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TMI Blog1973 (3) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... mon judgment. In Income-tax Reference No. 79 of 1970, the question that has been referred to us is : " Whether, on the facts and in the circumstances of the case, the furniture could have been taken as stock-in-trade of the business of the assessee ? " In Income-tax Reference No. 37 of 1971, the question which is referred to us is : " Whether, on the facts and circumstances of the case, the claim of the assessee to allow Rs. 25,127 as revenue expenditure was allowable under the Income-tax Act, 1961 ? " The assessee is a partnership firm and the assessment year is 1962-63, the relevant accounting year being S.Y. 2017. The assessee-firm carries on business of hiring out furniture for marriage functions, circus shows and other public functions and derives income from this business. During the relevant accounting year, the assessee claimed a sum of Rs. 25,127, being the deficit in stock of furniture. The Income-tax Officer rejected the loss but allowed depreciation on furniture according to the normal rules. Against this decision of the Income-tax Officer, the assessee went in appeal to the Appellate Assistant Commissioner and there it was contended on behalf of the assessee tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court was whether the cinema films in which the assessee was dealing as producer, distributor and exhibitor were stock-in-trade of the assessee and, secondly, at what rate depreciation should be allowed. Rajagopala Ayyangar J., who delivered the judgment of the court, pointed out that the Central Board of Revenue had issued a circular and in that circular, cinema films were treated as stock-in-trade of producers, distributors and exhibitors ; and, secondly, these films were to be valued at 40% of cost after one year, at 15% after two years and, thereafter, at nothing ; with the result that at the end of the third year the value of this particular kind of stock-in-trade was to become nil. It is true that in the course of that decision and in another decision also of the Madras High Court, films were treated as stock-in-trade and special amortisation allowance mentioned in the notification of the Central Board of Revenue was allowed but, in our opinion, this decision of the Madras High Court cannot help us in deciding whether furniture items which the assessee before us hired out for different functions can or cannot be considered to be the stock-in-trade of the assessee. The Madras ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -trade but in the case of an assessee who has invested his savings in land and gets income from the land or the structures put up on the land, the land is his capital asset. Therefore, one of the indications for deciding as to what is stock-in-trade is whether a particular assessee is buying or selling the commodity or whether he has merely invested his amount with a view to earn further income or with a view to carry on his other business. It may be pointed out that "trade" means that particular business activity where the person engaged in the profession buys or sells. All businesses may be carried on for the purpose of earning a profit but that particular kind of business where the businessman buys and sells a commodity can only be designated as "trade". This conclusion of ours is fortified by the decision of the Court of Appeal in England in Wheatley v. Smithers [1907] 2 KB 684 (CA). As is well-known, under the Partnership Act, a partner of a trading firm has the implied authority to borrow money on behalf of the partnership firm and the question before the Court of Appeal was whether a firm of auctioneers, which was carrying on business of buying and selling old furniture can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re let to hire to the intending customers with drivers or without drivers in what are known as "hire a car" companies, there is no buying and selling but the motor-cars are hired out to intending customers. In such a case, it is very difficult to say that the motor-cars in question are the stock-in-trade of that particular individual. The income which he would derive from letting out the motor-cars would be from the exploitation of his capital assets, viz., the motor-cars, and not from turnover of his stock-in-trade in the course of his business activities. A similar case in point, in our opinion, is also the case of a person who carries on the business of a circulating library. In the case of such a library, the books are bought and hired out to different persons on some fee or charge. It is possible that in the course of the business some books are worn out and have to be replaced but it is very difficult to envisage these books which are kept by the circulating library as the stock-in-trade of the library. No books are traded in. They are merely hired out and, in our opinion, these two illustrations of the circulating library and the car-hiring business clearly go to show the es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, clear that if the furniture acquired by the assessee for the purpose of carrying on his business of hiring out furniture is not treated as the stock-in-trade, the amount of Rs. 25,127 claimed by the assessee as trading loss on its stock-in-trade cannot be allowed as a deduction. This does not mean that the assessee is not entitled to any deduction for replacement, repairs or revenue expenditure but we merely want to emphasize at this stage that the amount of Rs. 25,127 has not been correctly arrived at by the assessee for the purposes of claiming the deduction. On the second aspect of the case of revenue expenditure and replacement, on behalf of the assessee reliance was placed on several decided cases. The first decision on this part of the argument is the decision of the Court of Session, Scotland (First Division), in Hyam v. Commissioners of Inland Revenue [1929] 14 TC 479 (C Sess). Reliance was particularly placed on the following passage from the opinion of Lord President Clyde, at page 486 : " The propriety, and the practice, of charging the cost of supplying implements, utensils, or articles employed for the purposes of the trade to revenue must vary according to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure. The passage begins : "As has been often remarked in various decisions, the line of demarcation between capital expenditure and revenue expenditure is a very thin one and, therefore, courts of law have refrained from attempting to define or lay down any precise definition and have been content to set out only broad tests. These broad tests are, however, only workable guides and ultimately the question always depends upon the facts and circumstances of each case." It was pointed out by the