Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1972-73 - Assessee-company having taken on lease factory with plant and machinery for specified period, was required to carry out repairs/ replacement of lessor's plant and machinery also - In course of running said factory, lessor's machinery was damaged and had to be replaced by surrendering assessee's own machinery - Whether, in the circumstances, assessee was entitled to deduction of value of machinery so surrendered - Held, yes FACTS The assessee-company took a lease of factory for 15 years. It was provided in the lease deed that during the continuance of the lease and in the course of running the factory, if any machinery or a part of it was broken or became out of order, the assessee, would repair or replace the same at its own cost. During the course of the lease period, the assessee was also required to carry on certain repairs/replacement in the plant and machinery of the lessor. In accordance with the provisions of lease deed, the lessor gave notice to the assessee to surrender the leasehold property. A dispute arose between the assessee and the lessor over the termination of the lease, but was ultimately resolved through arbitration. As a consequence, the assessee, inter alia, had to surrender certain machinery for replacement of the machinery belonging to the lessor which was said to have been damaged in the course of running of the assessee's business. For the assessment year 1972-73, the assessee claimed the value of the said machinery as deductible expenditure. The ITO as well as the AAC held it as capital in nature and disallowed the assessee's claim. However, on second appeal, the Tribunal allowed the assessee's claim. On reference: HELD In the instant case, any replacement made of plant and machinery was to the advantage of the lessor and not to the advantage of the assessee. The assessee had only right to use the aforesaid machinery. Even otherwise, replacement of a machinery could not be treated as an improvement of the factory as such and the expenditure in such replacement could not be treated on capital account. It was with the object of…

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