SRINIVASAN J. - The question referred to us is, 'whether the sum of Rs. 30,000 out of the total outlay of Rs. 31,818 on the boat No. 95 is also allowable as current repairs within the meaning of section 10(2) (v) ?'
The assessee is a registered firm which owns and plies cargo boats and carried out lighterage work within the Tuticorin harbour. Of the seven boats owned by the assessee, boat No. 95 was constructed in or about 1931. On the 8th April, 1953, it was drydocked and certain repairs which were intended to be carried out were not effected by the close of that year. The repair of the boat was undertaken in January, 1954. In the account year, that is, the calendar year 1954, a total sum of Rs. 31,817-13-5 was claimed to have been spent upon the repairs and in the assessment of the assessment year 1955-56, the assessee claimed this amount as a revenue expense allowable towards current repairs under section 10(2) (v) of the Act in the computation of its business income. The Income-tax Officer disallowed the claim being apparently obessed with the view that it was a huge expense. He thought that the assessee did not maintain a reconstruction account 'by means of which it would be clearly seen what was the cost of replacing the asset bringing it to its original condition and which was the extra expenditure which was incurred beyond this point of restoration.' He took the view that the written down value of this boat was only about Rs. 4,248 and that this fact itself glaringly shows that the huge expenditure is without doubt 'capital'. Nevertheless, he purported to allow a sum of Rs. 1,818 under the head 'current repairs' and disallowed Rs. 30,000 as being expenditure of a capital character. An appeal was taken to the Appellate Assistant Commissioner it being contended before him that there was no creation of a new asset and that the outlay represented expenditure which only brought the boat back to its original profit-earning capacity. Before the appellate authority, it was contended that the expenditure in question was to remedy the effect of a series of years wear and tear. The authority however held that the only possible inference to be drawn from the long period of 16 months which was involved in the entire work and the magnitude of expenditure incurred was that a major process of reconstruction had taken place. The appeal was accordingly dismissed. A further appeal to the Tribunal shared the same fate, before which the matter was presented apparently both as an item of current repairs within the meaning of section 10(2) (v) and as an expenditure found necessary on grounds of commercial expediency which would bring it within the scope of section 10(2) (xv). The Appellate Tribunal however observed that 'the boat had been renewed at almost half its replacement cost. It may be that the tonnage remained the same. But it cannot be disputed that the re-sale value has gone up to an equal extent if not more. Its efficiency too after the repairs must have gone up considerably. It may be fully loaded and plied without fear of sinking on larger number of trips per day than before the repair. The repairs carried out have been nothing but renewal of the whole subject-matter by a reconstruction of a substantial part thereof....' The order of the department was accordingly confirmed. On the application of the assessee under section 66(1) of the Act, the above question stands referred to us.
When the matter came for hearing on an earlier occasion, this court found it necessary to call for a revised statement of the case. It was pointed out that the approach of the Tribunal to the question before it was erroneous and that extensive repairs were being effected to the boats once in seven or ten years was not correct. The Tribunal had not adverted to the nature of the repairs effected and made no reference to any material facts which would justify the conclusion it reached that the repairs amounted to a renewal of the boat in its entirety. The reason that it gave was more or less speculative. The relevant authorities, a consideration of which would lead to a correct conclusion on the matter, were indicated in the order of this court and in the concluding portion of this courts order, it was stated :
'Even otherwise we are of the opinion that before it can be said that the efficiency of the boat has gone up by reason of the repairs effected, the Tribunal must have considered the materials available to it to find out whether in effecting the repairs, the assessee had done anything more than bringing the boat in question to its original sea-worthy condition or whether any permanent improvements had been effected to it. It is no doubt true that the onus of establishing that the sum expended was on current repairs is on the assessee. The assessee has tried to discharge that onus by producting his books of account. It cannot be taken as a matter of assumption that simply because expenses had come up to a large sum of money, the repairs carried out must necessarily amount to reconstruction of a substantial portion of the boat. We are not satisfied that the statement of the case submitted by the Tribunal can be said to contain all the relevant and material facts that were before the Tribunal or that the Tribunal had in its order dealt with the real question at issue by considering all the material facts bearing thereon. It was the duty of the Tribunal to have considered the available evidence to find out whether the assessee had discharged the onus of showing that the repairs claimed to have been effected in the instant case were current repairs within the meaning of section 10(2) (v) of the Income-tax Act. As that has not been done, it is necessary to have a revised statement of the case from the Tribunal after due consideration of the relevant materials available to it.'
The Tribunal has now submitted a revised statement of the case. Unfortunately, however, the Tribunal has not stated what its conclusion as a result of reconsideration of the material before it in the light of the observations made by this court really amounts to. But apparently, the Tribunal is of the opinion that the expenditure falls within the category covered by section 10(2) (v).
