JUDGMENT SIKANDAR HAYAT KHAN (MEMBER).r-1. This appeal on behalf of assessee is directed against the "impugned order of learned Commissioner of Income Tax (Appeals) in consequence of which he confirmed assessm ent relating to charge year, 1981-82.
2. Brief facts giving rise to this appeal are that the assessee, a private limited company, derives income from the manufacture of figured and plain glass sheets. It filed a return in respect of the charge year 1981-82 to disclose net income of Rs. 1 5,85,926 which was subsequently revised to Rs. 6,0 5,926. The revised return was necessitated on bccount of discovery of casting mistake in sales in day book of the assessee. In consequence thereof sales were overcast by a sum of Rs. 10,00,000, which were adjusted by posting of the same incorrect amount to the Control Account of the customers called the sales ledger control account. This return as is apparent from assessment order was accepted by the Income Tax Officer and consequently disclosed income was accepted subject to inadmissible items from P&L Account of the assessee under sub-section (1) of section 59 of the Income Tax Ordinance, 1979. In consequence thereof, the following two additions were made to disclose income. (i) Addition on account of deemed interest under section 12(7) of the Ordinance ibid Rs. 1, 89, 764; (ii) Addition on account of Furnace repairs held to be an expenditure of capital nature Rs.
17,49,069.
3. After adding the above two amounts to disclosed income, net income of the assessee after adjusting depreciation as per chart was computed at Rs. 19,27,408. Income so assessed was contested in appeal before the learned Commissioner of Income Tax (Appeals) who by virtue of Appeal No. 157, dated 16th February, 1983 confirmed both the additions. In this connection relevant part of the appellate order relating to the two additions separately is set out below for facility of reference:-- "The income determined by the Income Tax Officer, under section 12(7) of the Ordinance has been found to be in order since the advances have been made to the sister concern for business purposes. The addition made by the Income Tax Officer on this issue is, therefore, confirmed."
4. The learned Commissioner of Income Tax (Appeals) also held that a sum of Rs. 17,49,069 claimed under the head Furnace repairs and maintenance was really in the nature of capital expenditure. He, therefore, concluded that the "real point of distinction is the fact that heavy structural repairs were involved in the present case and that as a result of expenditure incurred, the earning capacity of the furnace was revised. As such, this was a clear case of renewal and restoration of fixed asset and not a case of current repairs. In this view of the matter it is very clear that the expenditure incurred for the reconditioning of the furnace must be regarded as an expenditure of capital nature. I, therefore, uphold the disallowance of the amount and capitalisation thereof by the Income Tax Officer which has erroneously been claimed under the head current repairs." 5v Having failed to get required relief from learned Commissioner of Income Tax (Appeals), the assessee filed second appeal before the Tribunal. In this connection, a number of objections were taken by- the assessee which are listed below:-- (i) That the learned Commissioner of Income Tax (Appeals) erred in rejecting appeal of the assessee and to uphold the following additions/disallowance. (a) Addition of Rs. 1,51,811 on account of deemed interest under section 12(7) of the Ordinance ibid, (b) Disallowance of Furnace repairs amounting to Rs.
17,49,069. (ii) That order passed by the Income Tax Officer as well as by learned Commissioner of Income Tax (Appeals) was in contravention of the rule laid down in Commissioner of Income Tax vs. Oxford University Press reported as (1979) 40 Tax 1 (H.C. India). (iii) The content of the reported case was miscon ceived by learned Commissioner of Income Tax (Appeals). (iv) That it was not appreciated by learned Commissioner of Income Tax (Appeals) that if there could be two interpretations of one which favoured the assessee should have been accepted for deciding this appeal. (v) That learned Commissioner of Income Tax (Appeals) committed an error in presuming that expenditure was incurred not on repairs but on replacement of the entire furnace necessitating heavy structural repairs. (vi) That addition made under section 12(7) of the Ordinance ibid was wrongly taken as advance for business purposes. (vii) That in respect of the above objection no regard was paid to the date of payment and receipt against it.
6. Before taking objections of the assessee it is desirable to mention here that the Office of the Commissioner of Income Tax (Appeals) intimated the Assistant Registrar, Islamabad Bench of the Income Tax Appellate Tribunal that appeal was served on the assessee on 2nd June, 1983 and not 12th June, 1983 as is mentioned in the memo of appeal. Thus according to information conveyed by the Office of learned Commissioner of Income Tax (Appeals), appeal of the assessee for the charge year 1981r82 was late by two days. This fact was brought to the notice of the assessee vide Income Tax Appeal No. 29(IB)/83-84, dated 14th December, 1983. At the time of hearing, however, it was conceded by learned Departmental Representative after appreciating evidence furnished by learned counsel of the assessee that appeal was filed in time. On account of this admission on the part of learned Departmental Representative we hereby conclude that order of learned Commissioner of Income Tax (Appeals) was received by the assessee on 12th June, 1983 and as the appeal was received in the office of the Tribunal on 3rd August, 1983, it was filed within the period of limitation. Therefore, appeal of the assessee for the charge years 1981-82 has been taken up for disposal on merit.
