THE COMMISSIONER OF INCOME TAX V. M/S.KARNATAKA STATE ROAD TRANSPORT CORPORATION LTD

ITA/162/2008

AI Insights

The case involves the Karnataka State Road Transport Corporation Ltd (the respondent) appealing against the orders of the Assessing Officer and the First Appellate Authority, which treated certain expenditures as capital in nature. The expenditures in question were for reconditioning over-aged buses and interest paid to IDBI Bank for loans on new bus chassis. The Income Tax Appellate Tribunal (the Tribunal) found these expenditures to be revenue in nature, contrary to the lower authorities' decisions. The Revenue challenged the Tribunal's decision in the High Court, leading to the current appeal.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 728027 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 28-04-2014
• Assessment Year: misc
• Other Referred Cases: BALLIMAL NAVAL KISHORE & ANOTHER v/s COMMISSIONER OF INCOME TAX, COMMISSIONER OF INCOME TAX v/s SRI.MANGAYARKARASI MILLS (P) LTD.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: S PARTHASARATHI; MALLAHARAO
• Assessee Lawyers: K V ARAVIND
• Keywords: Capital expenditure; Differential interest; Mercantile system of accounting; Revenue expenditure; Reconditioning of buses
• Section: 143(2); 143(1); 143(1)(a); 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 28TH DAY OF APRIL 2014 PRESENT THE HON'BLE MR.JUSTICE DILIP B.BHOSALE AND THE HON'BLE MR.JUSTICE B.MANOHAR I T A No.162/2008 BETWEEN: 1. The Commissioner of Income Tax C R Building Queens Road, Bangalore. 2. The Joint Commissioner of Income Tax Special Range – 5 C R Building, Queens Road, Bangalore. ... Appellants (By Sri.K.V.Aravind, Advocate) AND: M/s.Karnataka State Road Transport Corporation Ltd P.B.No.2778, K.H.Road, Shanthinagar, Bangalore. ... Respondent (By Sri.S.Parthasarathi, Adv A/w Mallaha Rao, Adv) 2 ITA filed u/S.260-A of I.T.Act, 1961 arising out of Order dated 19-09-2007 passed in ITA No. 328/BNG/2005, for the Assessment Year 1997-98, praying that this Hon'ble Court may be pleased to: i. formulate the substantial questions of law stated therein, ii. 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. This appeal coming for hearing this day, B.MANOHAR.J., delivered the following: J U D G M E N T The Revenue has preferred this appeal under Section 260A of the Income Tax Act, 1961 (for short ‘the Act’) challenging the order dated 19-09-2007 made in ITA No.328/Bang/2005 passed by the Income Tax Appellate Tribunal, Bangalore Bench ‘A’ (hereinafter referred to as ‘the Tribunal’) allowing the appeal filed by the assessee while setting aside the order passed by the Commissioner of Income Tax (Appeals)-I, Bangalore (hereinafter referred to as ‘the First Appellate 3 Authority’) as well as the Assessing Authority, for the assessment year 1997-98. 2. The respondent-assessee is a Company incorporated under the Companies Act, 1956 and is a State Public Sector Undertaking whose main activity is to provide transport facilities to the travelling public and to provide passengers amenities such as construction of the bus stations, rural way-side shelters, City pick-up shelters and operating services in the rural and sub- urban routes. The assessee-company filed the return of income on 28-11-1997 for the assessment year 1997- 98 declaring a net loss. The return was accompanied with the unaudited accounts i.e. Balance Sheet, Profit and Loss account. Subsequently, on completion of statutory audit, the certified accounts and Audit Report of the assessee-company issued by the Accountant General, Karnataka State was filed on 28-10-1998. The return of income was processed under Section 143(1)(a) 4 of the Act, thereafter selected for scrutiny and notice under Section 143(1) and 143(2) was issued calling upon the assessee to clarify certain queries. In pursuance of the said notice, the authorized representative of the assessee made available the necessary documents. The Assessing Officer after considering the necessary documents amongst other things, noticed that the assessee-company had incurred expenditure of Rs.2,61,23,558/- towards reconditioning the passenger buses and the interest paid to IDBI Bank in a sum of Rs.27,53,452/- towards the loan availed for purchasing the new bus Chassis. On verifying the necessary documents, the Assessing Officer found that the nature of the benefit as a result of reconditioning of over-aged buses is not transitory and ephemeral. It is enduring benefit to the Corporation inasmuch as productivity used can be extracted out of the over-aged buses for some more years. The reconditioning of the over-aged buses resulted in extending the productive life 5 of the buses by few more years and it is an enduring benefit, hence the expenditure is capital in nature. 