1974 (2) TMI 1 - HC - Income Tax

Assessee is a firm carrying on the business of re-rolling steel. It took on lease the factory premises from one Ravinder Nath under a lease deed dated April 2, 1956. The lease was for a period of five years commencing from 1st April, 1956. The rent payable for the premises was Rs. 500 per month. The lease deed did not contain any term giving the option to the assessee to renew the lease for a further period. On the other hand, the lease was terminable before the expiry of the lease period at the instance of the assessee by giving one month s notice. The lease was also terminable at the instance of the lessor on the breach of any of the conditions of the lease. The lease deed did not contain any specific term with regard to the liability of the lessor or the lessee in respect of the repairs to the factory premises - Whether expenditure incurred on repair would under these circumstances be allowable as business expenditure

Issues Involved:
1. Legal obligation of the assessee to carry out repairs.
2. Allowability of the repair expenses under Section 10(2)(ii) of the Indian Income-tax Act, 1922.
3. Consideration of the repair expenses under Section 10(2)(xv) of the Indian Income-tax Act, 1922.
4. Distinction between capital and revenue expenditure.

Issue-wise Detailed Analysis:

1. Legal Obligation of the Assessee to Carry Out Repairs:
The lease deed between the assessee and the lessor did not explicitly impose a liability on the assessee to carry out repairs to the factory premises. However, the Tribunal relied on a letter dated April 16, 1962, from the lessor confirming that all repairs and renewals to the sheds and buildings were the responsibility of the assessee. The Tribunal accepted this letter as genuine and interpreted it as expressing the agreement of the parties on a point on which the lease deed was silent. The conduct of the parties, including the fact that the assessee undertook repairs without requiring the lessor to do so and the high cost of repairs relative to the rent, supported the Tribunal's view that the assessee had undertaken to carry out the repairs.

2. Allowability of the Repair Expenses Under Section 10(2)(ii):
Section 10(2)(ii) of the Indian Income-tax Act, 1922, allows for the deduction of repair costs if the assessee, as a tenant, has undertaken to bear such costs. The court noted that the repairs need not be directly related to the business of the assessee or be of a revenue nature to qualify under this section. The Tribunal's decision to allow the deduction was based on the letter from the lessor and the conduct of the parties, which indicated that the assessee had undertaken the responsibility for repairs. The court upheld the Tribunal's interpretation, concluding that the assessee's claim was allowable under Section 10(2)(ii).

3. Consideration of the Repair Expenses Under Section 10(2)(xv):
Section 10(2)(xv) is a residuary clause that allows for the deduction of any expenditure laid out wholly and exclusively for the purpose of the business, provided it is not capital expenditure or personal expenses. The court addressed the argument that a specific provision (Section 10(2)(ii)) excludes the operation of a general provision (Section 10(2)(xv)). The court examined various precedents, including decisions from the Bombay, Madras, and Madhya Pradesh High Courts, which suggested that if an expenditure falls under a specific provision, it cannot be considered under a general provision. However, the court also considered divergent views from other High Courts and the Supreme Court, which indicated that if an expenditure does not satisfy the conditions of a specific provision, it can still be considered under the general provision. The court concluded that the assessee's claim could be considered under Section 10(2)(xv) if it did not qualify under Section 10(2)(ii).

4. Distinction Between Capital and Revenue Expenditure:
The court examined whether the repair expenses were of a capital nature. It noted that the repairs were necessary for carrying on the assessee's business and were incurred in the second year of a five-year lease, which was terminable earlier. Given these circumstances, the court concluded that the expenditure was not of a capital nature. The court emphasized that the nature of the expenditure must be viewed in the context of business necessity and expediency, as established by the Supreme Court in various cases.

Conclusion:
The court held that the repair expenses of Rs. 20,807 incurred by the assessee were a permissible deduction under both Section 10(2)(ii) and Section 10(2)(xv) of the Indian Income-tax Act, 1922. The question referred to the court was answered in the affirmative, in favor of the assessee and against the revenue. The assessee was also entitled to the costs of the reference, with counsel's fee fixed at Rs. 250.

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