The Commissioner of Income Tax vs The City and Mofussil Transports

Sethuraman, J.—In this reference under the income tax Act, the following question has been referred:

Whether on the facts and in the circumstances of the case, the expenditure of Rs. 25,156 incurred by the Assessee on the cost of two new engines

for replacing two old and worn-out engines was an expenditure for repairs and allowable as a deduction u/s 31 of the income tax Act of 1961.

The Assessee is a company which runs a fleet of buses in Coimbatore District. Under the head spares and repairs, at showed an amount of Rs.

25,156 as cost of replacement of two engines. This represents the costs of two new engines purchased in September 1963 and February 1964 for

Rs. 12,545 and Rs. 12,611 totaling Rs. 25,156. The claim of the Assessee in the assessment for the assessment year 1964-65, the relevant

previous year ending on 31st March 1964, was that this represented a revenue expenditure. The income tax Officer, relying on the decision of the

Supreme Court in the COMMISSIONER OF Income Tax, MADRAS Vs. MIR MOHAMMAD ALI. ARUNA MILLS LTD. :

INTERVENER., held that the engines, which the Assessee purchased, were machinery entitled to depreciation and could not be allowed as

revenue expenditure. On appeal the Appellate Assistant Commissioner noticed that these two engines had been fitted in the place of two

condemned engines. He held also that the replacement of the two engines represented capital expenditure and, therefore, not allowable as

deduction. On further appeal the Assessee relied particularly on Section 31 of the income tax Act of 1961 and submitted that the expenditure

represented current repairs. The Tribunal considered that the matter had been decided in Hanuman Motor Service Vs. Commissioner of Income

Tax, Mysore, of the Mysore High Court and the Commissioner of Income Tax Vs. Coimbatore Motor Transport Co-Operative Society for Ex-

Servicemen, of this Court and held that the expenditure was admissible u/s 31 of the Act. At the instance of the Commissioner the question set out

already has been referred.

(2) The learned Counsel for the Revenue submitted that the expenditure incurred in substituting two new engines for the two old and worn-out

engines was an expenditure of a capital nature and could not have been allowed as deduction u/s 31 of the Act. We have, thus to consider two

aspects viz., (a) whether the expenditure represents current repairs contemplated by Section 31 of the Act and (b) whether it was liable to be

disallowed as capital expenditure. Section 31 of the Act runs to the extent relevant as follows:

In respect of repairs....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;

(ii) xx xx xxx xx

There is no dispute here that the buses to which these engines were fitted were used for the purposes of the business. The scope of the expression

current repairs has now to be considered. In Lurcott v. Wakely and Wheeler (1911) I.K.B. 905 the Court of Appeal had to consider the extent of

a tenant''s liability under a covenant to repair. Buckley L. J., said as follows:

Repair and renew are no words expressive of a clear contrast. Repair always involves renewal ; renewal of a part.... 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 bus substantially the whole subject-matter under discussion....and the test is whether the act to be done is one

which in substance is the renewal or replacement of defective parts, or the renewal or replacement of substantially the whole.

Though these observations came to be made in the context, of a tenant''s liability the Privy Council referred to this decision with approval in a tax

case in Rodesia Railways Limited v. income tax Collector (1933) A.C. 368.

This Court had occasion to consider the content of the expression current repair in the Commissioner of Income Tax, Excess Profits Tax,

Madras Vs. Rama Sugar Mills Ltd., Bobbili, . That case arose under the Indian income tax Act, 1922, and the corresponding provision was

Section 10(2) (iv). In that case the Assessee, a sugar factory, claimed that a boiler, which had to be replaced, was replaced by an exactly similar

boiler and that the expenditure of Rs. 86,496 incurred in the purchase, erection and fitting of the new boiler came within the scope of Section 10

(2) (v) of the Act. Satyanarayana Rao J., propounded the test at page 197 as follows:

The test, therefore, which decides the question whether a thing is a ""repair"" or not is to see whether the act actually done is one which in substance

is a replacement of defective parts or a replacement of the entirety or a substantial part of the subject-matter.

