Acknowledgment of debt and capital expenditure: balance-sheet wages stayed live, while foreign study tours were held capital in nature.

Repeated disclosure of unpaid wages as liabilities in annual balance-sheets amounted to acknowledgment of the debt under the Limitation Act, so the liability did not become time-barred and the amounts were not assessable as ceased liabilities under the 1922 Income-tax Act. By contrast, foreign tour expenditure incurred to study textile machinery and processes, pursuant to board resolutions and leading to acquisition of new machinery, was treated as capital in nature because it related to the profit-making apparatus and a preliminary survey for an improved capital asset. The reference was therefore answered in part for the assessee on unpaid wages and against the assessee on the foreign tour expenses.

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Issues: (i) Whether unpaid wages carried forward in the balance-sheets had become time-barred and taxable under section 10(2A) of the Income-tax Act, 1922. (ii) Whether expenditure on foreign tours undertaken to study textile machinery and processes was allowable as revenue expenditure under section 10(2)(xv) of the Income-tax Act, 1922.

Issue (i): Whether unpaid wages carried forward in the balance-sheets had become time-barred and taxable under section 10(2A) of the Income-tax Act, 1922.

Analysis: The unpaid wages were repeatedly shown as liabilities in the annual balance-sheets. Such entries constituted acknowledgment of the debt within the meaning of section 19 of the Limitation Act. The liability therefore did not become time-barred, and the amounts could not be treated as having ceased so as to attract section 10(2A).

Conclusion: In favour of the assessee. The unpaid wages were not time-barred and were not assessable under section 10(2A).

Issue (ii): Whether expenditure on foreign tours undertaken to study textile machinery and processes was allowable as revenue expenditure under section 10(2)(xv) of the Income-tax Act, 1922.

Analysis: The tours were undertaken pursuant to board resolutions for on-the-spot study of modern textile processes and machinery, and the reports led to the purchase of new machinery. The expenditure was directed to the fixed framework of the profit-making apparatus and was intended to bring into existence a new or improved capital asset. Expenditure incurred for a preliminary survey with a view to acquiring such machinery is capital in nature and not revenue expenditure.

Conclusion: Against the assessee. The foreign tour expenses were capital expenditure and were not allowable under section 10(2)(xv).

Final Conclusion: The reference was answered partly in favour of the assessee on the unpaid wages question and against the assessee on the foreign tour expenditure question, with costs directed to be borne by each party.

Ratio Decidendi: Repeated acknowledgment of a debt in balance-sheets prevents the debt from becoming time-barred, and expenditure incurred for a preliminary survey aimed at acquiring machinery or improving the profit-making apparatus is capital expenditure, not revenue expenditure.

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