Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME-TAX, WEST BENGAL-IICALCUTTA
Vs.
RESPONDENT:
KALYANJI MAVJI & COMPANY
DATE OF JUDGMENT14/01/1980
BENCH:
PATHAK, R.S.
BENCH:
PATHAK, R.S.
UNTWALIA, N.L.
CITATION:
1980 AIR 640 1980 SCR (2) 758
1980 SCC (2) 78
ACT:
Indian Income-Tax Act 1922 (11 of 1922), Ss. 10(2)(v) &
10(2)(xv)-Assessee doing business in coal-Working various
collieries-One colliery requisitioned for military use-Later
derequisitioned-Expenditure incurred for resuming operation
of Colliery-Whether capital or revenue expenditure.
HEADNOTE:
The respondent-assessee carried on business in coal as
the owner of various collieries. One of the collieries, was
occupied by the military from 1942 until it was
derequisitioned in 1955. During that period the assessee did
not work the said colliery: although the business in coal
and working of the other collieries were carried on. While
the colliery remained under military occupation the assessee
incurred expenditure in respect of the colliery on account
of payment of surface rent, minimum royalty and salary for
the watch and ward staff, which expenditure was claimed and
allowed as business expenditure of the assessee. After the
colliery was handed over to the assessee upon derequisition
the assessee incurred an expenditure of about Rs. 1.6 lakhs
in renovating the building, reconditioning the machinery and
clearing the land of all debris accumulated over a number of
years.
In the assessment proceedings for the assessment year
1959-60 the assessee claimed deduction of the aforesaid
amount under section 10(2)(xv) of the Indian Income Tax Act.
The deduction was disallowed by the Income Tax officer on
the ground that the expenditure was capital in nature.
The appeals by the assessee to the Appellate Assistant
Commissioner and the Income Tax Appellate Tribunal were
dismissed.
In the reference to the High Court at the instance of
the assessee the High Court observed that the business of
the assessee had to be considered as a whole and not on the
basis of its different sources of supply or units of
production, and held that on the facts admitted and found it
could not be said that any fresh asset had been acquired by
the assessee by spending Rs. 1.6 lakhs and that the
expenditure was incurred by the assessee for the purpose of
carrying on an existing concern. The expenditure was,
therefore, in the nature of a revenue expenditure.
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In the appeal by the Revenue to this Court, it was
contended: (a) where repairs are effected to buildings and
machinery a deduction under section 10(2) is permissible
only in respect of "current repairs" and repairs which are
not "current repairs" are not intended to be the subject of
relief, (b) the repairs made by the assessee cannot be
described as "current repairs", and (c) if section 10(2) (v)
is the relevant clause, being the specific provision in
respect of expendi-
759
ture on "current repairs" to buildings and machinery, there
is no justification for relying on section 10(2)(xv) a
residuary clause.
Dismissing the appeal,
^
HELD: 1. The High Court was right in holding that the
expenditure was not of a capital nature. [764 E]
2. The expenditure of Rs. 1.6 lakhs was expenditure
laid out as part of the process of profit earning. The
nature of the expenditure was clearly revenue in character.
[764 D]
3. There can be little doubt that the expenditure
incurred was incidental to the business of the assessee. It
was involved in renovating the buildings, reconditioning the
machinery and clearing the debris, from the land, for the
purpose of resuming the operation of the colliery. The
expenditure was laid out wholly for the purpose of the
business. [763 D]
4. There must be strong evidence that in the case of
repairs which are not "current repairs", the Legislature
intended a departure from the principle that an expenditure
laid out or expended wholly and exclusively for the purposes
of the business, and which expenditure is not capital in
nature, should not be allowed in computing the income from
business. There is nothing in the language of section 10(2)
(v) which declares or necessarily implies that repairs,
other than, "current repairs", will not qualify for the
benefit of that principle. On accepted commercial practice
and trading principles an item of business expenditure must
be deducted in order to arrive at the true figure of profits
and gains for tax purposes. [762 G-763 A]
C.I.T. v. Chitnis 50 I.A. 292; Motipur Sugar Factory
Ltd. v. C.I.T. Bihar and Orissa, 28 I.T.R. 120; Devi Films
Ltd. v. C.I.T. Madras, 75 I.T.R. 301; Badridas Daga v.
C.I.T. 34 I.T.R. 10, 15; Calcutta Co. Ltd. v. C.I.T. West
Bengal, 37 I.T.R. 1, 9; the Law Shipping Co. Ltd. v.
Commissioners of Inland Revenue 12 Tax Cases 621,625
referred to.
The scope of Section 10(2)(xv) should be construed
liberally. [763 B]
In the instant case even if the expenditure made by the
assessee cannot be described as "current repairs" he is
entitled to invoke the benefit of s. 10(2)(xv). [763 C]
5. Whether an expenditure can be described as capital
or revenue falls to be decided by serial tests, each one of
which approaches the question from one perspective or
another, conditioned by the particular facts of each case.
[763 F]
Assam Bengal Cement Co. Ltd. v. C.I.T. West Bengal
(1955) 27 I.T.R. 34 referred to.
