Kalpesh Classes

Current repairs​​ 

The Supreme Court, in CIT v. Saravana Spg. & Mills (P.) Ltd. [2007] 163 Taxman 201, held that the basic test to judge whether a repair is current repair or not is whether expenditure has​​ been incurred to preserve and maintain an already existing asset and secondly, the object of such expenditure is not to bring a new asset or fresh or new advantage.​​ It held that the tests laid down for capital or revenue classification do not hold any relevance for allowance of deduction under this section. Thus, expenditure may be revenue, yet it may not be in the nature of current repair. However, it would not hold true on the contrary where expenditure is capital in nature. The Explanation in the section​​ provides a stop at that point. Again there could be a thin line in classifying between capital and revenue. It is truly endless in the absence of any definition in the Act as of date. Hope the new tax code at least does not make such mess and define them​​ in the Act itself.

An elaborate judgment of the Madras High Court in the case of CIT v. Janakiram Mills Ltd. [2005] 275 ITR 403 discussed and followed the earlier precedents in​​ favour of taxpayers on the subject. This decision in a common judgment included that of Saravana Mills’ case, which was taken up first and reversed in CIT v. Saravana Spinning Mills P. Ltd. [2007] 293 ITR 201 (SC).​​ The decision mainly went against the assessee because the main or practically the sole basis for deduction considered by the Supreme Court was whether the assumption that spinning mills will be treated as a single process industry, so as to merit deduction of replacement as current repairs.​​ Notwithstanding a certificate from South India Textile Research Association (SITRA), the Supreme Court found that as a matter of fact, textile industry could not be characterised as a single process industry. It is because of this finding that it was found that replacement could not be automatically allowed in every case as revenue expenditure. It found that ​​ items like ring frames could not, therefore, be treated as a part of a larger machinery, since they are capable of operation by themselves. It is in the light of this finding that the other cases relied upon by the assessee were distinguished.​​ 

Repair to premises on lease​​ 

The Delhi High Court in CIT v. HI Line Pens (P.) Ltd. [2008] 175 Taxman 132 held that the expenses, that were incurred by the assessee,​​ towards repairing of the premises taken on lease so as to make it more conducive to its business activity, would admit of deduction under section 30(a)(i).​​ The High Court stressed on the reasoning that the Legislature has made a distinction between expenses incurred by a tenant for repairs of the premises and expenses incurred by a person who is not a tenant towards current repairs to the premises and in its view this distinction has to be given meaning. Perhaps, the logic behind the distinction is that a​​ tenant would, by the very nature of his status as a tenant, not undertake expenditures as would endure beyond his likely period of tenancy or create a new asset, whereas an owner may undertake expenditures so as to even bring about new assets of capital nature. It was, therefore, necessary to qualify the expenditure on repairs. The deduction was, therefore, limited to expenditure on ‘current repairs’ only.​​ 

Repairs and renovation of lease hold premises in order to have reasonable facilities for running an office can be allowed as revenue expenditure.​​ It was so held in CIT v. Dr. A. M. Singhvi [2008] 302 ITR 26 (Raj). In such cases, the nature of the expenditure would be important. The fact that it is incurred in respect of rented premises lends further support to the claim for deduction.

Structural alterations​​ 

In Bigjo’s India Ltd. v. CIT [2007]​​ 161 Taxman 135​​ (Delhi), new counters and lift were erected in the showroom and huge expenditure was incurred on purchase of timber and plywood. Further, the assessee had altogether built a new shaft and shifted old shaft to a new site and had spent huge amount on the construction of it. The Delhi High Court​​ held that the expenditures incurred by the assessee were for fixed capital assets and, therefore, the expenditure was in the nature of capital and not just amounting to renovation of existing old assets