1994 (12) TMI 45 - HC - Income Tax

Business Expenditure, Computation Of Capital, Current Repairs, Industrial Undertaking, Special Deduction

Summary

Issues Involved:
1. Classification of expenditure on ship repairs as revenue or capital expenditure.
2. Deduction of loans in computing capital for relief under section 80J.
3. Applicability of section 40(c) versus section 40A(5) to directors.

Issue-wise Detailed Analysis:

1. Classification of Expenditure on Ship Repairs:
The primary issue involved the classification of a significant expenditure of Rs. 99,52,440 incurred on repairing the ship "Maratha Transhipper." The assessee claimed it as a revenue expenditure, deductible under section 31 of the Income-tax Act, 1961. The Income-tax Officer initially allowed the deduction but was later contested by the Commissioner of Income-tax, who deemed it capital expenditure due to the magnitude of the amount and its comparison with the ship's original cost. The Tribunal, however, upheld the assessee's claim, stating that the expenditure was for preserving and maintaining an existing asset, not creating a new one. The Tribunal emphasized that the quantum of expenditure or the replacement of parts does not determine the nature of the expenditure. The High Court concurred with the Tribunal, referencing several precedents, and concluded that the expenditure was indeed for "current repairs" and thus allowable as a revenue deduction.

2. Deduction of Loans in Computing Capital for Relief under Section 80J:
Both parties agreed that this issue was covered by the Supreme Court decision in Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308. Following this precedent, the High Court answered the question in the negative and in favor of the Revenue, indicating that loans should be deducted when computing capital for the purpose of section 80J relief.

3. Applicability of Section 40(c) versus Section 40A(5) to Directors:
Counsel for both parties acknowledged that this issue was addressed by the High Court in CIT v. Hico Products P. Ltd. (No. 1) [1993] 201 ITR 567. Based on this precedent, the High Court answered the question in the affirmative and in favor of the assessee, affirming that section 40(c) applies to directors rather than section 40A(5).

Conclusion:
The High Court upheld the Tribunal's decision, affirming the classification of the ship repair expenditure as revenue expenditure. The court also followed established precedents to resolve the other two issues, ruling in favor of the Revenue regarding the deduction of loans under section 80J and in favor of the assessee concerning the applicability of section 40(c) to directors. The reference was disposed of with no order as to costs.