Gauhati H.C : Whether under the facts and in the circumstances of the case, the Tribunal was justified in law in restoring the order of the AO in respect of disallowance under s. 40A(5) of the IT Act, 1961, on estimated basis ?

High Court Of Gauhati

B & A Plantations And Industries Ltd. vs. CIT

Sections 37(1), 40A(5)

H.K. Sema, ACTG. C.J. & A.H. Saikia, J.

IT Ref. No. 20 of 1997

1st June, 2001

Counsel Appeared

A.K. Saraf, R.K. Joshi, U. Chakravorty, S.K. Agarwal, D. Baruah, S. Saikia & K.K. Gupta, for the Assessee : K.P. Sarma with B. Chowdhury, for the Revenue

JUDGMENT

A.H. Saikia, J. :

The following questions of law, under reference, have been referred to the High Court at the instance of the Tribunal :

1. Whether under the facts and in the circumstances of the case, the Tribunal was justified in law in restoring the order of the AO in respect of disallowance under s. 40A(5) of the IT Act, 1961, on estimated basis ?

2. Whether under the facts and in the circumstances of the case, the Tribunal was justified in law in coming to the conclusion that the expenditure incurred on account of repairs to plant and machinery of Rs. 3,18,214 was for enduring benefit and restoring the order of the AO in disallowing the said amount on the basis of such conclusion ?”

2. In referring the abovementioned questions of law, the Tribunal has also drawn up a statement of facts of the case. The statement of facts as referred by the Tribunal are as follows : “The facts of the case in respect of question No. 1 are that the AO had made disallowance of Rs. 50,000 under s. 40A(5) of the IT Act, 1961. The assessee was requested to furnish details of salary paid, allowances paid to employees, house rent paid and value of perquisites provided, etc., for the purpose of s. 40A(5) of the Act. The assessee did not furnish the details and contended that no amount was required to be disallowed under s. 40A(5). In the absence of specific details, the AO disallowed Rs. 50,000 on estimate as per details worked out in the immediate preceding assessment year giving increment to the employees drawn from the employer’s as well as considering the profit disclosed. Being aggrieved, the assessee came up in appeal before the CIT(A). Similar disallowance was made in the immediately preceding year and the CIT(A) deleted the disallowance vide its order dt. 25th Feb., 1988, in Appeal No. 401, Guwahati, 1986-87 for the asst. yr. 1983-84. Following its earlier order, the CIT(A) deleted the disallowance of Rs. 50,000 as according to him, the reasons given by the AO were not understandable and the AO should have obtained details from the books of account or by raising specific query. Before the CIT(A) also no details were furnished.

In second appeal by the Revenue, the Tribunal restored the order passed by the AO observing that even the CIT(A) did not give reasons for deleting the disallowance and even before the Tribunal, the assessee failed to give necessary details as required by the AO. The assessee submitted a copy of the annual report and accounts which indicates that the expenses has been claimed within the limits provided under s. 40A(5) of the Act. In this view of the matter, the order of the CIT(A) is reversed and that of the AO was restored. Question No. 2 relates to the deletion of addition of Rs. 3,18,214 made by the AO as capital expenditure. The facts of the case are that the assessee claimed Rs. 7,53,320 under the head ‘Machinery repairs and renewals’. The AO found that the following items were (sic-of) capital nature :

The AO was of the opinion that the assessee would derive enduring benefit out of the above expenses and, therefore, he disallowed Rs. 3,18,214. Being aggrieved, the assessee came up in appeal before the CIT(A). Before the CIT(A), the assessee submitted that details of the expenses and submitted that those expenses were in the nature of current repairs and for the replacement of worn out parts of existing machineries and for purchase of parts. The assessee placed reliance on the decisions of the apex Court in Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC) : TC 16R.841 and Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC) : TC 16R.963. Considering the ratio laid down in the above decisions, the CIT(A) held that all the above expenditure had been incurred as current repairs and, therefore, he came to the conclusion that they were in the nature of revenue expenditure. On further appeal by the Revenue, the Tribunal considered the details of the expenditure and recorded a finding that the expenditure incurred were for enduring benefits. The Tribunal also considered the principle laid down by the apex Court and observed that the decision of Assam Bengal Cement Ltd. vs. CIT (supra), was not applicable. In this view of the matter, the order of the CIT(A) was reversed and that of the AO restored.”

