I.T.A. No. 744/KB of 1997-98, decided on 26th October, 2002. VS I.T.A. No. 744/KB of 1997-98, decided on 26th October, 2002., 2003 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 436 (2002)

(a) Income Tax Ordinance (XXXI of 1979)‑‑‑-

‑‑‑First Sched., Parts V, & IV, Para. B(2), Ss.2(16)(31) & 47‑‑‑Finance Ordinance (XIV of 1983), C.B.R. Circular No. 7 of 1983, dated 12‑6‑1983‑‑‑Rate of tax for companies‑‑‑Trust‑‑‑Rate of tax i.e. 46% was charged on the income of .trust applicable to companies other than banking companies and public companies‑‑‑Validity‑‑‑As her .2(16) of the Income Tax Ordinance, 1979, a "company" means a Trust formed by under any law for the time being in force‑‑‑Central Board of Revenue ‑pile explaining Cl. (bb) of S.2(16) of the Income Tax Ordinance, 1979 reiterated in Circular No.7 of 1983 dated 12‑6‑1983 that the rate of tax applicable to such Trusts would be the same as in the case of public company‑‑‑In order to give effect to these Instructions of Central Board of Revenue an amendment was made in S.2(31) of the Income Tax Ordinance, 1979 thereby including such a Trust into a public company and a further amendment was made by substituting sub‑para. (2) of para. B, in Part IV of the First Sched. of the Income Tax Ordinance, 1979 whereunder Trust was included in the definition of "public company", and all Trusts formed by or under any law whether recognized or not for the purposes of S.47 of the Income Tax Ordinance, 1979 were to be treated as public company and the tax rate applicable to public companies was to be applied to the Trust‑‑‑Appellate Tribunal directed that tax in the present case may be computed at the rates applicable to public companies.

(b) Income‑tax

‑‑‑‑Revenue expenditure‑‑‑Principle‑‑‑Whatever are substitutes or surrogates in revenue expenditure is also revenue expenditure‑‑ Surrogate expenditure may be a lump sum payment, it may be laid out at any stage but it saves the tax payer from incurring in the very year or in other years, other revenue payments either in whole or in part, then the expenditure has to qualify as revenue expenditure.

(c) Income Tax Ordinance (XXXI of 1979)‑‑‑

‑‑‑‑S.23(1)(iii)‑‑‑Deductions‑‑‑Current repairs‑‑‑Rented out building‑‑ Amount was spent for construction of rented out premises by dismantling the old and claimed as revenue expenditure on the ground that the building in which business was carried on did not belong to assessee and no asset of the assessee had been created by dismantling the old building‑‑‑Assessing Officer treated the same as capital expenditure and disallowed the same in toto‑‑‑Validity‑‑‑Building was already in the possession of the assessee and the investment made in amendment the building was for the purpose of obtaining a new advantage and as such the expenditure could not be treated as expenditure of a revenue nature and was not admissible as expenditure incurred on current repairs‑‑ Appellate Tribunal unheld the findings of the Authorities below that the expenditure was capital expenditure and was not admissible as "current repair"‑‑‑Disallowance of 25 % for unverifiable expenses being reason able was also upheld by the Appellate Tribunal.

(1986) 54 Tax 128 distinguished.

New Shorrock Spinning & Manufacturing Company Ltd. v. Commissioner of Income‑tax, Bombay North (1956) 30 ITR 336 rel.

Anthony Santamaria, I.T.P. for Appellant.

Abdul Salam, D.R. for Respondent.

Date of hearing: 23rd October, 2002.

ORDER

MUHAMMAD AKHTAR NAZAR MIAN (ACCOUNTANT MEMBER).‑‑‑The appellant is a trust and is aggrieved against the order, dated 31‑7‑1997 made by the learned CIT(A) for the assessment year 1996‑97. The order has been contested on the issues of charging tax at a rate different from that of a public limited company and disallowances as adjudicated upon under Repair and Maintenance Expenses, Motor Car expenses. Miscellaneous expenses, entertainment expenses, Contingencies, Telephone expenses and Travelling expenses. Both the learned representatives have been heard and orders of the authorities below perused.