7. Learned counsel for the assessee has stated at the bar vide order sheet entry No. 14, dated 6th July, 1986 that he does not wish to press his objection with regard to charge of deemed interest under section 12(7) of the Ordinance ibid. In this view of the matter, we confirm addition on account of deemed interest.
8. Next objection of learned counsel for the assessee relates to the fact that a sum of Rs. 17,49,069 represented expenditure on current repairs of furnace.
In this connection he has submitted a copy of his Letter No. T-2, dated 17th January, 1980 addressed to the Income Tax Officer, Companies Circle-I, Rawalpindi. In this letter, learned counsel of the assessee explained the position in the following words:-- "Furnace being the fundamental part of the Glass Industries operates round the clock to maintain the required temperature and being exposed to a high degree of heat 'and above all to the process of phemical defensive reaction is always subject to high leval of wear and tear. Since the furnace in glass industry is covered with the refractory material inside, it is this matter which is worn of due to heat and chemical reaction and is required to be replaced most frequently. Most of the refractory material is imported in bulk and is charged at P&L Account as it is used through out the year."
9. Arguing further learned counsel of the assessee has submitted that refractory material does not improve or enhance capacity of the furnace. He has also stated by using refractory material no new asset is brought into existence. His contention is that without the use of refractory material, at regular intervals the furnace just cannot function He has also invited our attention to the fact that expenditure on account of refractory material was considered as a part of the P&L expenditure and was allowed as such upto the assessm ent year 1978-79. He has accordingly stated that a sum of Rs. 17,49,069 on account of purchase of refractory material may be allowed as a part of the P&L account of the assessee. In support of this contention reliance has been placed on the following cases:-- (i) 1981 PTD (Trib) 197.
(ii) (1979) 39 Tax 210 (H.C. India). (iii) (1979) 40 Tax 1 (H.C. India).
10. Learned Departmental Representative on behalf of the department has stated that if expenditure on the purchase of refractory material was allowed in full as a part of P&L account of the assessee upto the charge year 1978-79, it did not debar a successor-in-office to make a departure from the established pattern of allowing the expenditure. He has pointed out that a departure from established pattern of treating expenditure on refractory material was made on sound reasons by the Income Tax Officer. He has submitted that on account of this fact learned Commissioner of Income Tax (Appeals) also confirmed treatment accorded to refractory material expenditure. Arguing further he has stated that expenditure on refractory material is not in the nature of repairs but actually falls under the head of capital expenditure. Therer fore, the assessee could only be allowed depreciation on it. Finally, he has drawn our attention to a case reported as (19 51) 19 ITR 324 which is mentioned in commentary by Kanga and palkiwala at page 345 In this case, Allahabad High Court had held "that current repairs means petty repair usually carried out periodically and will not include repair or renewal costing a large sum of money which has to be spent after a machine has been run for a number of years".
11. After a careful consideration of the case cited as 1981 PTD (Trib.)
197, we are of the opinion that it simply lays down a principle to determine what expenditure will amount to repairs and thus debitable to P&L account of the assessee and what will constitute a capital expenditure so as to fall under this head. In this connection the Tribunal has held that "it is now too well-established a proposition of law that the volume of expenditure on repairs cannot be determining factor of the nature of expenses. It is only the nature of repairs that would indicate whether it falls within the ambit of the expression "current repairs" or not". In the case before us expenditure on refractory material was incurred with the object of replacing the material which had become obsolete. A necessary corollary of this fact is that as a result of this expenditure earning capacity of furnace was revived as without it furnace codld not have operated resulting in closure of business. Therefore, this expenditure was also in the nature of restoration of the fixed asset or replacement of the asset which had gone obsolete. Such an expenditure would not fall under the head of current repairs. Before proceeding further, it is necessary to put on record, that Messrs Nowshera Glass Industries have treated expenditure on refractory material as a capital expenditure and not repairs. In this connection, Muniff Zia-ud-Din & Co., Chartered Accountants note'dated 28th July, 1985 addressed to the Committee of Administration, National Police Foundation, Islamabad is reproduced below for facility of reference:-- "Depreciation of Furnace was being charged (a) 40% p.a. Till last year. This rate has been reduced to 33/1/3% p/a with retrospective effect from 1982 and accordingly depreciation amounting to Rs. 10,29,276 charged in past has been reversed and credited to prior year's adjustments account. It was explained to us that departure fr.Om previous depreciation policy was made to bring the depreciation charge in line with the life of the asset."
12. From Muniff Zia-ud-Din & Co. Chartered Accountants note dated 28th July, 1983 to the Chairman, Committee of Administration, National Police Foundation, Islamabad it is abundantly clear that furnace has been treated as an asset and consequently purchases of refractory material debited to furnace account are covered under the head Capital expenditure. The life of this furnace for purposes of depreciation has been fixed at three years. This note goes a long way to support our view that expenditure incurred-on refraptory material related to a fixed asset falls under the definition of capital expenditure.