3. We have heard Dr. A.K. Saraf, learned senior counsel assisted by R.K. Joshi,appearing on behalf of the assessee. Also heard Sharma, learned senior counsel assisted by Miss B. Choudhury, learned counsel appearing on behalf of the Revenue.

4. Challenging the order dt. 27th Oct., 1994, passed by the Tribunal, Dr. Saraf, learned senior counsel appearing on behalf of the assessee, has strenuously argued that as regards to question No. 1 relating to disallowance of Rs. 50,000 under s. 40A(5) of the IT Act, 1961, hereinafter referred to as the “Act”, the Tribunal took a wrong approach in holding that the assessee failed to file the details as required by the AO in order to enable the Tribunal to judge as to whether the disallowance was according to the provisions of s. 40A(5) of the Act. Besides the Tribunal also committed error of law and facts by observing that the CIT(A) has not given any reason for deleting the disallowance. Referring pointedly to the order dt. 3rd Oct., 1988, passed by the CIT (A), learned counsel appearing for the assessee has stated that in discussing ground No. 2(g), the learned CIT(A) had clearly recorded the reasons as follows : “In ground No. 2(g) it has been stated that the IAC(Asst.) was not justified in making disallowance of Rs. 50,000 on estimate under s. 40A(5) of the IT Act, 1961. The IAC (Asst.) made the aforesaid disallowance on the ground that the appellant did not furnish details of expenses which were required to be furnished under s. 40A(5). Reasons given by the IAC (Asst.) are not understandable. The IAC (Asst.) could have obtained details from the books of account or by raising specific query to the appellant but the same has not been done. Under the circumstances, I am of the opinion that the disallowance was not called for. Moreover, similar disallowance was made in the immediately preceding year and vide my order dt. 25th Feb., 1988, in Appeal No. 401/Guwahati of 1986-87 for the asst. yr. 1983-84, I decided in favour of the appellant. Following the same, the addition of Rs. 50,000 is deleted.”

5. A bare reading of the said observation clearly transpires that the CIT(A) passed the reasoned order in deleting the addition of Rs. 50,000 as per s. 40A(5) of the Act. Be it noted that on our pointed query it is stated at the Bar that the order dt. 25th Feb., 1988, referred to in the order the CIT(A) above, has not been challenged.

6. Learned counsel appearing for the assessee has, referring to the statement of facts drawn by the Tribunal in making the present reference, stated that in the said statement of facts it was manifestly recorded that “the assessee submitted a copy of the annual report and accounts which indicates that the expenses has been claimed within the limits provided under s. 40A(5) of the Act”. Thus, the statement of facts has absolutely belied the findings of the Tribunal to the effect that the assessee did not furnish the details as required by the AO. It is contended that the statement of facts accompanying the reference shall be accepted orthodoxly inasmuch as the statements were prepared with the knowledge and in the presence of both the parties. In support of his contention. Dr. Saraf, learned senior counsel, has referred to two decisions of the apex Court in CIT vs.Calcutta Agency Ltd. (1951) 19 ITR 191 (Gau) : TC 16R.587 and Karnani Properties Ltd. vs. CIT (1971) 82 ITR 547 (Gau) : TC 54R.333.

7. In CIT vs. Calcutta Agency’s case (supra), the Supreme Court held that the jurisdiction of the High Court in the matter of IT reference is an advisory jurisdiction and under the Act the decision of the Tribunal on facts is final, unless it can be successfully assailed on the ground that there was no evidence for the conclusions on fact recorded by the Tribunal. It is, therefore, the duty of the High Court to start by looking at the facts found by the Tribunal and answer the questions of law on that footing. The statement of facts under the rules framed under the IT Act is prepared with the knowledge of the parties concerned having full opportunity to apply for any addition or deletion from thestatement of facts, the statement of facts must be accepted as correct and the Court has to pronounce its judgment on the basis of the said statement of facts.