Division Bench that Bowen L.J. in City of London Contract Corporation Ltd. v. Styles [1887] 2 TC 239 (CA), explained the difference between the two types of expenditure by observing that the expenditure in the acquisition of the concern would be capital expenditure and the expenditure in carrying on the concern would be revenue expenditure. Commenting on this dictum, Lord Dunedin in Vallambrosa Rubber Co. Ltd. v. Farmer [1910] 5 TC 529 (C Sess) thought that the dictum laid down by Bowen L.J. was not absolutely final or determinative. He believed that it was not a bad criterion of what was capital expenditure as against what was income expenditure to say that capital expenditure was a th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the one concerns the instrument for earning profits and the other the continuous process of its use or employment for that purpose." It was pointed out relying upon the decision in Commissioners of Inland Revenue v. Granite City Steamship Company Ltd. [1927] 13 TC 1 (C Sess), that, broadly speaking, the outlay would be deemed to be capital when it was made for the initiation of a business, for the extension of a business or for a substantial replacement of equipment. It was also pointed out that a Full Bench of the Lahore High Court in In re Benarsidas Jagannath [1947] 15 ITR 185 (Lah) [FB] had formulated three broad principles from the different decisions ; and the three principles were : (1) Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment ; (2) Expenditure may be treated as properly attributable to capital when it is made not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. The expressions "enduring benefit" or "of a permanent character" were introduced to make it clear that the asset or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iodical renewal by sections of the rails and sleepers of a railway line as they wear out by use is in no sense a reconstruction of the whole railway and is an ordinary incident of railway administration. The fact that the wear although continuous is not and cannot be made good annually does not render the work of renewal when it comes to be effected necessarily a capital charge. The expenditure here in question was incurred in consequence of the rails having been worn out in earning the income of previous years on which tax had been paid without deduction in respect of such wear, and represented the cost of restoring them to a state in which they could continue to earn income. It did not result in the creation of any new asset ; it was incurred to maintain the appellants' existing line in a state to earn revenue." In Commissioner of Income-tax v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 (SC) the question before the Supreme Court was in connection with development rebate. The assessee in that case who was carrying on business of manufacture and sale of cotton yarn spent Rs. 93,215 for introduction of the "Casablanca conversion system" in its spinning plant. Substantially, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat in Hanuman Motor Service v. Commissioner of Income-tax [1967] 66 ITR 88 (Mys) the Mysore High Court held that in finding out whether a given case falls within the scope of section 10(2)(v), the true test is whether, as a result of the expenditure which is claimed as expenditure for repairs, what is really being done is to preserve and maintain an already existing asset or whether the object of such expenditure was to bring a new asset into existence or to obtain a new or fresh advantage. If it is the former, then it is a "repair" ; if it is the latter, it should be considered as a replacement or renewal. In that particular case the assessee was a firm of bus operators and they had replaced the petrol engines of some of their buses with diesel engines and that cost of installation of diesel engines was claimed as a deduction either under section 10(2)(v) or section 10(2)(xv) of the Act ; and the Mysore High Court held that the machineries concerned were buses and not the petrol engines that were replaced. The replacement of worn out parts of a machinery does not by itself bring a new asset into existence ; and the fact that an old part of a machinery was replaced by a new part d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount of Rs. 25,127 as its trading loss in the stock-in-trade, it was not possible for the Income-tax Officer or the Appellate Assistant Commissioner or the Tribunal to consider what amount was spent by the assessee for replacement of parts ; and, secondly, whether the amount claimed by the assessee as expenditure was incurred for replacement of furniture, i.e., substantial replacement. It must also be borne in mind that the assessee seems to have treated all items of its furniture as a whole rather than treating each individual article of furniture as a separate part. Of course, the expenditure incurred for repairing any part of a furniture, i.e., a leg of a chair or a seat of a chair or repairing any other items of furniture in a similar manner would be expenditure incurred for repairs ; but replacing new chairs or new tables for old or new gadlas for old gadlas would hardly be considered replacing parts of different articles of furniture which are capital assets of the assessee by new parts. It is true, as has been urged on behalf of the assessee, that in this particular business carried on by the assessee-firm, it has to incur heavy expenditure because of breakages of art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscarded, demolished or destroyed in the relevant previous year, i.e., in S.Y. 2016, then if the requirements of the provision were satisfied, viz., about the deficiency being written off in the books of account, then the amount by which the moneys payable in respect of such furniture together with the amount of the scrap value, if any, fall short of the written down value thereof, would be allowed as deduction. It may be pointed out that this contention regarding section 32(1)(iii) was raised before the Tribunal and in paragraph 5 of its order, the Tribunal has observed : " The only provision under which the assessee could claim some deduction is under section 32(1)(iii) of the Act which allows something known as obsolescence allowance. But this also the assessee cannot claim this year because all the furniture that was purchased by him was being allowed as a revenue item previously." The question whether in the previous years, the furniture that was purchased by the assessee for the purposes of its business was allowed as a revenue item or as capital expenditure item is not material for the purposes of section 32(1)(iii), if the written down value of the particular item of cap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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