1997 JTR(SC) 27
1997 AIR(SC) 851 ; 1997 AIR(SCW) 679 ; 1997 2 BomLR 62 ; 1997 138 CTR 284 ; 1997 224 ITR 414 ; 1997 1 JT 488 ; 1997 1 KLT(SN) 32 ; 1997 1 Scale 227 ; 1997 2 SCC 449 ; 1997 1 SCR 179 ; 1997 TaxLR 187 ; 1997 90 Taxman 402 ; 1997 KHC 217 ; 1997 2 Supreme 61
1997(2) Supreme 61
SUPREME COURT OF INDIA
B.P. Jeevan Reddy & K.T. Thomas, JJ.
M/s. Ballimal Naval Kishore & Anr. -Appellants
versus
Commissioner of Income Tax, Bombay -Respondent
Civil Appeal No. 646 of 1981.
Decided on 10-1-1997
Counsel for the Parties :
For the Appellants : Ms. A.K. Verma, and S. Ganesh, Advocates for M/s. JBD & Co., Advocates
For the Respondent : Dr. R.R. Mishra, Sr. Advocate, Ms. Laxmi Iyengar, B. Krishna Prasad, Advocates.
IMPORTANT POINT
Expression "Current repairs" in Section 10(2)(v) of Income Tax Act means expenditure on buildings, machinery, plant or furniture which is not for purposes of renewal or restoration but only for preserving or maintaining an already existing asset.
Act Referred :INCOME TAX ACT : S.30(a)(ii), S.31(i), S.10(2)(v)
(A) Section 10(2)(v) of the Income Tax Act, 1922 permits deduction for amounts spent on current repairs to buildings, machinery, plant, and furniture used in business. This case involves an assessee operating a cinema theatre who claimed deduction for extensive repairs, including machinery, furniture, sanitary fittings, electrical wiring, and structural renovations. The Income Tax Officer and the Appellate Authority treated the expenditure as capital in nature, while the Tribunal allowed the claim. The Bombay High Court, under Section 66(1) reference, held the expenditure to be capital in nature, rejecting the deduction. The court relied on the interpretation of current repairs as distinguished from capital expenditure, emphasizing that only revenue expenditures aimed at preserving an existing asset are deductible under the section.
(B) The expression current repairs in Section 10(2)(v) encompasses only those expenditures which preserve or maintain an existing asset without bringing a new asset into existence or conferring a new advantage. The test is whether the expenditure results in renewal or restoration versus maintenance, and must be determined on grounds of commercial expediency. Expenditure resulting in the creation of a new asset or a new advantage constitutes capital expenditure and is not deductible.
Facts of the case:
The assessee carried on the business of exhibiting films in a theatre. The building was originally a ginning factory constructed in 1937 and was converted into a cinema theatre in 1945. During the period from 1960 to March 1961, the assessee extensively repaired the theatre, incurring significant expenditure on new machinery, furniture, sanitary fittings, electrical wiring, and major structural repairs. The theatre remained closed during this period. The assessee claimed these amounts as deductions under Section 10(2)(v), but the Income Tax Officer and the Appellate Authority disallowed them as capital expenditure. The Tribunal allowed the claim, leading to a reference to the Bombay High Court.
Findings of Court:
The Bombay High Court held that the repairs were in reality a total renovation, involving new machinery, furniture, sanitary fittings, and wiring, along with extensive structural work. Such expenditure could not qualify as current repairs within the meaning of Section 10(2)(v), as it resulted in a new asset and a new advantage, and was therefore capital in nature.
Issues:
Whether the substantial expenditure incurred on renovating and repairing the theatre qualifies as current repairs under Section 10(2)(v) of the Income Tax Act, 1922, or whether it constitutes non-deductible capital expenditure.
Ratio Decidendi:
The expression current repairs must be interpreted as maintenance or preservation of an existing asset without creating a new asset or advantage. Expenditure that results in renewal or restoration, or that provides a new asset or advantage, is capital in nature and not deductible under Section 10(2)(v). Applying this test, the court found the assessees expenditure to be capital renovation, not deductible repairs.
Result:
The appeal is dismissed, and the deduction claimed is disallowed.
(A) Section 10(2)(v) of the Income Tax Act, 1922 permits deduction for amounts spent on current repairs to buildings, machinery, plant, and furniture used in business. This case involves an assessee operating a cinema theatre who claimed deduction for extensive repairs, including machinery, furniture, sanitary fittings, electrical wiring, and structural renovations. The Income Tax Officer and the Appellate Authority treated the expenditure as capital in nature, while the Tribunal allowed the claim. The Bombay High Court, under Section 66(1) reference, held the expenditure to be capital in nature, rejecting the deduction. The court relied on the interpretation of current repairs as distinguished from capital expenditure, emphasizing that only revenue expenditures aimed at preserving an existing asset are deductible under the section.
(B) The expression current repairs in Section 10(2)(v) encompasses only those expenditures which preserve or maintain an existing asset without bringing a new asset into existence or conferring a new advantage. The test is whether the expenditure results in renewal or restoration versus maintenance, and must be determined on grounds of commercial expediency. Expenditure resulting in the creation of a new asset or a new advantage constitutes capital expenditure and is not deductible.
Facts of the case:
The assessee carried on the business of exhibiting films in a theatre. The building was originally a ginning factory constructed in 1937 and was converted into a cinema theatre in 1945. During the period from 1960 to March 1961, the assessee extensively repaired the theatre, incurring significant expenditure on new machinery, furniture, sanitary fittings, electrical wiring, and major structural repairs. The theatre remained closed during this period. The assessee claimed these amounts as deductions under Section 10(2)(v), but the Income Tax Officer and the Appellate Authority disallowed them as capital expenditure. The Tribunal allowed the claim, leading to a reference to the Bombay High Court.
