1964 (8) TMI 93 - HC - Income Tax

Supreme Court: Printing machine types expense not deductible under Income Tax Act.

Jansatta Karyalaya Versus Commissioner of Income Tax, Gujarat, Ahmedabad

The Supreme Court upheld the decision that the expenditure on types for the printing machine, though necessary for operation, was capital expenditure for ... - Issues Involved:1. Whether the amount of Rs. 21,741/- incurred in the purchase of types for the printing machine in the first year of its business by the assessee firm is a revenue expenditure allowable as a deduction under S.10(2)(xv) of the Income Tax Act, 1922.Detailed Analysis:Issue 1: Nature of Expenditure - Revenue or CapitalRelevant Facts:The assessee firm, engaged in publishing a daily newspaper, incurred Rs. 22,799/- in the purchase of types for the printing machine in the first year of its business. The Income Tax Officer allowed Rs. 1,058/- of this amount, leaving a disputed balance of Rs. 21,741/-.Contentions:- The Income Tax Officer classified the expenditure as capital, arguing that the types formed part of the printing machinery and were initial expenses.- The Assistant Appellate Commissioner disagreed, stating that types are not integral parts of the machinery but consumable items necessary for its operation.- The Tribunal upheld the Income Tax Officer's view, treating the expenditure as capital since it was incurred in the first year of business.Legal Principles:The distinction between capital and revenue expenditure is nuanced and fact-specific. Several judicial precedents provide broad tests:- Bowen L.J. (City of London Contract Corporation v. Styles): Expenditure for acquiring a concern is capital, while expenditure for running it is revenue.- Lord Dunedin (Vallambrosa Rubber Co., Ltd. v. Farmer): Capital expenditure is spent once and for all; revenue expenditure recurs annually.- Rowlatt J. (Ounsworth v. Vickers, Ltd): The test is whether the expenditure meets a continuous demand or is a one-time outlay.- Viscount Cave, L.C. (Atherton v. British Insulated and Helsby, Cables, Ltd.): Expenditure bringing an enduring benefit is capital.- Lord Haldane (John Smith & Son v. Moore): Differentiates between fixed and circulating capital.Supreme Court's View:In Assam Bengal Cement Co. Ltd. v. Commr of I.T. West Bengal, the Supreme Court synthesized the principles:1. Outlay for initiating or extending a business, or substantial equipment replacement, is capital.2. Expenditure bringing an enduring benefit is capital.3. The aim and object of the expenditure determine its nature.Application to Current Case:- Types as Non-Integral Parts: While types are not integral to the printing machine, they are essential for its operation.- Replacement and Durability: Types require frequent replacement, but this does not automatically classify the expenditure as revenue. Replacement also applies to machinery parts.- Aim and Object: The expenditure aimed at acquiring an instrument for profit-making, not merely running the business.Conclusion:The expenditure on types, though necessary for the machine's operation, was for acquiring an instrument to earn profits, not a recurring operational expense. Thus, it is capital expenditure.Judgment:The Tribunal's decision to disallow the expenditure as a revenue expense was upheld. The expenditure was deemed capital in nature, incurred for acquiring an apparatus essential for profit-making, rather than for the continuous operation of the business.Final Answer:The question was answered in the negative, affirming that the expenditure was not allowable as a revenue deduction. The assessee firm was ordered to pay the costs of the reference to the Commissioner.