a business or for a substantial replacement of equipment. It was also pointed out that a Full Bench of the Lahore High Court in In re Benarsidas Jagannath had formulated three broad principles from the different decisions; and the three principles were (pages 198, 199 :

(1) Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment;

(2) Expenditure may be treated as properly attributable to capital when it 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. The expressions 'enduring benefit' or 'of a permanent character' were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset; and

(3) Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital.

18. These broad principles formulated by the Full Bench of the Lahore High Court were approved by the Supreme Court in Assam Bengal Cement Co. Ltd., v. Commissioner of Income-tax : [1955]27ITR34(SC) ; and it was p ointed out by the Supreme Court that in cases where the expenditure was made for the initial outlay or for the extension of a business or a substantial replacement of the equipment, there could be no doubt that it would be capital expenditure; and it was thus clear that whereas a question might arise where the expenditure is incurred while the business is going on and is not incurred either for the extension of the business of for a substantial replacement of its equipment, whether such expenditure is capital or revenue expenditure, no such question can arise in the case of expenditure incurred as and by way of initial outlay. The test which appealed to the Division Bench of this court in Jansatta Karyalaya's case : [1964]54ITR792(Guj) was whether the aim and object of the expenditure in question was the purchase or acquisition of the apparatus or the instrument for earning profits as distinguished from the expenditure incurred in the continual process of its use or employment for that purpose.

19. We may point out at this stage that in Rhodesia Railways Ltd., v. Income-tax Collector. Bechuanaland Protectorate [1933] AC 368; [1933] 1 ITR 227, their Lordships of the Privy Council were concerned with the question of repairs and the renewal of railway track and it was pointed out by Lord Macmillan, delivering the opinion of their Lordships, at page 374 of the repor :

''Repair' and 'renew' are not words expressive of a clear contrast, and repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal as distinguished from repair, is reconstruction of the entirety, meaning by the entirety not necessarily the whole but substantially the whole subject-matter under discussion. The periodical renewal by sections of the rails and sleepers of a railway line as they wear out by use is in no sense a reconstruction of the whole railway and is an ordinary incident or railway administration. The fact that the wear although continuous is not and cannot be made good annually does not render the work of renewal when it comes to be effected necessarily a capital charge. The expenditure here in question was incurred in consequence of the rails having been worn out in earning the income of previous years on which tax had been paid without deduction in respect of such wear, and represented the cost of restoring them to a state in which they could continue to earn income. It did not result in the creation of any new asset; it was incurred to maintain the appellants' existing line in a state to earn revenue.'

20. In Commissioner of Income-tax v. Mahalakshmi Textile Mills Ltd. : [1967]66ITR710(SC) the question before the Supreme Court was in connection with development rebate. The assessee in that case who was carrying on business of manufacture and sale of cotton yarn spent Rs 93,215 for introduction of the 'Casablanca conversion system' in its spinning plant. Substantially, this involved replacement of certain roller stands and fluted rollers fitted with rubber aprons to the spinning machinery, removal of ring frames from certain existing parts, introduction, interalia, of ball-bearing jockey-pulleys for converting the original band-drivers to tape drivers and other additions and alterations in the drafting mechanism. Development rebate on this expenditure was claimed on the ground that introduction of 'Casablanca conversion system' involved installation of new machinery and it was claimed before the Tribunal in those proceedings in the alternative that the amount laid out was in any event expenditure for current repairs allowable under section 10(2)(v) of the Indian Income-tax Act, 1922; and the Supreme Court held that the Tribunal had evidence before it from which it could be concluded that by introduction the 'Casablanca conversion system' the assessee made current repairs to the machinery and land and the sum of Rs. 93,215 was allowable as an expenditure incurred for current repairs under section 10(2)(v) of the Act. At page 712 of the report, Shah J., delivering the judgment of the Supreme Court, observe :

'The Tribunal had evidence before it from which it could be concluded that by introducing the Casablanca conversion system the assessee made current repairs to the machinery and plant. The High Court observed that certain moving parts of the machinery had because of 'wear and tear' to be periodically replaced, and when it was found that the old type of replacement parts were not available in the market, the assessee introduced the Casablanca conversion system, but thereby there was merely replacement of certain parts which were a modified version of the older parts.'

