2014 (6) TMI 611 - HC - Income Tax

Expenses incurred for reconditioning of over aged buses Revenue or capital accrual of interest liability - Held that - The buses need to be repaired and make them roadworthy again after the ware and tare due to the bad condition of the road the expenses cannot be called as capital in nature or enduring benefit - These are all current repairs to the already existing assets and making such assets again to be roadworthy will not bring any new assets or fresh advantage to the assessee - The expenditures are routine in nature and it is a revenue expenditure - Thousands of buses had to be repaired now and then due to the bad condition of the road and make them fit or roadworthy - The body engine of the buses are not replaced but it is only repairing of ware and tare - It is a routine expenditure being incurred hence the expenditure incurred by the assessee is a revenue expenditure. Relying upon BALLIMAL NAVAL KISHORE & ANOTHER v/s COMMISSIONER OF INCOME TAX 1997 (1) TMI 3 - SUPREME Court - the expenditure incurred to preserve and maintain the already existing assets and not to bring new assets into existence or obtain fresh advantage is a revenue expenditure and does not amount to capital expenditure - the replacement of machinery and construction of new building amounts to obtaining the enduring benefit and it is a capital expenditure - the assessee-Corporation owns more than 10, 000 buses it is has to take out the routine repair work of the buses and recondition the buses to make them roadworthy otherwise there will be breakdown of the buses every now and then - The expenditure incurred on reconditioning and overhauling of the buses is a routine work and the expenditure is revenue in nature and cannot be treated as capital expenditure Decided against Revenue. Liability to pay interest to IDBI Mercantile system followed by assessee Held that - The principal and interest are payable half yearly in equal installments for a period of five years which was further modified to 20 installments the expenditure should have been accounted for the AY 1996-97 and not for the AY 1997-98 as the assessee is following the mercantile system of accounting - The reasoning of the Tribunal to set aside the order passed by the Assessing Authority as well as the FAA on the count is erroneous in law - the assessee is following the mercantile system of accounting the interest accrued for the AY 1996-97 cannot be claimed to be deducted for the AY 1997-98 Decided in favour of Revenue.

Summary

Issues: Appeal challenging order allowing appeal filed by assessee for assessment year 1997-98 regarding expenditure incurred on reconditioning buses and interest paid to IDBI Bank.

Analysis:

1. Expenditure on Reconditioning Buses:
- The assessee, a State Public Sector Undertaking, incurred expenditure on reconditioning over-aged buses, extending their productive life. The Assessing Officer deemed this expenditure as capital in nature for enduring benefit. However, the High Court held that routine repairs to existing assets, like reconditioning buses, do not create new assets or fresh advantages. Citing precedent, the court clarified that expenses to preserve and maintain existing assets are revenue expenditures, not capital. The judgment emphasized the distinction between repairs and replacements, supporting the assessee's position that the reconditioning expenditure was revenue in nature.

2. Interest Paid to IDBI Bank:
- The respondent-Corporation availed financial assistance from IDBI for bus purchases, with interest payable in installments. The Bank demanded differential interest payment in 1996, which the Assessing Authority disallowed for the 1997-98 assessment year. The First Appellate Authority partly allowed the appeal, but the High Court disagreed. Following the mercantile system of accounting, the interest accrued in 1996 could not be claimed as a deduction for 1997-98. The court found the Appellate Tribunal's decision erroneous in law, ruling in favor of the Revenue on this issue.

In conclusion, the High Court allowed the appeal in part, holding that the expenditure on reconditioning buses was revenue in nature, favoring the assessee. However, the interest payment issue was decided in favor of the Revenue, as the interest accrued in 1996 could not be deducted for the 1997-98 assessment year under the mercantile accounting system.