8. In Karnani Properties Ltd. vs. CIT (supra), it was held by the Supreme Court that when the question referred to the High Court speaks of “on the fact and in the circumstances of the case” it means on the facts and circumstances found by the Tribunal and not about the facts and circumstances that may be found by the High Court. The jurisdiction of the High Court in dealing with the reference under s. 66 is a very limited one and it must take the facts as stated in the statement of facts and cannot go beyond them. Taking into account the ratio of the aforesaid cases, we find force in the submissions of learned senior counsel appearing on behalf of the assessee and we are inclined to hold that the statement of facts prepared by the Tribunal on making the reference must be accepted.

9. Mr. K.P. Sharma, learned senior counsel appearing on behalf of the Revenue, has fairly accepted the contentions made on behalf of the assessee that the reasons had already been recorded by the CIT(A) in passing the order of deleting the addition of Rs. 50,000. But his strong objection is that the assessee had failed to file details as required by the AO. It is submitted that in spite of the request made by the AO as well as the Tribunal, the assessee failed to furnish the detailed accounts like increments given to the employees drawn from the employer, the status and position held by the respective employees, etc. Due to a failure of the submission of such details, the Tribunal acted legally and within the jurisdiction in restoring the order dt. 31st March, 1987, passed by the AO reversing the order dt. 3rd Oct., 1988, passed by the CIT(A).

10. This submission on behalf of the Revenue, in our considered view cannot be accepted in view of the statement of facts recorded by the Tribunal as noted above that the assessee submitted a copy of the annual report and accounts indicating claim of expenses to the limit prescribed under the rules. It is the settled position of law that since the statement of facts is prepared with the knowledge of the concerned parties, the same must be accepted as correct. The statement of the case is binding on the parties and they are not entitled to go behind the facts found by the Tribunal in the statement.

11. On a careful perusal of the impugned order dt. 27th Oct., 1994, passed by the Tribunal, the order dt. 3rd Oct., 1988, passed by the CIT(A) and the statement of facts drawn at the time of making a reference of this Court and on consideration the rival contention of learned counsel for the parties as well as having regard to the ratio of the decisions cited by learned counsel for the assessee, we are of the considered view that the Tribunal was wrong and not justified in reversing the order dt. 3rd Oct., 1988, passed by the CIT(A) and restoring the earlier order of the AO in respect of making disallowance of Rs. 50,000 made under s. 40A(5) of the Act on estimated basis. In that view of the matter, the question of law No. 1 under reference is answered in the negative and in favour of the assessee.

12. Now coming to the second question of law under reference, learned senior counsel appearing on behalf of the assessee, has stated that the Tribunal failed to apply its mind to the ratio of the two decisions cited before it, namely, (1) Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC) : TC 16R.841 and (2) Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC) : TC 16R.963. The expenditure incurred on account of repairs of plant and machinery of Rs. 3,18,214 ought to have been accepted as without having the enduring benefit. It is stated that the assessee had clearly and specifically explained the expenditure of Rs. 3,18,214 for accepting the same as revenue expenditure inasmuch as those expenses were incurred in carrying out the repairs and replacement of the machineries including purchase of parts of such purposes. There is absolutely no scope to bring such expenditure under the head of capital expenditure.

1. Assailing the order dt. 27th Oct., 1994, learned senior counsel appearing for the assessee has drawn our attention to the order dt. 3rd Oct., 1988, passed by the CIT(A), particularly, the observations made in discussing in ground No. 2(i).

