TMI Blog1975 (7) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... is a company carrying on business of publishers and book sellers, importing and selling books published by the Oxford University. The assessment year is 1963-64. During the accounting period relevant to the assessment year the assessee incurred an expenditure of Rs. 59,000 in the form of payment made to M/s. John Fleming Co. for guniting work carried on in its building known as " Oxford House " and also a sum of Rs. 3,680 as fees paid to the architects in connection with guniting work undertaken on the advice of the architects. The assessee claimed both the items as expenditure incurred for repairs to their building. The Income-tax Officer observed that the repairs in question could not be called " current repairs " but that the assessee had undertaken major structural repairs which had the effect of prolonging the life of the building for at least 15 years and as the repairs resulted in extension of the period of the serviceableness of the asset and in the creation of an enduring benefit, the expenditure was a capital expenditure. In the appeal preferred to the Appellate Assistant Commissioner the assessee explained the real nature of guniting work that had been undertaken and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame should be allowed as a deduction either as current repairs or accumulated repairs under section 37 of the Act. At the instance of the Commissioner of Income-tax the first question set out above has been referred to us for determination. The question as to what is the proper meaning of the expression it " 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 Gulamhussein Ebrahim Matcheswalla v. Commissioner of Income-tax [1974] 97 ITR 24 (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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out the plastering and repair work to the building and the reasons and circumstances as to why the guniting process had been employed, it appears to us very clear that by employing this method, which was nothing but an improved method of plastering and repairing work, all that the assessee had done was to preserve and maintain the already existing asset. No new asset or new advantage as such could be said to have been brought into existence by reason of expenditure incurred for doing the guniting work. As a result of guniting work done the assessee had not changed the nature of the asset, viz., the building as a whole, and the same in no way increased the accommodation or earning capacity of the building ; in that sense no new advantage of enduring benefit has been brought into existence. The repairs also could not be regarded as heavy structural repairs, for, according to the assessee's architects, what could not be achieved by the ordinary method of plastering was achieved by a sophisticated method of process of guniting. In this view of the matter, it seems to us very clear that the expenditure of Rs. 59,000 incurred for guniting work done as also the expenditure of Rs. 3,680 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had, in the past, repaired the flooring by replacing the upper layer which was a wooden layer by wooden boards. In the year of account, a layer of oxychloride was laid between the two layers. Though this process cost the company less than the original process, it made the floor more durable. The department's contention was that by this particular process a new asset had come into existence and, therefore, the amount spent was not a revenue expenditure. This court held that the assessee was only maintaining and preserving an asset, which he already possessed, by the process which he adopted. The life of the asset was made longer and it was made to give better service than it was doing in the past. Even so, the expenditure incurred was not of a capital nature. The ratio of this case would apply with equal force to the facts in the present case. All that the assessee-company did in the instant case was to undertake the plaster repairing work but by adopting a new method called guniting process, and by incurring the expenditure by adopting such a process the assessee was merely maintaining and preserving an asset which it already possessed and thus though to some extent the life of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee company to its covenanted staff could not be considered to be an ex gratia payment. After examining the terms of settlement between the assessee-company and the non-covenanted staff, the Appellate Assistant Commissioner took the view that the gratuity paid to the deceased's heirs was equivalent to approximately 2 years' salary while the gratuity fixed for the non-covenanted staff was only 12 months' salary and in view of this he held that the gratuity payment in excess of 12 months' salary was an ex gratia payment. In other words, he allowed a deduction of Rs. 24,000 representing 12 months' salary as legitimate business expenditure but disallowed the rest as being in the nature of ex gratia payment. Crossappeals were filed before the Appellate Tribunal, one by the assessee contending that there was no justification for disallowing part of the gratuity paid by the assessee-company to the heirs of the deceased and the other by the department contending that since there was no contract to pay such gratuity to the covenanted staff, any payment was purely ex gratia and no part of the gratuity paid to the heirs of the deceased who was a member of the covenanted staff should have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of Rs. 40,000 by the assessee-company " in appreciation of his long and valuable services to the company ". The company had no scheme for payment of gratuities nor did it pay such gratuities in practice. There was nothing to show that the employee had accepted a low salary in expectation of a gratuity