ITA 364/2013 Page 1 of 14
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA No. 364/2013
Reserved on: 5
th August, 2013
% Date of Decision: 22nd August, 2013
SURINDER MADAN ....Appellant
Through Mr. Kedar Nath Tripathy, Advocate.
Versus
ASISTANT COMMISSIONER OF INCOME TAX,
CIRCLE 22(1), NEW DELHI …Respondent
Through Mr. N.P. Sahni, Advocate.
CORAM:
HON’BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE SANJEEV SACHDEVA
SANJIV KHANNA, J.
This appeal under Section 260A of the Income Tax Act 1961 (Act,
for short) by the assessee, an individual, relates to assessment year 2007-
08.
2. The appellant is engaged in export of garments and had incurred
an expenditure of Rs.12,72,564/- in replacing the entire floor measuring
about 9000 square feet with marble flooring in his factory and office.
This amount represents purchase cost of marble and cost of laying/fixing
the marble floor. The Assessing Officer disallowed the said amount
holding that it was capital expenditure, since it was renewal or
replacement of a profit yielding apparatus of the assessee. ITA 364/2013 Page 2 of 14
Commissioner of Income Tax (Appeals) upheld the said addition and
observed that expenditure does not fall under Section 30(a)(ii) vide order
dated 11th October, 2010. The Tribunal has upheld the view taken by the
lower authorities by the impugned order dated 17th December, 2004.
3. In the appeal, by order dated 5th August, 2013, the following
substantial question of law was framed:
“Whether the Income Tax Appellate Tribunal
was right in holding that the expenditure of
Rs.12,72,564/- for laying/fixing marble
flooring is not covered under „Current Repairs‟
as defined in Section 30(a)(ii) of the Income
Tax Act, 1961 read with the Explanation?”
4. The contention of the appellant is that the entire floor of the office
and factory premises, located at Okhla Industrial area, was in bad shape
and, therefore, the appellant had no choice but to replace the flooring.
He has submitted that the factory was purchased five years back and, due
to wear and tear, repair was necessary.
5. Section 30 of the Act reads as under:
“30. In respect of rent, rates, taxes, repairs and insurance
for premises, used for the purposes of the business or
profession, the following deductions shall be allowed—
(a) where the premises are occupied by the assessee—
(i) as a tenant, the rent paid for such premises ; and further if
he has undertaken to bear the cost of repairs to the
premises, the amount paid on account of such repairs ;
(ii) otherwise than as a tenant, the amount paid by him on
account of current repairs to the premises ;ITA 364/2013 Page 3 of 14
(b) any sums paid on account of land revenue, local rates or
municipal taxes ;
(c) the amount of any premium paid in respect of insurance
against risk of damage or destruction of the premises.
[Explanation.—For the removal of doubts, it is hereby
declared that the amount paid on account of the cost of
repairs referred to in sub-clause (i), and the amount paid
on account of current repairs referred to in sub-clause (ii),
of clause (a), shall not include any expenditure in the
nature of capital expenditure.]”
6. Explanation to the Section was inserted by Finance Act, 2003
w.e.f. 1st April, 2004 and is applicable to the year under assessment. In
present factual position, Section 30(a)(i) is not applicable as it relates to
amount spent or paid by a tenant on account of repairs. The appellant is
not a tenant. Clause (ii) to Section 30(a) applies to an occupant who is
not a tenant i.e. the appellant herein and stipulates that amount spent on
current repairs would be allowed as deduction but the explanation states
that current repairs should not include expenditure of capital nature. It
is, therefore, clear that twin conditions have to be satisfied. Firstly,
amount spent should be in nature of current repairs and secondly it
should not be in nature of capital expenditure. When twin conditions are
satisfied, deduction under Section 30(a)(ii) can be allowed.
7. In CIT vs. Saravana Spinning Mills (P) Ltd. (2007) 293 ITR 201
(SC), Supreme Court examined the expression current repairs and
observed that it denotes repairs which involves renewal. However, the ITA 364/2013 Page 4 of 14
word „repairs‟ is not to be read in isolation, since the precise term used
in the section is “current repairs”. The word repairs means to preserve
and maintain an asset i.e. in the present case the premises owned by the
assessee. All repairs are not to be treated as current repairs. The
expression “current repairs” does not mean and include repairs which
result in acquisition a new asset or to obtain a new advantage.