Findings of Court:
The Bombay High Court held that the repairs were in reality a total renovation, involving new machinery, furniture, sanitary fittings, and wiring, along with extensive structural work. Such expenditure could not qualify as current repairs within the meaning of Section 10(2)(v), as it resulted in a new asset and a new advantage, and was therefore capital in nature.
Issues:
Whether the substantial expenditure incurred on renovating and repairing the theatre qualifies as current repairs under Section 10(2)(v) of the Income Tax Act, 1922, or whether it constitutes non-deductible capital expenditure.
Ratio Decidendi:
The expression current repairs must be interpreted as maintenance or preservation of an existing asset without creating a new asset or advantage. Expenditure that results in renewal or restoration, or that provides a new asset or advantage, is capital in nature and not deductible under Section 10(2)(v). Applying this test, the court found the assessees expenditure to be capital renovation, not deductible repairs.
Result:
The appeal is dismissed, and the deduction claimed is disallowed.
JUDGMENT
B.P. Jeevan Reddy, J.-Section 10(2)(v) of the Income Tax Act, 1922 allows deduction of the amount spent of "current repairs" to buildings, machinery, plant, furniture employed in the business. The assessee-appellant carries on the business of exhibiting films in a theatre called "Naval Talkies" at Panipat. He had purchased the said building in 1937. It was a ginning factory then. The ran the factory till 1940. In the year 1945, he converted it into a cinema theatre and was exhibiting films therein. During the period 1960 to March 1961, the assessee extensively repaired the theatre by expending substantial amounts. The amounts spent by him are: on machinery Rs. 16,002/-, new furniture Rs. 27,889/- sanitary fittings Rs. 5,225/- and replacement of electrical wiring Rs. 13,604/-. In addition thereto, a total amount of Rs. 62,977/- was spent on extensive repairs to walls, to the hall, to the flooring and roofing, to doors and windows and to the stage sides etc. Actually the theatre had to be closed during the aforesaid period for effecting the repairs.
2. In the assessment proceedings relating to the relevant assessment year, the assessee claimed deduction of the aforesaid amount of Rs. 62,977/-. The Income Tax Officer disallowed the same. According to him it was capital expenditure. On Appeal, Appellate Assistant Commissioner affirmed the view taken by the Income Tax Officer. On further appeal, however, the Tribunal upheld the assessee s case whereupon the following question was referred to the Bombay High Court under Section 66(1) of the Indian Income Tax Act, 1922, at the instance of the Revenue: "Whether on the facts and circumstances of the case, in computing the Income of the assessee for the material year a sum of Rs. 62,977/- or any portion thereof is deductible?" The High Court answered the question in favour of the Revenue and against the assessee following the earlier decision of the said court in New Shorrock Spinning and Manufacturing Company Ltd. v. Commissioner of Income Tax1.
3. The expression used in Section 10(2)(v) is "current repairs" and not mere "repairs". The same expression occurs in Section 30(a)(ii) and in Section 31(i) of the Income Tax Act, 1961. The question is what is the meaning of the expression in the context of Section 10(2). In New Shorrock Spinning and Manufacturing Company Ltd., Chagla, C.J., speaking for the Division Bench, observed that the expression "current repairs" means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration but which is only for the purpose of preserving or maintaining an already existing asset and which does not bring a new asset into existence or does not give to the assessee a new or different advantage. The learned Chief Justice observed that they are such repairs as are attended to as and when need arises and that the question when a building, machinery etc. requires repairs and when the need arises must be decided not by any academic or theoretical test but by the test of commercial expediency. The Learned Chief Justice observed:
"The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure or repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of repairs because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure.
If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which, the Legislature has permitted under Section 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure."
In taking the above view, the Bombay High Court dissented from the view taken by the Allahabad High Court in Ramkrishan Sunderlal v. Commissioner of Income Tax. U.P.2, where it was held that the expression "current repairs" in Section 10(2)(v) was restricted to petty repairs only which are carried out periodically. The Learned Judge agreed with the view taken by the Patna High Court in Commissioner of Income Tax v. Darbhanga Sugar Co. Ltd.3 and by the Madras High Court in Commissioner of Income Tax v. Sri Rama Sugar Mills Ltd.4.
In Liberty Cinema v. Commissioner of Income-Tax, Calcutta5, P.B. Mukharji, J., speaking for a Division Bench of the Calcutta High Court, held that an expenditure incurred with a view to bring into existence a new asset or an advantage of enduring nature cannot qualify for deduction under Section 10(2)(v).
4. In our opinion the test involved by Chagla C.J. in New Shorrock Spinning & Manufacturing Company Limited is the most appropriate one having regard to the context in which the said expression occurs. It has also been followed by a majority of the High Courts in India. We respectfully accept and adopt the test.
5. Applying the aforesaid test, if we look at the facts of this case, it will be evident that what the assessee did was not mere repairs but a total renovation of the theatre. New machinery, new furniture, new sanitary fittings and new electrical wiring were installed besides extensively repairing the structure of the building. By on stretch of imagination, can it be said that the said repairs qualify as "current repairs" within the meaning of Section 10(2)(v). It was a case of total renovation and has rightly been held by the High Court to be capital in nature. Indeed, the finding of the High Court is that as against the sum of Rs. 17,00/- for which the assessee had purchased the factory in 1937, the expenditure incurred in the relevant accounting year was in the region of Rs. 1,20,000/-.
7. The appeal accordingly fails and is dismissed. No costs.
Appeal dismissed.
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