2013 (8) TMI 766 - HC - Income Tax

Current repairs - Capital expenditure vs. Revenue expenditure Replacement of entire marble floor was done Allowable expenditure u/s 30 of the Income Tax Act - Held that - Applying the tests of current repairs and capital expenditure to the present case the expenditure in question was a capital expenditure and even otherwise cannot be classified as current repairs . The earlier flooring was removed and completely replaced by marble flooring in an area of 9000 sq. ft. consisting of basement, ground floor, first and second floor. The effect thereof was that an entirely new flooring came into existence. It was not mere repair or current repair , as is understood in commercial sense or in terms of the tests specified above. The said expenditure was not necessary for maintaining or preserving the building but was done with the view to make distinct improvement and upgrade the appearance and ambience. The expenditure incurred would have entailed specific benefits and a new advantage. The word repair involves renewal of existing or replacement of a part or a supporting part and not complete replacement or reconstruction. Reliance had been placed upon the decision in the case Commissioner of Income Tax vs. Modi Industries Ltd. 2010 (9) TMI 162 - DELHI HIGH COURT apart from various other decisions In the instant case, the assessee has in fact averred that enduring benefit has accrued to him as it would help in long term since the foreign clients visit his factory/ office. A new asset of enduring benefit in form of completely new flooring of marble, different and distinct from the earlier flooring, has come into existence Decided against the Assessee.

Issues Involved:
1. Whether the expenditure of Rs. 12,72,564/- for laying/fixing marble flooring qualifies as "current repairs" under Section 30(a)(ii) of the Income Tax Act, 1961.
2. Whether the expenditure is capital in nature or revenue in nature.

Issue-wise Detailed Analysis:

1. Whether the expenditure qualifies as "current repairs" under Section 30(a)(ii):

The appellant, engaged in the export of garments, incurred an expenditure of Rs. 12,72,564/- for replacing the entire floor of his factory and office with marble flooring. The Assessing Officer disallowed this amount, holding it as capital expenditure, since it was a renewal or replacement of a profit-yielding apparatus. The Commissioner of Income Tax (Appeals) and the Tribunal upheld this view.

Section 30(a)(ii) of the Income Tax Act allows deductions for "current repairs" to premises used for business, provided the expenditure is not capital in nature. The Supreme Court in CIT vs. Saravana Spinning Mills (P) Ltd. clarified that "current repairs" denotes repairs involving renewal but not resulting in a new asset or advantage. The term "current repairs" should be interpreted to mean repairs that preserve and maintain an existing asset.

The appellant argued that the marble flooring did not create a new asset. However, the court noted that the context differs for machinery versus building repairs. In the case of buildings, the Supreme Court's decision in CIT vs. Sri Mangayakarasi Mills P. Ltd. provided tests to determine if an expenditure qualifies as "current repairs," such as maintaining and preserving the machine, not creating a new asset, and not increasing production capacity.

The court referred to Ballimal Naval Kishore & Anr. vs. CIT, where it was held that "current repairs" should preserve or maintain an existing asset without creating a new asset or advantage. The court concluded that replacing the entire flooring with marble flooring did not qualify as "current repairs" as it resulted in a new asset and distinct advantage.

2. Whether the expenditure is capital in nature or revenue in nature:

The court examined whether the expenditure was capital in nature under the legislative edict effective from April 1, 2004, which excludes capital expenditure from "current repairs." The principles from Empire Jute Co. Ltd. vs. CIT were applied, which state that the nature of the advantage in a commercial sense determines if the expenditure is capital or revenue. If the expenditure facilitates trading operations without affecting fixed capital, it is revenue; otherwise, it is capital.

Applying these principles, the court held that the expenditure for replacing the entire flooring with marble was capital in nature. The new flooring provided a distinct and enduring benefit, enhancing the factory/office's appearance and ambience, which was necessary for attracting foreign buyers. The expenditure was not merely for maintaining or preserving the building but for making significant improvements.

The court also noted that if the expenditure had been incurred during the initial purchase or construction of the building, it would have been considered capital expenditure. The enduring benefit accrued from the new marble flooring confirmed its capital nature.

Conclusion:

The court affirmed the Tribunal's decision, holding that the expenditure for laying/fixing marble flooring did not qualify as "current repairs" under Section 30(a)(ii) and was capital in nature. The appeal was dismissed, and the question of law was decided in favor of the Revenue.

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