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Petitioner: HUMAYUN PROPERTIES LTD. VS Respondent: COMMISSIONER OF INCOME-TAX CALCUTTAHonorable Justice MUKHARJI
1963 P T D 40
1963 P T D 40
[Calcutta India]
Before P. B. Mukharji and H. K. Bose, JJ
HUMAYUN PROPERTIES LTD.,
versus
COMMISSIONER OF INCOME‑TAX CALCUTTA
Income‑tax Reference No. 82 of 1956, decided on 5th April 1961.
Income‑tax Act (XI of 1922) S. 10 (2) (v)‑"Current repairs" ‑Meaning‑Cinema houses‑Expenses for renovation involving capital expenditure‑Whether allowable,
The assessee company, which carried on business as cinema exhibitors, was the owner of two cinema houses. During the accounting year ending September 30, 1949, in addition to spending the sum of Rs. 81,799 under the separate head of account of repairs the assessee incurred expenses amounting to Rs. 2,41,312 which it termed renovation expenses. The assessee claimed that owing to dearth of materials during the war years it was unable then to execute the necessary repairs to the machinery, building and furniture of the cinema houses and spent in the accounting year the sum of Rs. 2,41,312 in renovating them. On enquiry the Income‑tax Officer found that the primary purpose of the renovation was to make the halls more attractive and comfortable to the public and therefore designed to increase their value and running capacity and that the bulk of the amount of renovation expenses was expenditure of a capital nature e.g., for replace ment of furniture and sanitary fittings and new electrical instal lations. He, therefore, allowed only 10% of the renovation expenses and treated 90% as capitalised expenses. The question was whether the balance of 90% of the renovation expenses amount ing to Rs. 2,17,182 was allowable under section 10(2)(v) of the Indian Income‑tax Act, 1922, as expenditure for " current repairs":
Held, on the facts, that the sum of Rs. 2,17,182 was not allowable under section 10 (2) (v) as expenditure for "current repairs".
Per Mukharji J.‑Only such repairs can be current repairs which have periodicity implicit in the word "current". "Current repairs" include repairs for ordinary wear and tear. Current repairs are necessary repairs and which are needed for the mainte nance of the building, machinery, plant or furniture mentioned in section 10(2)(v) of the Income‑tax Act. The term "current repairs", in its ordinary acceptation, means not luxury repair or repairs which wait upon the whims or choice of the assessee. The element of need is implicit in the expression "current repairs". "Current repairs" must be those that are needed periodically and from that point of view accumulation of repairs will not ordinarily satisfy that test.
Per Bose J.‑The idea which is latent in the expression "current repairs" is the characteristic of re-currency and the expression has reference to repairs effected with the object of maintaining and preserving the existing asset and restoring them to their original condition when they have deteriorated as a result of wear and tear. But when the expenditure is incurred to bring into existence a new asset or an advantage of an enduring nature, it cannot be regarded as an expenditure incurred in current repairs. The word "asset" is an elusive expression and it is difficult to draw a line where an existing asset becomes a new asset as a result of expenditure incurred for its restoration.
The test depends on the degree of improvement brought about and the change effected in the identity of the existing asset as a result of the expenditure incurred. Again, to make the repair a "current repair" the need for such repair must have arisen;
Held also, per Bose J.‑(i) that although the question as framed by the Tribunal was of a general nature its scope was limited in this case to the consideration of the aspect whether the renovation was "current repairs" or not ;
(ii) that the High Court was not restricted to what was stated in the statement of the case but was entitled to look into the orders of the Income‑tax Officer and the Appellate Assistant Commissioner which were required by the rules of the High Court to be made part of the paper book in the reference.
