AI Drafter 
TaxTMI 
TaxTMI 
1951 (5) TMI 7
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.... up at regular intervals and to give each of them some rest. It was, therefore, submitted that the three boilers were regularly used for the purpose of manufacture of sugar. One of these three boilers deteriorated in its efficiency and during the relevant accounting year the assessee company had to purchase another boiler at a cost of Rs. 86,496. 2. The assessee company claimed this sum as a revenue expenditure. The Income-tax Officer/Excess Profits Tax Officer as well as the Appellate Assistant Commissioner disallowed it on the ground that it was a capital expenditure. In order to establish that the expenditure is of a capital nature one must be satisfied that the new boiler is an improvement on the old one producing bigger outturn of sugar or that it is not a part of the machinery used for the purpose of such production. The claim of the assessee company has always been that it was merely a replacement of the old one having the same pressure which the old one possessed when it was new and which is doing the same work which the old one was doing previous to its deterioration. The Tribunal accepted this. Before the Tribunal it was also stressed by the departmental representative....
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....r, the factory undoubtedly has to work for 24 hours and during such period two boilers have to be constantly in use. The third boiler is necessary and has to be used when any one of the other boilers have to be cleaned up at intervals and have to be given rest. One of these three boilers deteriorated in its efficiency during the relevant accounting period and the assessee was obliged to purchase another boiler at a cost of Rs. 86,496 and the old boiler was sold for a sum of about Rs. 15,000. The assessee company claimed this sum as a deduction from and out of its profits as expenditure chargeable to revenue. The deduction was not allowed by the Income-tax Officer and the Excess Profits Tax Officer and his decision was confirmed by the Appellate Assistant Commissioner. They held that it was a capital expenditure and not an expenditure chargeable to revenue. On a further appeal, the Appellate Tribunal reversed this decision and upheld the claim of the assessee company. Hence this reference. The question whether the expenditure incurred for the purpose of trade is properly debitable to the incomings of the trade or is capital expenditure is not always easy to decide. The sche....
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....the revenue authorities from establishing that even according to the general principles of commercial accountancy the deduction must be treated as in the nature of a capital expenditure, while it is equally open to the assessee to show that it is chargeable to the incomings of the business. Bearing these principles in mind, it would be convenient now to consider the decisions cited at the Bar to elucidate the distinction between capital and revenue expenditure. Though in the question formulated and in the arguments before the Income-tax Officer and the other authorities which dealt with this question, the point was considered only from the point of view of clause (xv) to sub-section (2) of Section 10, in the arguments before us, reference was made to sub- clause (v) of that sub-section relating to repairs and also to clause (xv). If the substitution of the new boiler for the old by the assessee can aptly be described as a "repair" of the machinery, the claim for allowance must be upheld under clause (v) of Section 10(2) and no further question whether it is in the nature of capital expenditure or expenditure which is to come out of revenue arises for consideration. It has been h....
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....y the whole." On a careful analysis of this passage of Buckley, L.J., it would be seen, a renewal may be a repair or a reconstruction. Renewal is a repair if it is only restoration by renewal or replacement of subsidiary parts of a whole. If, on the other hand, it amounts to a reconstruction of the entirety or of substantially the whole of the subjectmatter it is not a repair but a reconstruction. The test, therefore, which decides the question whether a thing is a "repair" or not is to see whether the act actually done is one which in substance is a replacement of defective parts or a replacement of the entirety or a substantial part of the subject-matter. A reconstruction of a wall, it was held in that case, was a repair and was covered by the obligation of the tenant who was under a covenant to repair the leasehold property. The reason given for this conclusion appears at page 927. It was held to be a "repair" because it merely restored the stability and safety of a subordinate part of the whole like replacing a new floor of a house. The Judicial Committee had occasion to consider a similar question under the Bechuanaland Income Tax Proclamation--see Rhodesia Railways Ltd.....
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....s referred to in the course of the judgment. At page 376 Lord Macmillan adds:- "The contrast between the cost of relaying the line so as to restore it to its original condition and the cost of relaying the line so as to improve it is well brought out in the passage just quoted, and while the former is recognised as a legitimate charge against income the extra cost incurred in the latter case in the improvement of the line is equally recognised as a proper charge against capital." The distinction drawn in Highland Railway Company v. Special Commissioners of Income Tax* was that if what was done was a substitute of one kind of rail for another, steel rails for iron rails, that would have been a material alteration and an improvement in the corpus of the heritable estate of the company and in such a case, the cost of such an improvement would be a charge against capital. If, however, the old rails were replaced by substantially the same kind of rails and no improvement in the corpus was effected, it would follow that there was no creation of any new asset, to use the language o....
