Commissioner of Income-Tax, West
Bengal-II Calcutta Vs. Kalyanji Mavji & Company [1980] INSC 2 (14 January
1980)
PATHAK, R.S.
PATHAK, R.S.
UNTWALIA, N.L.
CITATION: 1980 AIR 640 1980 SCR (2) 758 1980
SCC (2) 78
ACT:
Indian Income-Tax Act 1922 (11 of 1922), Ss.
10(2)(v) & 10(2)(xv)-Assessee doing business in coal-Working various
collieries-One colliery requisitioned for military use-Later
derequisitioned-Expenditure incurred for resuming operation of Colliery-Whether
capital or revenue expenditure.
HEADNOTE:
The respondent-assessee carried on business
in coal as the owner of various collieries. One of the collieries was occupied
by the military from 1942 until it was derequisitioned in 1955. During that
period the assessee did not work the said colliery: although the business in
coal and working of the other collieries were carried on. While the colliery
remained under military occupation the assessee incurred expenditure in respect
of the colliery on account of payment of surface rent, minimum royalty and
salary for the watch and ward staff, which expenditure was claimed and allowed
as business expenditure of the assessee. After the colliery was handed over to
the assessee upon derequisition the assessee incurred an expenditure of about
Rs. 1.6 lakhs in renovating the building, reconditioning the machinery and
clearing the land of all debris accumulated over a number of years.
In the assessment proceedings for the
assessment year 1959-60 the assessee claimed deduction of the aforesaid amount
under section 10(2)(xv) of the Indian Income Tax Act.
The deduction was disallowed by the Income
Tax officer on the ground that the expenditure was capital in nature.
The appeals by the assessee to the Appellate
Assistant Commissioner and the Income Tax Appellate Tribunal were dismissed.
In the reference to the High Court at the
instance of the assessee the High Court observed that the business of the
assessee had to be considered as a whole and not on the basis of its different
sources of supply or units of production, and held that on the facts admitted
and found it could not be said that any fresh asset had been acquired by the
assessee by spending Rs. 1.6 lakhs and that the expenditure was incurred by the
assessee for the purpose of carrying on an existing concern. The expenditure
was, therefore, in the nature of a revenue expenditure.
In the appeal by the Revenue to this Court,
it was contended: (a) where repairs are effected to buildings and machinery a
deduction under section 10(2) is permissible only in respect of "current
repairs" and repairs which are not "current repairs" are not
intended to be the subject of relief, (b) the repairs made by the assessee
cannot be described as "current repairs", and (c) if section 10(2)
(v) is the relevant clause, being the specific provision in respect of expendi-
759 ture on "current repairs" to buildings and machinery, there is no
justification for relying on section 10(2)(xv) a residuary clause.
Dismissing the appeal,
HELD: 1. The High Court was right in holding
that the expenditure was not of a capital nature. [764 E]
2. The expenditure of Rs. 1.6 lakhs was
expenditure laid out as part of the process of profit earning. The nature of
the expenditure was clearly revenue in character.
[764 D]
3. There can be little doubt that the
expenditure incurred was incidental to the business of the assessee. It was
involved in renovating the buildings, reconditioning the machinery and clearing
the debris, from the land, for the purpose of resuming the operation of the
colliery. The expenditure was laid out wholly for the purpose of the business.
[763 D]
4. There must be strong evidence that in the
case of repairs which are not "current repairs", the Legislature
intended a departure from the principle that an expenditure laid out or
expended wholly and exclusively for the purposes of the business, and which
expenditure is not capital in nature, should not be allowed in computing the
income from business. There is nothing in the language of section 10(2) (v)
which declares or necessarily implies that repairs, other than, "current
repairs", will not qualify for the benefit of that principle. On accepted
commercial practice and trading principles an item of business expenditure must
be deducted in order to arrive at the true figure of profits and gains for tax
purposes. [762 G-763 A] C.I.T. v. Chitnis 50 I.A. 292; Motipur Sugar Factory
Ltd. v. C.I.T. Bihar and Orissa, 28 I.T.R. 120; Devi Films Ltd. v. C.I.T.
Madras, 75 I.T.R. 301; Badridas Daga v. C.I.T. 34 I.T.R. 10, 15; Calcutta Co. Ltd.
v. C.I.T. West Bengal, 37 I.T.R. 1, 9; the Law Shipping Co. Ltd. v. Commissioners
of Inland Revenue 12 Tax Cases 621,625 referred to.
The scope of Section 10(2)(xv) should be
construed liberally. [763 B] In the instant case even if the expenditure made
by the assessee cannot be described as "current repairs" he is
entitled to invoke the benefit of s. 10(2)(xv). [763 C]
5. Whether expenditure can be described as
capital or revenue falls to be decided by serial tests, each one of which
approaches the question from one perspective or another, conditioned by the
particular facts of each case.
[763 F] Assam Bengal Cement Co. Ltd. v.
C.I.T. West Bengal (1955) 27 I.T.R. 34 referred to.
