Deputy Commissioner of Income Tax vs S.T.N. Textiles Ltd.

V.P. Mohan Kumar, J.—This appeal arises out of the order passed by the Income Tax Appellate Tribunal, Cochin Bench, for the assessment year 1991-92. The assessee is a company running a textile mill. While completing the assessment for the year 1991-92, the Assessing Officer disallowed the claim for deduction of a sum of Rs. 11,11,600 on the head of replacement of electric control panel. The Assessing Officer was of the view that the expenditure incurred in replacement of electric control panel cannot be considered allowable deduction as current repairs u/s 31(i) of the Income Tax Act, 1961. He was of the view that the same is not a current expenditure but was capital expenditure. The matter was taken up in appeal which was disposed of revising the same and holding it amounted to current repairs coming within the ambit of section 31(1) of the Income Tax Act. The appeal filed by the Revenue was also rejected by the Tribunal confirming the order. Aggrieved the Department has come up in appeal u/s 260A of the Income Tax Act raising the following questions of law :

"1. Whether, on the facts and in the circumstances of the case could the expenditure incurred on replacing the power panel be considered as current repairs entitled to deduction u/s 31 of the Income Tax Act ?

Whether, on the facts and in the circumstances of the case is not the expenditure of Rs. 11,11,600 incurred on replacement of electric control panel a capital expenditure ?"

We have heard learned counsel for the Revenue as also learned counsel for the assessee.

Section 31(i) of the Income Tax Act, inter alia, states as under :

"In respect of repairs and insurance of machinery, plant or furniture used for the purposes of the business or profession, the following deductions shall be allowed--

(i) the amount paid on account of current repairs thereto ;" (underlining for easy reference).

The phraseology used is that the deduction can be claimed under the section only with respect to the amount paid on account of "current repairs" with respect to machinery, plant or furniture used for the purposes of the business or profession. From the expression what we understand is that in respect of current repairs and insurance of machinery, plant or furniture used for the purpose of the business the amount paid on account thereof can be deducted. We cannot consider the replacement of a machinery as such would be a "current repair". The electric control panel could be repaired or may be beyond repair. In the case of repair or replacement of certain parts to set right the equipment may be "current repairs". The expression "repair" in ordinary connotation means a restoration by renewal, or replacement of subsidiary parts of a whole and it is also understood that it should be allowed to make good the effect of the equipment. When we say to make good the effect of the equipment, it should be understood to mean that with the repair the defective con- dition of the equipment is cleared and the equipment is restored to the position to be used as it was a new one. If the equipment as a whole is to be replaced, it would mean that it is not repaired and it may be a case of replacement. The earlier equipment that was electric control panel was one which was damaged and which was treated as an equipment that cannot be set right. Therefore, what has been done in this case is that the old equipment is replaced with a new equipment. Hence, it cannot be said that the same is current repair of the equipment.

In Ullal Dinkar Rao v. N. Ratna Bai AIR 1958 Mys 77 , the Mysore High Court was considering the expression "repair". In that case the view taken by the court was that "when we think of repair of the original equipment as such is to set right the old equipment and it is restored back to its original utility. The repair does not contemplate large scale alteration of the existing structure or equipment as the case may be." But in this case, what was done is that the original equipment was totally changed and a new equipment replaced it. It cannot be said that it would be a repair of the electric control panel. In this situation, it would be a case of capital investment and would not be a case of repair. The test, therefore, which decides the question as to whether a thing is repaired or not is to see whether the act actually done is one which in substance is a replacement of defective parts or a replacement in entirety or a substantial part of the subject-matter. When we say that this electric control panel was replaced one cannot assume that it is repaired. Our attention was drawn to a decision of the Allahabad High Court in RAMKISHAN SUNDERLAL Vs. COMMISSIONER OF Income Tax, U.P., , where their Lordships state as under (page 328) :

" ''Repair'' and ''renew'' are not words expressive of a clear contrast. Repair always involves renewal; renewal of a part; of a subordinate part. A skylight leaks ; repair is effected by hacking out the putties, putting in new ones, and renewing the paint. A roof falls out of repair; the necessary work is to replace the decayed timbers by sound wood ; to substitute sound tiles or slates for those which are cracked, broken or missing; to make good the flashings, and the like.

Repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal, as distinguished from repair, is reconstruction of the entirety, meaning by the entirety not necessarily the whole but substantially the whole subject-matter under discussion."

Similar is the view expressed by the decision of the Allahabad Court in Girdhari Dass and Sons Vs. Commissioner of Income Tax, . Their Lordships have expressed in the decision that repair should be current repairs and not the total replacement of the whole equipment. In such cases it is a clear case of replacement and not a repair. The whole equipment is totally replaced. One cannot say that there is a current repair. In view of what is stated above the view of the order of the Appellate Tribunal has to be set aside and we do so. The questions raised are answered in favour of the Revenue. Disposed of.