Bansilal Abirchand Spinning & Weaving Mills v. Commissioner of Income‑tax (1957) 31I T R 427 (Nag.); Bullcroft Main Collieries Ltd. v. O'Grady (1932) 17 Tax Cas. 93 (K. B.); Commissioner of Income- tax v. Darbhanga Sugar Co. Ltd. (1956) 29 I T R 21 ; Commis sioner of Income‑tax v. Ranjit Singh (1955) 28 I T R 14 (Punj.) ; Commissioner of Income‑tax v. Sheikhupura Transport Co. Ltd. (1961) 41 I T R 336 (Punj.) ; Commissioner of Income‑tax and Excess Profits Tax v. Sree Rama Sugar Mills Ltd. (1952) 21 I T R 191 ; In re Gregory (G. T. M.) & Co. (1937) 5 I T R 12 ; Grey v. Woodhouse (1927) 1 Ch. 242 ; Highland Railway Co. v. Balderston (1889) 2 Tax Cas. 485 ; Indian Molasses Co. (P.) Ltd. v. Commis sioner of Income‑tax (1959) 37 I T R 66 ; Jackson v. Laskers Home Furnishers Ltd. (1957) 1 W L R 69 ; Kusumben D Mahadevia v. Commissioner of Income‑tax (1960) 39 I T R 540 ; Law Shipping Co. Ltd. v. Commissioners of Inland Revenue (1923) 12 Tax Cas. 621 ; Lurcott v. Wakely and Wheeler (1911) 1 K B 905 (C. A.) ; Mann Crossman and Paulin Ltd. v. Compton (1947) 28 Tax Cas. 410 (K. B.) ; New Jehangir Vakil Mills Ltd. v. Commissioner of Income‑tax (1959) 37 I T R 11 ; New Shorrock Spinning & Manu facturing Co. Ltd. v. Commissioner of Income‑tax (1956) 30 I T R 338 ; Philips v. Whieldon Sanitary Potteries Ltd. (1952) 33 Tax Cas. 213 (K. B.) ; Ramkishan Sunderlal v. Commissioner of Income‑tax (1951) 19 I T R 324 (All.) ; Rhodesia Railways Ltd. v. Income‑tax Collector Bechuanaland (1933) A C 368 and Samuel Jones & Co. (Devonvale) Ltd. v. Commissioners of Inland Revenue (1951) 32 Tax Cas. 513 ref.
STATEMENT OF CASE
By this application, presented on August 13, 1956, the appli cant requires the Appellate Tribunal to refer, to the High Court certain questions of law which are said to arise out of the Appellate Tribunal order dated June 5; 1956, in I. T. A. No. 4750 of 1955‑56. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid order, we hereby draw up a statement of the case aid refer it to the High Court of Judicature at Calcutta under section 66 (1) of the Income‑tax Act.
2. The assessee is a company carrying on the business of cinema exhibitors. Amongst other houses, it was the owner of the two show houses, the Light House and the New Empire. The year of account was the year ending on September 30, 1949. During this year of account the assessee incurred certain expenses which it termed as renovation expenses. Under, the Head New Empire renovation the expenses amounted to Rs. 91,994 and under the head Light House renovation the expenses amounted to Rs. 1,49,318. . The Income‑tax Officer allowed 10% of the claim as current repairs while disallowing Rs. 82,796 for New Empire renovation and Rs. 1,34,386 as Light House renovation. Thus the disallowed expenses aggregated to Rs. 2,17,182. A summary of the expenses of the New Empire renovation and Light House renovation are made part of this case and are Annexures "A" and "A‑1." Apart from the renovation expenses the assessee also incurred expenses under the head repairs amounting to Rs. 17,748. The income‑tax department allowed the claim of repairs for the last amount while disallowing the claim of Rs. 2,17,182 (not Rs. 2,18,182 as given in the order of the Income‑tax Officer) as the amount was not incurred for the current repairs.
3. Upholding the decision of the department the Tribunal held that renovation was not in the nature of repairs as envisaged under section 10(2) (v). Following the decision in the case of Ramkishan Sunderlal v. Commissioner of Income‑tax ((1951) 19 I T R 324 (All.)), it held that repair was qualified by the word "current" and only the current repairs for the business could be allowed under the said subsection. The Tribunal found that the assessee company was unable to execute substantial repairs for dearth of materials during the war and as a result after several years the assessee renovated the furniture and buildings and rightly wrote of the amount under renovation. Copy of the Tribunal's order is made a part of the case and is Annexure "B".
4. From the above facts and circumstances the following question of law arises;
"Whether on the facts and circumstances of this case, the sum of Rs. 2,17,182 claimed as an expenditure on renovation was allowable as a deduction in computing the business income of the assessee company?"
5. Draft copies of the statement were sent to the parties concerned. The suggestions of the assessee have been appro priately incorporated. The Commissioner of Income‑tax has no suggestion.
JUDGMENT
MUKHARJI, J.‑This income‑tax reference under section 66(1) of the Income‑tax Act raises the following question of law for decision;
"Whether, on the facts and circumstances of the case, the sum of Rs. 2,17,182 claimed as an expenditure on renovation was allowable as a deduction in computing the business income of the assessee company ?"
