1979 (8) TMI 46 - HC - Income Tax

Issues Involved:
1. Conflict of judicial opinions on whether expenditure for replacing a motor engine is revenue or capital expenditure.
2. Whether the expenditure of Rs. 15,851 incurred by the assessee in replacing a motor engine is allowable as revenue expenditure under the Income-tax Act, 1961.

Detailed Analysis:

1. Conflict of Judicial Opinions:
The judgment notes a direct conflict between the view expressed by the Andhra Pradesh High Court in R.B. Shreeram & Co. (P.) Ltd. v. CIT [1968] 67 ITR 428 and the Mysore High Court in Hanuman Motor Service v. CIT [1967] 66 ITR 88. Other High Courts, such as Punjab and Haryana in CIT v. Khalsa Nirbhai Transport Co. (P.) Ltd. [1971] 82 ITR 741 and Gujarat in Addl. CIT v. Desai Bros. [1977] 108 ITR 14, have followed the Mysore High Court's view. The Madras High Court in CIT v. Sri Rama Sugar Mills Ltd. [1952] 21 ITR 191 also aligns with the Mysore High Court's perspective.

2. Allowability of Expenditure as Revenue Expenditure:
The core issue was whether the expenditure of Rs. 15,851 for replacing an old diesel engine with a new one in the assessee's motor van used for business purposes is allowable as revenue expenditure under the Income-tax Act, 1961.

Material Facts:
- The assessee, a firm in the beedi manufacturing and sale business, incurred Rs. 15,851 for replacing a diesel engine in its motor van.
- The Income Tax Officer (ITO) treated this expenditure as capital expenditure, disallowing it but permitting depreciation.
- The Appellate Assistant Commissioner (AAC) and the Income-tax Appellate Tribunal upheld the ITO's decision, prompting the reference to the High Court.

Legal Provisions Involved:
- Section 31: Allows deduction for repairs to machinery.
- Section 37(1): Allows deduction for any expenditure laid out wholly and exclusively for business purposes, provided it is not capital expenditure.

Arguments:
- Assessee's Argument: The expenditure should be considered under "repairs to machinery" (Section 31) or, alternatively, as revenue expenditure (Section 37(1)).
- Department's Argument: The expenditure is capital in nature and does not qualify under Section 31 or Section 37(1).

Court's Analysis:
- The court examined whether the engine of a motor vehicle qualifies as "machinery" under Section 31. Citing CIT v. Mir Mohammad Ali [1964] 53 ITR 165 (SC), it affirmed that a diesel engine is indeed "machinery".
- The court then considered whether replacing the engine constitutes "repair". Referring to Lurcott v. Wakely & Wheeler [1911] 1 KB 905, it distinguished "repair" from "renewal", noting that repair involves replacing defective parts, not the entirety.
- The court reviewed precedents, including:
- Rhodesia Railways Ltd. v. Income-tax Collector [1933] 1 ITR 227: Large-scale track renewal was deemed repair.
- CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 (SC): Significant expenditure for machinery conversion was considered current repair.
- Hanuman Motor Service v. CIT [1967] 66 ITR 88 (Mys): Replacing petrol engines with diesel engines in buses was deemed current repair.
- CIT v. Sri Rama Sugar Mills Ltd. [1952] 21 ITR 191 (Mad): Boiler replacement was treated as business expenditure.

Conclusion:
- The court concluded that the replacement of the diesel engine constituted "current repairs" under Section 31, making the expenditure revenue in nature, not capital.
- The decision in R.B. Shreeram & Co. (P.) Ltd. v. CIT [1968] 67 ITR 428 was deemed incorrect, while the view in Hanuman Motor Service v. CIT [1967] 66 ITR 88 was upheld.

Final Judgment:
The expenditure of Rs. 15,851 incurred by the assessee for replacing the motor engine is allowable as revenue expenditure under Section 31 of the Income-tax Act, 1961. The court's answer to the referred question was in the affirmative, favoring the assessee, with no order as to costs.

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