P.D. Mulye, J. - (1.) BY this reference under Section 256(1)of the I.T. Act, 1961, the Income-tax Appellate Tribunal, Indore, at the instance of the assessee, has referred the following questions of law to this court for its opinion: " 1. Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the expenditure on repairs to the extent of Rs. 90,000 was capital in nature ? " 2. Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that the amount of Rs. 93,100 expended by the assessee in the purchase of know-how relating to the existing line of business was capital in nature ? "
(2.) THE facts giving rise to this reference as per the statement of facts furnished by the Tribunal are as under : THE assessee is a company engaged in the manufacture of densified impregnated and laminated wood products and boards and components. THE assessment year concerned is the assessment year 1975-76, the previous year being the year ended September 30, 1974. The assessee had during the relevant year incurred an expenditure of Rs. 1,73,935 by way of repairs and maintenance of buildings which they had purchased by a registered sale deed on February 11, 1974, prior to which they were occupying the premises as a tenant from October 1, 1963. Two major items included in this expenditure were replacement of three inch pipeline from BHEL pipeline to factory building of the assessee at a cost of Rs, 34,234 and on water proofing of two staff quarters and residential buildings for breaking the existing treatment on terrace and treating the terrace with water proof compound including break-bat coba, etc., amounting to Rs. 52,200. In making the assessment, the ITO disallowed these two sums as well as two other sums of 2,000 being cost incurred in replacing the A.C. sheets in factory building and Rs. 11,801 out of labour charges. The ITO rounded off the disallowance to Rs. 1,00,000. During the relevant accounting period the assessee, in terms of agreement dated October 17, 1973 (annexure-D), between Permali Ltd., U.K. and the assessee, incurred an expenditure of Rs. 93,100 (equivalent to 5,000) towards purchase of know-how for manufacture of fibre glass laminates and cast epoxies. It was the assessee's contention that the final product obtained by the assessee-company by using the know-how so acquired was the same as was being produced by the assessee-company by adopting the earlier method of production by a different process that was in vogue. It was also its contention that the assessee continued the manufacture and production of the final product by both these methods. In the assessment framed by the ITO for the assessment year 1975-76, he disallowed both these items of expenditure.
(3.) ON an appeal filed by the assessee, the Commissioner of Income-tax (Appeals) confirmed the disallowance of both these items. Against the said decision of the Commissioner of Income-tax (Appeals), the assessee filed a second appeal before the Tribunal before which it was contended that the expenditure on "repairs was revenue expenditure being in the nature of current repairs. The Tribunal allowed the expenditure of Rs. 2,050 on replacement of A.C. sheets and Rs. 7,801 out of labour charges. In other words, the sums of Rs. 34,234, Rs. 52,200 and out of labour charges a sum of Rs. 4,000 were disallowed as of capital nature and the Tribunal rounded off the amount to Rs. 90,000. Hence, this reference. According to the learned counsel for the petitioner, the expenditure incurred by him on repairs was a revenue expenditure and not a capital expenditure. According to the learned counsel, these repairs were carried out after the petitioner-assessee had purchased the said property prior to which they were occupying the same as a tenant. The learned counsel for the petitioner contended that the view taken by the Commissioner of Income-tax (Appeals) as also by the Tribunal that if these expenses had been incurred by the seller, the same would have been added to the purchase price and, consequently, it would have added to the price at which the petitioner purchased the same and, thus, in that case, his cost of expenditure together with the purchase price at which the petitioner-assessee purchased the same would have been included as a capital expenditure is not a correct proposition of law, because the nature of expenditure carried out by the petitioner, though for the benefit of the petitioner-company, would not be included in the capital expenditure but will have to be included as revenue expenditure because change of roof and replacement of pipeline, which had got damaged, were such repairs which were required to be carried out by the petitioner and, consequently, the same have been wrongly treated as a capital expenditure and in support of his submission, he placed reliance on the decisions reported in CIT v. Wheels India Ltd. [1983] 141 ITR 745 (Mad), CIT v. Ciba of India Ltd. [1968] 69 ITR 692 (SC); Kanpur Dyeing & Printing Co. v. CIT [1970] 75 ITR 686 (All), CIT v. Sri Rama. Sugar Mills Ltd. [1952] 21 ITR 191 (Mad) and CIT v. Kalyanji Mavji & Co, 1980 122 ITR 49 (SC).;