Deductibility of lease repair costs: lessee-paid repairs for premises or lessor-owned machinery are revenue deductions when restoring possession.

Where a lessee contractually bears repair and restoration obligations, expenditures on restoring leased premises are deductible as repair expenses under the lessee provision, because they are incurred in performance of the lease and do not create or enhance an asset for the lessee; accordingly such building repairs were held deductible. Repairs to movable plant and machinery owned by the lessor but restored by the lessee are revenue expenditures deductible as repairs, not capital, where incurred solely to comply with lease obligations and enable delivery of possession; accordingly such machinery repairs were held deductible.

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

Issue (i): Whether Rs.16,954 spent on repairing the building is deductible under the relevant provision.

Analysis: The lease terms required the tenant to bear all repair expenses and to restore possession of the building and factory in working order on dissolution or expiry. The provision applicable to a lessee who undertakes repairs of leased premises permits deduction for repairs undertaken by the lessee under those lease obligations. The obligation to restore possession indicates the expenditure was incurred in performance of the lease and not for acquiring or enhancing an asset that the lessee would retain.

Conclusion: The expenditure of Rs.16,954 on repairs to the building is deductible under Section 10(2)(ii) of the Income-tax Act; conclusion in favour of the assessee.

Issue (ii): Whether Rs.5,995 spent on repairs to plant and machinery is deductible under the relevant provision.

Analysis: Machinery is movable and not part of the building premises; therefore the lessee provision for premises does not cover machinery. In absence of a specific lessee provision for machinery, the general provision permitting deduction for repairs applies. The lease required restoration of machinery to owners on termination, so the repairs were not capital expenditure for the lessee nor personal expenditure, but revenue expenditure incurred to comply with lease obligations and to enable delivery of possession.

Conclusion: The expenditure of Rs.5,995 on repairs to plant and machinery is deductible under Section 10(2)(xv) of the Income-tax Act; conclusion in favour of the assessee.

Final Conclusion: Both challenged expenditures are held deductible under the Income-tax Act and the references are answered in favour of the assessee.

Ratio Decidendi: A lessee who contractually undertakes to effect and pay for repairs to leased premises may claim deduction for such repairs under Section 10(2)(ii), and repairs to machinery owned by the lessor but required to be restored by the lessee are revenue expenditures deductible under Section 10(2)(xv) provided they are not capital in nature.

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