21. The Supreme Court held that the conclusion of the High Court that, on the facts and circumstances of that case, the sum of Rs. 93,215 was allowable under section 10(2)(v) of the Act must be accepted. It is clear from this decision of the Supreme Court in Mahalakshmi Mills' case : [1967]66ITR710(SC) that if there is replacement of certain parts of the machinery, after replacement new parts would form part of the capital asset but since replacement is necessitated because of wear and tear, such expenditure for replacement of these parts can be deducted as revenue expenditure under section 10(2)(v) of the Indian Income-tax Act, 1922.

22. We may point out that in Hanuman Motor Service v. Commissioner of Income-tax : [1967]66ITR88(KAR) the Mysore High Court held that in finding out whether a given case falls within the scope of section 10(2)(v), the true test is whether, as a result of the expenditure which is claimed as expenditure for repairs, what is really being done is to preserve and maintain an already existing asset or whether the object of such expenditure was 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. In that particular case the assessee was a firm of bus operators and they had replaced the petrol engines of some of their buses with diesel engines and that cost of installation of diesel engines was claimed as a deduction either under section 10(2)(v) or section 10(2)(xv) of the Act; and the Mysore High Court held that the machineries concerned were buses and not the petrol engines that were replaced. The replacement of worn out parts of a machinery does not by itself bring a new asset into existence; and the fact that an old part of a machinery was replaced by a new part did not mean that a new asset has been brought into existence. In relation to the bus concerned the replacement of its engine was only a current repair of that bus; there was no justification for understanding the expression 'current repairs' as being equivalent to petty repairs.

23. In C R Corera and Brothers v. Commissioner of Income-tax : [1963]49ITR188(Mad) the Madras High Court held that the nature of expenditure on any repairs claimed to have been effected has to be viewed as a whole and in the proper perspective, in order to determine whether such repairs have only had the effect of restoring the machinery to its original condition or whether they have introduced any additional advantage or features which have improved the income earning capacity. It cannot be taken as a matter of assumption that merely because a large sum is expended on repairs it must necessarily amount to reconstruction. On the facts of that particular case, the Madras High Court held that the expenditure was allowable under section 10(2)(v) of the Act.

24. We have referred to these different decisions for the purpose of pointing out as to under what circumstances different courts have allowed deduction for repairs or replacement to the existing capital assets of the assessee concerned. In our opinion, if there is a substantial replacement, there cannot be any question of expenditure for such replacement being allowed as a deduction for repairs of replacements. Secondly, it is also clear that if the replacement is of parts only, the expenditure for such replacement can be held to be deductible but if the replacement is of the whole machinery as such as distinguished from replacement of parts with a view to bring a new asset into existence, the expenditure again will not be deductible and will not be allowed to be treated as revenue expenditure. It is clear from a discussion of the authorities cited above that when the parts of capital assets are required to be changed fairly frequently, the theory of normal depreciation would not be adequate form the point of view of commercial practice and hence the concept of replacement of parts of the capital assets has been introduced and such expenditure for replacement of parts is also to be treated as revenue expenditure as distinguished from capital expenditure. In the case before us, in view of the claim put forward by the assessee claiming the amount of Rs. 25,127 as its trading loss in the stock-in-trade, it was not possible for the Income-tax Officer or the Appellate Assistant Commissioner or the Tribunal to consider what amount was spent by the assessee for replacement of parts; and, secondly, whether the amount claimed by the assessee as expenditure was incurred for replacement of furniture, i.e., substantial replacement. It must also be borne in mind that the assessee seems to have treated all items of its furniture as a whole rather than treating each individual article of furniture as a separate part. Of course, the expenditure incurred for repairing any part of a furniture, i.e., a leg of a chair or a seat of a chair or repairing any other items of furniture in a similar manner would be expenditure incurred for repairs; but replacing new chairs or new tables for old or new gadlas for old gadlas would hardly be considered replacing parts of different articles of furniture which are capital assets of the assessee by new parts. It is true, as has been urged on behalf of the assessee, that in this particular business carried on by the assessee-firm, it has to incur heavy expenditure because of break-ages of articles of furniture; but at the same time it must be pointed out that on the figure supplied by the assessee itself against the existing opening stock of Rs. 26,657, the assessee spent as large a sum as Rs. 38,286 in the course of the assessment year under consideration for buying new items of furniture and also for the purpose of carrying out repairs. No separate facts are forthcoming for the purpose of pointing out how much was spent for repairing which articles of furniture and how much was spend by the assessee for buying brand new articles of furniture. In view of this state of affairs till now the question whether these items of furniture were stock-in-trade of the assessee or its capital assets was in dispute, no authority so far seems to have applied its mind to this distinction between repairs to different individual articles of furniture used by the assessee in the course of its business of hiring out furniture and the expenditure incurred by the assessee for buying new articles of furniture in the course of its business, has not been considered by any authority so far (sic); and the question will have to be considered by the authorities concerned in order to do full justice between the parties.

