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PETITIONER: COMMISSIONER OF INCOME-TAX, WEST BENGAL-IICALCUTTA

       Vs.

RESPONDENT: KALYANJI MAVJI & COMPANY

DATE OF JUDGMENT14/01/1980

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. UNTWALIA, N.L.

CITATION:  1980 AIR  640            1980 SCR  (2) 758  1980 SCC  (2)  78

ACT:      Indian Income-Tax Act 1922 (11 of 1922), Ss. 10(2)(v) & 10(2)(xv)-Assessee doing  business in  coal-Working  various collieries-One colliery requisitioned for military use-Later derequisitioned-Expenditure incurred  for resuming operation of Colliery-Whether capital or revenue expenditure.

HEADNOTE:      The respondent-assessee  carried on business in coal as the owner  of various collieries. One of the collieries, was occupied  by   the  military   from  1942   until   it   was derequisitioned in 1955. During that period the assessee did not work  the said  colliery: although  the business in coal and working  of the  other collieries were carried on. While the colliery remained under military occupation the assessee incurred expenditure  in respect  of the colliery on account of payment  of surface  rent, minimum royalty and salary for the watch  and ward staff, which expenditure was claimed and allowed as  business expenditure  of the assessee. After the colliery was  handed over to the assessee upon derequisition the assessee  incurred an expenditure of about Rs. 1.6 lakhs in renovating the building, reconditioning the machinery and clearing the land of all debris accumulated over a number of years.      In the  assessment proceedings  for the assessment year 1959-60 the  assessee claimed  deduction  of  the  aforesaid amount under section 10(2)(xv) of the Indian Income Tax Act. The deduction  was disallowed  by the  Income Tax officer on the ground that the expenditure was capital in nature.      The appeals  by the assessee to the Appellate Assistant Commissioner and  the Income  Tax  Appellate  Tribunal  were dismissed.      In the  reference to  the High Court at the instance of the assessee  the High  Court observed  that the business of the assessee  had to be considered as a whole and not on the basis of  its  different  sources  of  supply  or  units  of production, and held that on the facts admitted and found it could not  be said that any fresh asset had been acquired by the  assessee  by  spending  Rs.  1.6  lakhs  and  that  the expenditure was  incurred by the assessee for the purpose of carrying  on  an  existing  concern.  The  expenditure  was, therefore, in the nature of a revenue expenditure.

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    In the  appeal by  the Revenue  to this  Court, it  was contended: (a)  where repairs  are effected to buildings and machinery a  deduction under  section 10(2)  is  permissible only in  respect of  "current repairs" and repairs which are not "current  repairs" are not intended to be the subject of relief, (b)  the repairs  made by  the  assessee  cannot  be described as "current repairs", and (c) if section 10(2) (v) is the  relevant clause,  being the  specific  provision  in respect of expendi- 759 ture on  "current repairs" to buildings and machinery, there is no  justification for  relying  on  section  10(2)(xv)  a residuary clause.      Dismissing the appeal, ^      HELD: 1.  The High  Court was right in holding that the expenditure was not of a capital nature. [764 E]      2. The  expenditure of  Rs. 1.6  lakhs was  expenditure laid out  as part  of the  process of  profit  earning.  The nature of  the expenditure was clearly revenue in character. [764 D]      3. There  can be  little  doubt  that  the  expenditure incurred was  incidental to the business of the assessee. It was involved in renovating the buildings, reconditioning the machinery and  clearing the  debris, from  the land, for the purpose of  resuming the  operation  of  the  colliery.  The expenditure was  laid out  wholly for  the  purpose  of  the business. [763 D]      4. There  must be  strong evidence  that in the case of repairs which  are not  "current repairs",  the  Legislature intended a  departure from the principle that an expenditure laid out or expended wholly and exclusively for the purposes of the  business, and  which expenditure  is not  capital in nature, should  not be  allowed in computing the income from business. There  is nothing in the language of section 10(2) (v) which  declares or  necessarily  implies  that  repairs, other than,  "current repairs",  will not  qualify  for  the benefit of  that principle.  On accepted commercial practice and trading  principles an item of business expenditure must be deducted in order to arrive at the true figure of profits and gains for tax purposes. [762 G-763 A]      C.I.T. v.  Chitnis 50  I.A. 292; Motipur  Sugar Factory Ltd. v.  C.I.T. Bihar  and Orissa, 28 I.T.R. 120; Devi Films Ltd. v.  C.I.T. Madras,  75 I.T.R.  301;  Badridas  Daga  v. C.I.T. 34  I.T.R. 10,  15; Calcutta  Co. Ltd. v. C.I.T. West Bengal, 37  I.T.R. 1,  9;  the  Law  Shipping  Co.  Ltd.  v. Commissioners of  Inland    Revenue  12  Tax  Cases  621,625 referred to.      The scope  of Section  10(2)(xv)  should  be  construed liberally. [763 B]      In the instant case even if the expenditure made by the assessee cannot  be described  as "current  repairs"  he  is entitled to invoke the benefit of s. 10(2)(xv). [763 C]      5. Whether  an expenditure  can be described as capital or revenue  falls to be decided by serial tests, each one of which  approaches  the  question  from  one  perspective  or another, conditioned  by the  particular facts of each case. [763 F]      Assam Bengal  Cement Co.  Ltd. v.  C.I.T.  West  Bengal (1955) 27 I.T.R. 34 referred to.      In the  instant case  the business  of the assessee was coal mining  and it  was carried  on by  the operation  of a network  of   collieries.  Each   colliery  was  a  unit  of production. While  the several units of production continued to be  employed and the business continued to be carried on,