The facts briefly are as follows : The assessee company, Human un Properties Ltd., carries on business of cinema exhibi tors. Amongst other houses, it is the owner of the two well- known show houses in Calcutta, called the Light House and the New Empire. The accounting year ended on September 30, 1949. During that year of account the assessee incurred certain expenses which it called as "renovation expenses". Under the head "New Empire renovation", the expenditure amounted to Rs. 91,994‑10‑9 and under the head "Light House renovation" the expenditure amounted to Rs. 1,48,318. The Income‑tax Officer allowed 10% of the claim as current repairs and disallowed Its. 82,796 for New Empire renovation and also disallowed Rs. 1,34,386 as Light House renovation. The total of these disallowed renovation expenditure amounted to Rs. 2,17,182. The Appellate Assistant Commissioner upheld the Income‑tax Officer's disallowance of Rs. 2,17,182. The Tribunal also affirmed the decision holding that the renovation was not in the nature of current repairs within the meaning of section 10(2)(v) of the Income‑tax Act.
The Appellate Tribunal expressly states that the only question before them was whether renovation was current repair and whether in part it can be allowed as current repairs. It referred to the decision of Ramkishan Sunderlal v. Commissioner of Income‑tax ((1951) 19 I T R 324 (All.)), a decision of the Allahabad High Court of Mallik, C. J., and Bhargava J., and the Madras decision of Satyanarayana Rao J. and Raghava Rao J. in Commissioner of Income‑tax v. Sree Rama Sugar Mills Ltd. ((1952) 21 I T R 191 (Mad.)).
The main question on this reference is the interpretation of the words "current repairs" in section 10(2)(v) of the Income -tax Act which reads as follows;
"Such profits or gains shall be computed after making the following allowances, namely;
In respect of `current repairs' to such buildings, machinery, plant or furniture, the amount paid on account thereof."
As usual there are a number of conflicting decisions on the meaning and interpretation of the expression "current repairs." A brief review of them is both inevitable and essential. The first decision is that of the Allahabad High Court in Ramkishen Sunderlal v. Commissioner of Income‑tax, a decision of the Division Bench of Mallick C. J. and Bhargava J. It quotes the well‑known observations of Buckley L. J. in Lurcott v. Wakely and Wheeler ((1911) 1 K B 905 at 923‑4 (C. A.)), where it is said that the words "repair" and "renew" are not words of clear contrast, for repair always involves renewal and repair may be restoration by renewal or replacement of subsidiary parts of a whole, and where renewal, as distinguished from repair, is said to be reconstruction of the entirety, meaning by the word "entirety" not necessarily the whole but substantially the whole subject‑matter. The Allahabad High Court in Ram Kishen's case ((1951) 19 I T R 324, 328 (All.)) observed;
"In the Indian Income‑tax Act the word `repair' is further qualified by the word `current' which would further restrict its meaning to petty repairs, usually carried out periodically and will not include repair or renewal costing a large sum of money which has to be spent after a machine has been run for a number of years."
The next case is of the Madras High Court in Commissioner of Income‑tax v. Sree Rama Sugar Mills Ltd. ((1952) 21 I T R 191 (Mad.)), a decision of a Division Bench of Satyanarayana Rao and Raghava Rao JJ.
There in that case Satyanarayana Rao J. observed at page 197 as follows;
"Renewal is a repair if it is only restoration by renewal or replacement of, subsidiary parts of a whole if, on the other hand, it amounts to a reconstruction of the entirety or of substantially the whole of the subject‑matter it is not a repair but a reconstruction. 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 sub stantial part of the subject‑matter."
The same learned Judge then proceeded to analyse the well- known decisions of the Judicial Committee in Rhodesia Railways Ltd. v. Income‑tax Collector, Bechuanaland ((1933) 1 I T R 227 (P.C.)), and Highland Railway Co. v. Balderston ((1889) 2 Tax Cas. 425 (Exch.)), and also the decision of Rowlatt J. in Bullcroft Main Collieries Ltd. v. O'Grady ((1932) 17 Tax Cas. 93 (K.B.)), and then disagreed with the view of the Allahabad High Court by holding at page 202 of the report;
"The dictionary meaning of the word `current' is not petty, but it means `belonging to the present time, prevailing', and with great respect to the learned Judges, it is difficult to accept such a restricted construction of the expression `current repair' in the clause."