STATUS:

2. There is no dispute that the appellant is a Trust and for charging tax at the total income determined by the Assessing Officer the rate of 46% has been applied as was applicable to companies other than banking companies and public companies. It is submitted by the learned A.R. that the tax should have been charged at the rate as applicable to public companies. The Assessing Officer has not given any reason for applying the tax rate of 46.% on the total income. The learned CIT(A) has, however, mentioned that since the Trust is unrecognized charitable Trust, the tax has rightly been charged at the rate of 46 %.

3. As per subsection (16) of section . 2 of the Income Tax Ordinance, 1979 (hereinafter called the Ordinance), a company means a Trust formed by or under any law for the time being in force. This amendment was made by Finance Ordinance, 1983. The C.B.R. while explaining this clause (bb) of section 2(16) reiterated in Circular No.7 of 1983 dated June 12, 1983 that the rate of tax applicable to such Trusts would be the same as in the case of public company. In order to give effect to these instructions of C.B:R., an amendment was made in subsection (31) of section 2 thereby including such a Trust into a Pakistani Company and a further amendment was made by substituting sub‑para. (2) of para. B in Part IV of the 1st Schedule where under the Trust was included in the definition of "public company". In this view of the matter all the Trusts formed by or under any law whether recognized or not for the purposes of section 47 of the Ordinance are to be treated as public company and therefore, the tax rate applicable to public companies is to be applied to the Trusts. This being the position, it is directed that tax may be computed at the rates applicable to public companies.

Repair and maintenance expenses:

4. The appellant claimed an expenditure of Rs.2,407,019 as repair and maintenance expenses. On scrutiny by the Assessing Officer it was found that a sum of Rs.433,623 was spent for construction of Operation Theatre and so paid to Messrs Dawn Services. This amount was treated as capital expenditure by the Assessing Officer and was disallowed in toto. Out of the balance claim of Rs.1,972,396, 25% of the claim was disallowed for unverifiable expenses. This treatment has been upheld by the learned CIT(A).,

5. It is argued by the learned A. R. that the building in which the business activities of the Trust are carried on does not belong to the Trust. The repair to the building is responsibility of the tenant as contained in clause (3) of the Tenancy Agreement. Since no asset of the Trust has been created by dismantling the old room and in its place constructing ICU, Surgeon Room, a Store Room, a Recovery Room, and a Corridor, the expenditure was rightly claimed as "current repairs" under section 23(1)(iii) of the Ordinance. In support of its contention the learned A.R. has referred to a case cited as (1986) 54 Tax 128.

6. We have had the advantage of going through the decision referred to by the learned A.R. but we have found that this case is distinguishable and is of no benefit to the appellant. In the reported case the lessee had agreed to demolish and reconstruct the building at its own cost and expenses when the landlord had granted, lease on a long term basis at considerably low rents as compared with prevailing rates in the similar vicinity. The expenditure so made by the lessee was allowed on the principle that whatever substitutes or surrogates in Revenue expenditure is also revenue expenditure. The surrogate expenditure may I be a lump sum payment. It may be laid out at any stage but it saves the taxpayer from incurring in the very year or in other years, other revenue payments either in whole or in part, then the expenditure has to qualify as revenue expenditure. In nutshell it was held that because of the agreement to demolish and reconstruct the building but by releasing the ownership of building brick by brick as it is built, the Revenue expenditure of rent for the succeeding years has in actuality been substituted with the investment in construction of the building. In the case before us this building is already in the possession of this Trust and the investment made in amending the building is for the purpose of obtaining a new advantage and as such the expenditure cannot be treated as expenditure of a revenue nature. In this regard we will like to profusely quote from the decision of the Bombay High Court in the case of New Shorrock Spinning & Manufacturing Company Ltd. v. Commissioner of Income‑tax Bombay North cited as (1956) 30 ITR 336. Mr. Chagla, C.J. as author of the decision has explained as to what is admissible as current repairs:‑‑‑

"Section 10(2)(v) permits a deduction in respect of current repairs to such building, machinery, plant or furniture; the amount paid on account thereof.. Now, 'such' must be read with reference to the earlier clause which is clause (iv) and refers to 'insurance against risk of damage or destruction of building, machinery, plant, furniture, stocks or stores, used for the purposes of the business, profession or vocation, the amount of any premium paid.