2. For better appreciation of the issue in hand, we feel it necessary to reproduce the relevant portion of the observation made by the CIT(A) in discussing in ground No. 2(i) and the same is extended as below : “It has been stated that the IAC (Asst.) was not justified in making disallowance of Rs. 3,18,214 out of machinery repairs. The IAC(Asst.) noted that under this head repair and maintenance a sum of Rs. 3,18,214 was expenditure incurred for the purchase of various machineries. Such expenditure was in the nature of capital expenditure and therefore, he disallowed Rs. 3,18,214. The appellant stated before me that all these expenditure were in the nature of current repairs and for the replacement of worn out parts of existing machineries and for the purchase of parts and he filed the details of such expenses which is being reproduced as under : (i) Installation of motors Rs. 6,127—The dryers of the Salkathoni factory had to be shifted from the existing position to a new position for making space available for “sorting”. The old motors had to be removed from their positions and fixed to a new position to be fitted with dryers. (ii) Cost of one se of casting and accessories Rs. 1,42,199—Paid to Andrew Yule & Co. Ltd. for supply of spare set of castings and accessories for No. 14 S.C.D. AIR heater Bill No. 210120-3 dt. 13th Aug., 1983. In coal-fired heaters replacement of casting from time to time is essential. (iii) Cost of spare of new CTC machine Rs. 33,285 (bill enclosed)—Segments are used in CTC machine and after use the segments got worn out and unuseable. These segments have to be replaced from time to time to get a proper cut of the leaf. (iv) Incorporation of capital expenditure incurred by Salkathoni Tea Estate Rs. 1,30,194.—Paid to Friends Electrical Co. as detailed below : (Bil enclosed) (v) Amount paid to Aspiring Ltd. Rs. 6,408—Cost of spare parts of tea machineries. I have considered the submission of learned counsel and noted that all the above expenditures have been incurred as current repairs or for the purchase of parts of the machinery for replacement of worn out parts of the existing machineries and, therefore, these are in the nature of revenue expenditure. The appellant has also placed reliance on the following decisions : Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC) : TC 16R.841 and Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC) : TC 16R.963. I have considered the ratio laid down in these decisions and I am of the view that all these expenses are revenue in nature and, therefore, the addition of Rs. 3,18,214 is deleted.”

15. Taking us to the above observation of the CIT(A) learned senior counsel has tried to explain the expenses shown itemwise in order to convince that all these expenses were in the nature of current repairs and replacement of worn out parts of existing machineries as well as for the purchase of parts. For instance regarding item (i), i.e., installation of motors of Rs. 6,127 on remarks column, it was noted that the dryers of Salkathoni factory had to be shifted from existing position to a new position for making space available for “sorting”. The old motors had to be removed from their position and fixed to a new position to be fitted with dryers. It appears that such installation of motors as well as shifting of dryers are necessary for the purpose of making more space available for shorting and as such replacement does not come under the purview of enduring benefit to make it a capital expenditure. Item No. (ii) relates to cost of one set of casting and accessories for Rs. 1,42,199. The said cost has been shown as paid to Andrew Yule and Co. Ltd. for supply of spare set of castings and accessories for No. 14 S.C.D. Air Heater inasmuch as in coal fired heaters replacement of casting from time to time is essential, while item No. (iii) speaks of cost of spares of new CTC machine for Rs. 33,285. This expense was shown as the segments used in CTC machine had to be replaced from time to time to get a proper cut of the leaf because by the use such segments get worn out and unuseable. These item Nos. (ii) and (iii) appear to be expenditure incurred as current repairs and the same could be easily accepted as revenue expenditure. As regards to item No. (iv) which shown Rs. 1,30,194 as incorporation of capital expenditure incurred by Salkathoni Tea Estate, the Tribunal held that the assessee itself admitted the said expenditure as capital expenditure and as such the same was accepted as correct. But learned counsel appearing on behalf of the assessee, countering the said finding, has argued that showing an item under the head of capital expenditure would not make the said expenditure as capital in nature, the competent authority must consider the pros and cons of the details submitted by the assessee and depends on the facts and circumstances of each case. similarly, showing an expenditure under the head of revenue expenses shall not make that expenditure automatically revenue expenditure until and unless a close scrutiny and examination is made to the details.

In the instant case, the reference to capital expenditure in item No. (iv) was an inadvertent mistake on the part of the assessee and it is the burden of the competent authority to take into account the existing facts and circumstances of the case to declare a particular expenditure as “capital” or “revenue” expenditure. The particulars furnished against the expenditure of item No. (iv) clearly show that these were incurred in overhauling of generators and repairing charges of motor as well as repairing charges of alternator of generator on different dates. The other item No. (v) relates to the amount of Rs. 6,418 paid to one Aspiring Ltd. as cost of spare parts of tea machine which was claimed to be expenditure of revenue in nature.