After the judgment was pronounced in this case on March 11, 2002, Shri P. Balachandran, learned counsel appearing for the assessee, submitted that he wanted to highlight certain aspects in this appeal further. Accordingly, we posted the matter today for being spoken to and is being heard today at length.

Shri F. Balachandran, learned counsel for the assessee, invited our attention to the decision of the Supreme Court in Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., to contend that even a total replacement would amount to a current repair as interpreted by the learned judges therein. We feel that the dictum laid down in the above decision cannot have any application to the facts of this case. The Supreme Court has stated thus (page 713) :

"The Tribunal, on investigation of the true nature of the alterations made by the introduction of the Casablanca conversion system, came to the conclusion that it did not amount to installation of new machinery or plant, but it amounted in substance to current repairs to the existing machinery."

This finding of fact by the Tribunal was for the reason that the expenditure incurred on current repair would come within Section 10(2)(v) though not u/s 10(2)(vib) of the 1922 Act, the predecessor enactment. Even after the change, the older equipment remained the same except that one of its integral parts was changed. It was only a repair. In this case the position is different. Likewise he wanted to rely on a decision in Commissioner of Income Tax Vs. Noroth Oil Mill Co. Ltd., as also Commissioner of Income Tax Vs. Chowgule and Co. Pvt. Ltd., . We are afraid that neither decision has any application to the facts of the present case, even though Commissioner of Income Tax Vs. Chowgule and Co. Pvt. Ltd., is a case where the discussion regarding what is meant by current repair has taken place nothing stated therein is of any help to the assessee. Counsel for the assessee invited our attention to the decision of the Delhi High Court in C/T v. Volga Restaurant [2002] 253 ITR 405 where the entire machinery got damaged due to a fire and was replaced by another equipment. Thereafter a claim was made with respect to Rs. 1,45,516 as the amount expended. As against this claim a sum of Rs. 25,563 was allowed and the balance was declared as capital expenditure. The facts of the case disclosed that the air-conditioner, furniture, etc., got completely damaged and were replaced with new equipment. The court held that the expenditure incurred by the assessee in replacement of the airconditioner plant was a revenue expenditure. It allowed the entire claim. But here we have to note that only a small amount of Rs. 1,45,516 was claimed for the replacement. It discloses the fact that this is not a major replacement, but it can only be a marginal repair effected to the equipment even though they got damaged because of fire. We do not think that in view of the facts of this case it will have any application to the present case. We are, therefore, not inclined to apply the said case to the instant facts.

One other contention urged by learned counsel is that this expenditure could be treated as revenue expenditure u/s 37 of the Income Tax Act and the matter may be adjudicated in that manner. Learned counsel, Mr. P. K. Ravindranatha Menon, appearing for the Revenue, submits that no separate appeal is filed by the assessee claiming this relief. The question of considering the present claim that it would be a revenue expenditure cannot be adjudicated.

We are of the view that there is no prohibition in the statute preventing the examination of the said contention as to whether the present claim be treated as revenue expenditure. Sub-section (7) of section 260A reads as follows :

"Save as otherwise provided in this Act, the provisions of the Code of Civil Procedure, 1908 (5 of 1908), relating to appeals to the High Court shall, as far as may be, apply in the case of appeals under this section."

This means that all the provisions relating to an appeal under the CPC would apply when an appeal is preferred u/s 260A. It is well known that a respondent in appeal can sustain the order which is being challenged in appeal relying on any ground that is decided against him. In this case the question as to whether the claim would amount to a revenue expenditure or not was not pressed in aid by him for the reason that the assessee had succeeded in the appeal and there was no occasion for the assessee to do so. If the decision binding on the main aspect is against the Revenue, he can always sustain the relief granted to him relying on an issue decided against him. If this be the position, the claim of the assessee as to whether it will be a revenue expenditure could be examined by this court at this stage. But, however, as the question was not examined by the Tribunal the matter should be remitted for fresh consideration by the Tribunal to examine whether the claim of deduction of Rs. 11,11,600 can be claimed u/s 31(i) of the Income Tax Act as a revenue expenditure as contemplated u/s 37 of the Act. For this purpose alone, the matter is remitted back to the Tribunal for fresh disposal. Besides the second question raised by the appellant in this appeal is as follows :

"Whether, on the facts and in the circumstances of the case is not the expenditure of Rs. 11,11,600 incurred on replacement of electric control panel a capital expenditure ?"

The present direction answers the issue as well. As such it will not spring any surprise on the Revenue as well. The Tribunal is directed to consider the second question of law formulated by the Revenue in this appeal afresh and in accordance with law.