1981 (1) TMI 149 - AT - Income Tax

Tribunal: Engine Replacement Cost for Maintenance, Not Capital, Ruled as Revenue Expenditure

The Tribunal ruled in favor of the firm, holding that the cost of replacing a Petrol Engine in a Motor Car with a Diesel Engine constituted revenue ... - Issues:Whether the cost of replacement of a Petrol Engine in a Motor Car with a Diesel Engine constitutes revenue expenditure.Analysis:The appeal before the Appellate Tribunal ITAT Madras-A centered on determining if the cost incurred for replacing a Petrol Engine in a Motor Car with a Diesel Engine qualifies as revenue expenditure. The firm, consisting of 9 partners, claimed expenses for a new Diesel Engine and fitting charges under car expenses, justifying them as repair charges for an existing asset. The firm argued that the expenses did not aim to create a new asset or provide a fresh advantage to the business. However, the Tribunal noted that the replaced petrol engine was in sound condition and was sold for Rs. 2,050, indicating an intention to create a new asset rather than maintain an existing one. The Income Tax Officer treated the expenditure as capital, disallowing it but allowing depreciation. The firm appealed to the AAC, who, following a previous Tribunal decision, ruled in favor of the firm, directing the deletion of the addition to expenses. The Revenue challenged this decision before the Tribunal.The Revenue contended that the cost of the Diesel Engine, significantly higher than the written down value of the car, resulted in the creation of a new asset with enduring benefits. Citing a decision of the Andhra Pradesh High Court, the Revenue argued that the expenditure should be treated as capital. Conversely, the firm's counsel relied on the previous Tribunal decision and the Gujarat High Court decision, supporting the claim that the expenditure should be considered revenue expenditure.The Tribunal observed that the car, purchased in 1970 and used for nearly seven years, required engine replacement due to damage. The decision to fit a diesel engine was based on the necessity arising from the defective petrol engine, constituting a replacement rather than acquiring a new asset. By referencing the previous Tribunal decision and the Gujarat High Court ruling, the Tribunal favored the firm, dismissing the Department's appeal. The judgment emphasized that the replacement of the engine was for maintenance purposes and did not result in the creation of a new asset, aligning with the principles of revenue expenditure.