1. This appeal by the revenue is directed against the order of the AAC allowing the deduction of expenditure incurred by the assessee for replacing a petrol engine by a diesel engine in his car.
2. The assessee is an individual earning income from his profession as a chartered accountant. He purchased a new Hindustan Ambassador car on 12-5-1978 for Rs. 34,150. Immediately thereafter he replaced the petrol engine in that car with a diesel engine which cost Rs. 22,500 and he also incurred a sum of Rs. 3,854 towards the labour for fitting the new engine. The petrol engine was sold for Rs. 4,000 and after setting off this amount against the replacement expenditure of Rs. 26,359, he claimed the balance of Rs. 22,359 as a revenue expenditure in computing the income from profession for the previous year ended 15-5-1978, corresponding to the assessment year 1979-80. The ITO was of the opinion that the replacement was not by way of repairs and that it had brought into existence a new asset with benefit of enduring nature and, therefore, the expenditure should be disallowed as capital in nature.
On appeal, the AAC followed the decision of the Andhra Pradesh High Court in the case of Nathmal Bankatlal Parikh & Co. v. CIT [1980] 122 ITR 168 (FB) and held that a replacement of a subsidiary part could only be a revenue expenditure since no new asset had been brought into existence. He, accordingly, allowed the deduction.
3. In the appeal before us, the contention of the revenue is based on the decision of the Kerala High Court in the case of CIT v. C.P.A.Yoosuf [1978] 113 ITR 225 and it was submitted that the deduction could not be allowed as repair charges because a new engine had been replaced by another new engine and that the value of the car as such had gone up which indicated that the assessee had incurred only capital expenditure which could not be allowed as a deduction. On the other hand, it was submitted on behalf of the assessee, relying on an unreported decision of the Madras High Court in the case of City & Moffusil Transports (P.) Ltd. (Tax Case No. 63 of 1970 dated 17-12-1975), that a replacement of a part does not involve a creation of a new asset, which alone would make the expenditure, as capital in nature, 4. On consideration of the rival submissions, we are of the opinion that there are no merits in this appeal. The admitted facts are that a new Ambassador car was purchased and its petrol engine was replaced with a diesel engine. The effect of the replacement was that the running expenditure of the car which was dependent on the type of engine, was considerably reduced. With the petrol engine the car was expected to give 10 kms, per litre of petrol which cost Rs. 3.31 per litre, whereas the diesel engine would give 14 kms. per litre which cost only Rs. 1.39 per litre. The recurring expenditure of the assessee who in the practice of his profession had to travel by his own car from Erode to Madras, Trichy, Coimbatore, Salem and Mysore, etc., was thus considerably reduced and that was the sole benefit that the assessee derived, though it is possible that the value of the car had also been increased. The assessee did not capitalise the expenditure by adding it to the cost of the car but claims that the expenditure should be allowed as a deduction in computing the income from the profession. If the replacement can be considered to be for current repairs to the machinery, the expenditure incurred could be allowed under Section 31 of the Income-tax Act, 1961 ('the Act'). Obviously, in the present case a replacement of a new petrol engine by a new diesel engine cannot be considered to be current repairs because the words 'current repairs' have been judicially understood as replacement of only a defective part. But it has been held by the Supreme Court in the case of CIT v.Kalyanji Mavji & Co. [1980] 122 ITR 49 that repairs which are not current repairs could be considered under Section 10(2)(xv) of the 1922 Act [corresponding to Section 37(1) of the Act]. While considering the admissibility of the expenditure under Section 37 we have only to see whether the expenditure could be allowed as a revenue expenditure or not. Admittedly, the expenditure was laid out for the purpose of business. It is well settled that looking at this question, the enquiry should be what a reasonable businessman would understood by the expression 'capital expenditure' and would he regard this expenditure as capital expenditure or not and the modern approach to the problem is to treat the expenditure as a revenue expenditure unless it is clearly of a capital nature. In the present case, the expenditure could be regarded as capital in nature only if it resulted