2008 (1) TMI 430 - AT - Income Tax

Summary

Issues Involved:

1. Whether the provision made by the assessee for overhauling and hot section inspection (HSI) of the aircraft engine can be allowed as a deduction.
2. Whether the expenditure in question is a capital expenditure or a revenue expenditure.

Detailed Analysis:

1. Deduction of Provision for Overhauling and HSI:

The assessee, a company operating aircraft for passenger carriage, made a provision for overhauling and HSI charges of Rs. 39,67,988 for the engine of its aircraft, based on the manufacturer's recommendations and mandatory requirements under the Aircraft Act, 1934, and Aircraft Rules, 1937. The provision was calculated by estimating the liability for TBO (time between overhauls) and HSI after completing the requisite flying hours and proportionally allocating the liability based on the hours flown during the previous year.

The Assessing Officer rejected the claim, arguing that the liability would arise only upon completion of the stipulated flying hours, making the provision contingent and not deductible. The Commissioner of Income-tax (Appeals) upheld this view, stating that the expenses would accrue only when the overhauling and HSI are carried out, thus deeming the provision a contingent liability.

Upon appeal, the Tribunal examined the certainty of the liability under the Aircraft Act and Rules, noting that the overhauling and HSI were mandatory after specific flying hours. The Tribunal referenced the Supreme Court's principles in Bharat Earth Movers v. CIT [2000] 245 ITR 428, which allow for deduction if a business liability has definitely arisen in the accounting year, even if it needs to be quantified and discharged later. The Tribunal concluded that the liability was certain and the estimate reasonable, thus allowing the deduction.

2. Nature of Expenditure: Capital vs. Revenue:

The Assessing Officer and Commissioner of Income-tax (Appeals) considered the expenditure to be capital in nature, arguing that TBO and HSI bring a new life of enduring nature to the engine. The assessee contended that the expenditure was for maintenance, preserving an existing asset without creating a new one or providing a different advantage.

The Tribunal referred to judicial decisions, including New Shorrock Spinning and Manufacturing Co. Ltd. v. CIT [1956] 30 ITR 338 and Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, which distinguish between capital and revenue expenditure based on whether the expenditure maintains an existing asset or creates a new one. The Tribunal determined that the overhauling and HSI were necessary for maintaining the aircraft, did not create a new asset, and did not provide a new advantage, thus classifying the expenditure as revenue in nature.

Conclusion:

The Tribunal allowed the appeal, holding that the provision for overhauling and HSI was not a contingent liability and was deductible. Additionally, the expenditure was classified as revenue expenditure, not capital. The appeal of the assessee was allowed in full.