Raghava Rao J., wrote a dissenting judgment, but the judgment of Satyanarayana Rao J., prevailed, as it confirmed the Tribunal''s view in that

case. In some of the later decisions the test of Satyanarayana Rao J., has been adopted.

But it may be noticed that both the learned Judges did not accept the meaning put on the expression current repairs by the Allahabad High

Court in RAMKISHAN SUNDERLAL Vs. COMMISSIONER OF Income Tax, U.P., as being equivalent to ""petty"" repairs. The learned

Judges did not, however, discuss the ambit of the words current repairs.

This expression current repairs came to be considered by the Bombay High Court in New Shorrock Spinning and Manufacturing Co. Ltd. Vs.

Commissioner of Income Tax, Bombay North, . The Assessee, a textile mill, spent a sum of Rs. 30,557 at Rs. 47 per piece for replacing certain

parts in 646 looms out of 864 looms and claimed the amount as expenditure for current repairs u/s 10 (2) (v) of the 1922 Act. The Bombay High

Court speaking through Chagla C.J., expressed itself as follows:

The expression ""repairs"" must be understood in contradistinction to renewal or restoration. The test that has to be applied is that as a result of the

expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The

object of such expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage but if the amount

spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then such an expenditure would not be an

expenditure of a revenue nature but it would be a capital expenditure.

The word "" current"" in the expression "" current repairs "" does not mean ""petty"" but denotes such repairs which are attended to when the need for

them arises and are not allowed to fall into arrears to be accumulated. If the Assessee, although the need has arisen, does not attend to that need

and allows the repairs to get accumulated, it could not be said that when he is expending money on these repairs he is expending them on current

repairs. But if the need for repairs had not arisen before they were actually effected, even repairs done long after the acquisition of the asset would

be ""current repairs

The expression ""current repairs "" used in Section 10 (2) (v), therefore, means expenditure on buildings, machinery, plant or furniture which is not

for the purpose of renewal or restoration, which is only for the purpose of preserving or maintaining an already existing asset which does not bring

a new asset into existence or does not give to the Assessee a new or different advantage, and they must be repairs which are attended to as and

when the need for them arises.

The same question came up for consideration before this Court again in the Commissioner of Income Tax, Madras Vs. Mahalakshmi Textile

Mills Ltd., . The Assessee a textile mill, spent a sum of Rs. 96,533 for the purpose of introducing the Casablanca High Drafting System and

claimed that it was only a revenue expenditure for effecting substitution of worn-out parts of the existing machinery. The income tax authorities took

the view that the amount represented capital expenditure as the whole system of working of the mill was changed into a new one and that there

was an enduring benefit to the mills by this change. It was, however, found that parts of the old type were not available and that the Assessee

replaced the worn out parts with the parts produced by a different manufacturer, the provision of these parts being referred as the Casablanca

High Drafting System. The Tribunal found that no new asset was brought into existence or no new advantage was derived by the Assessee. In

dealing with this claim this Court referred to the Bombay decision cited above and pointed out at page 263 as follows:

The replaced part may be new and may be a new asset ; but in 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 replacement of parts which are really in the nature

of current repairs can be held to be not eligible for the allowance u/s 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.

The allowance of the Assessee''s claim by the Tribunal was confirmed. This decision was affirmed by the Supreme Court in the Commissioner of

Income Tax, Madras Vs. Mahalakshmi Textile Mills Ltd., . The Supreme Court held that the Tribunal had evidence before it from which it could

be concluded that by introducing the Casablanca conversion system the Assessee made current repairs to the machinery and plant and that the sum

of Rs. 93,215 was allowable as an expenditure incurred for current repairs u/s 10 (2) (v) of the Act.

This Court had again occasion to go into the concept of repairs in the Commissioner of Income Tax Vs. Coimbatore Motor Transport Co-

Operative Society for Ex-Servicemen, . In that case the Assessee claimed deduction of the expenditure on completely renovating the body of

motor vehicles by putting in a new body on old chassis. There was no question in that case as to whether what was done was "" current"". The

question was whether what was done was repairs to the machinery.