In the instant case the business of the
assessee was coal mining and it was carried on by the operation of a network of
collieries. Each colliery was a unit of production. While the several units of
production continued to be employed and the business continued to be carried
on, one alone of all the units, was compelled to suspend production. The
suspension was due to the property being requisitioned for military use. As
soon as it was derequisitioned the assessee 760 took measures to resume
production of coal. The buildings were renovated, the machinery reconditioned
and the accumulated debris removed from the land No new asset was brought into
existence, no advantage for the enduring benefit of the business was acquired.
The activity which was continuously in operation but had been temporary
suspended was resumed. [763 G-764 C]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 2098 of 1972 From the Judgment and Order dated 5-8-1971 of the Calcutta
High Court in Income Tax Reference No. 109/65.
D.V. Patel, J. Ramamurthy and Miss A
Subhashini for the Appellant.
S. R. Banerjee, Mrs. Indu Goswamy and Arvind
Minocha for the Respondent.
The Judgment of the Court was delivered by
PATHAK, J.: This appeal by certificate granted by the High Court at Calcutta
under s. 66A(2) of the Indian Income- tax Act, 1922 is directed against the
judgment dated August 5, 1971 of that High Court disposing of an income-tax
reference.
The respondent assessee is a registered firm
and owns several collieries in West Bengal and Bihar. One of the collieries is
known as the South Samla Colliery. The South Samla colliery was under military
occupation from 1942 and was released in 1955. During the period of military
occupation the assessee incurred expenditure on account of minimum royalty
payable in respect of the colliery, the surface rent and salaries for the watch
and ward employees.
The expenditure was allowed in income-tax
proceedings as a business expenditure. After the colliery was released by the
military, the assessee incurred a further expenditure amounting to Rs. 1,61,742
on the colliery with a view to resuming mining operations. The expenditure was
incurred during the previous year beginning October 24, 1957 and ending
November 11, 1958 relevant to the assessment year 1959-60. In the assessment
proceedings for that assessment year the assessee claimed a deduction of the
amount of Rs. 1,61,742 under s. 10(2) (xv) of the Indian Income Tax Act, but
the deduction was disallowed by the Income-tax Officer on the ground that the
expenditure was capital in nature. On appeal, the Appellate Assistant Commissioner
affirmed that the expenditure was in the nature of capital expenditure.
The assessee proceeded in second appeal, but
the Income Tax Appellate Tribunal, without giving any reasons of its own,
merely recorded its agreement with the income-tax authorities. The assessee
obtained 761 a reference to the High Court at Calcutta for its opinion on the
following question:
"Whether on the facts and circumstances
of the case, the Income-tax appellate Tribunal was justified in holding that
the expenditure clammed on the South Samla Colliery at Rs. 1,61,742 was capital
in nature." The High Court noted the following facts:
The assessee carried on business in coal as
the owner of various collieries. The South Samla Colliery, which was one of
them, was occupied by the military from 1942 until it was derequisitioned in
1955. During that period the assessee did not, because he could not, work the
colliery. He continued, however, carrying on his business in coal and working
other collieries during that period. While the South Samla Colliery remained
under military occupation the assessee incurred expenditure on payment of
surface rent and minimum royalty in respect of that colliery and also on
account of salary for the watch and ward staff. The expenditure had been claimed
and allowed as business expenditure of the assessee. After the colliery was
handed over to the assessee upon derequisition, the assessee incurred, during
the relevant period, an expenditure of Rs. 1,61,742 in renovating the building,
reconditioning the machinery and clearing the land of debris accumulated over a
number of years. The expenditure of Rs. 1,61,742 consisted of Rs. 66,937 spent
on the staff and labour force by way of salaries, wages and other benefits and
an amount of Rs. 94,805 spent on the purchase of various stores, machinery
repairs, dhowrah repairs etc. This expenditure had to be incurred by the
assessee for the purpose of putting the machinery in working order and bringing
the colliery to a state where the mining operations could be resumed. The
colliery had not started working and mining operations had not been resumed
during the relevant year.
The High Court observed that the assessee was
carrying on its business throughout and the circumstance that one of the
collieries was not being worked did not affect the carrying on of that
business. The business of the assessee, the High Court said, had to be
considered as a whole and not on the basis of its different sources of supply
or units of production. The High Court held that on the facts admitted and
found it could not be said that any fresh asset had been acquired by the
assessee by spending Rs. 1,61,742. The expenditure, it observed, was incurred
by the assessee for the purpose of carrying on an existing concern and not for
acquiring any concern not in existence. Accordingly, it held that the
expenditure was in the nature of revenue expenditure and, therefore, answered
the question in favour of the assessee.
In this appeal the first contention raised by
the Revenue is that the High Court had no jurisdiction to re- appraise the
facts and therefore its finding on the nature of the expenditure is vitiated.
The contention is without substance. The facts on which the High Court has
relied are admitted between the parties or are facts found by the income-tax
authorities. We have no hesitation in rejecting the first contention.
