Bombay H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the expenditure of Rs. 2,29,258 incurred by the assessee in replacing petrol engines with diesel engines fitted in jeeps is of a revenue nature in computing its business income for the asst. yr. 1977-78 ?

Counsel Appeared

D.R. Dhanuka with D.H. Parekh, for the Revenue : R.J. Kolah with F.B. Andhyarina for the Assessee

BHARUCHA, J.:

This is an application made by the Revenue under s. 256(2) of the IT Act, 1961. Rule has been issued only in regard to the first proposed question. It reads thus :

” Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the expenditure of Rs. 2,29,258 incurred by the assessee in replacing petrol engines with diesel engines fitted in jeeps is of a revenue nature in computing its business income for the asst. yr. 1977-78 ? “

The facts are indicated in the question itself. The Tribunal found, in view of the fact that the assessee had merely replaced petrol engines with diesel engines which the assessee considered advisable to do in view of the steep rise in petrol prices as compared to diesel prices, that the expenditure thereon was of revenue nature.

The Revenue relied before us upon the decision of the Kerala High Court in CIT vs. Noroth Oil Mill Co. Ltd. (1982) 28 CTR (Ker) 299: (1983) 140 ITR 173(Ker). This was a case in which the assessee had constructed five fishing boats and fitted them with 40 horse-power engines. About four years later, these engines were replaced with 60 horse-power engines. The Tribunal held that the boats might have required repairs and hence the expenditure of Rs. 1,55,448 was allowable as revenue expenditure. The Kerala High Court, on a reference, took a different view. It found that there was no material before the Tribunal to show that the boats had become uneconomic in operation or that the engines were defective. By the mere use of the boats for about four years, the Tribunal could not find that the boats “might have required repairs” and even if it was found that they ” might have required repairs “, this was not a finding that they did require repairs. Two factors which were emphasised were that the original engines were not shown to have required replacement and that the new engines were more powerful than those they replaced. The consequence was that the efficiency of the boats was considerably increased. There was an enduring advantage to the assessee by reason of the more efficient operation of the boats on the replacement of the engines. Hence, the expenditure was taken to be of a capital nature.

Mr. Kolah, learned counsel for the assessee, invited our attention to the judgment of the Supreme Court in Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34(SC). The Supreme Court observed that the aim and object of the expenditure would determine its character, namely, whether it was capital expenditure or revenue expenditure. If the expenditure was made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it was properly attributable to capital and was of the nature of capital expenditure. If, on the other hand, it was made for running the business or working it with a view to produce profits, it was revenue expenditure. The question whether expenditure was of capital or revenue nature was a question of fact to be determined by the authorities on an application of the broad principles aforementioned and courts of law would not ordinarily interfere with such findings of fact, if arrived at on a proper application of these principles.

The Tribunal, in the instant case, came to the conclusion that the assessee had replaced the petrol engines with diesel engines in view of the steep rise in the price of petrol as compared to that of diesel. This is a finding of fact and, inevitably, the conclusion from this finding must be that the expenditure was incurred with a view to augment the assessee’s profits. The Tribunal was entirely right in holding that it was revenue expenditure.

The Kerala High Court judgment is based on different facts. The emphasis in that judgment was on the fact that (a) there was no material to show that the original engines required replacement, and (b) that, when replaced, they were replaced with more powerful engines. In these circumstances, the replacement was found to be intended to bring about an asset of an enduring character and the expenditure incurred was held to be capital expenditure. In the premises, we discharge the rule.

7. There will be no order as to costs.

[Citation : 169 ITR 538]