in bringing in to being a new asset or obtained a new or fresh advantage. In other words, we have to see whether the replacement of the petrol engine by the diesel engine amounted to a replacement of the entire or substantial part of the car. The Madras High Court has observed in the case of CIT v. Mahalakshmi Textile Mills Ltd. [1965] 56 ITR 256, subsequently affirmed by the Supreme Court in CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710, as follows : . . . The replaced part may be new and may be a new asset ; but having regard to the nature of the expenditure, one should consider the productive unit as a whole and not pick out parts therein which are new. If such a view is taken, then even the replacement of parts which are really in the nature of current repairs can be held to be not eligible for the allowance under section. 10(2)(v), for as the part is undoubtedly new, it is a new asset and because of its newness it confers some advantage. That does not appear to be the correct view to take. (p. 263) This view has been reiterated by the Madras High Court in a recent judgment dated 17-12-1975 in the case of Mofussil Transports (supra) where it is held that the cost of replacement of two engines in two buses was allowable as a deduction. Similarly in the case of CIT v.Coimbatore Motor Transport Co-operative Society [1968] 70 ITR 165 (Mad.), it was held that the complete renovation of a body of a motor vehicle by putting in a new body on an old chassis did not amount to creation of a new asset. The following test laid down by the Mysore High Court in the case of Hanuman Motor Service v. CIT [1967] 66 ITR 88 is to be applied in such cases : In finding out whether a given case falls within the scope of Clause (v) of Section 10(2), the true test is whether, as a result of the expenditure which is claimed as expenditure for repairs, what is really being done is to preserve and maintain an already existing asset or whether the object of such expenditure was to bring a new asset into existence or to obtain a new or fresh advantage. If it is the former, then it is a 'repair'. If it is the latter, it should be considered as a replacement or renewal... (pp. 88-89) When we apply this test to the facts of the present case, we find that by merely replacing the petrol engine with the diesel engine, no new asset was brought into existence because the original asset, namely, the car, was continued to be preserved and maintained. It was pointed out on behalf of the revenue that the cases of Nathmal Bankatlal (supra), Addl. CIT v. Desai Bros. [1977] 108 ITR 14 (Guj.) as well as Hanuman Motor (supra) were concerned with the cases of replacement of old and unserviceable petrol engine by a new diesel engine which could be regarded as a repair or replacement whereas in the present case a new petrol engine was replaced by a new diesel engine which must be accepted to have given the assessee an added advantage. It was pointed out that in the case of C.P.A. Yoosuf (supra), the Kerala High Court directed the Tribunal to find whether the petrol engines in that case had become disused and whether there was any need for substituting them by diesel engines for purposes of preserving arid maintaining the existing buses. It was submitted that since in the present case a fully serviceable and new petrol engine has been discarded and replaced by a new diesel engine, it must be considered to have been done only for obtaining a fresh advantage. We are aware of this aspect of the matter and we find that the only advantage the assessee derived by replacing the petrol engine with a diesel engine was that the running cost was considerably reduced. As we have noted above, the asset as such which was here the car, was not substantially replaced or reconstructed because only one part of the car was replaced. Maybe it is the prime mover of the vehicle, but it is still only one of the several component parts that make a car and the replacement of the engine alone cannot be considered to be such a substantial alteration of the vehicle as to consider it to be a completely new asset. We have only to consider whether the assessee derived a fresh advantage of an enduring benefit.
On this aspect, we find the advantage was only of a reduction in recurring revenue expenditure and an expenditure incurred for reducing the revenue expenditure cannot be considered to be a capital expenditure. From the point of view of an ordinary businessman, it was an expenditure to cut the running expenditure and is not to be capitalised. Therefore, we are convinced that the AAC was right in allowing the expenditure claimed as an admissible deduction in computing the income of the assessee.