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one alone  of  all  the  units,  was  compelled  to  suspend production. The  suspension was  due to  the property  being requisitioned  for   military  use.   As  soon   as  it  was derequisitioned the assessee 760 took measures  to resume  production of  coal. The buildings were  renovated,   the  machinery   reconditioned  and   the accumulated debris  removed from  the land  No new asset was brought  into  existence,  no  advantage  for  the  enduring benefit of the business was acquired. The activity which was continuously in  operation but  had been temporary suspended was resumed. [763 G-764 C]

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil Appeal No. 2098 of 1972      From the  Judgment and  Order  dated  5-8-1971  of  the Calcutta High Court in Income Tax Reference No. 109/65.      D.V. Patel, J. Ramamurthy and Miss A Subhashini for the Appellant.      S. R.  Banerjee, Mrs.  Indu Goswamy  and Arvind Minocha for the Respondent.      The Judgment of the Court was delivered by      PATHAK, J.:  This appeal  by certificate granted by the High Court at Calcutta under s. 66A(2) of the Indian Income- tax Act,  1922 is directed against the judgment dated August 5, 1971  of that  High  Court  disposing  of  an  income-tax reference.      The respondent  assessee is  a registered firm and owns several collieries  in West  Bengal and  Bihar. One  of  the collieries is  known as  the South Samla Colliery. The South Samla colliery  was under  military occupation from 1942 and was  released   in  1955.  During  the  period  of  military occupation the  assessee incurred  expenditure on account of minimum royalty  payable in  respect of  the  colliery,  the surface rent  and salaries for the watch and ward employees. The expenditure  was allowed  in income-tax proceedings as a business expenditure. After the colliery was released by the military,  the   assessee  incurred  a  further  expenditure amounting to  Rs. 1,61,742  on the  colliery with  a view to resuming mining  operations. The  expenditure  was  incurred during the  previous year  beginning October  24,  1957  and ending November  11, 1958  relevant to  the assessment  year 1959-60. In  the assessment  proceedings for that assessment year the  assessee claimed  a deduction of the amount of Rs. 1,61,742 under  s. 10(2)  (xv) of the Indian Income Tax Act, but the  deduction was  disallowed by the Income-tax Officer on the ground that the expenditure was capital in nature. On appeal, the  Appellate Assistant  Commissioner affirmed that the expenditure  was in  the nature  of capital expenditure. The assessee  proceeded in second appeal, but the Income Tax Appellate Tribunal,  without giving  any reasons of its own, merely  recorded   its   agreement   with   the   income-tax authorities. The assessee obtained 761 a reference to the High Court at Calcutta for its opinion on the following question:                "Whether on  the facts  and circumstances  of      the  case,   the  Income-tax   appellate  Tribunal  was      justified in  holding that  the expenditure  clammed on      the South Samla Colliery at Rs. 1,61,742 was capital in      nature." The High Court noted the following facts:

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    The assessee  carried on  business in coal as the owner of various  collieries. The  South Samla Colliery, which was one of them, was occupied by the military from 1942 until it was derequisitioned in 1955. During that period the assessee did not,  because  he  could  not,  work  the  colliery.  He continued, however,  carrying on  his business  in coal  and working other collieries during that period. While the South Samla  Colliery   remained  under  military  occupation  the assessee incurred expenditure on payment of surface rent and minimum royalty  in respect  of that  colliery and  also  on account  of  salary  for  the  watch  and  ward  staff.  The expenditure  had   been  claimed  and  allowed  as  business expenditure of  the assessee.  After the colliery was handed over  to  the  assessee  upon  derequisition,  the  assessee incurred, during  the relevant period, an expenditure of Rs. 1,61,742 in  renovating  the  building,  reconditioning  the machinery and clearing the land of debris accumulated over a number of  years. The  expenditure of Rs. 1,61,742 consisted of Rs.  66,937 spent on the staff and labour force by way of salaries, wages  and other  benefits and  an amount  of  Rs. 94,805 spent  on the  purchase of  various stores, machinery repairs, dhowrah  repairs etc.  This expenditure  had to  be incurred by  the assessee  for the  purpose of  putting  the machinery in  working order  and bringing  the colliery to a state where  the mining  operations could  be  resumed.  The colliery had  not started  working and mining operations had not been resumed during the relevant year.      The High  Court observed that the assessee was carrying on its  business throughout and the circumstance that one of the collieries  was not  being worked  did  not  affect  the carrying on  of that business. The business of the assessee, the High Court said, had to be considered as a whole and not on the  basis of its different sources of supply or units of production. The  High Court  held that on the facts admitted and found it could not be said that any fresh asset had been acquired by  the assessee  by  spending  Rs.  1,61,742.  The expenditure, it  observed,  was incurred by the assessee for the purpose  of carrying  on an existing concern and not for acquiring any concern not in existence. Ac- 762 cordingly, it held that the expenditure was in the nature of revenue expenditure and, therefore, answered the question in favour of the assessee.      In this  appeal the  first  contention  raised  by  the Revenue is  that the  High Court  had no jurisdiction to re- appraise the  facts and  therefore its finding on the nature of the  expenditure is  vitiated. The  contention is without substance. The  facts on which the High Court has relied are admitted between  the parties  or are  facts  found  by  the income-tax authorities.  We have  no hesitation in rejecting the first contention.      The second contention is that the claim of the assessee must be  considered with reference to s. 10(2)(v) and not s. 10(2)(xv) of the Act. It is urged that if s.10(2) (v) is the relevant clause,  being the specific provision in respect of expenditure on  current repairs  to buildings and machinery, there is  no justification  for relying  on s.10(2) (xv). S. 10(2) (xv) is a residuary clause, and deals with expenditure not being an allowance of the nature described in any of the preceding clauses  of s.10(2).  The submission is that where repairs are  effected to buildings and machinery a deduction under s.10(2)  is permissible  only in  respect  of  current repairs, and repairs which are not "current repairs" are not intended to  be the  subject  of  relief.  The  Act,  it  is contended, limits  the repairs  to  "current"  repairs.  The