Raghava Rao J., who delivered a separate judgment in that case, expressed the view that the replacement of the old boiler by the new boiler was a case of repair but was not current repair within the meaning of section 10(2)(v) of the Income‑tax Act.
The next case is of the Punjab High Court in Commissioner of Income‑tax v. Ranjit Singh ((1955) 28 I T R 14 (Punj.)), a decision of a Division Bench of Bhandari, C. J. and Falshaw J. This was also a hotel repair case. This case, however, as pointed out by Falshaw J., shows that a sum can be allowed as the cost of repairs and can be held at the same time not to be a capital expenditure in spite of the fact that the expenditure in a particular year happened to be specially heavy on account of the fact that it was undertaken to remedy the effect of several years of wear and tear or neglect and also in spite of the fact that such expenditure might not be necessary for some time to come after the repairs have been effected. But at page 22 of the report Falshaw J., dealing with the Allahabad decision construing "current repairs" as "petty repairs", observed as follows (1955) 28 I T R 14, 22 (Punj) .
"I am not at all sure that I entirely agree with this view if it means that the only test is that a particular item of expendi ture must be one which is constantly recurring and not one which may only recur after a few years and it seems to me that other factors must also be taken into consideration."
The next case is the decision of the Patna High Court in Commissioner of Income‑tax v. Darbhanga Sugar Co. Ltd. ((1956) 29 I T R 21 (Pat.)), a decision of a Division Bench of Ramaswami and Imam JJ. According to this authority the expression "current repairs" in section 10(2) (v) of the Income‑tax Act means repairs in the current accounting year, It disagreed with the Allahabad view that "current" meant "petty". It also disagreed with the view taken by Raghava Rao J. in the Madras case, that "current repairs" meant expenditure on repairs of the plant and machinery in a running condition and if the repair was effected after the machinery or the plant came to a standstill, they could not be regarded as "current repairs". Ramaswami J., delivering the judgment of that Division Bench at page 28, observed;
"I, therefore, think that the expression `current repairs to machinery' which occurs in section 10(2)(v) must be interpreted to mean repairs to machinery in the current accounting year. In other words, `current' is used in contradistinction to past or arrear repairs."
The next decision is of the Bombay High Court in New Shorrock Spinning and Manufacturing Co. Ltd. v. Commissioner of Income‑tax ((1956) 30 I T R 338 (Bom.)), a decision of the Division Bench of Chagla C. J. and Tendolkar J. This decision followed the Patna and the Madras decisions but dissented from the Allahabad decision. It holds that the expression "repairs" in this section 10(2)(v) must be understood in contradistinction to renewal or restoration. Chagla C. J., observed as follows at page 3 44 of the report;
"The definition of `repair' really does not create much difficulty, but the difficulty is created by the adjective which qualifies the expression `repairs', and that adjective is `current', and as already pointed out, the legislature did not intend that the assessed should be permitted all repairs, even though the expenditure may be a revenue expenditure, as a permissible deduction under section 10(2)(v).
"What we have to consider is in what way has the legislature circumscribed the expression `repairs' and to what extent has the legislature limited the right of the assessee to claim deduction in respect of repairs. One or two views are possible of the expression `current'. It may be said that `current' is used in contradistinction to heavy and that small petty repairs are the only repairs which can fall within the ambit of section 10 (2) (v).
"The other view is a view more in fitting with the etymol ogical meaning of the expression `current' and it is that they are such repairs which are attended to when the need for them arises and are not allowed to fall into arrears to be accumulated. If a building, machinery, plant or furniture needs some repairs and those repairs are attended to as and when the need arises then the repairs are current repairs.
"But if the assessed, although the need has arisen, does not attend to that need and allows the repairs to get accumulated, then it could not be said that when he is expending money on these repairs he is expending them on current repairs.
Again, it seems to have been the intention of the legislature, that if the assessed could carry on with his building, machinery, plant or furniture without attending to its repairs and spends an amount at a later date when the arrears are accumulated, such expenditure partakes more of the nature of capital expenditure than of revenue expenditure."
In the same case the learned Chief Justice of the Bombay High Court proceeds to observe at page 345 of the report further (1956) 30 I T R 338, 345 (Bom.)
"In our opinion, therefore, the expression `current repairs' used in section 10(2)(v) 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 assessed a new or different advantage, and they must be repairs which are attended to as and when the need for them arises."