3. With regard to the expenditure incurred on payment of interest is concerned, the Assessing Authority held that the interest should have been accounted for the assessment year 1996-97. The IDBI Bank informed the assessee-Corporation that they have to 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 accordingly disallowed the same by its assessment order dated 29-02-2000. 4. The assessee being aggrieved by the assessment order passed by the Assessing Authority preferred an appeal before the First Appellate Authority challenging the same on various grounds contending that the order passed by the Assessing Authority is contrary to law and also contended that the expenditure was incurred 6 in the nature of repair and renewal to preserve and maintain the already existing assets as a result of which, neither new asset came into existence nor fresh advantages are obtained by the assessee. Hence, treating the expenditure incurred as capital in nature is contrary to law. Further the assessee had availed financial assistance from IDBI to purchase the buses. The payments are being made in 10 – 20 installments. The Assessing Officer disallowed the differential interest paid on the ground that the differential interest claimed by the IDBI is related to assessment year 1996-97 and the deduction cannot be claimed for the assessment year 1997-98. Hence, the Assessing Authority disallowed the said deduction. The First Appellate Authority after considering the matter in detail found that the expenditure incurred for obtaining the enduring benefit is a capital expenditure and not revenue expenditure. Further the denial of deduction in respect of differential interest paid to IDBI was also 7 upheld, and partly allowed the appeal filed by the assessee by its order dated 09-12-2004. 5. The assessee being aggrieved by the order passed by the First Appellate Authority filed an appeal before the Tribunal, challenging the same on various grounds. The Appellate Tribunal after considering the matter in detail found that the order passed by the Assessing Authority as well as the First Appellate Authority is contrary to law. The expenditure incurred for repairing and reconditioning the buses does not amount to capital expenditure, it is only revenue expenditure. With regard to payment of interest is concerned, the assessee-Corporation has to pay the interest even though it was paid during assessment year 1997-98, they are entitled for deduction and allowed the appeal by setting aside the orders passed by the authorities below by its order dated 19-09-2007. Being aggrieved 8 by the order passed by the Appellate Tribunal, the revenue has preferred this appeal. 6. The instant appeal was admitted on 23-03-2009 for considering the following substantial questions of law: (i) Whether the Tribunal was correct in holding that the expenditure incurred by the assessee for reconditioning of over aged buses was revenue in nature without taking into consideration the admitted position that the expenditure incurred was to increase the lifetime of the over-aged buses? (ii) Whether the Tribunal was correct in holding that though the liability to pay interest to IDBI was for the assessment year 1996-97, since the payment is made in the current assessment year 1997-98 the same has to be allowed for Assessment year 1997-98 itself without taking into consideration that the assessee was following mercantile system of accounting? 7. We have carefully considered the arguments addressed by the learned counsel for the parties and perused the orders impugned and relevant records. 9 8. The records clearly disclose that the assessee- Corporation is a Company wholly owned and controlled by the State Government whose main activity is to provide transport facilities to the travelling public and necessary infrastructure i.e. establishment of bus- stations, rural way-side shelters and City pick-up bus- shelters. The assessee-Corporation owns more than 10,000 buses. The expenditure was incurred on reconditioning and overhauling of the buses. The aforesaid expenditure is for repair and renewal to preserve and maintain the already existing assets. The buses need to be repaired and make them roadworthy again after the ware and tare due to the bad condition of the road. In that process, the assessee has to necessarily incur expenses. These expenses cannot be called as capital in nature or enduring benefit. These are all current repairs to the already existing assets and making such assets again to be roadworthy will not 10 bring any new assets or fresh advantage to the assessee. These expenditures are routine in nature and it is a revenue expenditure. The order passed by the Assessing Authority as well as the First Appellate Authority holding that the reconditioning of over-aged buses resulting in extending the productivity life of buses by few more years, minimizing the breakdown for few more years and also negating the necessity of purchase of new assets which is of enduring benefit to the assessee, it is only a capital expenditure which cannot be acceptable. Thousands of buses had to be repaired now and then due to the bad condition of the road and make them fit or roadworthy. The body, engine of the buses are not replaced, but it is only repairing of ware and tare. It is a routine expenditure being incurred, hence the expenditure incurred by the assessee is a revenue expenditure. 