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Commissioner of Income-tax Vs. I.C.i. (India) Pvt. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 134 of 1970
Judge
Reported in[1983]139ITR105(Cal)
ActsIndian Income Tax Act, 1922 - Section 10(2)
AppellantCommissioner of Income-tax
Respondenti.C.i. (India) Pvt. Ltd.
Appellant AdvocateB.L. Pal and ;Ajit Sengupta, Advs.
Respondent AdvocateD. Pal and ;M. Seal, Advs.
Excerpt:
- .....4,70,000 and rs. 7,88,286 in the assessment years 1958-59, 1959-60 and 1960-61, respectively, was revenue expenditure and allowable as such in each year 'we will refer to the assessee as the company. the ' crescent house ' at bombay was built in 1938. it was purchased by the company for using it as its bombay office. it was repaired in the relevant accounting years. the ito disallowed the amounts mentioned in the question spent by the company for repairing the 'crescent house '.2. three appeals for the aforesaid three years were filed by the company. one of them was allowed by one aac. two other appeals were dismissed by another aac. the parties then went to the tribunal. a consolidated order was passed by the tribunal in all those appeals.3. the relevant facts found by the tribunal may.....
Judgment:

Deb, J.

1. The following question is involved in this reference under Section 66(1) of the Indian I.T. Act, 1922 :

' Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the entire expenditure incurred by the asssessee on its office premises at Bombay amounting to Rs. 3,41,130, Rs. 4,70,000 and Rs. 7,88,286 in the assessment years 1958-59, 1959-60 and 1960-61, respectively, was revenue expenditure and allowable as such in each year '

We will refer to the assessee as the company. The ' Crescent House ' at Bombay was built in 1938. It was purchased by the company for using it as its Bombay office. It was repaired in the relevant accounting years. The ITO disallowed the amounts mentioned in the question spent by the company for repairing the 'Crescent House '.

2. Three appeals for the aforesaid three years were filed by the company. One of them was allowed by one AAC. Two other appeals were dismissed by another AAC. The parties then went to the Tribunal. A consolidated order was passed by the Tribunal in all those appeals.

3. The relevant facts found by the Tribunal may now be briefly stated. At the time the company purchased the 'Crescent House' for Rs. 15.5 lakhs there was no sign of its external deterioration. In 1956 the company discovered that the building was severely damaged. It was surveyed by architects and engineers. They opined that extensive repairs were absolutely necessary and advised that concrete works, some columns and beams should be plastered with cement by the process of guniting in order to prevent further deterioration and corrosions. The company carried out the repairs under the supervision of Mr. B.K. Banerji, an engineer, by incurring the aforesaid expenditure without creating any additional space. No remodelling was done nor any structural alteration was made. Some columns and beams were plastered with cement by the process of guniting. The repairs were made to preserve and maintain the building and to prevent further deterioration and corrosions as far as possible. The condition of the building was not improved from its original condition, nor its original life was extended by those repairs although there was a new look to the repaired portions.

4. The Tribunal also accepted the evidence of Mr. B.K. Banerji, who, inter alia, stated that the life of the building even after the repairs was shortened by 40 years. The Tribunal further found that the company did not derive any benefit of an enduring nature by those repairs which were also carried out in order to save recurring expenditure in repairs.

5. The departmental representative argued before the Tribunal that the entire expenditure was a capital expenditure and, if not wholly, at least partly was of a capital nature to the extent it was incurred in connection with the process of guniting. It was also argued that the repairs were not current repairs and, therefore, the expenditure was not allowable as a deduction under Section 10(2)(v) of the Indian I.T. Act, 1922. The company disputed those contentions and urged that the entire expenditure should be allowed as a revenue expenditure.

6. The parties also cited a number of cases. After thoroughly considering those cases, the arguments and the aforesaid facts, the Tribunal held that the entire expenditure incurred by the company was deductible as a revenue expenditure and allowed the claim. In that view of the matter, the Tribunal did not deal with the other contentions of the departmental representative.

7. Mr. B. L. Pal, learned counsel for the Revenue, argues before us as follows :

' (i) In view of the judgment of Mr. Justice P.B. Mukharji (as he then was) in the case of Humayun Properties v. CIT : [1962]44ITR73(Cal) , it should be held that those repairs were not current repairs and accordingly the expenditure was not an allowable deduction under Section 10(2)(v) of the Indian I.T. Act, 1922;

(ii) Section 10(2)(v) is a specific provision, whereas Section 10(2)(xv) is a residual provision and, therefore, as the expenditure is not an allowable deduction under Section 10(2)(v), it cannot be allowed under Section 10(2)(xv) of the Act;

(iii) As the expression ' current repairs' has not been used in the English Act, the Tribunal has erred in following the case of Conn (H.M. Inspector of Taxes] v. Robins Bros. Ltd. [1966] 43 TC 266, in arriving at its conclusion that the expenditure was a revenue expenditure ;

(iv) Since the architects and engineers opined that by patch work the building would last for 5 to 10 years and by applying the process of guniting it would last for many more years, it should be held that a part of the expenditure which has been laid out or expended in connection with the process of guniting is a capital expenditure although the expenditure incurred in connection with other repairs may be a revenue expenditure; and

(v) The instant case is not covered by the decision in the case of CIT v. Oxford University Press : [1977]108ITR166(Bom) , because no major or heavy structural repairs was done to ' Oxford House ', whereas major or heavy structural repairs were done to the ' Crescent House '.