16. Now the question is whether such “overhauling” or “repairing” charges can be accepted as capital expenditure to give enduring benefit. Strongly emphasing the “overhauling” and “repairing” charges as revenue expenditure, Dr. Saraf, learned senior counsel, has convincingly argued that overhauling or repairing charges cannot be accepted as capital expenditure under the existing facts and circumstances inasmuch as the said expenditure was a recurring one incurred for the purpose of maintenance of generators and motors without having any enduring benefit. In order to substantiate his argument, learned senior counsel appearing on behalf of the assessee has referred several decisions of the apex Court as well as High Courts. Those case laws are discussed as under.

17. In the celebrated case of Atherton (H.M. Inspector of Taxes) vs. British Insulated & Helsby Cables Ltd. (1925) 10 Tax Cases 155, the House of Lords speaking through Viscount Cave L.C., held as follows : “When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. For this view there is already considerable authority. Thus, moneys expended by a brewing firm with a view to the acquisition of new licensed premises [Southwell vs. Savill Bros. (1901) 2 KB 349]: ‘fitting expenses’ incurred in transferring a manufacturing business to new premises [Granite Supply Association vs. Kitton (1905) 8 F. 55, 5 Tax Cases 168]; costs incurred in promoting a Bill which was dropped on the desired facilities being obtained by agreement [A.G]Moore & Co. vs. Hare (1914) 6 Tax Cases 572]; and expenditure incurred by a shipbuilding firm in deepening a channel and creating a deep water berth (not on their own property) to enable vessels constructed by them to put out to sea [Ounsworth vs. Vickers (1915) 3 KB 267], have been held to be in the nature of capital expenditure and not to be deductible under the IT Acts, and Rowntree & Co. vs. Curtis (1925) 1 KB 328, is to the same effect. I think that the principle to be deducted from the series of authorities rests on sound foundations and may properly be adopted by this House.”

18. In L.H. Sugar Factory & Oil Mills (P) Ltd. vs. CIT (1980) 19 CTR (SC) 185 : (1980) 125 ITR 293 (SC) : TC 16R.1358, the Supreme Court accepted the test for distinguishing between capital and revenue expenditure as enunciated by Lord Viscount Cave, L.C. in Atherton’s case (supra), and held that the said test is not of universal application and as the parenthetical clause shows, it must yield where there are special circumstances leading to a contrary conclusion. Their Lordships had the occasion to rely on the decision in Empire Jute Co. Ltd. vs. CIT (supra), wherein it was held that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would bedisallowable on an application of this test. But if the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leading the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.

In L.H. Sugar Factory & Oil Mills (P) Ltd. vs. CIT (supra), the question arose whether by spending an amount of Rs. 50,000 as a part of the consideration of the road around the factory, the assessee did acquire any asset of an enduring benefit. It was held that undoubtedly though the construction of those roads facilitated the business operations of the assessee and enabled the management to carry on the business more efficiently and profitably as well as have an advantage for a long duration till the roads continued to be in motorable condition, there was not an advantage capital in nature because no tangible or intangible asset was acquired by the assessee nor was there any addition to or expansion of the profit-making apparatus of the assessee. Accordingly, it was held that the amount of Rs. 50,000 contributed by the assessee for the purpose of facilitating the conduct of the business and making it more efficient and profitable was clearly an expenditure on revenue account.

19. In another case, cited by learned senior counsel for the assessee in Balimal Naval Kishore vs. CIT (1997) 138 CTR (SC) 284 : (1997) 224 ITR 414 (SC) : TC S16.726 the apex Court held as under : “If we look at the facts of this case, it will be evident that what the assessee did was not mere repairs but a total renovation of the theatre. New machinery, new furniture, new sanitary fittings and new electrical wiring were installed besides extensively repairing the structure of the building. By no stretch of imagination, can it be said that the said repairs qualify as ‘current repairs’ within the meaning of s. 10(2)(v). It was a case of total renovation and has rightly been held by the High Court to be capital in nature.”