Therefore, it is only in respect of building etc., used for the purposes of the business, profession or vocation of the assessee that the current repairs could be claimed. There is no doubt that this particular machinery or plant is used for the purposes of the business of the assessee. The question that we have to consider is whether the deduction constitutes current repairs.

It will be noticed that the Legislature has not permitted all repairs to constitute a permissible deduction. Not only has the assessee to satisfy the Department that the expenditure that he has made was for the purpose of repairs to his building, machinery, plant or furniture, but also that those repairs were current repairs, and what we have to consider is what is the connotation to be given to the expression 'repairs' and what is the connotation to be given to the expression `current'.

The expression 'repairs' must be understood in contradistinction to renewal or restoration. A building, machinery, plant or furniture may be renewed or restored either wholly or in part, in which case the amount expended would not be in respect of repairs, but when renewing or restoring a building, machinery, plant or furniture a need may arise to set right certain defects or flaws and an amount may be spent for this purpose and the result may be that although the original asset has been preserved and maintained, no new asset has come into existence and no additional advantage has accrued to the assessee.

The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage: This can be the only definition of `repairs' because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure.

If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which the Legislature has permitted under section 10(2)(v) is a deduction where the expenditure is revenue expenditure and not a capital expenditure.

Therefore, in giving the meaning which we are giving to the expression 'repair' we are only paraphrasing the expression that the expenditure under clause (v) of section 10(2) must be an expenditure of a revenue nature and not of a capital nature.

The definition of 'repair' really does not create much difficulty, but the difficulty is created by the adjective which qualifies the expression 'repairs' and that adjective is 'current' and as already pointed out the Legislature did not intend that ‑ the assessee should be permitted all repairs, even though the expenditure may be a revenue expenditure, as a permissible deduction under section 10(2)(v).

What we have to consider is in what way has the Legislature circumscribed the expression `repairs' and to what extent has the Legislature limited the right of the assessee to claim deduction in respect of repairs. One or two views are possible of the expression 'current'. It may be said that 'current' is used in contradistinction to heavy and that small petty repairs are the only repairs which can fall within the ambit of section 10(2)(v).

The other view is a view more in fitting with the etymological, meaning of the expression 'current', and it is that they are such repairs which are attended to when the need for them arises and are not allowed to fall into arrears or to be accumulated. If a building, machinery, plant or furniture needs some repairs and those repairs are attended to as and when the need arises then the repairs are current repairs.

But if the assessee, although the need has arisen, does not attend to that need and allows the repairs to be accumulated, then it could not be said that when he is expending money on these repairs he is expending them on current repairs. Again, it seems to have been the intention of the Legislature that if the assessee could carry on with his building, machinery, plant furniture without attending to its repairs and spends an amount at a later date when the arrears are accumulated, such expenditure partakes more of the nature of capital expenditure than of revenue expenditure."

7. When the principle enunciated above is applied to the case before us we find that the expenditure for constructing Operation Theatre etc. is an expenditure for the purpose of obtaining a new advantage and therefore, is not admissible as expenditure incurred on current repairs. We concur with the findings of the authorities below that such expenditure amounting and Rs.433,623 is capital expenditure and is therefore, not admissible as "current repair". Out of the balance amount the disallowance of 25 % for unverifiable expenses being reasonable has rightly been maintained by the learned CIT(A).

8. The disallowances have been reduced by the learned CIT(A) out of expenses claimed for Motor Car, Entertainment, Contingency and Telephone and a fair and reasonable relief has duly been allowed by the First Appellate Authority. In this view of the matter we find reason in maintaining the order of the learned CIT(A) in this regard. The appellant had claimed traveling expenses of Rs.757,320 which were found to be excessive and these also included foreign tours which were not proved to be entirely for business/professional expediency. In these circumstances the disallowance made by the Assessing Officer was rightly upheld by the learned CIT(A).

9. Consequently the appeal succeeds to the extent and in the manner indicated above.

C.M.A./575/Tax(Trib.)Appeal accepted.