on retirement or that the gratuity was paid for the purpose of facilitating the carrying on of the business of the company or as a matter of commercial expediency. The court held that the amount of gratuity paid by the assessee was not, under the circumstances an expenditure laid out or expended for the purposes of the assessee's business, within the meaning of section 10(2)(xv) of the Indian Income-tax Act, 1922, and was not deductible in computing the profits and gains of the company. In particular Mr. Joshi invited our attention to page 555 of the report where the Supreme Court has indicated the tests which it wished to lay down in these terms (See [1962] 44 ITR 551, 555) : " In our opinion the proper test to apply in this case is, was the payment made as a matter of practice which affected the quantum of salary or was there an expectation by the employee of getting a gratuity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly distinguishable on facts and he urged that in the instant case one of the tests which had been laid down by the Supreme Court in Gordon Woodroffe Company's case [1962] 44 ITR 551 (SC) was fully satisfied on the finding that had been recorded both by the Appellate Assistant Commissioner and by the Tribunal and that since the said finding recorded by the Appellate Assistant Commissioner and the Tribunal had not been challenged by the revenue, it was not open to the revenue to contend that the expenditure ought to be disallowed. In our view, there is considerable force in the contention of Mr. Kaka that each of the three decisions on which reliance has been placed by Mr. Joshi is clearly distinguishable on facts. So far as the Supreme Court decision in Gordon Woodroffe Company's case [1962] 44 ITR 551 (SC) is concerned, the decision really turned on the peculiar facts therein ; admittedly, the said company had no scheme whatsoever for payment of gratuity nor did the assessee pay such gratuity in practice to its employees. In the instant case before us it cannot be said that there is no scheme for payment of gratuity at all, for, admittedly, by reason of the settlement that was ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled under his contract of employment. The company claimed the aggregate of these sums amounting to Rs. 1,64,899 as business expenditure. The claim was rejected by the Tribunal and on a reference the company contended that a part of the sum paid was gratuity to its employees. This court held that the fact that the wage bill had been reduced by means of the payments was insufficient to arrive at the conclusion that they were made for commercial considerations ; that in the administration of the company there was no practice of payment of gratuity and no legally enforceable claim for such payment against the company. The payments had been described as retrenchment compensation but the retrenchment had been effected not for the purposes of economy but to comply with the requirements of the agreement for sale. This court took the view that the sum of Rs. 21,200 paid as commutation of pensions was an expenditure on account of an existing liability of the company and was deductible. The amount of Rs. 16,188 paid to the managing director under his contract of employment was also deductible as business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. The rest of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness expenditure. The question, it must be said, was considered by the Madras High Court in the context of a different test that was adopted for determination and, therefore, the ratio of the Madras decision would not apply to the facts of the present case. The question before us will have to be considered in the context of three separate and distinct tests which have been indicated by the Supreme Court in Gordon Woodroffe's case [1962] 44 ITR 551 (SC) and the question is whether the payment in the instant case satisfies at least one of the three tests so laid down. It is true, as was pointed out by Mr. Joshi, the Supreme Court has laid down three tests for determination of the question : (a) Was the payment made as a matter of practice which affected the quantum of salary ? (b) Was there an expectation by the employee of getting a gratuity ? and (c) Was the sum of money expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business ? According to Mr. Kaka, the test of expectation which has been laid down by the Supreme Court in the aforesaid decision must be deemed to have been satisfied fully having regard to a finding tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner held that part of the gratuity paid to the heirs of Mr. B. D'brass to the extent of Rs. 24,000 being 12 months' salary could be regarded as proper and legitimate business expenditure while that part which was in excess of 12 months' salary will have to be regarded as ex gratia payment and he, therefore, disallowed the excess amount to the extent of Rs. 26,000. Mr. Kaka further pointed out that when the matter was carried in further appeal to the Tribunal, the Tribunal has confirmed this finding of the Appellate Assistant Commissioner in these words : " In our opinion, the Appellate Assistant Commissioner was right in observing that some gratuity may be paid by the assessee-company to the covenanted staff also. In the absence of any written agreement, in our opinion, the Appellate Assistant Commissioner was right in allowing gratuity payment on a par with that paid to the non-covenanted staff. " Accordingly, the Tribunal upheld the deduction to the extent of Rs. 24,000 and further upheld the disallowance of gratuity to the extent of Rs. 26,000. Mr. Kaka urged that this finding which has been recorded by the Appellate Assistant Commissioner and which was confirmed by the T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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