B.P.SARAF,J. - (1.) BY this reference under S. 256(1) of the IT Act, 1961, made at the instance of the Revenue, the Tribunal has referred the following questions of law to this Court for opinion : "1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the expenditure of Rs. 99,52,440 incurred on the repairs of the ship 'Maratha Transhipper' is a revenue expenditure without appreciating the fact that the total expenditure together with written down value of the ship exceeds the original cost and confers on the assessee benefit of an enduring nature and which also involved the replacement of substantial parts of asset ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that loans should not be deducted in computing the capital for the purpose of granting relief under s. 80J of the IT Act, 1961 ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that S. 40(c) is applicable and not S. 40A(5) to the directors ?"
(2.) COUNSEL for the parties are agreed that question No. 2 is covered by the decision of the Supreme Court in Lohia Machines Ltd. vs. Union of India (1985) 44 CTR (SC) 328 : (1985) 152 ITR 308 (SC) and following the same, it should be answered in the negative and in favour of the Revenue. Counsel are further agreed that since question No. 3 is also covered by the decision of this Court in CIT vs. Hico Products Pvt. Ltd. (1993) 112 CTR (Bom) 35 : (1993) 201 ITR 567 (Bom), it should be answered in the affirmative and in favour of the assessee. Having regard to the above position, we answer these two questions accordingly. The only controversy that survives for our consideration is the one raised in question No. 1. In that view of the matter, we shall briefly refer to those facts which are material for answering the said question. The assessee is a private limited company doing business of export of iron ore, manganese ore, iron ore pellets and manufacture of yarn. It also derives income from loading, power supply and up topping ships, etc. In the previous year relevant to the asst. year 1974 75 to which this reference relates, the assessee effected major repairs to one of its vessels "Maratha Transhipper" which resulted in an expenditure of Rs. 99,52,440. The assessee claimed deduction in computation of its income in respect of the above amount as expenditure on current repairs. In course of assessment, the ITO noticed that the assessee had also lodged a claim with the insurance company for recovery of a part of the above expenditure amounting to Rs. 34,44,000, out of which it had received on 16th Jan., 1975 a sum of Rs. 11,50,000. In view of the fact that the total claim made by the assessee was Rs. 24,44,000 and out of which it had actually received Rs. 11,50,000, and the final claim was yet to be determined, the ITO disallowed the sum of Rs. 24,44,000 out of the claim of Rs. 99,52,440 and allowed deduction on account of the balance as expenditure on repairs of the vessel.
(3.) THE CIT, Bangalore, on perusal of the assessment order, being of the opinion that the above order of the ITO was erroneous and prejudicial to the interests of the Revenue, issued notice under s. 263 of the IT Act, 1961 ('the Act') to the assessee asking it to show cause as to why the order of the ITO should not be set aside. In response to the said notice, the assessee's representative appeared before the CIT and gave his objections. It was contended by the assessee before the CIT that the expenditure incurred on repairs to the vessel 'Maratha Transhipper' amounting to Rs. 99,52,440 was revenue in nature and no portion of it could be disallowed as capital expenditure. In support of this contention, the assessee relied on the observations of the IAC in his directions under S. 144B(4) of the Act to the effect that though the amount was large, it was only for the upkeep of the vessel; that the entire expenditure had been actually incurred and that no new asset had come into existence and that despite the fact that large amount was involved, the expenditure in question was revenue expenditure and not capital in nature. It was also contended that there was no authority for the proposition that when the total expenditure added to the written down value exceeds the original cost, such excess has to be disallowed. The assessee also contended that the quantum of expenditure was not material for determining whether it was to be allowed as a deduction or not. Lastly, it was contended that the repairs in question were for the purpose of preserving or maintaining an already existing asset which did not bring into being a new asset of enduring advantage and, therefore, the proposal to disallow any portion of the expenditure in question over and above the disallowance made by the IAC in his directions under S. 144B(4) should be dropped. The CIT, however, did not accept the above contention of the assessee as he was of the opinion that the expenditure in question had been incurred with a view to bringing into existence an asset or advantage of enduring benefit to the business of the assessee. Considering the huge amount spent, the CIT did not agree that the expenditure in question was current repairs as contended by the assessee. In arriving at the above conclusion, the CIT also observed that the written down value of the vessel as on 1st April, 1973 being only Rs. 1,12,21,713 the amount spent viz., Rs., 99,52,448 was for replacement of certain parts. The CIT, therefore, rejected the assessee's contention and directed the ITO to disallow expenditure of Rs. 75,88,440 incurred by the assessee on account of repairs to the vessel which had been earlier allowed by the ITO.;