Ita/162/2008 Of The Commissioner Of Income Tax v. M/S.karnataka State Road Transport Corporation Ltd

IN THB HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 28 DAY OF APRIL 2014. PRESENT THERE HON'BLE MR.JUSTICE DILIP B.BHOSAL AN D THR HON'BLBE MR..JUSTICBK B.MANOHA ITA No.162/2008 BBRHIWEE 1. The Commissioner ot Income TaxC R BuildingQueens Road, Bangalore. ”.2. The Joint Commissioner ot Income Taspecial Range — 5C R Building, Queens Road,Bangalore.... Appellants.(By Sri.K.V.Aravind, Advocate)AN):M/s.Karnataka State Road —Transport Corporation LtdP.B.No.2778, K.H.Road,ohanthinagar,|Bangalore.... Respondent (By Sri.S.Parthasarathi, Adv A/w Mallaha Rao, Adv) ITA filed u/S.260-A of I.T.Act, 1961 arising out ofOrder.dated19-09-200 /passed1nITANo.328/BNG/2005, for the Assessment Year 1997-98,praying that this Hon'ble Court may be pleased to: 1.formulate the substantial questions of law|stated therein,stated therein, ll.allow the appeal and set aside the order|passed by the ITAT Bangalore in ITA No.328/BNG/2005, dated 19-09-2007 confirm|the orders of the Appellate Commissioner|and Joint Commissioner of Income Tax,special Range - 5, Bangalore. passed by the ITAT Bangalore in ITA No.328/BNG/2005, dated 19-09-2007 confirm|the orders of the Appellate Commissioner|and Joint Commissioner of Income Tax,special Range - 5, Bangalore. Thisappealcomingfor.hearingthisday, B.MANOHAR.Jaadelivered the following: JUDGNMA NT The Revenue has preferred this appeal undersection 260A of the Income Tax Act, 1961 (for short ‘theAct") challenging the order dated 19-09-2007 made in|ITA No.328/Bang/2005 passed by the Income TaxAppellate Tribunal, Bangalore Bench ‘A’ (hereinaiterreferred to as °the Tribunal‘) allowing the appeal filed| by the assessee while setting aside the order passed bythe Commissioner of Income Tax (Appeals)-I, Bangalore(hereinafter referred to as ‘theFirstAppellate Authority‘) as well as the Assessing Authority, for theassessment year 1997-98. 2 |Therespondent-assessee1SaCompanyincorporated under the Companies Act, 19956 and is astate Public Sector Undertaking whose main activity isto provide transport facilities to the travelling public andto provide passengers amenities such as construction ofthe bus stations, rural way-side shelters, City pick-upShelters and operating services in the rural and sub-urban routes. The assessee-company filed the returnof income on 28-11-1997 for the assessment year 1997-98 declaring a net loss. The return was accompaniedwith the unaudited accounts i.e. Balance Sheet, Profitand Loss account. Subsequently, on completion ofstatutory audit, the certified accounts and Audit Reportof the assessee-company issued by the AccountantGeneral, Karnataka State was filed on 28-10-1998. The.return of income was processed under Section 143(1)(a) of the Act, thereafter selected for scrutiny and noticeunder Section 143(1) and 143(2) was issued callingupon the assessee to clarify certain queries. Inpursuar»ceOT thesaid|notice,theauthorizedrepresentative of the assessee made available thenecessary documents. The Assessing Officer afterconsidering the necessary documents amongst otherthings, noticed that the assessee-company had incurredexpenditure of Rs.2,61,23,558/- towards reconditioningthe passenger buses and the interest paid to IDBI Bankin a sum of Rs.27,53,452/- towards the loan availed forpurchasing the new bus Chassis. On verifying thenecessary documents, the Assessing Officer found thatthe nature of the benefit as a result of reconditioning ofover-aged buses is not transitory and ephemeral. It isenduring benefit to the Corporation inasmuch as.productivity used can be extracted out of the over-agedbuses for some more years. The reconditioning of theover-aged buses resulted in extending the productive life of the buses by few more years and it is an enduringbenefit, hence the expenditure is capital in nature. | of the buses by few more years and it is an enduringbenefit, hence the expenditure is capital in nature. | 3.