It is no doubt true that the price of the boat during the period in question was about Rs. 75,000 and that the expenditure incurred in the repairs effected in the calendar year 1954, came to very nearly half of that amount. The expenditure was undoubtedly not petty in any sense of the term. But it is well recognised that the expression 'current repairs' does not necessarily mean petty repairs. According to the assessee the boat was built in 1931 and though in the past no extensive repairs were effected to it, it was found necessary after the lapse of nearly 20 years that the boat required extensive repairs in order to restore it to a condition capable of ensuring normal performance.
It is also seen that for the purpose of effecting repairs to the boat, as site in the port limits was allotted to it and the boat was hauled up and drydocked in June, 1953. The certificate of the port officer, Tuticorin, shows that the boat whose displacement tonnage was 119.28 tons before repairs was after the completion of the essential repairs found to be 118.99 tons. Another certificate from the port officer reveals that after the repairs the boat was launched on 21st July, 1954. The port officer certified that only essential minor repairs were effected, the keel, the ribs, the mast and rudder remaining the same. Such 'minor repairs' according to the port officer, consisted of caulking, replacement of underwater planking and copper-sheathing wherever necessary. An extract from the boat register also forms part of the record. Annexure 'X-3' which is a record of the port register in the year 1943 gives the particulars of the boat its length, breadth, depth and tonnage as on the date of registry, 7th May, 1943. Apparently, the boats are re-registered from time to time. Though it is not quite clear whether 7th May, 1943, given as the date of registry in annexure 'X-3' refers to the re-registration after some extensive repairs or not, it appears probable that whenever these boats are dry-docked and repaired, their sea-worthiness has to be certified by the concerned port authorities and entries in the register appear to be made on such occasions. After the launching of the boat on the 21st July, 1954, another entry appears in the register and the date of the registry is given as 24th July, 1954. Further details in this register furnish the measurements of the boat and its tonnage.
It is not the case of the department that any extensive repairs were effected during the past several years. It is true that in 1950, 1951 and 1952, repairs were claimed to have been effected at a cost of between Rs. 3,000 and Rs. 4,000 per year.
Though no accounts are available, it is presumable from the fact of the entries in the port books in 1943, that some major repairs might have been effected at that time. According to the assessee, the boat, though no doubt it was sea-worthy, in the sense that it would not have swamped in the sea required extensive repairs due to wear and tear of the preceding several years. Both the side and the dock plankings had become rotten in parts and the copper-sheathing at the bottom of the boat had also become eroded. Unfortunately, no estimate of the repairs to the boat was prepared before the work was undertaken. That must have been because the work was not entrusted to any other outside agency but the assessee itself effected the repairs. The assessee however maintained a boat maintenance account in which are shown all purchases required for the repairs of this and other boats together with the labour charges incurred in effecting the repairs. Examination of the entries herein would not help to characterise any particular item of expense as either capital or revenue. Except for the fact that the expenditure in respect of timber and the cost of copper sheathing came to a high figure the other items relevant to the repairs of this particular boats appears to be nothing more than expenses necessary even for effecting current repairs to the boat. The question before us cannot therefore be decided on the basis of any particular entries in this account, but only on a consideration of the general aspects. In fact, neither the department nor the Tribunal so much as point to any particular items contained in this account as giving any positive indication that such claim of expenditure is an expense of a capital nature.
We may take it then that it is established by the certificates issued by the port authorities that the boat remained substantially the same with regard to its measurement and tonnage and its operating capacity and abilities, and that what was done was undoubtedly to renew the wooden planks which through submersion in the sea water for the last 20 years required replacement and that the copper sheathing to the bottom had due to the action of the sea water thereon eroded and also required replacement. But the port officer certified that the keel of the boat, the ribs, the mast and the rudder remained the same. In one sense, it may be possible to say that only the skeleton of the boat was retained, all other structures upon the boat having had to be renewed. Nothwithstanding that this is so, the question is whether it ceased to be an expenditure of a revenue natural and whether it does not also come within the category of current repairs.
In Commissioner of Income-tax v. Sri Rama Sugar Mills, this court had to consider a case where in the case of a sugar manufacturing plant, an old boiler was replaced by a new and exactly similar boiler. This boiler had deteriorated in its efficiency and the expenditure of Rs. 86,496 incurred in the purchase erection and fitting of the new boiler was claimed to be a business expenditure. Satyanarayana Rao. J. pointed out that even restoration by renewal of replacement of subsidiary parts would be a repair and unless substantially the whole of the subject-matter is involved by way of reconstruction or replacement, it would not be anything but a repair. The substitution of the new boiler did not bring any additional advantage to the business and there was no improvement effected thereby. The machinery was only brought to its original state and the use of the new boiler did not increase the productive capacity of the manufacturing unit. In this view, it was held that it was an allowable item of expenditure. It is true that the other learned judge Raghava Rao J., took a different view in the particular feature present in that case. For our part, we accept the principle laid down by Satyanarayana Rao J. in that decision.
