1959 (6) TMI 16 - HC - Income Tax

High Court deems knives & lasts as machinery/plant under Finance Act 1954, allowing investment allowance.

HINTON (INSPECTOR OF TAXES) Versus MADEN AND IRELAND LTD.

The High Court held that the knives and lasts constituted machinery or plant under section 16(3) of the Finance Act, 1954. The expenditure on these items ... - Issues Involved:1. Whether the knives and lasts constituted machinery or plant for the purposes of section 16(3) of the Finance Act, 1954.2. Whether the expenditure incurred thereon by the respondents was of a capital or a revenue nature.Detailed Analysis:1. Whether the knives and lasts constituted machinery or plant for the purposes of section 16(3) of the Finance Act, 1954:The respondents, shoe and slipper manufacturers, used various machines in their manufacturing process, such as the 'Ideal Clicking Press' and 'Revolution Press,' which required specific knives to cut materials. These knives were essential and indispensable to the machines, as the machines could not function without them. Similarly, lasts were used in processes like the 'Pulling-Over Machine,' 'Lasting Machine,' and 'Pounding Machine.' The lasts, like the knives, were essential for the machines to function. The respondents argued that these knives and lasts should be considered 'machinery or plant' under sections 279 and 280 of the Income Tax Act, 1952, and section 16(3) of the Finance Act, 1954.The Commissioners found that the knives and lasts performed an indispensable function in the manufacturing process, were used in conjunction with machines, and were essential for the machines' operation. They concluded that the knives and lasts were 'machinery or plant' within the meaning of the relevant sections and entitled the respondents to the investment allowance claimed.The High Court agreed with the Commissioners, emphasizing that the words 'machinery or plant' should be given their ordinary meaning. The Court noted that the knives and lasts were integral to the manufacturing process and functioned in conjunction with machines that were undisputedly considered machinery or plant. Therefore, the knives and lasts were deemed to be machinery or plant under the relevant sections.2. Whether the expenditure incurred thereon by the respondents was of a capital or a revenue nature:The respondents treated the expenditure on new knives and lasts as capital and charged against profits one-quarter of the total cost over four succeeding half-yearly accounts. The Revenue argued that the expenditure was too conservative and agreed on an average life of three years instead of two. The respondents accepted this for income tax purposes, and a sum equal to one-sixth of the total expenditure was allowed as a deduction over six half-years.The Revenue contended that the expenditure on knives and lasts was not capital expenditure but revenue expenditure. They argued that the knives and lasts were separate chattels and implements, utensils, or articles employed for the purposes of the respondents' trade within the meaning of section 137(d) of the Income Tax Act, 1952. Consequently, they were not eligible for an investment allowance under section 16(3)(c) of the Finance Act, 1954.The respondents argued that the words 'implements, utensils, and articles' and 'plant or machinery' were not mutually exclusive but overlapping. They claimed that the expenditure on knives and lasts, although they had a short life, was capital expenditure in respect of fixed assets and not revenue expenditure in respect of circulating capital. The respondents maintained that the expenditure was for the provision of new machinery or plant within the meaning of section 16(3) of the Finance Act, 1954, and should be treated as capital expenditure for the purposes of that section.The High Court held that the expenditure on knives and lasts was capital expenditure. The Court reasoned that the knives and lasts had a degree of durability, with an average life of three years for sole knives and lasts and one year for upper knives. The Court emphasized that the expenditure was for assets retained for use in the manufacturing process and not for stock-in-trade. Therefore, the expenditure was considered capital expenditure.Conclusion:The High Court concluded that the knives and lasts constituted machinery or plant for the purposes of section 16(3) of the Finance Act, 1954. The expenditure incurred on these items was of a capital nature, entitling the respondents to an investment allowance. The appeal was dismissed, and the respondents were granted the investment allowance for the year 1955/56.