|With regard to the expenditure incurred onpayment of interest is concerned, the AssessingAuthority held that the interest should have beenaccounted for the assessment year 1996-97. The IDBIBank informed the assessee-Corporation that they haveto pay the differential interest in the month of February— March 1996 itself. Hence the said amount cannot be!deducted for the assessment year 1996-97 accordinglydisallowed the same by its assessment order dated |IQ-ODQD-VOOO. 4The assessee being aggrieved by the assessmentorder passed by the Assessing Authority preferred anappeal before the First Appellate Authority challengingthe same on various grounds contending that the orderpassed by the Assessing Authority is contrary to lawand also contended that the expenditure was incurred in the nature of repair and renewal to preserve andmaintain the already existing assets as a result ofwhich, neither new asset came into existence nor freshadvantages are obtained by the assessee. Hence,treating the expenditure incurred as capital in nature iscontrary to law. Further the assessee had availedfinancial assistance from IDBI to purchase the buses.The payments are being made in 10 —- 20 installments.The Assessing Officer disallowed the differential interestpaid on the ground that the differential interest claimedby the IDBI is related to assessment year 1996-97 andthe deduction cannot be claimed for the assessment|year1997-98.Hence,theAssessingAuthoritydisallowed the said deduction. The First AppellateAuthority after considering the matter in detail foundthat the expenditure incurred for obtaining theenduring benefit is a capital expenditure and notrevenue expenditure. Further the denial of deduction inrespect of differential interest paid to IDBI was also upheld, and partly allowed the appeal filed by theassessee by its order dated 09-12-2004. 5The assessee being aggrieved by the order passedby the First Appellate Authority filed an appeal beforethe Tribunal, challenging the same on various grounds. —The Appellate Tribunal after considering the matter indetail found that the order passed by the AssessingAuthority as well as the First Appellate Authority iscontrary to law. The expenditure incurred for repairingand reconditioning the buses does not amount tocapital expenditure, it 1s only revenue expenditure. —With regard to payment of interest is concerned, theassessee-Corporation has to pay the interest eventhough it was paid during assessment year 1997-98,they are entitled for deduction and allowed the appealby setting aside the orders passed by the authoritiesbelow by its order dated 19-09-2007. Being aggrieved by the order passed by the Appellate Tribunal, therevenue has preferred this appeal. 6. The instant appeal was admitted on 23-03-2009for considering the following substantial questions of law: (1)Whether the Tribunal was correct inholding that the expenditure incurred bythe assessee for reconditioning of overaged buses was revenue in naturewithout taking into consideration theadmitted position that the expenditureincurred was to increase the lifetime ofthe over-aged buses?holding that the expenditure incurred bythe assessee for reconditioning of overaged buses was revenue in naturewithout taking into consideration theadmitted position that the expenditureincurred was to increase the lifetime ofthe over-aged buses? by the order passed by the Appellate Tribunal, therevenue has preferred this appeal. 6. The instant appeal was admitted on 23-03-2009for considering the following substantial questions of law: (1)Whether the Tribunal was correct inholding that the expenditure incurred bythe assessee for reconditioning of overaged buses was revenue in naturewithout taking into consideration theadmitted position that the expenditureincurred was to increase the lifetime ofthe over-aged buses?holding that the expenditure incurred bythe assessee for reconditioning of overaged buses was revenue in naturewithout taking into consideration theadmitted position that the expenditureincurred was to increase the lifetime ofthe over-aged buses? (it)Whether the Tribunal was correct inholding that though the liability to payinterest to IDBI was for the assessmentyear 1996-97, since the payment ismade in the current assessment year1997-98 the same has to be allowed forAssessment year 1997-98 itself withouttakingintoconsiderationthattheaASSCSSCCWas followingmercantilesystem of accounting?holding that though the liability to payinterest to IDBI was for the assessmentyear 1996-97, since the payment ismade in the current assessment year1997-98 the same has to be allowed forAssessment year 1997-98 itself withouttakingintoconsiderationthattheaASSCSSCCWas followingmercantilesystem of accounting? [|We have carefully considered the arguments addressed by the learned counsel for the parties and perused the orders impugned and relevant records.