The case of a somewhat different description arose in Commissioner of Income-tax v. Ranjit Singh. In that case, the assessee had leased out his hotel for twenty years at an annual rent of Rs. 50,000. The approach roads to the hotel were surfaced with concrete and an expenditure of Rs. 24,904 was claimed as an allowable the claim. On a reference the Punjab High Court held that despite the fact that the roads were surfaced with concrete, definitely an improvement upon their old condition, and despite the heavy expenditure in a particular year, it was still repairs and it was to remedy the effect of several years of wear and tear a neglect. The learned judges pointed out that expression 'current repairs' could not be restricted to petty repairs so carried out periodically in which cases, the question to be examined was whether a particular item of expenditure was own which constantly recurs or whether it is one which recurs only after a few years. They refer also to the classical passage in the judgment of Lord Macmillan in Rhodesia Railways Ltd. v. Income-tax Collector. That was a case where out of a total length of 394 miles, a stretch of 34 miles of the old track was replaced with new rails and new sleepers and for 40 miles of the track the old rails were relaid on sleepers which were replaced. Lord Macmillian said :
'The periodical renewal by sections of the rails and sleepers of railway line as they wear out by use is in no sense a reconstruction of the whole railway and is an ordinary incident of 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 the state in which they could continue to earn income. It did not result in the creation of any new assets; it was incurred to maintain the appellants existing line in a state to earn revenue.... Nor do their Lordships agree that expenditure in order to form a permissible deduction must have been incurred in the production of the actual years income which is the subject of the assessment of by this it is meant that the benefit of the expenditure must not extend beyond the year of assessment, for very many repairs have the result of enabling income to be earned in future years as well as in the year in which they are effected.....'
We may observe that practically in all the decisions in which the question of allowance of an expenditure of the present kind arose, the above observations of Lord Macmillan have been quoted again and again as laying down the law relevant to the subject.
Chagla C.J. in New Shorrock Spinning and Manufacturing Co. v. Commissioner of Income-tax pointed out that the test to understand the expression 'repairs' is that as a result of the expenditure what is really done is to preserve and maintain an already existing asset. But if the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage then such an expenditure would be capital expenditure. It was also laid down that the mere circumstance that the repairs have been delayed would not take them out of the category of current repairs. While the learned judge pointed out that the word 'current' denotes such repairs which are attended to when the need arises and are not allowed to fall into arrears and to be accumulated, it is interesting to note that, in that case, the so-called current repairs involved the fitting of a totally new device to the spinning machinery which actually rendered the working of the machinery easier and could from certain points of view be regarded as introducing an additional advantage. But nevertheless the view was taken that the expenditure was incurred to preserve and maintain the asset and that it was current repairs even though it was incurred more than sixty years after the acquisition of the asset.
In Dehri Rohtas Light Railway Co. v. Commissioner of Income-tax the Patna High Court accepted as current repairs an expenditure incurred in replacement of the sleepers and in replacement of the parts of the boilers. The importance of this decision is that the learned judges observed that even renewal may in certain cases by only repair. It would be so if it is the restoration or replacement of subsidiary parts of old machinery. It is unnecessary to refer to any other observations except to point out to the principle laid down by Lord Macmillan in the Privy Council decision referred to above relied upon as supporting the deduction.
An examination of the voluminous case-law on the subject leaves us with the impression that there can be no hard and fast rule and that every case has in the ultimate analysis to depend upon the facts and circumstances peculiar thereto. The broad principle that has been indicated in these decisions is that laid down by Lord Macmillan. The nature of the 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 advantages or features which have improved its income-earning capacity, that is to say, brought, as income, a new asset into existence. In the last resort, that is the only principle that can serve to determine the nature of an allowance claimed.
Looking at the facts in the present case, except that a large amount has been spent upon the repairs, it is impossible to agree that a new asset had been brought into existence in the sense that the repair is a substantial reconstruction with improved facilities and enhanced ability for earning income. The certificates of registration of 1943 and 1954 place this matter beyond doubt altogether. Structurally the boat has not been altered in any way. No improvements have been effected thereto which have increased either its loading capacity, its performance or other features. It may be that the expenditure is very high compares to the written down value of the boat. That is not a circumstance at all germane for determining the nature of the repairs. As we pointed out in the order calling for a revised statement of the case, the view of the Tribunal that the boat had gone up in re-sale value or its efficiency had increased is all speculative and is certainly belied by the certificates of registration. The expenditure was incurred only in replacing rotten planks, in sheathing the bottom of the boat with copper sheets and re-caulking and in incurring a considerable amount by way of labour charges in that connection. We are accordingly satisfied that all the decided cases on that point are in support of the assessees claim that this is noting more than current repairs eligible of allowance under section 10(2) (v) of the Act.
The question is accordingly answered in favour of the assessee. The assessee will be entitled to its cots. Counsels fee Rs. 250.
Question answered accordingly.