In the instant case the business of the assessee was
coal mining and it was carried on by the operation of a
network of collieries. Each colliery was a unit of
production. While the several units of production continued
to be employed and the business continued to be carried on,
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one alone of all the units, was compelled to suspend
production. The suspension was due to the property being
requisitioned for military use. As soon as it was
derequisitioned the assessee
760
took measures to resume production of coal. The buildings
were renovated, the machinery reconditioned and the
accumulated debris removed from the land No new asset was
brought into existence, no advantage for the enduring
benefit of the business was acquired. The activity which was
continuously in operation but had been temporary suspended
was resumed. [763 G-764 C]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2098 of
1972
From the Judgment and Order dated 5-8-1971 of the
Calcutta High Court in Income Tax Reference No. 109/65.
D.V. Patel, J. Ramamurthy and Miss A Subhashini for the
Appellant.
S. R. Banerjee, Mrs. Indu Goswamy and Arvind Minocha
for the Respondent.
The Judgment of the Court was delivered by
PATHAK, J.: This appeal by certificate granted by the
High Court at Calcutta under s. 66A(2) of the Indian Income-
tax Act, 1922 is directed against the judgment dated August
5, 1971 of that High Court disposing of an income-tax
reference.
The respondent assessee is a registered firm and owns
several collieries in West Bengal and Bihar. One of the
collieries is known as the South Samla Colliery. The South
Samla colliery was under military occupation from 1942 and
was released in 1955. During the period of military
occupation the assessee incurred expenditure on account of
minimum royalty payable in respect of the colliery, the
surface rent and salaries for the watch and ward employees.
The expenditure was allowed in income-tax proceedings as a
business expenditure. After the colliery was released by the
military, the assessee incurred a further expenditure
amounting to Rs. 1,61,742 on the colliery with a view to
resuming mining operations. The expenditure was incurred
during the previous year beginning October 24, 1957 and
ending November 11, 1958 relevant to the assessment year
1959-60. In the assessment proceedings for that assessment
year the assessee claimed a deduction of the amount of Rs.
1,61,742 under s. 10(2) (xv) of the Indian Income Tax Act,
but the deduction was disallowed by the Income-tax Officer
on the ground that the expenditure was capital in nature. On
appeal, the Appellate Assistant Commissioner affirmed that
the expenditure was in the nature of capital expenditure.
The assessee proceeded in second appeal, but the Income Tax
Appellate Tribunal, without giving any reasons of its own,
merely recorded its agreement with the income-tax
authorities. The assessee obtained
761
a reference to the High Court at Calcutta for its opinion on
the following question:
"Whether on the facts and circumstances of
the case, the Income-tax appellate Tribunal was
justified in holding that the expenditure clammed on
the South Samla Colliery at Rs. 1,61,742 was capital in
nature."
The High Court noted the following facts:
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The assessee carried on business in coal as the owner
of various collieries. The South Samla Colliery, which was
one of them, was occupied by the military from 1942 until it
was derequisitioned in 1955. During that period the assessee
did not, because he could not, work the colliery. He
continued, however, carrying on his business in coal and
working other collieries during that period. While the South
Samla Colliery remained under military occupation the
assessee incurred expenditure on payment of surface rent and
minimum royalty in respect of that colliery and also on
account of salary for the watch and ward staff. The
expenditure had been claimed and allowed as business
expenditure of the assessee. After the colliery was handed
over to the assessee upon derequisition, the assessee
incurred, during the relevant period, an expenditure of Rs.
1,61,742 in renovating the building, reconditioning the
machinery and clearing the land of debris accumulated over a
number of years. The expenditure of Rs. 1,61,742 consisted
of Rs. 66,937 spent on the staff and labour force by way of
salaries, wages and other benefits and an amount of Rs.
94,805 spent on the purchase of various stores, machinery
repairs, dhowrah repairs etc. This expenditure had to be
incurred by the assessee for the purpose of putting the
machinery in working order and bringing the colliery to a
state where the mining operations could be resumed. The
colliery had not started working and mining operations had
not been resumed during the relevant year.
The High Court observed that the assessee was carrying
on its business throughout and the circumstance that one of
the collieries was not being worked did not affect the
carrying on of that business. The business of the assessee,
the High Court said, had to be considered as a whole and not
on the basis of its different sources of supply or units of
production. The High Court held that on the facts admitted
and found it could not be said that any fresh asset had been
acquired by the assessee by spending Rs. 1,61,742. The
expenditure, it observed, was incurred by the assessee for
the purpose of carrying on an existing concern and not for
acquiring any concern not in existence. Ac-
762
cordingly, it held that the expenditure was in the nature of
revenue expenditure and, therefore, answered the question in
favour of the assessee.
In this appeal the first contention raised by the
Revenue is that the High Court had no jurisdiction to re-
appraise the facts and therefore its finding on the nature
of the expenditure is vitiated. The contention is without
substance. The facts on which the High Court has relied are
admitted between the parties or are facts found by the
income-tax authorities. We have no hesitation in rejecting
the first contention.
The second contention is that the claim of the assessee
must be considered with reference to s. 10(2)(v) and not s.
