COMMISSIONER OF INCOME-TAX, WEST BENGAL-IT,

CALCUTTA v.

KALYANJI MAVJI & COMPANY

January 14,. 1980

[N. L. UNTWALIA AND R. S. PATHAK, JJ.]

Indian Income 1ax Act 1922 (11 of 1922), Ss. 10(2)(v) & 10(2)(xv)- Assessee d1Jing business in coal-Working various collieries--One colliery requi~ sitioned for n1ilitary use-Later cferequisitioned-Expenditure incurrred far re~ suniing operation of Colliery-Whether capital or revenue expenditur~.

The respondentasses.&ee carried on business in coal as the owner of various collieries. One of the collieries, was' occupied by the niilitary from 1942 until it was derequisitioned in 1955. During that per)od the assessee did not work the said colliery : M.though 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 surlaco rent, minimum royalty and; sala•ry for the watch and ward staff, which expenditure was claimed and allo\ved as business expenditure\ of the assessee.

After the colliery was handed over to the assessce upon dorequisiticn the assessee incurred an expenditure of about Rs. 1.6 lakhs in renovating the build~ ing, reconditioning tha machinery and. clearing the land of all debris accumulated over a number of years.

In the assessment proceedings for the assessment year 1959-60 th~ a8Se, s.iee 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 assesseei to the Appellate AssistMlt' Comn1issioner and the Income Tax Appellate Tribunal were dismissed.

In the reference to the 1-Iigh Court at the instance of the assessee 'the High Court observed that the business of the assessee had to be considered as a wholei and not on the basis1 of its different sources of supply or units of production, and held thM: 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.

In the appeal by the Revenue to this Court, it wao contended : (a) where repairs are effected to buildings and machinery a deduction under section 10(2) is permissible only in respect of "current rpairsl' and, repairs which are not

' 1current repa-irs" 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-

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C.!.T. V. KALYANJI MAVJI 759

ture on "current repairs" to buildings and machinery, there is nu justifiration for relying on section 10(2)(xv) a residuary clause.

Dismisoing the appeal,

HEI.D: I. The High Court Wa.9 right in holding that the expenditure was eot of a carital nature. [764 EJ

2. The expenditure of Rs. 1.6 Jak.hs was expenditure laid out. as part of the B process of profit earning. The nature of tho expenditurr. was clearly revenue in characfer. (764 DJ

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, recondi

tioning the m&.<::hinefy and clearing the debris~ fron1 the land, for the purpose of resuming the operation of the co1liery. The expenditure \Vas laid out wholly for the pUrpQSe of the business. [763 DJ

4. There must be stroug evidence that in, the case of repairs which arc not "current repairs'' the Legisl<c1ture intended a depc:rturc from the principle that an expenditure iaid out or expended wholJy and exclusively for the purposes of the business, and which expenditure is not capital in n<:.•ture, should not be allo'ved in computing the incon1e from business.

There is nothing in the language of section 10(2)(v) \vhich declares or necessarily implies that repairs, other than, "current repairs", will not qualify for the benefit of that principle.

On accepted commercial practice anJ 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 AJ

C.l.T. v. Chitnis 50 I.A. 292; Mo'tipur Sugar Facto1y Ltd .. v. C./.T. Bihar and Orissa, 28 I.T.R. 120; Devi Fibns Ltd. v. C.l.T. /rrfadras, 75 I.T.R. 301; Badrldas Daga v. C.1.T. 34 I.T.R. 10, 15; Calcutta Co. Ltd. v. C.l.T. rvcsl

Bengal, 37 I.T.R. 1, 9; Ihe Law Shipping Co. Ltd. v. Con1111issioners of Inland Revenue 12 Tax Cases 621, 625 referred to.

The scope of Sectien !0(2)(xv) should be construed liberally. [763 BJ

Jn the instant case even if the expenditure n1ade by the assessee cannot b~

dcribed as "current repairs" he is entitled to invoke' the benefit of s. 10(2) (xv).

[763 CJ

5. \Vhether an expenditure can be described as capital or revenue falls to be decided by several ti?'sts, each one of which approaches the question from oae perspective or another, conditioned by the particular facts of each case.

[763 FJ

Assam Bengal Cement Co. Ltd. v. C.l.T. West Btngal (1955) 27 I.T.R. 34 G referred to.

In the instant case the business of the as.Sessee was coal mining and it was carried on by th~ Operation of a networ~ of collieries. Each colliery was a unit of production. \\'hile the several units of production continued to be employed and the business continued to be carried on, one alone of all the units, was compelled to suspend production. The suspension was due to the property be.ing H requisitioned for military use.

