TaxTMI 
TaxTMI 
1981 (11) TMI 29
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.... " Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 1,55,448 incurred by the assessee in replacing 40 H.P. engines fitted in the boats with 60 H.P. engines is of revenue nature in computing its business income for the assessment year 1968-69 ? " In I.T.R. No. 115 of 1981: " Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the " assessee has also not obtained a benefit of an enduring nature " and is not the above finding wrong and unreasonable in law and fact? " For the assessment year 1968-69, corresponding to the previous year ending on December 31, 1967, the assessee, a limited company, filed a return disclosing an income of Rs. 5,51,220. Such income was after deducting sum of Rs. 1,55,448, that being the expenditure incurred in the replacement of the 40 H.P. engines in the five fishing boats of the assessee with 60 H. P. engines. The assessee derives income from processing and export of canned and frozen sea foods. In 1963, five fishing boats were constructed by the assessee at a cost of Rs. 27,532. Each of them was fitted with 40 H.P. Crossley engine imported from the U.K. unde....
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....e is that the claim for deduction would arise under s. 31 of the I.T. Act and alternatively it is an admissible deduction under s. 37 of the Act. The income chargeable to income-tax under the head " Profits and gains of business or profession " is to be computed in accordance with ss. 30 to 43A of the Act. Sections 30 to 36 deal with deductions under various heads while s. 37 is a general provision which enables any expenditure not being of the nature described in ss. 30 to 36 and not being of the nature of capital expenditure and personal expenditure of the assessee to be deducted in computing the income, provided such expenditure is laid out or expended wholly and exclusively for the purpose of the business or profession. That the expenditure with which we are concerned in these cases is so laid out wholly for the purpose of the business is not in controversy. It is said that it is an expenditure falling within s. 31 and if it is found to be not so, then it must be found to fall within s. 37. That would be so if it is not in the nature of capital expenditure. Therefore, if we find that s. 31 will not apply to the case then we have to concern ourselves with the question whether th....
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....rat High Court in Addl. CIT v. Desai Bros. [1977] 108 ITR 14. Replacement of petrol engine by a diesel engine in a truck of a firm carrying on business in the manufacture and sale of beedies was considered as not bringing into existence a new asset and also not amounting to a substantial replacement or renovation of an existing asset. It was considered that the expenditure was incurred in preserving and maintaining an asset for purposes of its business, and, therefore, was held to be of revenue nature. That was for current repairs to the machinery of the assessee. A Full Bench of I the Andhra Pradesh High Court in the decision in Nathmal Bankatlal Parikh & Co. v. CIT [1980] 122 ITR 168, considered a case for deduction with reference to s. 31 of the I.T. Act, 1961, of an expenditure incurred in replacing an old diesel engine by a new diesel engine. Rightly the Full Bench said that before examining the question of the applicability of s. 37(1) it was the duty of the assessing authority to see whether the claim of the assessee fell under any one of the items of deduction specified in ss. 30 to 36. In considering the claim under the above-said sections the question whether the expendit....
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....er s. 31. The case proceeded on a consideration of the question what exactly was the scope of the term " repair " "and whether the expenditure incurred in that case would qualify for claim under s. 31. The question whether a truck was a machinery, plant or furniture is not seen urged in that case nor considered by the Full Bench. Therefore, with great respect we do not think that on the basis of that decision we should hold that s. 31 of the Act would apply to these cases. Now, the only question we have to consider is whether the deduction was permissible under s. 37 of the Act and that in turn calls for a consideration of the question whether the expenditure is one of a capital nature. Before we consider the law on this question, it is necessary to advert to the finding of the Tribunal in these cases. The Tribunal refers to the finding of the AAC on the need for replacement of the engines. The AAC, in the passage extracted in the order of the Tribunal, said: " No evidence has been brought on record to show that the fishing boats which were fitted with 40 H.P. engines were uneconomic or that the engines bad become useless. The only fact which is evident is that those engines ....
