Capital expenditure on machinery inspection travel denied where foreign tour was part of acquiring new plant for expansion.

Profits and gains earned in 1955 were treated as taxable for assessment year 1956-57 at the rates in the Indian Finance Act, 1956, and not under clause 23 of the 1 April 1938 agreement, because the issue had already been concluded by the Supreme Court in the assessee's own matter. Foreign tour expenses incurred by an engineer to inspect and purchase machinery for factory expansion were held to be capital expenditure, since the travel was integrally connected with acquiring new plant and machinery for a new asset; the deduction as revenue expenditure was therefore denied.

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Issues: (i) Whether the assessee's profits and gains earned in the calendar year 1955 were assessable to tax for the assessment year 1956-57 at the rates in force under the Indian Finance Act, 1956, or in accordance with clause 23 of the agreement dated 1 April 1938; (ii) Whether the foreign tour expenses of Rs. 13,070 incurred by the assessee's engineer for inspection and purchase of machinery were capital expenditure.

Issue (i): Whether the assessee's profits and gains earned in the calendar year 1955 were assessable to tax for the assessment year 1956-57 at the rates in force under the Indian Finance Act, 1956, or in accordance with clause 23 of the agreement dated 1 April 1938.

Analysis: The question was treated as concluded by the earlier decision of the Supreme Court in the assessee's own matter. That decision had determined that the profits earned in 1955 were taxable for assessment year 1956-57 at the rates under the Finance Act, 1956, and not under clause 23 of the 1938 agreement.

Conclusion: The issue was answered against the assessee and in favour of the Revenue.

Issue (ii): Whether the foreign tour expenses of Rs. 13,070 incurred by the assessee's engineer for inspection and purchase of machinery were capital expenditure.

Analysis: The tour was undertaken to inspect machinery for purchase for the extension of the assessee's factory, and the machinery was in fact purchased soon after the visit. The expenditure was thus integrally connected with acquisition of new plant and machinery for expansion of the business. The Court distinguished authorities dealing with borrowing costs or liabilities unrelated to acquisition of new capital assets and accepted the principle that expenditure incurred for investigating and procuring machinery for bringing into existence a new asset is capital in nature.

Conclusion: The expenditure was capital expenditure and was not allowable as revenue expenditure under section 10(2)(xv).

Final Conclusion: The reference was decided in favour of the Revenue on both questions, and the assessee was held not entitled to the claimed deduction.

Ratio Decidendi: Expenditure incurred as part of the process of acquiring new plant and machinery for expansion of business is capital expenditure, even if the spend itself is on investigation or travel rather than on the purchase price.

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