20. We must also refer to the decision of the Bombay High Court on which strong reliance was placed on behalf of the assessee. The Bombay High Court speaking through Chagla C.J. in New Shorrock Spinning & Manufacturing Co. Ltd. vs. CIT (1956) 30 ITR 338 (Bom) : TC 15R.278 held as follows : “The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure forrepairs what is really being done is to preserve and maintain an already existing asset. the object of the expenditure is not to bring a new asset into existing, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of ‘repairs’ because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure…… Turning to the authority, in the first place we might took at the well known definition of Lord Justice Buckley which is always quoted whenever a case of repairs comes up before a Court, and those observations were made in the case of Lurcott vs. Wakely & Wheeler (1911) 1 KB 905 (CA), and there Lord Justice Buckley draws a distinction between repair and renewal and this is what the learned Lord Justice says : “’Repair’ and ‘renew’ are not words expressive of a clear contrast. Repair always involves renewal; renewal of a part ; of a subordinate 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 but substantially the whole subject- matter under discussion.’……….

It is impossible to say with regard to any particular asset when the need for repairs would arise. It would depend upon various circumstances, and in this case it so happens that the particular parts that were used by the assessee for 60 years were such parts that the need to repair them did not arise earlier. It might have been due to the quality of the parts themselves or to the care with which the parts were used by the assessee but the fact remains that they had not to be repaired till after the passage of 60 years. In our opinion, therefore, this was an expenditure which the assessee-company could claim as a permissible deduction under s. 10(2)(v) of the Act.”

1. In another case CIT vs. Indian Woollen Textile Mills (P) Ltd. 1978 CTR (P&H) 1 : (1978) 112 ITR 441 (P&H) : TC 16R.1139 the Punjab & Haryana High Court held that the findings of fact recorded by the Tribunal led to the conclusion that the expenditure being for current repairs and replacements was incurred by the assessee in the day-to-day course of the carrying on of the business which was commercially expedient and demanded by the necessities of the business, such expenditure cannot be incurred as capital expenditure in nature.

2. Similarly, the Allahabad High Court in CIT vs. Kanodia Cold Storage (1975) 100 ITR

155 (All) : TC 17R.701, specifically held that replacement of existing service line for the functioning of the cold storage with a new line did not result in the creation of any new asset of enduring nature and the same was not in the nature of capital expenditure and as such the amount of expenditure was allowable in computing the income of the assessee.

1. The Madras High Court in CIT vs. Sree Narasimha Textiles (P) Ltd. (1999) 238 ITR 351 (Mad), held that the need for replacement of motor having become worn out and subsequent replacement of such motor was only for the purpose of keeping looms and spindles for the factory running and making it possible for production to continue and, therefore, such expenditure incurred for replacement by new motor was not capital expenditure but only revenue expenditure.

2. In a decision of this Court in R.G.S. Industries vs. CIT (1990) 81 CTR (Gau) 6 : (1990) 183 ITR 31 (Gau) : TC 16R.965, it was held that for consideration whether an expenditure comes within the meaning of capital expenditure or revenue expenditure that can only be decided taking into account the facts and circumstances of the case from the angle of a practical and prudent businessman but not from the viewpoint of a tax gatherer upon strict juristic classifiation of the legal right, if any, secured in the process.

3. Having regard to the abovementioned judicial pronouncements and on extralogical deduction of the same, we are of the considered view that the question whether an expenditure shall come within the purview of capital or revenue expenditure in nature shall have to be decided on the basis of the facts and circumstances of a particular case. It is to be closely looked into how the expenditure has been incurred so as to give enduring benefit or not. In our opinion, the intention and object of the expenditure must not be such so as to bring a new asset into existence or obtain a new or fresh advantage having enduring benefits. Obviously, if the amount spent is made, not only once and for all, but with a view to bringing into existence a new asset or obtaining a new advantage for the enduring benefit of a business, such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure and the deduction on such expenditure is not permissible under s. 37 of the Act as revenue expenditure.

4. Applying the ratio of the above cited cases in the instant case, we can safely hold that the installation of motors by shifting from the existing position to a new position for making space available for “sorting” and the replacement of casting essential in coal fired heaters as well as the replacement of segments used in CTC machine cannot be treated as new asset to call it capital expenditure. Similarly, the overhauling and repairing of generator and motor are necessary for the purpose of maintenance in order to make the factory run and continue production and hence the expenditure incurred for such overhauling and repairing was undoubtedly a recurring one without having any enduring benefit.