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...., or bases its conclusions on mere conjectures or surmises, or where no person judicially acting and properly instructed as to the relevant law could have come to the determination reached. In all such cases the findings arrived at are vitiated. " After so finding that the boats might have required repairs, the Appellate Tribunal proceeded to hold: " If any repair is done to any machinery or any worn out part replaced by a new one there is bound to be some benefit to the assessee. Any repair extends the life of a machine. So just because of the installation of a new engine the assessee can use the fishing boats for a few more years, it cannot be said that the assessee had obtained an enduring benefit as is ordinarily understood." The AAC had found that the replacement of 40 H.P. engine by a 60 H.P. engine cannot be called current repairs and that it was an expenditure incurred " in order to give a new advantage of enduring nature to the appellant's fishing boats, viz., speed and economy in operation ". Whether such advantage was not obtained was not considered by the Tribunal. The situation in this case leads us to a discussion of the distinction between an expenditure ....
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....: " I don't say that this consideration is absolutely final or determinative, but in a rough way I think it is not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year." As Lord Dunedin himself said this was only a rough test and would serve only as somewhat of a criterion. In fact none of the decisions to which we advert here should be taken to have found an exhaustive definition or drawn any clear and rigidly formulated distinctions. They should be taken only to have laid down useful guidelines. The test of " once and for all " referred to in Vallambrosa's case [1910] 5 TC 529 (C Sess) failed many often as there were cases of expenditure of a capital nature not incurred once and for all and there were cases of expenditure of a revenue nature incurred once and for all, though in the majority of cases the test may, perhaps, give more or less an idea as to whether an expenditure is of revenue or capital nature. Lord Viscount Cave L.C. in British Insulated and Helsby Cables Ltd. v. Atherton [19....
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....ained by agreement (A. G. Moore and Company v. Hare [1914] 6 TC 572); and expenditure incurred by a ship-building firm in deepening a channel and creating a deep water berth (not on their own property) to enable vessels constructed by them to put out to sea (Ounsworth v. Vickers Ltd. [1915] 3 KB 267), have been held to be in the nature of capital expenditure and not to be deductible under the Income Tax Acts; and Rowntree and Company Ltd. v. Curtis [1925] 1 KB 328, is to the same effect. I think that the principle to be deduced from this series of authorities rests on sound foundations and may properly be adopted by this House."(Emphasis supplied). Courts have uniformly adopted the rule that even though the payment is not " once and for all " an expenditure may be capital expenditure if it has brought into existence an asset or it has brought into existence an addition for the enduring benefit of a trade. The rule of enduring benefit was applied in Bradbury (H. M. Inspector of Taxes) v. United Glass Bottle Manufacturers Ltd. [1959] 38 TC 369 (CA). A company carrying on the trade of glassware manufacture agreed to pay to the National Coal Board a sum of pounds 40,000 in five e....
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....estrictions on the company's borrowing power such as limitation of borrowing powers to pounds 25,000, restrictions on the issue and transfer of shares and the restrictions of voting rights to members holding at least ten pounds 250 shares, all of which prevented proper functioning. The post of managing director had not the proper status to attract a suitable person. Therefore the company decided to petition for a supplementary charter which would take away the limitation on the borrowing powers, which would enlarge the powers of management and which would make other necessary alterations to make the company more efficient in its functioning. But a shareholder fought the company in its attempt to obtain the supplementary charter. By reason of her action it became necessary to get her round to facilitate obtaining the supplementary charter. Consequently the company settled the action by the shareholder by paying her the costs in the action and buying a part of her holding as also the whole holding of another shareholder, her nephew, with a condition that she and her nephew should desist from further obstruction and she should never again acquire shares in the company. The expenses in....
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....hole situation." In that case a company which made a contribution for the development of roads between the various sugarcane producing centres and the sugar factories to facilitate the transportation of cane from the cane producing centres to the premises of the factory, an obligation which it had to undertake statutorily, was held to have incurred an expenditure for running the business without the assessee getting an advantage of enduring benefit to itself. The Supreme Court in the decision in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 adopted the principle enunciated by Viscount Cave L.C. in Atherton's case [1925] 10 TC 155 (HL). Broadly that would be the principle which should be of application in cases arising under the I.T. Act. Now we come to the facts of the case. The assessee's boats were constructed in 1963 and imported engines were fitted to them. There is no case that the normal life of the engine is only 4 years. There is no case that the condition of the engines was such that they bad to be replaced., There is no specific finding by the Tribunal on these questions. Though the Tribunal finds that the boats " might have required repairs " that is a findi....