8. Learned counsel for the appellant has submitted that by installing
or fixing marble flooring no new asset has come into existence. We feel
that learned counsel is not appreciating the context in which the said
words explained the principle or ratio. The Supreme Court in the said
case was examining Section 31(a)(i) which relates to repair of
machinery, plant and furniture. In respect of machinery, plant and
furniture, it is of utmost relevance whether or not a new asset comes into
existence. Here we are not concerned with machinery, plant or furniture
which require constant replacement of old parts with new ones on
account of wear and tears, stress and strains etc. Replacement of parts
of a machinery normally could qualify for the revenue deduction under
the head „current repairs‟ but, as observed in Sarvana Spinning Mills
Pvt. Ltd. (supra), replacement generally would not fall under the
definition “current repairs”, though replacement of old machinery, in use
for over 40-50 years or where old parts are not available in the market, ITA 364/2013 Page 5 of 14
may fall under the expression „current repairs‟. Whether expenditure
qualifies as “current repairs” depends upon several factors like nature of
expenditure, nature of business activity, the asset subject matter of
“repair” etc.
9. The Supreme Court in CIT vs. Sri Mangayakarasi Mills P. Ltd.
(2009) 315 ITR 114 (SC), on the question whether the expenditure is
„current repairs‟ had expounded that the following tests which should be
taken into consideration:
“(i) It is a case of maintaining and preserving the
machine.
(ii) It is not a case of replacement.
(iii) It does not create any new asset.
(iv) It only restores the functional efficiency by
removing the defect.
(v) It does not increase the capacity of production. It
only prevents the loss.
(vi) It is not an independent unit and cannot be
compared with ring frames of a textile mill. It only
performed the functions of machining of gears
produced in the preceding line of manufacture by
performing earlier functions.
(vii) Quantum of repairs is not the relevant criterion
determinative of the nature of expenditure as to
whether it is current repairs or not.
(viii) Enduring benefit is no longer a criterion. After
current repairs, machine becomes usable for or number
of yeaRs. That does not mean that the expenditure on
current repairs is in the capital field.
(ix) Replacement of worn out parts in the process of
current repairs is not the replacement of the plant and
machinery itself.”
It was further held that:-ITA 364/2013 Page 6 of 14
“Moving on to the issue of `current repairs under
section 31 of the Act, the decision of this Court in CIT
v. Saravana Spinning Mills (P) Ltd. (supra) is again
relevant. This court has laid down that in order to
determine whether a particular expenditure amounts to
`current repairs the test is "whether the expenditure is
incurred to `preserve and maintain an already existing
asset and not to bring a new asset into existence or to
obtain a new advantage. For `current repairs
determination, whether expenditure is revenue or
capital is not the proper test." It is our opinion that the
entire textile mill machinery cannot be regarded as a
single asset, replacement of parts of which can be
considered to be for mere purpose of `preserving or
maintaining this asset. All machines put together
constitute the production process and each separate
machine is an independent entity. Replacement of such
an old machine with a new one would constitute the
bringing into existence of a new asset in place of the
old one and not repair of the old and existing machine.
Also, a new asset in a textile mill is not only for
temporary use. Rather it gives the purchaser an
enduring benefit of better and more efficient
production over a period of time. Thus, replacement of
assets as in the instant case cannot amount to `current
repairs‟. The decision in Saravana Mills (supra) case
clearly mentions that replacement of a derelict ring
frame by a new one does not amount to `current
repairs. Further in Ballimal Naval Kishore (supra) this
Court has held that a new asset or new/different
advantage cannot amount to `current repairs, which has
been subsequently approved in the Saravana Mills
(supra) case. For these reasons, the expenditure made
by the assessee cannot be allowed as a deduction under
section 31 of the Act. The judgment of this Court in
the Saravana Mills (supra) case mentions two
exceptions in which replacement could amount to
current repairs, namely:
Where old parts are not available in the market
(as seen in the case of CIT v. Mahalakshmi Textile
Mills Ltd., AIR 1968 SC 101, or
Where old parts have worked for 50-60 years.”