5. A bare reading of the judgment of the Tribunal, it appears that the Tribunal in arriving at a decision of reversing the order dt. 30th Oct., 1988, passed by the CIT(A), rejected the applicability of the ratio of Assam Bengal Cement Co. Ltd.’s case (supra) and Empire Jute Co. Ltd.’s case (supra), pressed into service on behalf of the assessee. The Tribunal held that both the aforesaid decisions did not come to the rescue of the assessee as the facts and circumstances of the instant case were although different.

6. Now let us closely look at these decisions to find out whether the ratio laid down therein can be made applicable to the case in hand. In Assam Bengal Cement Co. Ltd.’s vs. case (supra), the apex Court dealing in detail on the question of capital or revenue expenditure held that the line of demarcation of capital expenditure and revenue expenditure is very thin. It depends on the facts and circumstances of any particular case. In the said decision the apex Court held as follows : “If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of thepayment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. If is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has, therefore, got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductible allowance under s. 10(2)(xv) of the IT Act. The question has all along been considered to be a question of fact to be determined by the IT authorities on an application of the broad principles laid down above and the Courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles.”

Similarly the Supreme Court in Empire Jute Company’s case (supra), pointed out as follows : “There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.” Paraphrasing the above observations, we do not find any reason why the ratio of those decisions shall not be applicable in the instant case and we respectfully agree to accept that the proposition of law laid down in those judicial pronouncement is very much essential to decide the case in hand as the guiding principles.

29. Opposing the contentions made on behalf of the assessee, Mr. K.P. Sharma, learned senior counsel appearing on behalf of the Revenue, has urged that the items shown above cannot be accepted as revenue expenditure as claimed by the assessee. But it would come directly under the capital expenditure because as evident from the remarks column, the expenditures were seemingly for enduring benefit giving rise to capital expenditure. Distinguishing Assam Bengal Cement Co. Ltd.’s case (supra) and Empire Jute Co. Ltd.’s case (supra), Mr. Sharma has contended that the question whether the matter comes under capital or revenue expenditure is exclusively a question of fact to be determined by the Revenue authority and this Court would not interfere with such finding of facts under reference. Learned counsel appearing for the Revenue has further stated that all the items mentioned above carried the advantage for enduring benefit. There was substantial replacement of the machineries. On the other hand, the claim for overhauling and repairing was not explained properly for which the Tribunal rightly accepted that the expenditure incurred were for enduring benefit which automatically shall bring the expenditure under the head of capital expenditure.

30. We have given our thoughful consideration to the rival contentions and also gone deeply to the ratio of all the decided cases above cited. Under the existing facts and circumstances of the case, we have unhesitatingly agreed to approve the submissions made on behalf of the assessee when the claim of learned counsel appearing for the Revenue for accepting the expenditure as capital in nature cannot be countenanced.

31. It is settled position of law that there is no cut and dried formula for accepting particular expenses are revenue or capital expenditure. It all depends on the particular case having its own set of facts and circumstances. Applying the ratio of the abovenoted cases, we are of the firm opinion that the expenditure in question falls under the category of revenue expenditure without having enduring benefit. Rejecting, the submission made on behalf of the Revenue that the question involved herein is purely a question of fact which is only to be determined by the Revenue authority and not to be interfered with by this Court, we clearly say that taking into account the observation made in Assam Bengal Cement Co. Ltd.’s case (supra), though the questions of fact, would not be ordinarily interfered with by the Court, this same can be brought under the judicial scrutiny if such finding of facts have not been properly appreciated by the IT authority. In the case in hand, the Tribunal faultered in looking into the factual position in its proper perspective. Accordingly, in view of the matter, the finding of the Tribunal resulted in reversion of the finding of the CIT(A) cannot be sustained in law. This answers question No. 2 in the negative accordingly and in favour of the assessee. For the reasons, the observations and the discussions made above, this reference is answered accordingly.

[Citation : 251 ITR 455]

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