10(2)(xv) of the Act. It is urged that if s.10(2) (v) is the
relevant clause, being the specific provision in respect of
expenditure on current repairs to buildings and machinery,
there is no justification for relying on s.10(2) (xv). S.
10(2) (xv) is a residuary clause, and deals with expenditure
not being an allowance of the nature described in any of the
preceding clauses of s.10(2). The submission is that where
repairs are effected to buildings and machinery a deduction
under s.10(2) is permissible only in respect of current
repairs, and repairs which are not "current repairs" are not
intended to be the subject of relief. The Act, it is
contended, limits the repairs to "current" repairs. The
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repairs made by the assessee, it is said, cannot be
described as "current repairs" Now, this contention rests on
the principle that if a special provision covers the case,
resort cannot be had to a general provision. It seems to us
that if the renovation of the building, the reconditioning
of machinery and the removal of debris cannot be described
as "current repairs" and we assume that to be so-the case
would be entitled to consideration under s.10(2)(xv).
Section 10(2)(v) deals with current repairs only. The
subject matter of s.10(2) (v) is "current repairs" and it
appears difficult to agree that repairs which are not
"current repairs" should not be considered for deduction on
general principles or under s.10(2) (xv). There must be very
strong evidence that in the case of such repairs, the
Legislature intended a departure from the principle that an
expenditure, laid out or expended wholly and exclusively for
the purposes of the business, and which expenditure is not
capital in nature, should not be allowed in computing the
income from business. There is nothing in the language of
s.10(2) (v) which declares or necessarily implies that
repairs, other than, current repairs, will not qualify for
the benefit of that principle. We must remember that on
accepted commercial practice and trading principles an item
of business expenditure must be deducted in order
763
to arrive at the true figure of profits and gains for tax
purposes. The rule was held by the Privy Council in C.I.T.
v. Chitnis(1) to be applicable in the case of losses, and it
has been applied by the courts in India to business
expenditure incurred by an assessee. Motipur Sugar Factory
Ltd. v. C.I.T., Bihar and Orissa(2) and Devi Films Ltd. v.
C.I.T. Madras(3). The principle found favour with this Court
in Badridas Daga v. C.I.T.(4) and Calcutta Co. Ltd. v.
C.I.T. West Bengal(5). the contents of that rule be true on
general principle, there is good reason why the scope of
s.10(2) (xv) should be construed liberally. In our opinion,
even if the expenditure made by the assessee in the present
case cannot be described as "current repairs", he is
entitled to invoke the benefit of s. 10(2) (xv). We may
mention that in The Law Shipping Co. Ltd. v. Commissioners
of Inland Revenue(6) it has been held that accumulated
arrears for repairs are none the less repairs necessary to
earn profits, although they have been allowed to accumulate.
The question then is whether s. 10(2) (xv) is
attracted. There can be little doubt that the expenditure
incurred is incidental to the business of the assessee. It
was involved in renovating the buildings, reconditioning the
machinery and clearing the debris, from the land. All the
work done was for the purpose of resuming the operation of
the colliery. The expenditure was laid out wholly and
exclusively for the purposes of the business. We do not
think there can be any dispute as to that.
But the more serious question is whether the
expenditure can be regarded as capital in nature, for if
that be so the benefit of s. 10(2) (xv), on its plain terms,
must be denied. Now, whether an expenditure can be described
as capital or revenue falls to be decided by several tests,
each one of which approaches the question from one
perspective or another, conditioned by the particular facts
of each case. We need not refer to all of them. On the facts
of the present case, it seems sufficient to mention the
tests laid down by this Court in Assam Bengal Cement Co.
Ltd. v. C.I.T. West Bengal(7). The business of the assessee
in the present case was coal-mining, and it was carried on
by the operation of a network of collieries. Hach colliery
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was a unit of production. While the several units of
production continued to be
764
employed and the business continued to be carried on, one
alone of the units, the South Samla Colliery was compelled
to suspend production. The suspension was expected to be of
temporary duration, because the property was merely
requisitioned for military use, it was not acquired. As soon
as the property was de-requisitioned, the assessee took
measures to resume production of coal. It was necessary to
remove the impediments which had come in the way by reason
of the temporary suspension of work. The buildings were
removated, the machinery reconditioned and the accumulated
debris removed from the land. The colliery was, in a word,
reinstated to the condition necessary for ensuring
production. No new asset was brought into existence; no
advantage for the enduring benefit of the business was
acquired. An activity which was continuously in operation
but had been temporarily suspended was to be resumed. It is
immaterial that during the year under consideration there
was no mining activity. That the colliery was regarded as an
asset of a continuing business all along, even during the
period of military occupation, is evidenced by the fact
that expenditure incurred by the assessee during that period
in respect of the colliery was allowed as a permissible
deduction in its income tax assessments. The expenditure of
Rs. 1,61,742 under consideration in the present case was
also expenditure laid out as part of the process of profit
earning. The nature of the expenditure is clearly revenue in
character. The High Court is right in holding that the
expenditure is not of a capital nature.
The appeal is dismissed with costs.
N.V.K. Appeal dismissed.
765