As soon as it was derequisitioncd the a'8CS"See I l-9ISCil80

A took measures to resume production of coal. The buildings were renovated, the machinery reconditioned and the accumulated debris removed from the la.nd No new asct was brought into existence, no advantage for the enduring benefit of the business 'vas acquired. The activity which was continuously in operation but had been te1upora1y suspended was resumed. [763 G-764 CJ

OyIL 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 Rderence No. 109 /65.

D. V. Patel, ]. Ramamurthy and Miss A Subhashini for the Appellant.

S. R. Banerjee, Mrs. lndu 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 asscssee is a registered firm and owns several collieries in West Bengal and Bihar. One of the collieries is known as the South Samia Colliery. The South Samia 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 coJ:iery, the sur face 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 n further expenditure amounting to Rs. 1,61, 7 42 on the colliery with a view to resuming mining OJX'rations.

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 deduc'ion of the amount of Rs. 1,61,742 under s. 10(2)

(xv) of the Indian Income Tax Act, but the deduction was disal1owed by the Income-tax Officer on the ground that the expenditure was capital in 'nature.

On apJX'al, the Appe:late 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 itE agreement with the income-tax authorities. The assessee obtained

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C.I.T. v. KALYANJ! MAVJ! (Pathak, !.) 7 Gi

a reference to the High Court at Calcutta for its opinion ob the follow

ing question :

"Whether on the facts and circumstances of the case, the Income-tax appellate Tribunal was justified in holding that the expenditure claimed on the South Samla Colliery at Rs. 1,61,742 was capital in nature."

Th~ High Court noted the following facts :

The assessee carried on busihess in coal as the owner of various collieries. The South Samia Colliery, which was one of them, was occupied by the military from 1942 until it was derequisitioncd in

1955. During that period the assessee did not, because hei could not, work the colliery.

He continued, however, carrying on hie business in coal and working other collieries during that period. While the South Samia 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 expendi'.ure of Rs. 1,61,742 in renovating the bnil\ling, reconditioning the machinery and clearing the land of debris accumulated over a numrer 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 bringihg 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 snpr~Y or uuits of production. The High Court held that on the facts admitted and fon:nd 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. Accordi'ngly, it held that the expenditure was in the n&ture of revenue expenditure and, therefore, answered the question in favour of the assessee.

In this appeal the first con:ention raised by the Revenue is that the High Court had no jurisdiction to re-appraise the facts and therefore its finding on th~ 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 tho 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 nnd 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 curont repairs, and repairs which are not "current repairs" are not intended to be the subject of relief. The Act, it is conte'nded, limits the repairs to "current" repairs.

Th~ 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 rrovision covers the case, resort cannot be had to a general provision. It seems to us that if the renovation of the building. the reconditioni'ng 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" a'nd it appears difficult to agree that repairs which are not "current repairs" should not be considered for deduction on general princiQles 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, a'nd which expenditure is not capital in nature, shoud 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 o'n accepted commercial practice and trading principles an item of business expenditure must be deducted in order

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C.I.T. v. KALYANJI MAVJI (Pathak, J.) 763

to arrive at the true figure of profits and gains for tax purposes. The rule was held by the Privy Council in C.l.T. v. Chitnis(') to be applicable in the case of losses, and it bas 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(') and Devi Films Ltd . . v.

C.I.T. Madras(').

The principle found favour with this Court in Badridas Daga v. C.I.T.( 4 ) and Calcutta Co. Ltd. v. C.I.T. West Benzal(5). If 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 asseswe 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 ca. Ltd. v. Commissioners of Inland Revenue(') 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), o.-i its plain ternis, must be denied.

Now, whether an expendi" ture can be described as capital or revenue falls to be decided by several osts, each one of which approaches the queGtion 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('). 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.

Each colliery was a unit o~ production.

While the several units of production continued to be

(!) 59 I.A 297.

(2) 28 l.T.R. 120.

(3) 75 l.T.R. 301.

(4) 34 l.T.R. 10, 15.

(5) 37 l.T.R. 1, 9.

<(G) 12 Tax Cases 621, 625 .

17) [1955] 271.T.R. 34.

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, b~ cause 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 renovated, 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. Ail activity which was continuously in operation but had been temporarily suspended was to be resumed. It is imm:rterial that during the year under consideration there was no m!ning 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 ih 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 disJ01i.1•rcl .