25. On behalf, of the assessee, reliance was also placed on section 32(1)(iii) of the Income-tax Act, 1961. Section 32 provides for depreciation and under the main body of sub-section (1) of section 32, it has been provided that in respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, certain deductions subject to the provisions of section 34 were to be allowed. Under clause (iii), depreciation is allowed in the case of any building, machinery, plant or furniture which is sold, discarded, demolished or destroyed in the previous year (other than the previous year in which it is first brought into use), the amount by which the moneys payable in respect of such buildings, machinery, plant or furniture, together with the amount of scrap value, if any, fall short of the written down value thereo : Provided that such deficiency is actually written off in the books of the assessee. It is true that sub-clause (iii) applies to furniture also. If any items of furniture or individual articles of furniture which were used by the assessee in the course of its business were sold, discarded, demolished or destroyed in the relevant previous year, i.e., in S.Y. 2016, then if the requirements of the provision were satisfied, viz., about the deficiency being written off in the books of account, then the amount by which the moneys payable in respect of such furniture together with the amount of the scrap value, if any, fall short of the written down value thereof, would be allowed as deduction. It may be pointed out that this contention regarding section 32(1)(iii) was raised before the Tribunal and in paragraph 5 of its order, the Tribunal has observe :

'The only provision under which the assessee could claim some deduction is under section 32(1)(iii) of the Act which allows something known as obsolescence allowance. But this also the assessee cannot claim this year because all the furniture that was purchased by him was being allowed as a revenue item previously.'

26. The question whether in the previous years, the furniture that was purchased by the assessee for the purposes of its business was allowed as a revenue item or as capital expenditure item is not material for the purposes of section 32(1)(iii), if the written down value of the particular item of capital asset is the same as the original price because no depreciation has been allowed in the meanwhile, then that will be the written down value with reference to which the provisions of clause (iii) of section 32(1) will have to be worked out. This particular contention will have to be considered by the Tribunal and by the revenue authorities when the matter is reconsidered in view of the order that we propose to pass. So far as the question referred to us in Income-tax Reference NO. 37 of 1971 is concerned, it is not possible for us to answer the question that has been referred to us because the question of allowing Rs. 25,127 as revenue expenditure has not been considered by the Tribunal and the different items in the account have not been examined by the Tribunal or by the revenue authorities as they should have done. If the assessee is to be allowed any deduction as and by way of revenue expenditure, the principles which we have mentioned above, viz., that replacement should not be substantial and that it should be by way of repair to individual items of furniture or replacement of part of individual items of furniture has to be borne in mind. As we have pointed out above, the figure of Rs. 25,127 has been arrived at as a trading loss in the stock-in-trade of the assessee and that is not the correct method of working out revenue expenditure. Under these circumstances, as the Supreme Court has pointed out in Commissioner of Income-tax v. Indian Molasses Co. P. Ltd., : [1970]78ITR474(SC) , two courses are now open to us. We may either call for a supplementary statement or we may decline to answer the question referred to us; and we may leave it to the Tribunal to take appropriate steps to adjust its decision under the relevant section of the Income-tax Act. If we direct the Tribunal to submit a supplementary statement of the case, the Tribunal would be restricted to the evidence on record and may not be entitled to take additional evidence, which may result in injustice. Under these circumstances, we think it proper to decline to answer the question referred to us in Income-tax Reference No. 37 of 1971, on the ground that the Tribunal has failed to consider and decide the question whether any expenditure of the assessee in the relevant year of account was by way of revenue expenditure and the Tribunal has not considered all the appropriate provisions and legal authorities applicable the eto. It will be open to the Tribunal to dispose of the appeal under the relevant provisions of the Income-tax Act, 1961, in the light of the observations made by us after determining the questions which ought to have been decided.

27. We, therefore, answer the question referred to us in Income-tax Reference No. 79 of 1970 in the negative. We decline to answer the question referred to us in Income-tax Reference No. 37 of 1971, with the observations made above. The assessee will pay the costs in Income-tax Reference No. 79 of 1970 to the Commissioner, and there will be no order as to costs in Income-tax Reference No. 37 of 1971.


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