COMMISSIONER OF INCOME-TAX VS HIMALAYA DRUG CO. (P.) LTD, 2000 PTD-ALLAHABAD-HIGH-COURT-INDIA 1617 (1997)

Income-tax---

----Captial or revenue expenditure---Assessee-company carrying on business; in manufacture and sale of medicines---Amount spent for resurfacing road within factory premises---Only resulted in repair of an existing inefficient subsidiary part of factory premises and bringing it into a condition of normal efficiency---No new road came into existence or benefit of enduring advantage obtained by resurfacing road ---Expenditure on resurfacing is revenue expenditure.

Unless a new tangible or intangible asset comes into being or the expenditure incurred brings about any addition to or expansion of the profit making apparatus of the assessee or a benefit of enduring nature is received by the assessee, expenditure incurred on usual and routine repairs could not be said to be of capital nature.

The assessee-company carrying on business in the manufacture and sale of Ayurvedic and Ulan; medicines incurred an expenditure of Rs.60,000 for repairs (resurfacing with concrete) of the existing road within its factory premises and, claimed deduction of the same as revenue expenditure. The Income-tax Officer held that the expenditure was of capital nature and disallowed the claim for deduction. On appeal, the Appellate Assistant Commissioner found that the expenditure on concreting the road had resulted in an enduring benefit to the assessee, the road being a part of the factory building the assessee was entitled to depreciation and directed the Income-tax Officer to allow depreciation. On further appeal, the Tribunal allowed the claim of the assessee for deduction as revenue expenditure on the ground that an existing inefficient subsidiary part of the factory premises had been repaired and brought into a condition of normal efficiency. On a reference:

Held, that there was no finding by the Tribunal that by resurfacing the roads, the assessee received a benefit of enduring nature or any new road altogether came into existence. Therefore, the Tribunal was right in holding that the amount spent on resurfacing the road within the factory premises was allowable as revenue expenditure.

L. H. Sugar Factory and Oil Mills (Pvt.) Ltd. v. CIT (1980) 125 ITR 293 (SC) and Lakshmiji Sugar Mills Co. Ltd. v. CIT (1971) 82 ITR 376 (SC) fol.

JUDGMENT

The Income-tax Appellate Tribunal referred the following question relating to the assessment year 1975-76 for the opinion of this Court under section 256(2) of the Income Tax Act, 1961 (briefly, the Act):

"Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that a sum of Rs.60,000 spent on resurfacing the road within the factory premises was allowable as .revenue expenditure?"

The facts, in brief, are that the assessee is a private limited company carrying on business in the manufacture and sale of Ayurvedic and Unani medicines. The assessee had its head office at Dehradun and branch offices at Bombay and Bangalore.

The Income-tax Officer, noticed that the assessee had paid Rs.60,000 to one Thomse and Thomse for repairs (resurfacing with concrete) of the existing road, which was claimed as revenue expenditure. The Income tax Officer negatived the contention of the assessee and concluded that the expenditure incurred by the assessee on the resurfacing of the road, was expenditure of capital nature.

The Appellate Assistant Commissioner on appeal found that the expenditure on concreting the road had resulted in an enduring benefit to the assessee. He, however, pointed out that the road being a part of the factory building, the assessee was entitled to depreciation. The Appellate Assistant Commissioner, therefore, directed the Income-tax Officer to allow the depreciation.

Aggrieved, the assessee carried the dispute further in appeal before the Appellate Tribunal, which has recorded its findings as follows:

"In our view, this merely reflected the expenditure on refurnishing a subsidiary part of the factory premises. We think that in matters like in perspective. Expenditure, for example on the renovation of roof or flooring of a premises or panelling the walls to cover up ugly patches or replacing old petrol engines with diesel engines in trucks or buses in transport business or fitting new bodies in them or the cost to a railway company of reconditioning engine boilers and replacing fire boxes would be allowable as a revenue expenditure as is evident from reported case law. No. doubt if the cost of substitution of an old part by a new part substantially changes the identity of the asset in question or effects a substantial improvement the expenditure involved could be described as of capital nature. On the facts of the instant case, vile do not think such a situation has arisen. An existing inefficient subsidiary part of the factory premises has been repaired and brought into a condition of normal efficiency. In this view of the matter, we direct allowance of the claim of Rs.60,000 as revenue expenditure."

In Lakshmiji Sugar Mills Co. (Pvt.) Ltd. v. CIT (1971) 82 ITR 376, the Supreme Court held that the expenditure incurred under a statutory obligation for he development of roads which were originally the property of the Government and remained so even after the improvement had been done, was of revenue nature and not of a capital nature. The Supreme Court pointed out that there was no finding that the roads were to be altogether newly made or that the assessee would get an enduring benefit from those roads. In the instant case also there is no finding by the Appellate Tribunal that by resurfacing the roads, the assessee received benefit of enduring nature or any new road altogether came into existence. Therefore, in view of the ratio of the case of Lakshmiji Sugar Mills Co. (P.) Ltd. v. CIT (1971) 82 ITR 376 (SC), the expenditure incurred .by the assessee could not be said to be expenditure of capital nature.

In L. H. Sugar Factory and Oil Mills (Pvt.) Ltd. v. CIT (1980) 125 ITR 293 (SC), following its earlier decision in Lakshmiji Sugar Mills Co. (Pvt.) Ltd. v. CIT (1971) 82 ITR 376 (SC), the Supreme Court held that the construction of the roads facilitated the business operations of the assessee and enabled the management and conduct of the assessee's business to be carried on more efficiently and profitably. It was true that the advantage secured for the business of the assessee was of long duration, inasmuch as it would last so lang as the roads continued to be in motorable condition, but it was not an advantage in the capital field, because no tangible or intangible asset was acquired by the assessee nor was there any addition to or expansion of the profit-making apparatus of the assessee. The Supreme Court, therefore, held that the expenditure made by the assessee was not of capital nature but of revenue nature.

From the foregoing authorities, the principles that can be deduced are that unless a new tangible or intangible asset comes into being, or the expenditure incurred brings about any addition to or expansion of the profit making apparatus of the assessee or a benefit of enduring nature is received by the assessee, the expenditure incurred on usual and routine repairs could not be said to be of capital nature.

We, therefore, agree with the view taken by the Income-tax Tribunal.

The abovementioned question is, therefore, answered in the affirmative, that is, in favour of the assessee and against the Revenue.

M.B.A./3395/FC Reference answered.