Current repairs and loss apportionment: exempt income cannot reduce partner loss, and maintenance work stayed revenue in nature.

For apportionment under the second proviso to section 24(1), the loss to be divided among partners was the gross loss before any set-off against exempt income; exempt sums under section 16(1) are relevant only to computing total income and cannot reduce the loss available for apportionment. The replacement of a cylinder in a sizing machine and renovation of the wooden flooring of the spinning department were held to be current repairs, because the work preserved existing assets, created no new asset, and did not amount to reconstruction. The expenditure was therefore revenue expenditure and not capital expenditure, in favour of the assessee.

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Issues: (i) Whether, for apportionment under the second proviso to section 24(1), the loss to be divided among the partners was the gross loss before setting off exempt income or the balance loss after such set-off. (ii) Whether the expenditure incurred on replacing a cylinder in a sizing machine and renovating the wooden flooring of the spinning department was revenue expenditure as current repairs or capital expenditure.

Issue (i): Whether, for apportionment under the second proviso to section 24(1), the loss to be divided among the partners was the gross loss before setting off exempt income or the balance loss after such set-off.

Analysis: The exempt sums under section 16(1) are relevant only for computing total income. The right of set-off under section 24(1) operates where taxable income exists and is a right conferred on the assessee to adjust loss against profits for determining taxable income. It does not authorise the revenue to reduce the loss available for apportionment by first setting off exempt income against it.

Conclusion: The loss to be apportioned was Rs. 1,15,309 and not Rs. 1,04,885, in favour of the assessee.

Issue (ii): Whether the expenditure incurred on replacing a cylinder in a sizing machine and renovating the wooden flooring of the spinning department was revenue expenditure as current repairs or capital expenditure.

Analysis: The test is whether the work merely preserves and maintains an existing asset or amounts to reconstruction. The replacement of worn-out parts and renovation of flooring were done to preserve the existing machine and building, no new asset was created, and the magnitude of expenditure did not change its character. Such expenditure falls within current repairs under section 10(2)(v).

Conclusion: The expenditure was revenue expenditure and not capital expenditure, in favour of the assessee.

Final Conclusion: Both questions were answered for the assessee, and the reference was disposed of accordingly.

Ratio Decidendi: Expenditure that merely preserves or maintains an existing asset, without creating a new asset or amounting to reconstruction, is current repairs and revenue expenditure; exempt income is not to be used by the revenue to reduce the loss available for apportionment under section 24(1).

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