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.... "sugar works" as one unit for the purposes of fixing the percentage of depreciation allowable as a deduction under the Act. If such a process of splitting the machinery of a composite unit is permitted, there is no reason why one should stop at a particular point and not proceed with the division further. A fly wheel may be treated as one unit because it performs one function in the larger unit. If such a fly wheel is replaced, the expenditure incurred in that behalf, if the argument is correct, may as well be treated as capital expenditure as it amounts to replacement of a unit. But Mr. Rama Rao Sahib is not prepared to go so far and is driven to accept the position that in such a case the expenditure will be a revenue expenditure as it is a repair and not capital expenditure. The test laid down by Viscount Cave in British Insulated and Helsby Cables Limited v. Atherton** to distinguish an expenditure which is in the nature of a capital expenditure from an expenditure properly debitable against incomings of a trade in computing profits has been adopted and applied in later decisions and that test holds the field even today. Lord Dunedin in Vallambrosa Rubber Co. v. Farmer*** l....
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....ereby derived. It cannot be suggested that by using a new boiler for an old one, the productive capacity of the sugar manufacturing unit was in any manner increased. It therefore follows that the Appellate Tribunal applied the correct test and came to a right conclusion on the facts in holding that the amount claimed was a revenue expenditure deductible under Section 10(2)(xv) of the Indian Income-tax Act and not a capital expenditure. Our attention was drawn to a decision of the Allahabad High Court in Ramkishen Sundarlal v. Commissioner of Income-tax, U.P.#, where it was held that the expression "current repair" occurring in Section 10(2)(v) of the Indian Income-tax Act is confined only to "petty" repairs usually carried out periodically and will not include repair or renewal costing a large sum of money which was spent after the machine has been run for a number of years. The dictionary meaning of the word "current" is not petty, but it means "belonging to the present time, prevailing" and with great respect to the learned Judges, it is difficult to accept such a restricted construction of the expression "current repair" in the clause. The answer to the question referred to u....
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....f the trade in relation to what must be considered as itself a separate and important unit of the machinery required for the trade. Before dealing with the more important of the cases bearing on the matter it is as well to draw attention to the material provisions of the Indian Income-tax Act. After providing in Section 10(1) that "The tax shall be payable by an assessee under the head 'profits and gains of business'......in respect of the profits or gains of any business...carried on by him," the statute proceeds in sub-section (2) to provide for specified allowances to be taken into account in computing the profits or gains. Of the allowances so provided for, the one with which we are directly concerned is that contained in clause (xv) of sub-section (2) which runs as follows:- "any expenditure (not being in the nature of capital expenditure.....of the assessee) laid out or expended wholly and exclusively for the purpose of such business....." This is the provision with reference to which the matter has been considered so far in all the stages of the case. There is another provision which has also....
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.... old boiler by the new be regarded as money spent over repairs to the machinery or plant and if it can be, can or cannot it be regarded as money spent over current repairs? In order to answer these questions properly it is necessary to canvass the meaning of the word "repairs" as well as the meaning of the word "current". The Concise Oxford Dictionary treats "repair" and "renovate" as interchangeable terms and annotates one as equivalent to the other. Etymologically "repair" is derived from O.F. reparer which in its turn is derived from L re (reparare i.e., again to make ready;) while "renovate" is derived from L re (novare, i.e., make new again). The two terms are therefore not terms of mutual contrast or antithesis but of interchangeableness and equivalence. "Repair" is a comprehensive word which means "to make good defects" and which therefore must include renewal where that is necessary: Inglis v. Buttery*. A covenant to "repair" may well stand satisfied by "patching where patching is reasonably practicable, but where it is not, you must put in a new piece" (Per Lord Blackburn, Ibid, 579-vide Stroud's Judicial Dictionary, page 1719). In relation to a building as such wha....
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....econstruction of the entirety, meaning by the entirety not necessarily the whole but substantially the whole subject-matter under discussion. I agree that if repair of the whole subject-matter has become impossible a covenant to repair does not carry an obligation to renew or replace." If the replacement of the old boiler by the new in the present case is regarded as in the nature of a restoration of the machinery or plant of which the boiler is a part by a renewal of it, that obviously is tantamount to repair within the meaning of Buckley, L.J'.s exposition, as well as within the dictionary meaning of the word "repair" as an equivalent of "renovate" to which I have already adverted. It is true that Buckley, L.J., was not dealing with a case under the Income Tax Act but I see no reason after the careful consideration I have bestowed upon the matter since reservation of judgment why our interpretation of the word "repairs" occurring in the relevant provision of the Indian Income-tax Act now under consideration should not be guided by Buckley, L.J.'s interpretation of the expression which undoubtedly has been accepted by the Privy Council as a clue to the proper interpreta....