Dr. Debi Pal, learned counsel for the company, disputes the aforesaid arguments of Mr. B.L. Pal, Dr. D. Pal also argues that Mr. B. L. Pal is not entitled to urge that the repairs were not current repairs.

8. To us it does not appear that the Commissioner of Income-tax in his application for reference before the Tribunal has raised any question relating to current repairs or Section 10(2)(v) of the Act. Therefore, we cannot entertain the two pleas of Mr. Pal noted in points (i) and (ii) in view of the narrow scope of the question before us.

9. Even if the repairs were not current repairs, we are not convinced by the arguments of Mr. Pal noted in point (ii). An expenditure may not be an allowable deduction under Section 10(2)(v) of the Act on the ground that the repairs are not current repairs and yet, in our opinion, it may be allowed under Section 10(2)(xv) of the Act, provided its conditions are fulfilled.

10. In this view of the matter, we express no opinion on the contention of Dr. Pal, namely, that certain observations of Mr. Justice P.B Mukharji on ' current repairs ', which are in any way contrary to or inconsistent with the observations of Mr. Justice H.K. Bose (as he then was) in the case of Humayun Properties Ltd : [1962]44ITR73(Cal) , were not correct.

11. Though the English Act does not use the expression ' current repairs' we are not impressed by the contention of Mr. Pal noted in point (iii). Extensive repairs were effected to an old building of about 400 years in Conn's case [1966] 43 TC 266 . Two large panels of glass in the ground floor wall were changed, a wooden lintel was dismantled and was replaced with a steel joist; as an oak pillar supporting the front corner of the building was rotten it was replaced with a steel stanchion ; steel joists were also encased in oak wood which were taken from a good quality of timber, the drain was exposed and completely relaid with increased capacity but no new trap was fixed; the inside appearance of the ground floor was completely changed but no additional space was created anywhere ; the materials on the roof were changed; certain structural alterations were also made ; and a portion of the ground floor had a new look after repair.

12. It was an extreme case and yet it was held that the expenditure incurred by the assessee in repairing the building was not a capital but a revenue expenditure in spite of the fact that structural alterations were made.

13. Therefore, merely because some columns and beams were repaired by the company, in the instant case before us, it does not necessarily follow that the expenditure incurred on it is in the nature of a capital expenditure, in view of the judgment of Mr. Justice Buckley (as he then was) in Conn's case [1966] 43 TC 266.

14. That apart, it is not the finding of the Tribunal in the instant case before us that any structural alteration was made. The finding of the Tribunal is that the company carried out only those repairs which were absolutely necessary to preserve and maintain the ' Crescent House ' and to prevent its further deterioration.

15. By a mere patch work, the ' Crescent House ' would have lasted only for 5 to 10 years and the money that would have been spent in it would have been a complete waste. Therefore, plastering of certain portions of the concrete works with cement and some columns and beams by the process of guniting became absolutely essential. No doubt, this process has extended the life of the ' Crescent House ' by many more years, but not exceeding its original life. Further, the repairs have not improved its original condition.

16. The repair by the process of guniting extended the original life of the ' Oxford House 'by 15 years and yet it was held that the expenditure incurred in connection with such repair was not a capital expenditure. Therefore, it is by itself not a decisive factor. Moreover, the repair by the process of guniting has not extended the original life of the ' Crescent House '.

17. It is an admitted fact that ' Crescent House ' needed an extensive repair. The company has, no doubt, made extensive repairs by incurring a huge expenditure. But the magnitude of the repair goes with the magnitude of wear and tear, and not with the question as to whether the expenditure incurred in it is a capital or a revenue expenditure. The quantum of expenditure by itself is also not a determining factor.

18. Where a building needs repair, it is not for the taxing authorities but for its owner to decide how and in which manner, process or appliances it is to be carried out including the extent of its repair and the expenditure to be incurred on it. Even where structural repairs are carried out, the expenditure incurred on it is not necessarily a capital expenditure, for, every repair, if properly done, must, as a matter of course, improve the condition of the building.

19. The object and the purpose of every repair is to improve the bad condition of the building, to prevent its further deterioration as far as possible and to keep it wind and water-tight. So long the repair does not bring into existence an additional advantage or benefit of an enduring nature orchange the nature, character or the identity of the building itself, the expenditure must be regarded as a revenue expenditure. On the other hand, if it does, it will be in the nature of a capital expenditure.

