1982 (8) TMI 130 - AT - Income Tax

Summary

Issues:
1. Whether the expenditure incurred for replacing a petrol engine with a diesel engine in a car can be allowed as a revenue expenditure or should be treated as capital in nature.

Analysis:
The appeal before the Appellate Tribunal ITAT MADRAS-C involved the deduction of expenditure incurred by an individual, a chartered accountant, for replacing a petrol engine with a diesel engine in his car. The Income Tax Officer (ITO) disallowed the expenditure as capital in nature, considering it to have brought into existence a new asset with enduring benefits. However, the Assistant Commissioner of Income Tax (AAC) allowed the deduction based on the decision of the Andhra Pradesh High Court, stating that the replacement of a subsidiary part constituted a revenue expenditure as no new asset had been created. The revenue contended that the replacement of a new engine with another new engine indicated capital expenditure, relying on a decision of the Kerala High Court. Conversely, the assessee argued that the replacement did not create a new asset, citing a decision of the Madras High Court.

The Tribunal analyzed the facts and held that the replacement of the petrol engine with a diesel engine resulted in reduced running expenditure for the car. The Tribunal considered whether the replacement could be categorized as current repairs under the Income-tax Act, 1961, and emphasized that the expenditure was laid out for business purposes. Referring to judicial interpretations, the Tribunal assessed whether the replacement amounted to the creation of a new asset or obtained a fresh advantage. The Tribunal cited precedents from the Madras High Court and Mysore High Court to determine that the replacement did not result in a new asset but rather preserved and maintained the existing asset, the car.

Applying the test of whether the expenditure aimed to preserve an existing asset or create a new advantage, the Tribunal concluded that the replacement of the engine did not constitute a substantial alteration to the vehicle to be considered a completely new asset. The Tribunal noted that the only advantage derived by the assessee was a reduction in recurring revenue expenditure, which did not qualify as capital expenditure. Ultimately, the Tribunal upheld the AAC's decision to allow the expenditure as a deduction in computing the income of the assessee.