| 3.|The records clearly disclose that the assessee-Corporation is a Company wholly owned and controlledby the State Government whose main activity is toprovide transport facilities to the travelling public andnecessary infrastructure i.e. establishment of bus-stations, rural way-side shelters and City pick-up bus-Shelters. The assessee-Corporation owns more than10,000 buses. The expenditure was incurred onreconditioning and overhauling of the buses. Theaforesaid expenditure is for repair and renewal topreserve and maintain the already existing assets. Thebuses need to be repaired and make them roadworthyagain after the ware and tare due to the bad condition ofthe road. In that process, the assessee has to)necessarily incur expenses. These expenses cannot becalled as capital in nature or enduring benefit. Theseare all current repairs to the already existing assets andmaking such assets again to be roadworthy will not bring any new assets or fresh advantage to theassessee. These expenditures are routine in natureand it is a revenue expenditure. The order passed bythe Assessing Authority as well as the First AppellateAuthority holding that the reconditioning of over-agedbuses resulting in extending the productivity life ofbuses by few more years, minimizing the breakdown forfew more years and also negating the necessity ofpurchase of new assets which is of enduring benefit tothe assessee, it is only a capital expenditure whichcannot be acceptable. Thousands of buses had to berepaired now and then due to the bad condition of theroad and make them fit or roadworthy. The body,engine of the buses are not replaced, but it is onlyrepairing of ware and tare. It is a routine expenditurebeing incurred, hence the expenditure incurred by theassessee is a revenue expenditure. OQ The Hon’ble Supreme Court in a judgmentreported in (1997) 224 ITR 414 (SC) in the case ofBALLIMAL|NAVAL.KISHORH&ANOTHER|v/s.COMMISSIONER OF INCOME TAX examined the similarissue and distinguished the repair of machines withreplace of machines with the new _ construction. Paragraph 2 of the judgment reads as under: OQ The Hon’ble Supreme Court in a judgmentreported in (1997) 224 ITR 414 (SC) in the case ofBALLIMAL|NAVAL.KISHORH&ANOTHER|v/s.COMMISSIONER OF INCOME TAX examined the similarissue and distinguished the repair of machines withreplace of machines with the new _ construction. Paragraph 2 of the judgment reads as under: The expression used in section 10(2)(v) is"current repairs" and not mere "repairs". Thesame expression occurs in section 30(a)(it) and insection 3I1fi) of the Income-tax Act, 1961. Thequestion is what is the meaning of the expressionin the context of section 1O0(2). In New Shorrockspinning and Manufacturing Co. Ltd.'s case/1956/ 30 ITR 338 (Bom), Chagla C.J., speakingfor the Division Bench, observed that theexpression "current repairs" means expenditureon buildings, machinery, plant or furniture whichis not for the purpose of renewal or restorationbut which is only for the purpose ofpreserving ormaintaining an already existing asset and whichdoes not bring a new asset into existence or doesnot giwe to the assessee a new or differentadvantage. The learned Chief Justice observed|that they are such repairs as are attended to asand when need arises and that the questionwhen a building, machinery, etc., requires repairsand when the need arises must be decided not byany academic or theoretical test but by the test ofcommercial expediency. The learned Chief Justiceobserved : "The simple test that must be constantly borne inmind is that as a result of the expenditure whichis claimed as an expenditure for repairs what isreally being done is to preserve and maintain analreadyexistingasset.Theobjectofthe expenditure is not to bring a new asset intoexistence, nor is its object the obtaining of