1973 (3) TMI 42 - HC - Income Tax

Capital Asset Capital Or Revenue Expenditure Essential Characteristics Expenditure Incurred Income From Business Let Out Trading Loss

Summary

Issues Involved:
1. Whether the furniture could be considered as stock-in-trade of the business of the assessee.
2. Whether the claim of the assessee to allow Rs. 25,127 as revenue expenditure was allowable under the Income-tax Act, 1961.

Detailed Analysis:

1. Stock-in-Trade vs. Capital Asset:
- Issue: Determining whether the furniture used by the assessee-firm in its business of hiring out furniture for various functions is stock-in-trade or a capital asset.
- Assessee's Argument: The assessee argued that the furniture should be considered stock-in-trade, citing decisions from the Madras High Court where cinema films were treated as stock-in-trade.
- Court's Analysis: The court distinguished the nature of the assessee's business from those cases. It emphasized that stock-in-trade is something a trader deals in by buying and selling, whereas a capital asset is something with which the business is carried on.
- Conclusion: The court concluded that the furniture was not stock-in-trade but a capital asset. The assessee's business involved hiring out furniture, not trading in it. The court provided examples such as car-hiring businesses and circulating libraries to illustrate the distinction between stock-in-trade and capital assets.

2. Revenue Expenditure Claim:
- Issue: Whether the claim of Rs. 25,127 as revenue expenditure was allowable.
- Assessee's Argument: The assessee claimed this amount as a trading loss, arguing that normal depreciation was inadequate due to the nature of their business.
- Court's Analysis: The court noted that the assessee's method of calculating the loss was based on treating furniture as stock-in-trade, which was incorrect. The court emphasized the need to distinguish between expenditure for repairs and replacement of parts versus substantial replacement of the entire asset.
- Relevant Cases: The court referred to various cases to elucidate the principles governing capital and revenue expenditure:
- Hyam v. Commissioners of Inland Revenue: Discussed the propriety of charging the cost of supplying implements to revenue.
- Jansatta Karyalaya v. Commissioner of Income-tax: Provided broad tests for distinguishing between capital and revenue expenditure.
- Mahalakshmi Textile Mills Ltd.: Allowed current repairs as revenue expenditure.
- Hanuman Motor Service v. Commissioner of Income-tax: Differentiated between preserving an existing asset and bringing a new asset into existence.
- Conclusion: The court found that the amount of Rs. 25,127 was not correctly claimed as revenue expenditure. The Tribunal and revenue authorities had not properly examined the details of the expenditure. The court declined to answer the question and left it to the Tribunal to reconsider the matter in light of the observations made.

Judgment:
- Income-tax Reference No. 79 of 1970: The court answered the question in the negative, concluding that the furniture could not be considered stock-in-trade.
- Income-tax Reference No. 37 of 1971: The court declined to answer the question due to the Tribunal's failure to properly consider the expenditure details. The Tribunal was directed to reconsider the matter, applying the correct legal principles.

Costs: The assessee was ordered to pay costs in Income-tax Reference No. 79 of 1970 to the Commissioner, with no order as to costs in Income-tax Reference No. 37 of 1971.