Commissioner of Income-tax Vs. Mohd. Ishaque, Mohd. Gulam - Court Judgment

Excerpt:
- - 6. it is well established that where expenditure is incurred for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributable to capital and it is in the nature of capital expenditure and if, on the other hand, it is not made for the purpose of bringing into existence any such asset or advantage, but for running the business or working it with a view to augment the profits, it is revenue expenditure.u.l. bhat, c.j. 1. the commissioner of income-tax, jabalpur, has filed this application under section 256(2) of the income-tax act, 1961, seeking reference of the following question of law ;'whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the expenditure of rs. 40,930, incurred in replacing petrol engines by diesel engines was of a capital nature not allowable under section 37 of the income-tax act ?'2. we have heard both sides.3. the matter arises in relation to the assessment year 1978-79. the respondent-assessee is a firm carrying on the business of manufacture and sale of bidis. the firm had a jeep fitted originally with a petrol engine. during the assessment year, the petrol engine was replaced by a diesel engine at a cost of rs. 40,930. the assessee had claimed total expenditure of rs. 1,32,294 together with petrol expenses of rs. 15,298 as deductible revenue expenditure. the assessing officer did not advert to the cost of replacing the petrol engine by the diesel engine, but disallowed rs. 20,000 on the ground that the expenditure claimed was excessive. the assessee filed an appeal on this and other aspects of the order. the appellate assistant commissioner reduced the deduction from rs. 20,000 to rs. 15,000, issued notice with regard to the expenditure of rs. 40,930 and after hearing the assessee, disallowed the expenditure. the assessee filed an appeal before the tribunal which held that the expenditure of rs. 40,930 incurred for replacing the engine was an item of revenue expenditure incurred for repairs of machinery or plant and set aside the direction of the commissioner. the orders of the commissioner and the tribunal do not refer to section 51, but the orders are passed really on section 31 of the act. the tribunal also declined reference at the instance of the commissioner. hence, this application.4. the deduction claimed in this case was under section 31(1) of the act according to which in respect of repairs and insurance of machinery, plant or furniture used for the purposes of the business or production, the amount paid on account of current repairs shall be allowed. there is no dispute that the jeep was being used for the purpose of business of the assessee and if the replacement of the engine is to be regarded as current repairs, section 31 would apply.5. the question posed for consideration is whether replacement of the petrol engine by a diesel engine can be said to be current repairs and the expenditure to be treated as revenue expenditure or whether it would amount to capital expenditure.6. it is well established that where expenditure is incurred for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributable to capital and it is in the nature of capital expenditure and if, on the other hand, it is not made for the purpose of bringing into existence any such asset or advantage, but for running the business or working it with a view to augment the profits, it is revenue expenditure. the aim and object of the expenditure would determine the character of the expenditure. (see assam bengal cement co. ltd. v. cit : [1955]27itr34(sc) and travancore-cochin chemicals ltd. v. cit : [1977]106itr900(sc) ).7. one of the earlier cases relating to replacement of the petrol engine of the vehicle by a diesel engine is the one in hanuman motor service v. cit : [1967]66itr88(kar) which is a decision of the mysore high court. theassessee was a firm of bus operators. buses were run with petrol engines. in the relevant years, the petrol engines of some of the buses were replaced by diesel engines. allowance of the expenditure incurred in this behalf was claimed under section 10(2)(v) of the indian income-tax act, 1922, corresponding to section 31 of the income-tax act, 1961. it was held that the machinery concerned were buses and not the petrol engines that were replaced. the replacement of worn out parts of the machinery does not, by itself, bring a new asset into existence. in relation to the bus concerned, the replacement of the engine was only a current repair of that bus.8. in cit v. mahalakshmi textile mitts ltd. : [1967]66itr710(sc) the supreme court had occasion to consider the legitimacy of the claim for development rebate on the ground of installation of new machinery, in the business of manufacture and sale of cotton yarn. the expenditure was for introduction of the 'casablanca conversion system' in the spinning plant. this involved replacement of several parts, introduction of new parts and other additions and alterations in the drafting mechanism. on the evidence before it, the tribunal held that by introducing the 'casablanca conversion system', the assessee made current repairs to the machinery and plant and allowed the expenditure under section 10(2)(v) of the act. this was affirmed by the high court and the supreme court. in that case, because of wear and tear, certain moving parts of the machinery had to be periodically replaced and it was found that when the parts were not available, the assessee introduced the new system.9. the gujarat high court had occasion to consider this matter in addl. cit v. desai bros. : [1977]108itr14(guj) . in that case, a manufacturer of bidis incurred an expenditure for replacing a petrol engine of a truck used in the business by a diesel engine. the high court held that repair always involved renovation of a part, i.e., restoration or renewal or replacement of subsidiary parts of a whole. the expenditure did not bring into existence a new asset, nor was there a substantial replacement or renovation of existing assets and the expenditure in preserving and maintaining the asset for the purpose of business was of a revenue nature and for current repairs of machinery.10. the bombay high court considered the question in cit v. polyolefins industries ltd. : [1988]169itr538(bom) . in this case also petrol engines of vehicles had been replaced by diesel engines on account of the steep rise in petrol prices in comparison to diesel. it was held that the expenditure was incurred with a view to augment the profits.11. the business of the nsscsscc is of manufacture and sale of bidis. the jeep is used for the purpose of and in the course of business. the original petrol engine was replaced by a diesel engine. it is an undisputed fact that over the years, the cost of petrol has been increasing at a much higher rate than the cost of diesel. it was in these circumstances that the engine was replaced. the intention in replacing the engine was certainly to reduce the expenditure incurred in operating the jeep and thereby augment the profits of business. by incurring the expenditure, no new asset was brought into existence and no advantage for the enduring benefit of the business was derived. the expenditure was incurred for running the business with a view to produce profits. on these premises, the conclusion that the expenditure is of revenue expenditure is inevitable. we find no question of law arising for consideration.12. the application is accordingly dismissed, but without costs.