At page 166 the tests in this connection were formulated as follows:

The broad test, in our opinion to find out whether it is a repair is to see whether what has been done is to an existing asset and that by doing the

thing, the result is not the creation of a new asset.... The other test which the Tribunal had in mind may also apply, that is to say, whether what has

been done is a replacement of defective parts or a replacement of the entirety or a substantial part of the subject-matter. If it is the last alternative,

that will amount to creation of a new asset. In effect this and the creation of a new asset are not different. They are only different ways of looking at

the same question.

It may be seen that the test propounded above is substantially the same as that propounded by Satyanarayana Rao J., in the Commissioner of

Income Tax, Excess Profits Tax, Madras Vs. Rama Sugar Mills Ltd., Bobbili, . The same view has also been taken by the Punjab High Court in

the COMMISSIONER OF Income Tax, PUNJAB, JAMMU and KASHMIR AND HIMACHAL PRADESH Vs. SHEIKHUPURA

TRANSPORT CO. LTD., .

The Mysore High Court in Hanuman Motor Service Vs. Commissioner of Income Tax, Mysore, had to deal with the question of substitution of

petrol engines by diesel engines by the Assessee, a firm of bus operators. The learned Judges referred to the decisions of this Court in the

Commissioner of Income Tax, Excess Profits Tax, Madras Vs. Rama Sugar Mills Ltd., Bobbili, and of the Bombay High Court in New Shorrock

Spinning and Manufacturing Co. Ltd. Vs. Commissioner of Income Tax, Bombay North, and observed at page 93 as follows:

The replacement of worn-out parts of a machinery does not by itself bring a new asset into existence. The fact that an old part of a machinery is

replaced by a new part does not mean that a new asset has been brought into existence.... While effecting current repairs to any machinery old

parts may have to be replaced by new parts, sometimes by more efficient parts. If we look at the engines by themselves, there is no doubt that new

assets had been brought into existence. But in relation to the bus concerned, the replacement of its engine is only a current repair of that bus. We

see no justification for understanding the expression "" current repairs "" as being equivalent to petty repairs. Section 10 (2) (v) contemplates the

repair of a machinery and not of any part thereof.

The result of this discussion is to show that the word repair comprehends renewal or replacement of a subsidiary part and not merely

reconditioning the used one, and if what was done was a replacement of defective parts, and not a replacement of an entity or a substantial part of

the subject-matter, it would be a case of a repair. The repair is effected for the puroose of preserving or maintaining an already existing asset and

not to bring a new asset into existence or to obtain a new or fresh advantage. In the present case the unit with which we are concerned is the bus.

The Assessee had only replaced the worn-out and condemned engine by a new engine The a part of the bus, just as the chassis was Commissioner

of Income Tax Vs. Coimbatore Motor Transport Co-Operative Society for Ex-Servicemen, . It may be that the bus bus cannot function with the

engine, just as it could not without the chassis. The same would apply with reference to any of the other parts of bus. For instance the bus cannot

run without the wheels nor could it function say, without a radiator. It is not in dispute that if the wheels or the radiator are replaced, there would be

no capital expenditure, as such. Merely because the engine, as such, has been replaced, it does not mean that there has been a substitution of the

asset of the unit as a whole. We have to remember that the asset in this case is only the bus and that the engine is only a subsidiarry part of the bus.

Replacement of the subsidiary part, it is well settled, is revenue expenditure coming within the scope'' of the word ""repairs"" Applying the test

formulated in the decisions considered above as to what are current repairs, we consider that the substitution of the engine would also come within

the scope of the expression current repairs in the present case. expression current

The Learned Counsel for the Revenue however, submitted that this view would be inconsistent with the decision of the Supreme Court in the

COMMISSIONER OF Income Tax, MADRAS Vs. MIR MOHAMMAD ALI. ARUNA MILLS LTD. : INTERVENER., . In that case the

