TMI Blog1974 (9) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax [1967] 66 ITR 88 (Mys) was carrying on business of bus transport. The Income-tax Officer, therefore, preferred the decision of the Andhra Pradesh High Court in R. B. Shreeram Company (P.) Ltd. v. Commissioner of Income-tax [1968] 67 ITR 428 (AP). In the appeal before the Appellate Assistant Commissioner the same claim was advanced on the same ground. The Appellate Assistant Commissioner upheld this claim of the assessee as he found that the cost of replacement of unserviceable petrol engine of the assessee's truck by the diesel engine was actually the cost of repairs to the truck which in the opinion of the Appellate Assistant Commissioner was a machinery and, therefore, what was replaced was not machinery itself but only a part of the machinery. The cost of replacement, according to the Appellate Assistant Commissioner, was only a cost of repairs to the machinery and hence the claim was allowed under section 31 of the Income-tax Act, 1961. The Appellate Assistant Commissioner distinguished the decision of the Andhra Pradesh High Court in R. B. Shreeram Company (P.) Ltd. v. Commissioner of Income-tax [1968] 67 ITR 428 (AP) on the ground that the question raised ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Officer that the assessee in support of his claim was relying on the decision of the Mysore High Court which was admittedly a claim under section 10(2)(v) of the 1922 Act. Before the Appellate Assistant Commissioner also the claim was rested on that decision and the Appellate Assistant Commissioner has, in fact, upheld the claim under section 31 of the 1961 Act. The Appellate Assistant Commissioner has observed in his order as under : " With respect, I prefer to follow the Mysore decision. The cost of replacement of the unserviceable petrol engine of the appellant's truck by a diesel engine is only cost of repairs to the truck. The truck is machinery, and what is replaced is not the machinery itself but only a part of the same, viz., the engine. The cost of the replacement is only cost of repairs to machinery and hence allowable under section 31 of the Income-tax Act, 1961..." The Tribunal has also upheld the order of the Appellate Assistant Commissioner following the decision of the Mysore High Court in Hanuman Motor Service v. Commissioner of Income-tax [1967] 66 ITR 88(Mys). We do not feel doubt on examining the nature of claim made before the taxing authoriti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture has permitted under section 10(2)(v) (which is corresponding to section 31 of the 1961 Act), is a deduction where the expenditure is revenue expenditure and not capital expenditure. It was further observed that in giving the meaning to the expression " repair " the expenditure under clause (v) of section 10(2) must be an expenditure of a revenue nature and not of a capital nature. Various tests have been laid down by courts in deciding the nature of expenses, whether they are of capital nature or of revenue nature. A Full Bench of the Lahore High Court in In re Benarsidas Jagannath [1947] 15 ITR 185 (Lah) [FB] formulated three broad principles which emerged from the various decisions on the subject. The three principles are, (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, or of permanent character ; in order that the advantage is of " enduring benefit " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has, therefore, got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductible allowance under section 10(2)(xv) of the Income-tax Act. The question has all along been considered to be a question of fact to be determined by the income-tax authorities on an application of the broad principles laid down above and the courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles. " In Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax [1937] 5 ITR 202 (PC) the Privy Council observed that what was the money wholly and exclusively laid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessity for the expenditure in question has not arisen out of the use of the capital asset in earning the profits, the expenditure would be capital expenditure. In Sun Newspapers Ltd. v. Federal Commissioner of Taxation [1938] 61 CLR 337, it was held that the real difference between capital and revenue expenditure is 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. In Jansatta Karyalaya v. Commissioner of Income-tax [1964] 54 ITR 792 (Guj.) the Division Bench consisting of J. M. Shelat C.J. and Bhagwati J., as they then were, was concerned with a claim made on behalf of the assessee in respect of expenditure incurred by the assessee in purchase of printing types during the first year of its existence for its business of printing. After reviewing the case law on the subject the court held : " On the facts and circumstances of the present case, the real test would be the one laid down by the Supreme Court, namely, what was the aim and object of the expenditure. Was it for running the business or was it one concerning the instrument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of the Supreme Court in Commissioner of Income-tax v. Mir Mohammad Ali [1964] 53 ITR 165 (SC). In that case, during the accounting year ending March 31, 1950, the assessee, a transport operator, replaced the petrol engines in two of his buses by diesel engines, incurring an expenditure of Rs. 18,544. The question was whether in addition to normal depreciation the assessee was entitled to the extra depreciation allowances under the second paragraph of clause (vi) and clause (via) of section 10(2) of the Indian Income-tax Act, 1922. The majority court held that