TaxTMI 
TaxTMI 
2008 (1) TMI 430
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....ome for the assessment year 2001-02 declaring a loss of Rs. 49,21,329. In arriving at this loss the assessee had made deduction of Rs. 39,67,988 as the provision for overhauling and hot section inspection charges for the engine of the aircraft. According to the recommendations of the manufacturers of the aircraft the assessee was required to carry out overhauling and hot section inspection of the aircraft, if the aircraft completes flying of 3500 hours and 750 hours respectively. At the time when the assessee purchased the aircraft it had already completed 2700 hours and 58 minutes of flying time. The Aircraft Act, 1934, was enacted with a view to make better provision for the control of manufacture, possession, use, operation, sale, import and export of the aircraft. Section 5 of the said Act empowers making of rules for regulating the purpose for which the Act was enacted. Pursuant to such rule making power, the Aircraft Rules, 1937 were framed. Rule 50 Part VI of the said Rules provides for the provisions with regard to airworthiness. An airworthiness certificate has to be obtained from the Director General. Rule 52 provides that an operator of aircraft should follow the repa....
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.... taken by the and HOT assessment year aircraft inspection (Rs.) charges provided (Rs.) ---------------------------------------------------------- 1998-99 71 hrs 15 min. Nil Nil 1999-2000 171 hrs 45 min. Nil Nil 2000-01 332 hrs 50 min. 51,58,918 51,58,918 2001-02 256 hrs 20 min. 39,67,988 &....
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.... assessee did not make any provision for expenses and therefore the claim made in this assessment year is not genuine and was an afterthought. The Assessing Officer also held that TBO and HSI brings new life of enduring nature to the engine of the aircraft and therefore those expenses would in any case be capital expenses. On appeal by the assessee the Commissioner of Income-tax (Appeals) upheld the order of the Assessing Officer. The main reason assigned by the Commissioner of Income-tax (Appeals) for confirming the order of the Assessing Officer was that the liability in question was a contingent liability. The relevant observations of the Commissioner of Income-tax (Appeals) is as follows: "From the above discussion, it may be noted that overhauling and hot inspection is to be carried out in future after the aircraft is flown for specific number of hours. The aircraft may fly the stipulated number of hours in a year or two or may take several years to complete the flying hours. On the facts and in the circumstances of the case, the overhauling and hot inspection expenditure will accrue only when the overhauling and hot inspection is carried out. These future expenses canno....
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....incurred capital expenditure. He highlighted that this expenditure was necessary for preserving or maintaining an already existing asset and that no new asset comes into existence and that the assessee does not get a new or different advantage. Reliance was placed by learned counsel for the assessee on the decision of the hon'ble Bombay High Court in the case of New Shorrock Spinning and Manufacturing Co. Ltd. v. CIT [1956] 30 ITR 338 and the decision of the hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1. The learned Departmental representative on the other hand submitted that the liability in question was a contingent liability and it was not certain as to when the assessee would complete the required number of flying hours which calls for overhauling of the engine. In the circumstances it was submitted by him that the liability in question was a contingent liability. He also relied on the decisions referred to by the Commissioner of Income-tax (Appeals) in his order in support of his conclusion that the expenditure in question was a capital expenditure. We have considered the rival submissions. The assessee follows the mercantile system of....
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....iew that the liability in the case of the assessee was a certainty and the estimate of the same on a reasonable basis was possible. As the facts turned out in the subsequent years the estimate made by the assessee was a correct estimate of its liability. Even the matching concept of accountancy advocates accounting for such expenses. The liability of the assessee is in praesenti though it had to be discharged at a future date. Even if the date on which the liability is to be discharged is not certain that will not have any bearing as laid down by the hon'ble Supreme Court in the case of Bharat Earth Movers [2000] 245 ITR 428. We are, therefore, of the view that the liability in question was not a contingent liability and the assessee is entitled to claim deduction on the basis of the provision made for such liability. The next aspect that needs to be decided is as to whether the expenditure in question was a capital expenditure or a revenue expenditure. The tests laid down in the judicial decisions referred to by learned counsel for the assessee in this regard are as follows. Where the expenditure is only incurred for preserving or maintaining an already existing asset which doe....