1961-VIL-86-PAT-DT

Equivalent Citation: [1962] 46 ITR 533

PATNA HIGH COURT

Miscellaneous Judicial Cases Nos. 829 and 130 of 1959

Dated: 20.11.1961

MESSRS. DEHRI ROHTAS LIGHT RAILWAY CO. LTD

Vs

COMMISSIONER OF INCOME TAX, BIHAR & ORISSA

Bench

V. Ramaswami and N.L. Untwalia, JJ.

JUDGMENT

In this case the assessee is a railway company which runs a railway known as Dehri Rohtas Light Railway over a distance of 37 miles from Dehri-on-Sone to Rohtas in the Shahabad district. During the accounting year ending on the 31st March, 1951, the assessee renewed 5,518 sleepers on this railway line and incurred an expenditure of Rs 29,927. The assessee also incurred an expenditure of Rs 2,028 as railway freight for transporting materials for replacing the sleepers. For the same accounting year the assessee incurred an expenditure of Rs 7,511 for replacing certain parts of engine boilers. The assessee claimed that the expenditure required for changing the sleepers and for repairs of the boilers should be deducted under the provisions of section 10(2) of the Indian Income Tax Act. The claim was rejected by the Income Tax Officer, but on appeal the appellate Assistant Commissioner held that the expenditure should be deducted. The Income Tax department took the matter in appeal to the Appellate Tribunal which allowed the appeal and held that the expenditure incurred by the assessee for replacing the sleepers and for repairs of the boilers cannot be allowed as a deduction under section 10(2) of the Income Tax Act.

For the assessment year 1952-53 the assessee had incurred an expenditure of Rs 15,921 being the cost of two new fire-boxes and the cost of reconditioning the boilers of two old locomotives. During this assessment year the assessee also incurred an expenditure of Rs 11,400 for the replacement of sleepers. The Appellate Assistant Commissioner allowed these deductions, but on appeal the Appellate Tribunal took the view that these amounts should not be deducted from the income of the assessee as revenue expenditure.

Under section 66(1) of the Income Tax Act the Appellate Tribunal has submitted the following questions of law for the determination of the High Court :

"1. Whether the expenditure of Rs 31,955 and Rs 11,400 incurred by the assessee as cost of replacing the sleepers on the railway tracks in the assessment years 1951-52 and 1952-53 respectively was revenue expenditure permissible as a deduction within the meaning of section 10(2) of the Income Tax Act ?

2. Whether the expenditure of Rs 7,511 incurred by the assessee as cost of replacement of parts of the boilers during the assessment year 1951-52 was revenue expenditure permissible as a deduction under section 10(2) of the Income Tax Act ?

3. Whether the expenditure of Rs 15,921 incurred for the cost of two new fire-boxes and for reconditioning of boilers of two old locomotives incurred by the assessee during the assessment years 1952-53 was revenue expenses permissible as a deduction within the meaning of section 10(2) of the Act ?"

In our opinion the order of the Appellate Tribunal is vitiated by an error of law. The reason given by the Appellate Tribunal for not allowing these deductions to the assessee is that replacement of sleepers cannot be treated as revenue expenditure and cannot be claimed by the assessee as expenditure incurred "in respect of current repairs" to building, machinery and plant. The interpretation of the statutory provision has recently been the subject-matter of examination by a division bench of this High Court in Commissioner of Income Tax v. Darbhanga Sugar Co. Limited. It has been pointed out in that case that the expression "current repairs to machinery" in section 10(2)(v) of the Income Tax Act must be interpreted to mean repairs to machinery in the current accounting year and there is nothing to suggest that the expenditure on repairs cannot be allowed as a proper deduction if the repairs are not petty. It has also been held in that case that the expression "current" cannot be held to mean "petty" and the section does not say anything about the magnitude of the expenditure. It has also been held by the division bench in that case that merely because there is replacement of subsidiary parts of machinery the assessee is not debarred from claiming the expenditure as revenue expenditure under section 10(2)(v) of the Income Tax Act. It is clear that the renewal may be either repair or reconstruction. Renewal is repair only if it is restoration of or replacement of subsidiary parts of the old machinery. If, on the other hand, there is replacement of the entire machinery or substantially the whole of it, there is no question of repair. The test, therefore, applicable to a case of this description is whether the act of replacement is one which is in substance replacement of defective parts or replacement of the entire machinery or a substantial part of the entire machinery. Applying the test to the present case, we hold that the assessee is entitled to claim deduction of the cost of replacing sleepers on railway tracks for the two assessment years. It is also manifest that the assessee is entitled to claim deduction for replacement of the parts of the boilers for the assessment year 1951-52 and for the cost of two new fire-boxes and for reconditioning of boilers of two old locomotives for the assessment year 1952-53. The view that this High Court has expressed in Commissioner of Income Tax v. Darbhanga Sugar Co. Ltd. with regard to section 10(2)(v) of the Income Tax Act has been followed by a division bench of the Bombay High Court in New Shorrock Spinning and Manufacturing Co. Ltd. v. Commissioner of Income Tax and also by the Nagpur High Court in R. B. Bansilal Abirchand Spinning and Weaving Mills v. Commissioner of Income Tax. The view expressed by this High Court in Commissioner of Income Tax v. Darbhanga Sugar Co. Ltd. is also borne out by a decision of the Privy Council in Rhodesia Railways Limited v. Income Tax Collector, Bechuanaland Protectorate, where the material facts were of similar character to those of the present case. At page 232 of the report Lord Macmillan has stated as follows :

"The periodical renewal by sections of the rails and sleepers of railway line as they wear out by use is in no sense a reconstruction of the whole railway and is an ordinary incident of railway administration. The fact that the wear although continuous is not and cannot be made good annually does not render the work of renewal when it comes to be effected necessarily a capital charge. The expenditure here in question was incurred in consequence of the rails having been worn out in earning the income of previous years on which tax had been paid without deduction in respect of such wear and represented the cost of restoring them to state in which they could continue to earn income. It did not result in the creation of any new assets; it was incurred to maintain the appellants existing line in a state to earn revenue. The analogy of a wasting asset which appears to have affected the minds of the special court has really no application to such a case as the present. Nor do their Lordships agree that expenditure in order to form a permissible deduction must have been incurred in the production of the actual years income which is the subject of the assessment, if by this it is meant that the benefit of the expenditure must not extend beyond the year of assessment, for very many repairs have the result of enabling income to be earned in future years as well as in the year in which they are effected."

For these reasons we hold that all the three questions referred to the High Court in this case must be answered in favour of the assessee and against the Income Tax department. In other words, the assessee is entitled to deduct the expenditure of Rs 31,955 and Rs 11,400 incurred as cost of replacement of the sleepers for the assessment years 1951-52 and 1952-53, respectively, and deduct the expenditure of Rs 7,511 for replacement of parts of the boilers for the assessment year 1951-52 and the expenditure of Rs 15,921 incurred as cost of two new fire-boxes and for reconditioning of boilers of two old locomotives for the assessment year 1952-53. The assessee is entitled to the costs of this reference. There will be a consolidated hearing fee of Rs 250 for both the cases.

Reference answered accordingly.