the same meaning ought to be given to the word " machinery " in all the clauses, namely, clauses (iv), (v), (vi) and (via) of section 10(2) of the Indian Income-tax Act, 1922, and having regard to the definition of the term " machinery " adopted by the Privy Council in Corporation of Calcutta v. Chairman, Cossipore and Chitpore Municipality AIR 1922 PC 27, where it has been held that " machinery " would mean some mechanical contrivances which by themselves or in combination with one or more contrivances by the joint movement and interdependent operation of their respective parts generate power or evoke, modify, apply or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion and, therefore, it amended the question as under : " Whether extra depreciation is admissible under the provisions of section 10(2)(vi) and section 10(2)(via) of the Income-tax Act in respect of the diesel oil engines fitted to the motor vehicles in replacement of the existing engines ? " The High Court answered the question in the affirmative, in favour of the assessee. The revenue, therefore, took the matter in appeal to the Supreme Court. Now, the only question with which the High Court was concerned and, consequently the Supreme Court was concerned, was in respect of the claim of depreciation allowance as claimed by the assessee arising Out of the order of the Tribunal which held that the replacement of engine was merely a capital addition and, therefore, the claim of extra depreciation allowance was not tenable. The decision of the Supreme Court in Mir Mohammed Ali's case [1964] 53 ITR 165 (SC), therefore, is to be read in the context of the question with which it was concerned. As the question was in relation to depreciation allowance claimed by the assessee under section 10(2)(vi) and section 10(2)(via), the Supreme Court could not have considered the question, whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (C Sess) is : did the necessity for the expenditure in question arise out of the use of the capital assets in earning profits ? If the necessity has not arisen out of the use of capital assets in earning profits, the expenditure would be capital expenditure. In the instant case before us, the necessity for the expenditure in question has arisen out of the use of capital assets in earning profits and, therefore, the expenses must be held to be correctly attributable to revenue. It cannot be said on the finding made by the Appellate Assistant Commissioner as confirmed by the Tribunal, that the replacement of diesel engine was not necessary. As a matter of fact, as found by the Appellate Assistant Commissioner, the necessity for replacement had arisen because the petrol engine in question in the vehicle of the assessee was in unserviceable condition. Whenever a repair is made in a machinery or in an apparatus or in an instrument, which is being used in business, there is bound to be corresponding benefit to the person making such repair. Consequently, there would be also advantage to the assessee and that advantage or benefit may be, in given cases, of considerable duration. But from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine. The Andhra Pradesh High Court has followed the decision of the Supreme Court in Commissioner of Income-tax v. Mir Mohammad Ali [1964] 53 ITR 165 (SC) and held that not only diesel engines have been held to be machinery but also the expression " installations " would include and apply when machinery is inducted or introduced. This decision of the Andhra Pradesh High Court, therefore, for the same reasons on which we have held about the non-application of the decision of the Supreme Court in Mir Mohammad Ali's case [1964] 53 ITR 165 (SC) would not be of any assistance to the revenue. Mr. Kaji, therefore, attempted to persuade us that this was a case of substantial replacement and, therefore, would not come within the terms of section 31(1) where only expenses incurred in connection with current repairs can be allowed as deduction. In New Shorrock Spinning and Manufacturing Co. Ltd. v. Commissioner of Income-tax [1956] 30 ITR 338 (Bom) the Bombay High Court considered what is the difference between repairs and renewal and quoted with approval the following observation of Lord Justice Buckley in Lurcott v. Wakely and Wheeler [1911] 1 KB 905, 923 (CA) : " ' Repair ' and ' renew ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he unserviceable petrol engine with a diesel engine it was intending to bring into existence either a new asset or to achieve advantage or benefit to itself for permanent endurance, nor can it be said that it was substantially replacing the machinery. It is no doubt true that there was no material on the record before the Tribunal as to what would be the price or cost of a new truck. But, none the less, the assessee could not have been able to purchase a new truck from the amount which it spent in replacement. This very question arose before the Mysore High Court in Hanuman Motor Service v. Commissioner of Income-tax [1966] 66 ITR 88 (Mys), where a transport operator claimed the expenses incurred by him in replacement of a petrol engine with diesel engine as current repairs under section 10(2)(v). The court held in that case that what was really being done was to preserve and maintain an already existing asset and the expenses were not incurred to bring a new asset into existence or to obtain a new or a fresh advantage to the business of the assessee. In that view of the matter, therefore, we do not think that the object of the assessee in incurring the expenses in replacement was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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