20. Guniting is nothing but a modern process of plastering by a machine. The company has used this modern process. The finding of the Tribunal is that this process has not brought into existence any new or additional advantage or benefit of an enduring nature. It has also found that the process of guniting has not improved the original condition of the building, nor has it extended its original life. It is also the finding of the Tribunal that the object of those repairs was to maintain and preserve this building.

21. It may be noted here that the Revenue has not taken any exception to any of the aforesaid findings of the Tribunal. It also does not appear to us that the process of guniting has brought into existence any new advantage or new benefit of an enduring nature. There is also nothing on the record even to suggest that the process of guniting has changed the nature or the character or the identity of this building in any manner whatever. Therefore, the arguments of Mr. Pal noted in point (iv) must also fails,

22. Now, as to his final argument, Oxford University Press was the owner of ' Oxford House ' and used it for the purposes of its businsss. It was found on inspection that the reinforcements of the slabs had decayed, cracks were visible underside of the slabs and on the floors, and some of the steel reinforcement in the slab had little or no cover, The amount already spent in patch work was a waste and plastering by means of an ordinary method was found to be of no use. In those circumstances, the repair was carried out by the process of guniting.

23. Other facts are not relevant for our present purposes. The ITO rejected the assessee's claim that the expenditure incurred in it was a revenue expenditure. His rinding was that those repairs had extended the life of ' Oxford House ' by at least 15 years and had thereby created an enduring benefit. He also held that those repairs were not current repairs. The AAC sustained the disallowance, but the Tribunal allowed it as a revenue expenditure and also under the head ' Current repairs.'

24. The question before the Bombay High Court was whether the expenditure incurred in connection with the repair was a revenue expenditure. Mr. Justice Tulzapurkar (as he then was), at pages 170-171 (of 108 ITR) of the report, says this :

' The question as to what is the proper meaning of the expression ' repairs ' and what test should be applied for determining the question whether a particular expenditure incurred in connection with repairs of an asset like a building should be regarded as expenditure of a capital nature or of a revenue nature came up for consideration before this court in the case of Gulamhusein Ebrahim Matcheswalla, v. CIT : [1974]97ITR24(Bom) , where the principles applicable have been enunciated. It has been held in that case that the expression ' repair ' must be understood in contradistinction to renewal or restoration and the test to be applied is to see whether as a result of the expenditure what is being done is to preserve and maintain an already existing asset. If the amount is spent for the purpose of bringing into existence a new asset or obtaining a new advantage then such an expenditure would not be revenue expenditure. The mere quantum of expenditure is not by itself decisive of the question whether it is of the nature of revenue or capital. A sum can be allowed as cost of repairs even though the expenditure in a particular year is heavy on account of the fact that it is undertaken to remedy the effect of several years of wear and tear or neglect and also in spite of the fact that such expenditure may not be necessary for several years to come after repairs have been effected. It is thus clear that what the court is required to find out is whether as a result of the expenditure a new asset or a new advantage is being brought into existence. The court will also have regard to the aspect as to whether as a result of the expenditure what is being done is to preserve and maintain an already existing asset. It is on a consideration of these matters that the question will have to be decided.'

We entirely agree with the quoted opinions. This case also shows that guniting process is ' nothing but an improved method of plastering and repairing work '. It was held that the expenditure incurred in connection with this process was a revenue expenditure and was allowable as a deduction under Section 37 of the I.T. Act, 1961, because it did not bring into existence ' any benefit or advantage of an enduring nature ', or ' any new asset or new advantage ', nor did it change ' the nature of the asset, viz., the building as a whole ', or increase its ' accommodation or earning capacity'.

25. Mr. Pal, however, argues that ' Oxford House ' case is distinguishable on a single fact, namely, that in that case no major or heavy structural repair was done, whereas in the present case before us, major or heavy structural repairs were done. But, this distinction does not make any difference, for, in our opinion, major or heavy structural repair to a building is by itself not a decisive factor for the reasons already stated. Accordingly, the contention of Mr. Pal must fail.

26. It has been found by the Tribunal that the expenditure was incurred by the company with the object of maintaining and preserving the ' Crescent House ' and also to save the recurring expenditure on repairs and not with a view to bring into existence an advantage or benefit of an enduring nature. It is also the finding of the Tribunal that no additional space was created. The Revenue has accepted the aforesaid finding by not challenging them by an appropriate question.

27. We also agree with the finding of the Tribunal, namely, that the process of guniting has not brought into existence any new benefit or advantage of an enduring nature to the Company.

28. In the premises, we answer the question in the affirmative and infavour of the assessee. We, however, do not propose to make any orderas to costs.

C.K. Banerji, J.

29. I agree.


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