11 9. The Hon’ble Supreme Court in a judgment reported in (1997) 224 ITR 414 (SC) in the case of BALLIMAL NAVAL KISHORE & ANOTHER v/s COMMISSIONER OF INCOME TAX examined the similar issue and distinguished the repair of machines with replace 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\". The same expression occurs in section 30(a)(ii) and in section 31(i) of the Income-tax Act, 1961. The question is what is the meaning of the expression in the context of section 10(2). In New Shorrock Spinning and Manufacturing Co. Ltd.’s case [1956] 30 ITR 338 (Bom), Chagla C.J., speaking for the Division Bench, observed that the expression \"current repairs\" means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration but which is only for the purpose of preserving or maintaining an already existing asset and which does not bring a new asset into existence or does not give to the assessee a new or different advantage. The learned Chief Justice observed that they are such repairs as are attended to as and when need arises and that the question when a building, machinery, etc., requires repairs and when the need arises must be decided not by any academic or theoretical test but by the test of commercial expediency. The learned Chief Justice observed : 12 \"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 a revenue expenditure and not a capital expenditure.’’ The Hon’ble Supreme Court clearly held that the expenditure incurred to preserve and maintain the already existing assets and not to bring new assets into existence or obtain fresh advantage is a revenue expenditure and does not amount to capital expenditure. On the other hand, the replacement of machinery and construction of new building amounts to 13 obtaining the enduring benefit and it is a capital expenditure. 10. Similar question came before the Hon’ble Supreme Court in COMMISSIONER OF INCOME TAX v/s SRI.MANGAYARKARASI MILLS (P) LTD., reported in (2009) 315 ITR 114. The issue before the Supreme Court was that whether the expenditure incurred to ‘preserve and maintain’ an already existing asset and not to bring a new asset into existence or to obtain new advantage whether the expenditure is capital expenditure or revenue expenditure. The Hon’ble Supreme Court clearly held that the replacement of parts of which can be considered to be for mere purpose of ‘preserving or maintaining’ this asset is a revenue expenditure and not the capital expenditure. In the instant case also the assessee-Corporation owns more than 10,000 buses, it is has to take out the routine repair work of the buses and recondition the buses to 14 make them roadworthy otherwise there will be breakdown of the buses every now and then. The expenditure incurred on reconditioning and overhauling of the buses is a routine work and the expenditure is revenue in nature and cannot be treated as capital expenditure in view of text laid down in BALLIMAL NAVAL KISHORE case and subsequent judgment referred to above. Hence, the first substantial question of law is held in favour of the assessee and against the Revenue. 11. With regard to the second substantial question of law is concerned, the respondent-Corporation had availed financial assistance from IDBI for the purpose of purchasing of bus Chassis and construction of the body. The principal and interest are payable half yearly in equal installments for a period of five years which was further modified to 20 installments (quarterly payment from 9-8-1996). The Bank issued notice in 15 the month of February – March 1996 for payment of differential interest before the closure of book. However, the said expenditure should have been accounted for the assessment year 1996-97 and not for the assessment year 1997-98 as the assessee is following the mercantile system of accounting. The reasoning of the Appellate Tribunal to set aside the order passed by the Assessing Authority as well as the First Appellate Authority on this count is erroneous in law. Since the assessee is following the mercantile system of accounting, the interest accrued for the assessment year 1996-97 cannot be claimed to be deducted for the assessment year 1997-98. Hence, the order passed by the Appellate Tribunal cannot be sustainable. Accordingly, the second substantial question of law is held against the assessee and in favour of the Revenue. Accordingly, we pass the following: 16 ORDER The appeal is allowed in part. The first substantial question of law is held in favour of the assessee and against the Revenue and the second substantial question of law is held in favour of the Revenue and against the assessee. Sd/- JUDGE Sd/- JUDGE mpk/-* "