Lessee repair deductions upheld for leased factory building and machinery as revenue expenditure under lease obligations

A lessee was allowed deductions for repairs undertaken under the lease obligation to keep the factory building and machinery in working order. The factory building repair expense was treated as a permissible lessee repair allowance and not as capital expenditure. The machinery repair expense was treated as revenue expenditure because the machinery did not form part of the premises, belonged to the owners, and had to be returned in working order. Both items were therefore allowable deductions in favour of the assessee.

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Issues: (i) Whether the expenditure of Rs. 16,954 incurred in repairing the factory building was a permissible deduction; (ii) Whether the expenditure of Rs. 5,995 incurred in repairing the plant and machinery was a permissible deduction.

Issue (i): Whether the expenditure of Rs. 16,954 incurred in repairing the factory building was a permissible deduction.

Analysis: The assessee was a lessee of the premises and, under the lease arrangement, had undertaken to bear repairs and to restore the building and factory in working order on termination of the lease. On that footing, the expenditure on repairing the building was treated as falling within the allowance for repairs by a lessee, and it was not characterised as capital in nature.

Conclusion: The expenditure of Rs. 16,954 was held to be a permissible deduction, in favour of the assessee.

Issue (ii): Whether the expenditure of Rs. 5,995 incurred in repairing the plant and machinery was a permissible deduction.

Analysis: The machinery was held not to form part of the "premises" for the purpose of the repair allowance for leased premises. The expenditure on machinery repairs was therefore examined under the general deduction provision and was treated as revenue expenditure, since the machinery ultimately belonged to the owners and the assessee was obliged to repair it for return in working order.

Conclusion: The expenditure of Rs. 5,995 was held to be a permissible deduction, in favour of the assessee.

Final Conclusion: Both items of expenditure were allowable deductions, and the reference was answered entirely in favour of the assessee.

Ratio Decidendi: A lessee may claim deduction for repairs undertaken to leased premises in accordance with the lease, and repairs to machinery not forming part of the premises may be allowable as revenue expenditure where they are incurred under the lessee's obligation and do not result in acquisition of an asset of an enduring capital nature.

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