ADDITIONAL COMMISSIONER OF INCOME TAX Vs. DESAI BROS

JUDGEMENT

(1.) THE assessee herein is a registered firm which carries on business of bidi manufacturing. During the asst. year 1968 69, the assessee firm claimed an expenditure of Rs. 9,300 incurred for replacing a petrol engine by a diesel engine in the assessee's truck which was being used in its business. The assessee claimed the said replacement cost of Rs. 9,300 as expenses for current repairs and in support of its claim reliance was placed by the assessee on the decision of the Mysore High Court in Hanuman Motor Service vs. CIT (1967) 66 ITR 88 (Mys) : TC15R.274. The ITO rejected this claim of the assessee, as in his opinion the decision of the Mysore High Court was not applicable to the facts before him as the assessee was carrying on business of bidi manufacturing while the assessee before the Mysore High Court in Hanuman Motor Service vs. CIT (supra) was carrying on business of bus transport. The ITO, therefore, preferred the decision of the Andhra Pradesh High Court in R. B. Shreeram & Company (P) Ltd. vs. CIT (1968) 67 ITR 428 (AP). In the appeal before the AAC the same claim was advanced on the same ground. The AAC upheld this claim of the assessee as he found that the cost of replacement of unserviceable petrol engine of the assessee's truck by the diesel engine was actually the cost of repairs to the truck which in the opinion of the AAC was a machinery and, therefore, what was replaced was not machinery itself but only a part of the machinery The cost of replacement, according to the AAC, was only a cost of repairs to the machinery and hence the claim was allowed under S. 31 of the IT Act, 1961. The AAC distinguished the decision of the Andhra Pradesh High Court in R. B. Shreeram & Company (P.) Ltd. vs. CIT (supra) on the ground that the question raised therein was whether the expenditure was of capital nature or not and the said question was not relevant before him since the real question which arose before him was whether the expenditure in question was one pertaining to current repairs. The Revenue took the matter in appeal before the Tribunal and contended, inter alia, that the expenses incurred in replacing petrol engine of a truck by diesel engine were of capital nature, inasmuch as they were incurred for the creation of advantage of an enduring benefit and formed part of the assets of the undertaking. The Tribunal also referred to the judgment of the Mysore High Court in Hanuman Motor Service vs. CIT (supra) and found that the judgment was in favour of the assessee. Since one of the members of the Tribunal hearing the appeal was a party to some previous decision of the Tribunal, which was based upon the view of the Mysore High Court, the Tribunal thought fit to follow that decision on the basis of the decision of the Mysore High Court in preference to the view taken by the Andhra Pradesh High Court in R. B. Shreeram & Co. (P.) Ltd. vs. CIT (supra). The Tribunal, therefore, upheld the order of the AAC and dismissed the appeal of the Revenue. At the instance of the Addl. CIT, the following question has been referred to us for our opinion:

(2.) AT the outset we may refer to a short debate which took place between the parties before us as to what was the nature of the claim of the assessee before the taxing authorities and the Tribunal. On behalf of the assessee it was submitted that the claim before the ITO as well as before the AAC was one under S. 31 of the IT Act, 1961, on the basis of the expenses made for current repairs of the machinery. On behalf of the Revenue it was urged that the Tribunal has framed this question as if the expenses claimed were under S. 37(1) of the IT Act, 1961. It appears from the order of the ITO that the assessee in support of his claim was relying on the decision of the Mysore High Court which was admittedly a claim under S. 10(2)(v) of the 1922 Act. Before the AAC also the claim was rested on that decision and the AAC has, in fact, upheld the claim under S. 31 of the 1961 Act. The AAC has observed in his order as under:

(3.) IN Tata Hydro Electric Agencies Ltd. vs. CIT (1937) 5 ITR 202 (PC) the Privy Council observed that what was the money wholly and exclusively laid out for the purposes of the trade was a question which must be determined upon the principles of ordinary commercial trading. It was necessary, accordingly, to attend to the true nature of the expenditure, and to ask oneself the question, was it a part of the company's working expenses ? Was it expenditure laid out as part of the process of profit earning ? The distinction there made was between the acquisition of an income earning asset and the process of the earning of the income, the former being of a capital nature and the latter of a revenue nature. In CIT vs. Mahalakshmi Textile Mills Ltd. (1967) 66 ITR 710 (SC) : TC15R.289 the Supreme Court was concerned with a claim made on behalf of the assessee which was a textile mill for an amount of Rs. 93,215 being the amount of expenses for introduction of the "casablanca conversion system" in its spinning plant, which involved replacement of certain roller stands and fluted rollers fitted with rubber aprons to the spinning machinery, removal of ring frames from certain existing parts, introduction, inter alia, of ball bearing jockey pulleys for converting the original band drivers to tape drivers and other additions and alterations in the drafting mechanism. The assessee claimed development rebate on the ground that introduction of the "casablanca conversion system" involved installation of new machinery, and for the first time before the Tribunal claimed in the alternative that the amount laid out was in any event expenditure for current repairs allowable under S. 10(2)(v) of the Indian IT Act, 1922. The Tribunal held that though development rebate was not admissible the amount spent was admissible under S. 10(2)(v) since as a result of the stress and strain of production over a long period there was need for change in the plant, and that the assessee had replaced old parts. The Supreme Court upheld the view of the Tribunal as in its opinion the Tribunal found on evidence before it from which it could be concluded that by introduction of "casabalanca conversion system" the assessee made current repairs to the machinery and plant and the sum of Rs. 93,215 was allowable as an expenditure incurred for current repairs under S. 10(2)(v) of the Act.