13. We have also gone through content of the case reported as (1979) 39 Tax 210 (H.C. India). In this case the assessee engaged in the business of rqanufacture of bidis. He replaced a petrol engine by a diesel engine in a truck which was being used in the business. The question arose whether expenditure on replacement of petrol engine bydiesel engine fell under the head of repairs or was covered by the definition of capital expenditure, ln this case, it was held that the expenditure did not bring into existence a new asset nor was there a substantial replacement or renovation of an existing asset. The expenditure had been incurred in preserving and maintaining an asset for purpose of its business. It was of a revenue nature and was for current repairs to machinery of the assessee and was deductible. Even this case is distinguishable from the facts of the case before us. According to facts of the case before us, significant amount- of expenditure was spent on substantial replacement and renovation of furnace which is an existing asset. Therefore, this expenditure is covered by the definition of capital expenditure. It is capital expenditure on the further ground that by incurring it earning capacity of furnace was revived. By this finding, another case (1978) 38 Tax 244 (H.C. India) relied upon by learned counsel of the assessee is also disposed of as in our case by incurring huge expenditure on refractory material the assessee replaced an obsolete furnace with revived life and earning capacity.
14. The case cited as (1979) 40 Tax 1 (H.C. India) has been carefully seen by us. In this case, the assessee-company during the accounting period relevant to the assessment year 1963-64, incurred an expenditure of Rs. 59,000 in the form of payment made for guniting work carried on in its building known as 'Oxford House', and also a sum of Rs. 3,680 as fees paid to the architect in connection with the guniting work undertaken on the advice of the architect. The assessee claimed both the items as expenditure incurred for repairs' to their building. The Income Tax Officer observed that the repairs in question could not be called 'current repairs but that the assessee had undertaken major structural repairs which had the effect of prolonging the life of the building for at least 1 5 years and as the repairs resulted in extension of the period of the serviceable ness of the asset and in the creation of an enduring benefit, the expenditure was a capital expenditure. The Appellate Tribunal accepted the assessee's contention and held that the assessee had employed the guniting process to carry out certain repairs which were either current repairs or accumulated repairs and that therefore, the amount spent in guniting process and the architect's fees in connection therewith was an expenditure incurred for the repairs of the building and same should be allowed as a deduction under section 37 of the Income Tax Act, 1961. On a reference: "Held, that since guniting was a process of cement plastering with the use of a gun, and by that" process plastering was carried out under pressure and was particularly recommended where there were cracks, etc., and the ordinary plastering did not last, by employing this method, which was nothing but an improved method of plastering and repairing work, all that-the assessee had done was to preserve and maintain an already existing asset. Now new asset or no new advantage as such could be said to have been brought into existence by reason of expenditure incurred for doing the guniting work. As a result of guniting work done, the assessee had not changed the nature of asset viz., the building as a whole and the same in no way increased the accommodation or earning capacity of the building; in that sense, no new advantage of enduring benefit had been brought into existence. The repairs also could not be regarded as heavy structural repairs for according to the assessee's architect what could not be achieved by the ordinary method of plastering was achieved by the sophisticated process of guniting." 15w Even the above case does not help the assessee as the case before us is distinguishable from it. We say 'so because as a result of huge expenditure on refractory material obsolete furnace was replace with a furnace of revived earning capacity for the next few years. Therefore, expenditure incurred on refractory material went all the way for restoration of the existing fixed asset, namely furnace. 16.
Apart fr.Om the above cases, the assessee has also relied on the following cases to press his view point that expenditure incurred on refractory material is an item of the profit and loss account:-- (i)
Commissioner of Income Tax Estate Pakistan, Dacca vs. Gulistan Cinema Company, Dacca. (ii)
1965 PTD 638 (H.C. India). (iii) (1979) 40 fax 18 (H.C. India).
17. The cases under para 16 have either been covered in the discussion from paras 8-15 or are not identical with the facts and circumstances of the case before us. Therefore, the case of Neelam Glass Industries is distinguishable from cases under para 16.
18. It is true .That holding of the Allahabad High 'Court (19 51) 19 LT.R. 324 was dissented by rulings of the Madras High Court in (19 52) 21 ITR 191 and the Patna High Court in (19 56) 29 ITR 21 but nevertheless it is worthy of respect and consideration On our part, we have examined the expenditure on refractory material in respect of this case consistent with its own facts and circumstances which are different from others. We say so as it is a well established maxim that each and every case has its own peculiar facts and circumstances and these must be considered in isolation from other cases unless both sets of cases are completely parallel. In the present case we have found after appreciation of relevant facts that expenditure incurred by the assessee on refractory material in relation to the furnace which is capital asset makes the expenditure also to fall under the head of capital expenditure. This ^s on account of the reason that by incurring huge expenditure on refractory material the assessee achieved an advantage which revived life-of the furnace further and also its earning capacity. The expenditure incured on refractory material also falls under the head capital expenditure on account of the reason that it amounted to replacement of substantial part of furance. Even the assessee in its manufacturing profit and loss account for the relevant year placed this expenditure under the head furance replacement and not repairs. All this goes to prove that what learned Commissioner of Income Tax (Appeals) has stated needs to be confirmed. We accordingly uphold his finding as a result of which the appeal stands dismissed.