Assessee a bus owner, replaced petrol engines by new diesel engines and claimed not only normal depreciation u/s 10(2)(v) of the Act, but also

initial depreciation under the second paragraph of Section 10(2)(vi) of the Act. The question was whether this claim was admissible. This Court

took the view that the diesel engines represented machinery even for the purpose of an allowance of initial depreciation. In that case, ordinary

depreciation on the said diesel engines had already been allowed. The Supreme Court by a majority held that the same meaning ought to be given

to the word machinery in Clauses (iv), (v), (vi) and (vi-a) of Section 10 (2) of the income tax Act, 1922, and that if there was machinery for the

purpose of giving an allowance in respect of insurance or for repairs or in respect of normal depreciation, than it was also machinery for the

purpose of second paragraph of Clause (vi) and also Clause (vi-a). From the fact that the word "" machinery "" was understood in the same sense,

among others, in Clauses (v), (vi) and (vi-a), it would be clear that the Assessee could have claimed the relief under any of the clauses if the

language of the respective clauses was satisfied. The Supreme Court had no occasion to deal with the question as to whether the substitution of the

diesel engines by petrol engines was repairs or current repairs to, the machinery. It is not clear from the reports as to whether in that case the petrol

engine had become worn-out and the assease, therefore, thought of substituting them by the diesel engine. If in that case there was no replacement

of a worn-out part, then there was no question of the claim of the Assessee falling u/s 10 (2) (v) corresponding to Section 31 of the Act. As the

claim in that case was rested on a different provision, it would not, in our opinion, be proper to understand that case as having ruled out the claim

under any of the provisions relevant here.

Reference was made before us to a decision of Andhra Pradesh High Court in R. B. SHREERAM and CO. (PRIVATE) LTD. Vs.

COMMISSIONER OF Income Tax, A. P., . In that case also the Assessee, a transport operator, had replaced petrol engines by diesel engines.

The High Court held that such an expenditure was capital expenditure inasmuch as it was incurred for the creation of an advantage of an enduring

benefit. The Assessee was, however, held to be entitled to development rebate u/s 10 (2) (vi-b) of the income tax Act, 1922, on the cost of diesel

engine following the decision in the COMMISSIONER OF Income Tax, MADRAS Vs. MIR MOHAMMAD ALI. ARUNA MILLS LTD. :

INTERVENER., . In this case also there was no claim by the Assessee that the replacement of a petrol engine by a diesel engine constituted

current repairs to the machinery. Therefore, the Andhra Pradesh High Court had no occasion to go into this point.

The Learned Counsel for the revenue submitted that even assuming that the expenditure could be brought within the scope of Section 31, still

so long as it was capital expenditure it would have to, be ruled out of consideration for any of these provisions, viz., Sections 28 to 37. There is a

difference of opinion on this point. The Mysore High Court in Hanuman Motor Service Vs. Commissioner of Income Tax, Mysore, pointed out at

page 91 that in considering a claim for deduction u/s 10 (2) (v) of the Act of 1922 corresponding to Section 31 of the present Act the question

whether the expenditure was a capital expenditure or not was not relevant. The Bombay High Court in New Shorrock Spinning and Manufacturing

Co. Ltd. Vs. Commissioner of Income Tax, Bombay North, held that an expenditure under Clause (v) of Section 10 (2) of the Act of 1922 must

be expenditure of a revenue nature and not of a capital nature. This Court in the case reported in the Commr. of Inc. tax v. Mahalakshmi Textile

Mills Limited (1965) 56 256 observed at page 261 that if the expenditure was incurred for the purpose of bringing a new asset into existence or a

new advantage for the business, then such an expenditure would be of a capital nature. It is clear that this Court was inclined to the view that even

in a case coming u/s 10 (2) (v) of the Act of 1922 corresponding to Section 31 of the present Act, the expenditure must have a revenue character.

We agree with this view, with respect.

However, in the present case there is no question of any capital expenditure as such, because the replacement of the engine has not brought into

existence any new asset nor any enduring advantage. The bus continues to have the same capacity and run in the same manner as earlier. This is

not even a case where a diesel engine has been substituted for a petrol engine so that it may have to be considered whether there can be said to be

any economy in operation. Having regard to the faces before us, we are satisfied that there is no capital element in the expenditure so as to merit

disallowance.

In the result, we answer the question in the affirmative and in favour of the Assessee. The Assessee will be entitled to its costs.