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repairs  made  by  the  assessee,  it  is  said,  cannot  be described as "current repairs" Now, this contention rests on the principle  that if  a special provision covers the case, resort cannot  be had to a general provision. It seems to us that if  the renovation  of the building, the reconditioning of machinery  and the  removal of debris cannot be described as "current  repairs" and  we assume  that to be so-the case would  be   entitled  to  consideration  under  s.10(2)(xv). Section  10(2)(v)  deals  with  current  repairs  only.  The subject matter  of s.10(2)  (v) is  "current repairs" and it appears difficult  to  agree  that  repairs  which  are  not "current repairs"  should not be considered for deduction on general principles or under s.10(2) (xv). There must be very strong evidence  that in  the  case  of  such  repairs,  the Legislature intended  a departure from the principle that an expenditure, laid out or expended wholly and exclusively for the purposes  of the  business, and which expenditure is not capital in  nature, should  not be  allowed in computing the income from  business. There  is nothing  in the language of s.10(2) (v)  which  declares  or  necessarily  implies  that repairs, other  than, current  repairs, will not qualify for the benefit  of that  principle. We  must remember  that  on accepted commercial  practice and trading principles an item of business expenditure must be deducted in order 763 to arrive  at the  true figure  of profits and gains for tax purposes. The  rule was  held by the Privy Council in C.I.T. v. Chitnis(1) to be applicable in the case of losses, and it has  been  applied  by  the  courts  in  India  to  business expenditure incurred  by an  assessee. Motipur Sugar Factory Ltd. v.  C.I.T., Bihar  and Orissa(2) and Devi Films Ltd. v. C.I.T. Madras(3). The principle found favour with this Court in Badridas  Daga v.  C.I.T.(4) and  Calcutta  Co.  Ltd.  v. C.I.T. West  Bengal(5). the contents of that rule be true on general principle,  there is  good reason  why the  scope of s.10(2) (xv)  should be construed liberally. In our opinion, even if  the expenditure made by the assessee in the present case  cannot  be  described  as  "current  repairs",  he  is entitled to  invoke the  benefit of  s. 10(2)  (xv). We  may mention that  in The  Law Shipping Co. Ltd. v. Commissioners of Inland  Revenue(6) it  has  been  held  that  accumulated arrears for  repairs are  none the less repairs necessary to earn profits, although they have been allowed to accumulate.      The  question   then  is   whether  s.  10(2)  (xv)  is attracted. There  can be  little doubt  that the expenditure incurred is  incidental to  the business of the assessee. It was involved in renovating the buildings, reconditioning the machinery and  clearing the  debris, from  the land. All the work done  was for  the purpose of resuming the operation of the colliery.  The  expenditure  was  laid  out  wholly  and exclusively for  the purposes  of the  business. We  do  not think there can be any dispute as to that.      But  the   more  serious   question  is   whether   the expenditure can  be regarded  as capital  in nature,  for if that be so the benefit of s. 10(2) (xv), on its plain terms, must be denied. Now, whether an expenditure can be described as capital  or revenue falls to be decided by several tests, each  one   of  which   approaches  the  question  from  one perspective or  another, conditioned by the particular facts of each case. We need not refer to all of them. On the facts of the  present case,  it seems  sufficient to  mention  the tests laid  down by  this Court  in Assam  Bengal Cement Co. Ltd. v.  C.I.T. West Bengal(7). The business of the assessee in the  present case  was coal-mining, and it was carried on by the  operation of  a network of collieries. Hach colliery

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was a  unit  of  production.  While  the  several  units  of production continued to be 764 employed and  the business  continued to  be carried on, one alone of  the units,  the South Samla Colliery was compelled to suspend  production. The suspension was expected to be of temporary  duration,   because  the   property  was   merely requisitioned for military use, it was not acquired. As soon as the  property was  de-requisitioned,  the  assessee  took measures to  resume production  of coal. It was necessary to remove the  impediments which  had come in the way by reason of the  temporary suspension  of work.  The  buildings  were removated, the  machinery reconditioned  and the accumulated debris removed  from the  land. The colliery was, in a word, reinstated  to   the  condition   necessary   for   ensuring production. No  new asset  was brought  into  existence;  no advantage for  the enduring  benefit  of  the  business  was acquired. An  activity which  was continuously  in operation but had  been temporarily suspended was to be resumed. It is immaterial that  during the  year under  consideration there was no mining activity. That the colliery was regarded as an asset of  a continuing  business all  along, even during the period of  military occupation,  is evidenced  by  the  fact that expenditure incurred by the assessee during that period in respect  of the  colliery was  allowed as  a  permissible deduction in  its income tax assessments. The expenditure of Rs. 1,61,742  under consideration  in the  present case  was also expenditure  laid out  as part of the process of profit earning. The nature of the expenditure is clearly revenue in character. The  High Court  is right  in  holding  that  the expenditure is not of a capital nature.      The appeal is dismissed with costs. N.V.K.                                     Appeal dismissed. 765