10. On the question of current repairs, it would be appropriate to refer
to an earlier decision of the Supreme Court in Ballimal Naval Kishore & ITA 364/2013 Page 7 of 14
Anr. vs. CIT (1997) 224 ITR 414 (SC). In this case referring to the
decision of the Bombay High Court in New Shorrock Spinning &
Manufacturing Co. Ltd. vs. CIT (1956) 130 ITR 338 (Bom.), it was
observed as under:
“2. The expression used in Section 10(2)(v) is "current
repairs" and not mere "repairs". The same expression
occurs in Section 30(a)(ii) and in Section 31(i) of the
Income-tax Act, 1961. The question is what is the
meaning of the expression in the context of Section
10(2). In New Shorrock Spinning and Manufacturing
Company Ltd. (supra), speaking for the Division
Bench, observed that the expression "current repairs"
means expenditure on buildings, machinery, plant or
furniture which is not for the purpose of renewal or
restoration but which is only for the purpose of
preserving or maintaining an already existing asset and
which does not bring a new asset into existence or does
not give to the assessee a new or different advantage.
The learned Chief Justice observed that they are such
repairs as are attended to as and when need arises and
that the question when a building, machinery etc.
requires repairs and when the need arises must be
decided not by any academic or theoretical test but by
the test of commercial expediency. The learned Chief
Justice observed: The simple test that must be
constantly borne in mind is that as a result of the
expenditure which is claimed as an expenditure or
repairs what is really being done is to preserve and
maintain an already existing asset. The object of the
expenditure is not to bring a new asset into existence,
nor is its object the obtaining of a new or fresh
advantage. This can be the only definition of 'repairs'
because it is only by reason of this definition of repairs
that the expenditure is a revenue expenditure. If the
amount spent was for the purpose of bringing into
existence a new asset or obtaining a new advantage,
then obviously such an expenditure would not be an
expenditure of a revenue nature but it would be a
capital expenditure, and it is clear that the deduction
which, the Legislature has permitted under Section
10(2)(v) is a deduction where the expenditure is a
revenue expenditure and not a capital expenditure.ITA 364/2013 Page 8 of 14
In taking the above view, the Bombay High Court
dissented from the view taken by the Allahabad High
Court in Ramkrishan Sunderlal v. Comm. of Incometax, U.P. [1951]19 ITR 324(All) : TC 15R 319 : 17R,
1422, where it was held that the expression "current
repairs" in Section 10(2)(v) was restricted to petty
repairs only which are carried out periodically. The
Learned Judge agreed with the view taken by the Patna
High Court in Commr. of Income-tax v. Darbhanga
Sugar Co. Ltd [1956] 29 ITR 21(Pat) : TC 15R 323
and by the Madras High Court in Commr. of Incometax v. Sri Rama Sugar Mills Ltd. [1952] 21
ITR191(Mad) : TC 16R 1068.
In Liberty Cinema v. Commissioner of Income-tax,
Calcutta [1964] 52 ITR153 (Cal): TC 16R 157, P.B.
Mukharji, J., speaking for a Division Bench of the
Calcutta High Court, held that an expenditure incurred
with a view to bring into existence a new asset or an
advantage of enduring nature cannot qualify for
deduction under Section 10(2)(v).
In our opinion the test involved by Chagla, C.J. in New
Shorrock Spinning & Manufacturing Company
Limited (supra) is the most appropriate one having
regard to the context in which the said expression
occurs. It has also been followed by a majority of the
High Courts in India. We respectfully accept and adopt
the test.
Applying the aforesaid test, if we look at the facts of
this case, it will be evident that what the assessee did
was not mere repairs but a total renovation of the
theatre. New machinery, new furniture, new sanitary
fittings and new electrical wiring were installed
besides extensively repairing the structure of the
building. By no stretch of imagination, can it be said
that the said repairs qualify as "current repairs" within
the meaning of Section 10(2)(v). It was a case of total
renovation and has rightly been held by the High Court
to be capital in nature. Indeed, the finding of the High
Court is that as against the sum of Rs. 17,000/- for
which the assessee had purchased the factory in 1937,
the expenditure incurred in the relevant accounting
year was in the region of Rs. 1,20,000/-.”
11. The said observations are most appropriate when we deal with the
question of „current repairs‟ carried out in a building. We have to
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