Income-tax---

----Capital or revenue expenditure---Tests---Expenditure incurred in replacing petrol engine in car with diesel engine---Tribunal not fording out whether replacement was of a worn out or unserviceable engine---Matter remanded-- Income Tax Act, 1961, S. 37.

Capital expenditure is something which is spent once for all while revenue expenditure is that which is to be incurred every year. This criteria is not decisive and various other factors have to be taken into consideration. If the expenditure is to bring into existence an asset. or advantage for the enduring benefit of the business, that has to be taken into consideration. Replacement of machinery which is worn out in the usual course of business would be to maintain the machinery.

Held, that, in the present case, it had not been alleged or proved from the record that the petrol engine required massive repair or was worn out. The duration for which the petrol engine had worked was also not taken into consideration to find out if it needed heavy repairs justifying replacement. While deciding the appeal, the Income-tax Appellate Tribunal should have taken into consideration various requirements of the provisions of the Income Tax Act, 1961, and the facts of the case as to whether it was a case of replacement of a worn out or unserviceable engine or the diesel engine was fitted only to replace the petrol engine.

C.I.T. v. Mir Muhammad Ali (1964) 53 ITR 165 (SC); C.I.T. v. Noroth Oil Mill Co. Ltd. (1983) 140 ITR 173 (Ker.) and C.I.T. v. Polyolefins Industries Ltd. (1988) 169 ITR S38 (Boor.) ref.

D.S. Shishodia for the Commissioner.

B.C. Mehta for the Assessee.

JUDGMENT

V.K. SINGHAL, J.---The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, has referred the following question of law arising out of its order dated July 23, 1981, in respect of the assessment year 1978-79, under section 256(1) of the Income Tax Act, 1961:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure amounting to Rs.18,402 incurred by the assessee-company on the replacement of petrol engine with diesel engine in its car did not result in an advantage of enduring nature to the assessee and hence the aforesaid expenditure was revenue in nature?"

The facts of the case are that the assessee is a private limited company and, during the assessment year 1978-79, it replaced one petrol engine of its car by a diesel engine, the cost of which was Rs.18,402. The Income-tax Officer found that the said expenditure is not of revenue nature but is of capital nature and, therefore, cannot be-allowed as deduction. An appeal was preferred to the Commissioner of Income-tax (Appeals) and the appellate authority found that installation of the diesel engine has in fact brought into existence an asset giving rise to a permanent advantage by way of considerable reduction of the fuel cost. It was also observed that the petrol engine which has been removed had not reached the stage where it could have been thrown out as a scrap. No realisation from the sale of the petrol engine was shown and, therefore, the disallowance was sustained. The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur has held that the replacement of the Petrol engine by the diesel engine does not give advantage of enduring nature to the assessee and, therefore, the deduction was allowed.

Learned counsel for the Revenue has relied upon the decision of the Kerala High Court in C.I.T. v. Noroth Oil Mill Co. Ltd. (1983) 140 ITR 173, wherein fishing boats were fitted with imported engines and the replacement thereof was held not allowable. It was held that the efficiency ' of the boat was considerably increased and there was enduring advantage to the assessee by reason of more efficient operation of boats y the replacement.

According to normal accepted principles, a capital expenditure is something which is spent once for all, while the revenue expenditure is that which is to be incurred every year. This criteria is not decisive and various other factors have to be taken into consideration. If the expenditure is to bring into existence an asset or advantage far the enduring benefit of the business, that is also one of such consideration which has to be taken into consideration.

Replacement of machinery in the usual course of business which is worn out would be to maintain the machinery.

In C.I.T. v. Mir Muhammad Ali (1964) 53 ITR 165, the Supreme Court has held that a diesel engine is clearly machinery and extra depreciation was allowable in respect of replacement of the petrol engine in the assessee's bus by a diesel engine in addition to normal depreciation. If machinery or a part thereof requires repair to preserve and maintain the machinery, then it will be an allowable deduction, but in that case the expenditure must be such which does not bring a new asset into existence nor its object to obtain a new or fresh advantage.

The Bombay High Court in C.I.T. v. Polyolefins Industries. Ltd. (1988) 169 ITR 538, has held that the expenditure on replacement of the petrol engine with a diesel engine in view of the rise in the price of petrol is not for acquiring or bringing into existence an asset of enduring advantage for the business and was for running of the business or working it with a view to produce profits. The finding given by the Tribunal was considered to be a finding of fact.

In the present case, neither has it been alleged nor proved from the record that the petrol engine required massive repair or was worn out nor has it been shown that the said engine has been disposed of in any manner. This point was raised by the Commissioner of Income-tax (Appeals) and even before him it could not be proved as to what has happened to the petrol engine which was fitted on the car. The duration for which the petrol engine has worked was also not taken into consideration to find our as to whether it required heavy repairs which warrant justification for replacement. While deciding the appeal, the Income-tax Appellate Tribunal should have taken into consideration various requirements of the provisions of the Income-tax Act and the facts of the case as to whether it was a case of replacement of a worn out or unserviceable engine or the diesel engine was fitted only to replace the petrol engine. The finding of fact could have been recorded by the Tribunal on the basis of evidence before it and not to the basis of any judgment as to whether the petrol engine was worn out or unserviceable or not.

In these circumstances, we are of the view that the Income-tax Appellate Tribunal was not justified in holding that the expenditure incurred by the assessee-company on replacement of the petrol engine with a diesel engine is an allowable deduction and no advantage of enduring nature is obtained and, therefore, the expenditure was not allowable as revenue in nature. The matter is, therefore, sent back to the Tribunal for deciding it afresh in the light of the observations made above.

Accordingly, the reference is answered in favour of the Revenue and against the assessee.

No order as to costs.

M.BA./163/T.F

Reference answered.