The last of the Indian cases is of the Nagpur High Court in Bansilal Abirchand Spinning and Weaving Mills v. Commissioner of Income‑tax ((1957) 31 I T R 427 (Nag.)), a decision of the Division Bench of V. R. Sen and G. P. Bhutt JJ. That authority also considers the question of interpretation of the words, "current repairs" in section 10(2)(v) of the Income‑tax Act. It comes to the following conclusion ((1957) 31 I T R 427, 432).
"The term `repairs' has to be understood to contradistinction to reconstruction. When the existing asset is only maintained or preserved, the case is one of repairs and not reconstruction . . . . The question of the amount of expenditure does not count in such cases, for that does not change the nature of the expenditure. In Commissioner of Income‑tax v. Ranjit Singh ((1955) 28 I T R 14 (Punj.)) it was held that a sure can be allowed as the cost of repairs even though the expenditure in a particular year is heavy on account of the fact that it is undertaken to remedy the effect of several years of wear and tear or neglect and also in spite of the fact that such expenditure may not be necessary for several years to come after the repairs have been effected. As no new asset has been created by the replacement of these parts, the expenditure must be held to be in respect of current repairs. We hold that the expenditure is revenue and not capital expenditure."
This concludes a survey of the relevant Indian decisions on the point before us and shows the conflict of interpretation. Before I express my views it would be appropriate to notice two English decisions to which our attention has been drawn. It is necessary however to staid at the outset that the English statute does not contain any section which uses the words "current repairs" which we have to interpret in. section 10(2)(v) of the Income‑tax Act. Thu English decision f Law Shipping Co. Ltd. v. Commissioners of inland Revenue ((1923) 12 Tax Cas. 621 (Sess)) deals with the question of an assessee's claim for deduction of the cost of repairs in respect of a ship. Lord President Clyde of the Court of Sessions, Scotland, in delivering the opinion at page 625 of the report observed as follows;
"The expense laid out in keeping a ship, which is employed in trade, in proper repair is certainly an expense necessary for the purposes of the trade . . . . . Repairs may be executed as the occasion for them occurs ; or if they are such as brook delay, they may be postponed to a convenient season; but, in either case, they truly constitute a constantly recurring incident of that continuous employment of the ship which makes them necessary . . . . . Accumulated arrears for repairs are, in short, nonetheless repairs necessary to earn profits, although they have been allowed to accumulate."
This view is contrary to the view of the Bombay High Court that due to the special word "current" in the expression "current repairs" in section 10(2)(v) of the Indian Income‑tax Act, repairs which could be accumulated and whose need could be postponed, could not be brought under the expression "current repairs" in India.
The other English case has already been mentioned in some of the Indian decisions which I have cited and that is Rhodesia Railways Ltd. v. Collector of Income‑tax, Bechuanaland ((1933) A C 368 ; 1 I T R 227 (P C)), where Lord Macmillan, delivering the advice of the Judicial Committee of the Privy Council, expresses the view that the words "repairs" and "renewal" are not expressive of a clear contrast and the fact that the wear and tear of the rails and sleepers of a railway line although continuous is not made good annually does not render the work of renewal, when it comes to be effected, necessarily a capital charge.
This concludes my survey of all the relevant English and Indian authorities on the point. In the facts of the present case before us the signal consideration remains that the assessee company itself disclosed this disputed expenditure under the head "renovation" and clearly separated this expenditure from other expenses which he himself classed as "current repairs" and which the Income‑tax Officer allowed. The assessee's own opinion may not be conclusive if it is a question of law or legal inference but it becomes a matter of great importance when it is a question of fact how far the expenses listed as renovation could be claimed really as current repairs. If they are really renovation which could be separated from repairs, as the assessee himself did separate, then clearly this renovation expen diture is not the same thing as expenditure on repairs at all, far less "current repairs". Indeed, it is a finding of fact by the Income‑tax Officer that the primary purpose of the renovation in this case was to make the halls more attractive and comfort able to the public and therefore designed to increase the value and running capacity of the halls. The further finding of fact is that many of the bills represent expenses of capital improve ment nature as, for example, plumbing and sanitary works consisting of purchase of new shanks, basins, pipes and new electric installations. In fact, enquiries and investigations were conducted at the office of the contractors of the assessee and it was thereupon found that the bulk of the expenditure was of capital nature and upon an examination and investigation of the relevant bills, vouchers and enquiries from the contractors it was established that 90% of the total expenses under the head "renovation" were of capital nature. Therefore, only 10% of the renovation…
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