The second contention is that the claim of
the assessee must be considered with reference to s. 10(2)(v) and not s. 10(2)(xv)
of the Act. It is urged that if s.10(2) (v) is the relevant clause, being the
specific provision in respect of expenditure on current repairs to buildings
and machinery, there is no justification for relying on s.10(2) (xv). S. 10(2)
(xv) is a residuary clause, and deals with expenditure not being an allowance
of the nature described in any of the preceding clauses of s.10(2). The
submission is that where repairs are effected to buildings and machinery a
deduction under s.10(2) is permissible only in respect of current repairs, and
repairs which are not "current repairs" are not intended to be the
subject of relief. The Act, it is contended, limits the repairs to
"current" repairs. The repairs made by the assessee, it is said,
cannot be described as "current repairs" Now, this contention rests
on the principle that if a special provision covers the case, resort cannot be
had to a general provision. It seems to us that if the renovation of the
building, the reconditioning of machinery and the removal of debris cannot be
described as "current repairs" and we assume that to be so-the case
would be entitled to consideration under s.10(2)(xv). Section 10(2)(v) deals
with current repairs only. The subject matter of s.10(2) (v) is "current
repairs" and it appears difficult to agree that repairs which are not
"current repairs" should not be considered for deduction on general
principles or under s.10(2) (xv). There must be very strong evidence that in
the case of such repairs, the Legislature intended a departure from the
principle that an expenditure, laid out or expended wholly and exclusively for
the purposes of the business, and which expenditure is not capital in nature,
should not be allowed in computing the income from business. There is nothing
in the language of s.10(2) (v) which declares or necessarily implies that
repairs, other than, current repairs, will not qualify for the benefit of that
principle. We must remember that on accepted commercial practice and trading
principles an item of business expenditure must be deducted in order 763 to
arrive at the true figure of profits and gains for tax purposes. The rule was
held by the Privy Council in C.I.T. v. Chitnis(1) to be applicable in the case
of losses, and it has been applied by the courts in India to business
expenditure incurred by an assessee. Motipur Sugar Factory Ltd. v. C.I.T.,
Bihar and Orissa(2) and Devi Films Ltd. v. C.I.T. Madras(3). The principle
found favour with this Court in Badridas Daga v. C.I.T.(4) and Calcutta Co.
Ltd. v. C.I.T. West Bengal(5). the contents of that rule be true on general
principle, there is good reason why the scope of s.10(2) (xv) should be
construed liberally. In our opinion, even if the expenditure made by the
assessee in the present case cannot be described as "current
repairs", he is entitled to invoke the benefit of s. 10(2) (xv). We may
mention that in The Law Shipping Co. Ltd. v. Commissioners of Inland Revenue(6)
it has been held that accumulated arrears for repairs are none the less repairs
necessary to earn profits, although they have been allowed to accumulate.
The question then is whether s. 10(2) (xv) is
attracted. There can be little doubt that the expenditure incurred is
incidental to the business of the assessee. It was involved in renovating the
buildings, reconditioning the machinery and clearing the debris, from the land.
All the work done was for the purpose of resuming the operation of the
colliery. The expenditure was laid out wholly and exclusively for the purposes
of the business. We do not think there can be any dispute as to that.
But the more serious question is whether the
expenditure can be regarded as capital in nature, for if that be so the benefit
of s. 10(2) (xv), on its plain terms, must be denied. Now, whether an
expenditure can be described as capital or revenue falls to be decided by
several tests, each one of which approaches the question from one perspective
or another, conditioned by the particular facts of each case. We need not refer
to all of them. On the facts of the present case, it seems sufficient to mention
the tests laid down by this Court in Assam Bengal Cement Co. Ltd. v. C.I.T.
West Bengal(7). The business of the assessee in the present case was
coal-mining, and it was carried on by the operation of a network of collieries.
Hach colliery was a unit of production. While the several units of production
continued to be 764 employed and the business continued to be carried on, one
alone of the units, the South Samla Colliery was compelled to suspend
production. The suspension was expected to be of temporary duration, because
the property was merely requisitioned for military use, it was not acquired. As
soon as the property was de-requisitioned, the assessee took measures to resume
production of coal. It was necessary to remove the impediments which had come
in the way by reason of the temporary suspension of work. The buildings were renovated,
the machinery reconditioned and the accumulated debris removed from the land.
The colliery was, in a word, reinstated to the condition necessary for ensuring
production. No new asset was brought into existence; no advantage for the
enduring benefit of the business was acquired. An activity which was
continuously in operation but had been temporarily suspended was to be resumed.
It is immaterial that during the year under consideration there was no mining
activity. That the colliery was regarded as an asset of a continuing business
all along, even during the period of military occupation, is evidenced by the
fact that expenditure incurred by the assessee during that period in respect of
the colliery was allowed as a permissible deduction in its income tax
assessments. The expenditure of Rs. 1,61,742 under consideration in the present
case was also expenditure laid out as part of the process of profit earning.
The nature of the expenditure is clearly revenue in character. The High Court
is right in holding that the expenditure is not of a capital nature.
The appeal is dismissed with costs.
N.V.K. Appeal dismissed.
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