Karnataka H.C : The expenditure incurred by the applicant in demolishing the existing compound wall and rebuilding the same was a capital expenditure

Counsel Appeared

Sarangan for S. Parthasarathi & N.C. Ravikrishnan, for the Petitioner : E.R. Indrakumar, for the Respondent

ORDER

A.V. SRINIVASA REDDY, J. :

In this reference under s. 256(1) of the IT Act (‘the Act’ for short) the following questions of law have been referred to us for our opinion :

“(1) Whether, on the facts and in the circumstances of the case the Tribunal was right in holding that the expenditure incurred by the applicant in demolishing the existing compound wall and rebuilding the same was a capital expenditure ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the new compound wall constructed by the applicant after demolishing of the said compound wall gave the applicant ‘enduring benefit’ and, therefore, was in the nature of a ‘capital asset’ entitled to depreciation ?”

The assessee-company filed its return of income on 30th June, 1984, admitting an income of Rs. 1,09,820. The assessment came to be completed on 28th July, 1986, under s. 143(3) of the Act on a total income of Rs. 1,10,000. Assessee had claimed the expenditure on the construction of the wall as a revenue expenditure. Subsequently, on 7th Sept., 1988, the assessee was served with a notice under s. 263 of the Actissued by the CIT, Karnataka-I, Bangalore, wherein it was informed to the assessee that the revenue expenditure claimed by the assessee for demolishing and reconstructing of an existing compound wall was proposed to be treated as capital expenditure. The assessee replied to the said notice stating that the expenditure did not result in a new or material addition to the corpus of the assessee’s property and, therefore, the expenditure incurred would be in the nature of revenue expenditure and not capital expenditure as suggested in the notice. The CIT turned down the claim of the assessee and disallowed the expenditure. Being aggrieved, the assessee filed an appeal before the Tribunal. The Tribunal dismissed the appeal and referred the questions stated above for our opinion.

The question that arises for our consideration is whether the expenditure incurred by the assessee is a ‘capital expenditure’ or a ‘revenue expenditure’? We have heard the learned counsel on both sides. The learned counsel on both sides cited several decisions in support of their respective submissions. The decisions cited by the learned counsel only lay down the tests to be adopted to determine the controversy. The line dividing a capital expenditure from a revenue expenditure being very thin and, therefore, it would be difficult to decide one case on the analogy of another. The right solution would be to examine the facts of the case closely to arrive at the right answer. According to the facts arising in this case the compound wall was completely replaced by another wall. The replacement included the removal of the existing foundation and replacing it with a new foundation. This has resulted in effacing an old asset and bringing into existence a totally new asset. The only probable reason for the replacement of the asset would have been to obtain an enduring benefit from the asset so replaced. Learned counsel for the assessee relied on the decision of the Calcutta High Court in Cultural Enterprises Corporation vs. CIT (1992) 196 ITR 488 (Cal) : TC 16R.1099 wherein a Division Bench of the Calcutta High Court held, the renovation was incidental to the extensive repairs required by the dilapidated condition of the property, such renovation could not be said to be capital expenditure insofar as it did not result in the creation of a new asset. It is only a case of existing asset being brought to a habitable state, which was otherwise uninhabitable.’ Their Lordships took the view as aforesaid considering the fact that the renovation did not result in effacement of an old asset and creation of a new one in its place. That is not so, in the present case. Therefore, the principle laid down by their Lordships would not apply to the facts of the present case. So also in CIT vs. Binny Ltd. (1995) 129 CTR (Mad) 258 : (1995) 215 ITR 536 (Mad) : TC S16.1725 the Bench of Madras High Court observed, ‘the entire structure of the spinning department was not altered. Replacing of the roof was for the purpose of repairing the existing roof. The expenditure incurred for replacing the roof could not be considered to be for the purpose of obtaining an enduring benefit. The expenditure incurred for re-roofing of the spinning department was allowable as revenue expenditure.’ There can be no quarrel with the proposition that even where substantial repairs are carried out in order to put to use an existing asset, the same could still be termed as a revenue expenditure. But, where there is replacement ‘as a whole’ it amounts to reconstruction and not repairs. It is pertinent that the asset in its old form must continue to exist to say that the expenditure involved in improving the asset is a revenue expenditure. Where effacement takes place and a new asset comes into being then the expenditure involved would become a capital expenditure. But, in CIT vs. North Dhemo Coal Co. Ltd. vs. (1977) 106 ITR 592 (Cal) : TC 17R.256, the Calcutta High Court had occasion to deal with a case wherein the assessee who had been operating a coal mine constructed a dam to prevent disaster to the mine and to ensure safety of workers. Observing that the object of constructing the dam was to provide an enduring benefit to the existing asset of the business, their

Lordships held that the expenditure so incurred on the construction of the dam is a capital expenditure. A similar position obtains in the case on hand also. The compound wall has been built to provide enduring safety to the assessee. Therefore, the expenditure would be a capital expenditure and not a revenue expenditure. Tribunal on appreciation of evidence present on the record came to the conclusion that the expenditure incurred was for acquiring a capital asset and, therefore, the same would be a capital expenditure. For the reasons stated above, we answer both the questions referred to us in the affirmative i.e., in favour of the Revenue and against the assessee.

[Citation : 248 ITR 656]