1970 (5) TMI 7 - HC - Income Tax

Damage to leased premises and machinery by fire -Whether the expenditure incurred by the assessee after the repairs to the plant and machinery was a permissible deduction - Held, yes

Summary

Issues:
1. Interpretation of provisions of section 10(2)(ii) and 10(2)(xv) of the Income-tax Act regarding deduction for repair expenses.
2. Determination of whether repair expenses incurred by the assessee-firm on building and machinery are of a capital nature.
3. Assessment of the nature of expenses incurred by the assessee-firm in relation to the ownership structure of the factory.

Analysis:
The High Court of Punjab and Haryana addressed an income-tax reference initiated by the Commissioner of Income-tax concerning repair expenses claimed by an assessee-firm. The factory in question was co-owned by four individuals, with two of them leasing their shares to the assessee-firm. The firm incurred significant expenses in repairing the factory after a fire incident. The primary issues revolved around the deductibility of these repair expenses under sections 10(2)(ii) and 10(2)(xv) of the Income-tax Act.

The court considered the contention that repair expenses on the building and machinery were capital in nature and thus not eligible for deduction under the specified sections. The court analyzed the provisions of section 10(2)(ii) and held that the assessee, being a tenant of the premises, could claim exemption for all types of repairs undertaken as part of the lease agreement. It was emphasized that the term "premises" in section 10(2)(ii) referred to the building and its adjunctures, excluding machinery. Therefore, repairs to the building were deemed deductible under section 10(2)(ii).

Regarding repair expenses for machinery, the court determined that section 10(2)(xv) applied as machinery was not considered an adjuncture to the building. The court rejected the argument that expenses on machinery constituted capital expenditure, emphasizing that the machinery belonged to the factory owners, not the assessee-firm. As the firm was obligated to return the machinery in working order to the owners, the repair expenses were held to be deductible under section 10(2)(xv).

Furthermore, the court dismissed the notion that repair expenses incurred by the firm's co-owners should be treated as capital expenditure, emphasizing that the assessment was to be made on the firm as a whole, not individual partners. The court upheld the findings of the Income-tax Appellate Tribunal, ruling in favor of the assessee on both questions regarding the deductibility of repair expenses.

In conclusion, the court answered both questions in favor of the assessee, allowing the deduction of repair expenses for the building and machinery. The judgment clarified the applicability of sections 10(2)(ii) and 10(2)(xv) in determining the deductibility of repair expenses in the context of a lease agreement and ownership structure of the factory.