a newor fresh advantage. This can be the onlydefinition of ‘repairs’ because it is only by reasonof this definition of repairs that the expenditure is|a revenue expenditure. If the amount spent was for the purpose ofbringing into existence a new asset or obtaining anevadvantage, thenobviouslysuchan.expenditure would not be an expenditure of arevenue nature but it would be a capitalexpenditure, and it is clear that the deductionwhich the Legislature has permitted under section1O(2)(v) ts a deduction where the expenditure is aTevenueexpenditureandNot|Omcapitalexpenditure. “ The Hon’ble Supreme Court clearly held that theexpenditure incurred to preserve and maintain thealready existing assets and not to bring new assets intoexistence or obtain fresh advantage iS a revenueexpenditureanddoes|notamountTO capitalexpenditure. On the other hand, the replacement ofmachinery and construction of new building amounts to obtaining the enduring benefit and it is a capitalexpenditure. | 10.|similar question came before the Hon’ble SupremeCourt in COMMISSIONER OF INCOME TAX v/s.oORI.LMANGAYARKARASI MILLS (P) LTD., reported in(2009) 315 ITR 114. The issue before the SupremeCourt was that whether the expenditure incurred to‘preserve and maintain’ an already existing asset andnot to bring a new asset into existence or to obtain newadvantagewhethertheexpenditure1S.capitalexpenditure or revenue expenditure.The Hon’ble.Supreme Court clearly held that the replacement ofparts of which can be considered to be for mere purposeof ‘preserving or maintaining’ this asset 1S a revenueexpenditure and not the capital expenditure. In theinstant case also the assessee-Corporation owns morethan 10,000 buses, it is has to take out the routinerepair work of the buses and recondition the buses to makethem|roadworthyotherwisetherewillbebreakdown of the buses every now and then. Theexpenditure incurred on reconditioning and overhaulingof the buses is a routine work and the expenditure isrevenue in nature and cannot be treated as capitalexpenditure in view of text laid down in BALLIMALNAVAL KISHORE case and subsequent judgmentreferred to above. Hence, the first substantial questionof law is held in favour of the assessee and against theRevenue. makethem|roadworthyotherwisetherewillbebreakdown of the buses every now and then. Theexpenditure incurred on reconditioning and overhaulingof the buses is a routine work and the expenditure isrevenue in nature and cannot be treated as capitalexpenditure in view of text laid down in BALLIMALNAVAL KISHORE case and subsequent judgmentreferred to above. Hence, the first substantial questionof law is held in favour of the assessee and against theRevenue. 11.)With regard to the second substantial question oflaw is concerned, the respondent-Corporation hadavailed financial assistance from IDBI for the purpose ofpurchasing of bus Chassis and construction of thebody. The principal and interest are payable half yearlyin equal installments for a period of five years whichwas further modified to 20 installments (quarterlypayment from 9-8-1996). The Bank issued notice in the month of February — March 1996 for payment ofdifferential interest before the closure of book. However, |the said expenditure should have been accounted fortheassessmentYCar1996-97|andNOTforthe|assessment year 1997-98 as the assessee is followingthe mercantile system of accounting. The reasoning ofthe Appellate Tribunal to set aside the order passed bythe Assessing Authority as well as the First AppellateAuthority on this count is erroneous in law. Since theASSECSSEE1Sfollowingthe.mercantile systemOT accounting, the interest accrued for the assessmentyear 1996-97 cannot be claimed to be deducted for theassessment year 1997-98. Hence, the order passed bytheAppellateTribunalcannotbesustainable.Accordingly, the second substantial question of law isheld against the assessee and in favour of the Revenue.Accordingly, we pass the following: 16 ORDER The appeal is allowed in _ part. The firstsubstantial question of law is held in favour of theassessee and against the Revenue and the secondsubstantial question of law is held in favour of theRevenue and against the assessee. od/-JUDGE od/-JUDGEod/-|JUDGE. JUDGE. _* | mp