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....e plant or machinery is in a running condition must in my judgment be regarded as current repairs, whereas if the repairs effected are after the machinery or plant comes to a stand-still and ceases to run, they must be regarded as not current repairs. Whether the repairs involve a high or low degree of expenditure does not matter, so long as the machinery or plant is actually running and the consideration of pettiness or contra of which the Allahabad case makes a point is really immaterial. Whatever the bigness or smallness of the repairs, so long as they are "current" repairs they fall within clause (v), while if they are not that, they fall outside it. If the worn-out boiler became at the time of its replacement something with which it was impossible to run the plant or machinery of which it was a part, it seems to me that the replacement cannot reasonably be regarded as in the nature of current repairs. On the other hand, any repairs to any part of the machinery or plant such as may lie in a patching up during the running of the machinery or plant for the business, must, in my opinion, be regarded as in the nature of "current" repairs. This meaning of the expression "current ....
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....he Act the expenditure incurred in the purchase of the new boiler is or is not in the nature of capital expenditure. In support of his contention that it is, the case most strongly relied upon by Mr. Rama Rao Saheb is the one reported in Margrett (H.M. Inspector of Taxes) v. Lowestoft Water and Gas Company*, where the question arose with reference to the cost of replacement of a reservoir which was part of the apparatus for water supply by the respondent company to Lowestoft and district. It was held by Finlay, J., that there was no evidence upon which the Commissioners could arrive at their conclusion that any part of the cost of the reservoir was other than capital expenditure. At page 487 of the report the learned Judge first observes thus as the reasoning of his conclusion:- "What strikes one who is familiar with the long line of cases on this sort of subject is that this looks like the plainest case of capital expenditure. If a reservoir is antiquated or worn out and the people responsible, instead of repairing it and letting it go on for a bit longer, discard it or scrap it and build a new, a be....
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....ecomes worn out or antiquated it is replaced and "let go on for a bit longer" the expenditure over such a step which is in the nature of current repair is revenue expenditure, while if it is replaced by a new boiler the expenditure incurred is capital expenditure. As I read the decision, if the replacing boiler is a new one, that is enough to make of the expenditure capital expenditure. Of course if it is a better or different one-which was an accident of fact in that case-that is a fortiori a case of capital expenditure. But then there is the case of the Privy Council in Rhodesia Railways v. Income Tax Collector, Bechuanaland**, which I must consider in this connection. It is true that Finlay, J., said of this case that it did not seem to him to throw any real light upon the case before him. There is no reason given by the learned Judge for saying so of the Privy Council decision. Whether right or wrong Lord Macmillan in the Privy Council case does give reasons for his view that the expenditure there in question was not of a capital nature. Apparently, Finlay, J., who could not but be alive to those reasons would not accept them, though he does not say so in so many terms. In orde....
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....on of the accepted practice in such matters in the United Kingdom, to which the appellants' chief accountant spoke, in the case of the Highland Ry. Co. v. Special Commissioners of Income Tax*. There the Highland Railway Company had relaid a portion of their main line, and in doing so had substituted steel rails of greater weight for the previous iron rails. No question was raised as to the cost of relaying the rails except as regards the additional weight and the cost of the improved rails as compared with the original rails. The railway company claimed to deduct the additional cost as a proper charge against revenue on the ground that no permanent improvement of their property had been effected by the substitution of the heavier and costlier steel rails and that they derived no additional revenue from the outlay. The Lord President (Inglis) in rejecting the company's contention said*: "It must be kept in view that this is not a mere relaying of line after the old fashion. It is not taking away rails that are worn out or partially worn out and renewing them in whole or in part along the whole line. That would not alter the character of the line ; it would not affect the nat....
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....e rails and sleepers of a railway line as they wear out by use is in no sense a reconstruction of the whole railway and is an ordinary incident of railway administration" (vide page 374 of the report) Lord Macmillan held as a corollary that the cost of them did not constitute an outgoing of a capital nature especially in view of the circumstance that tax had been paid in previous years without deduction for wear and tear. On the scheme of the Proclamation there in question the Privy Council seems to have thought that what had to be regarded as repairs within one provision of it could not be regarded as an outgoing of a capital nature within another part of it with the result that the analogy of a wasting asset relied upon by the Court below could not be accepted by the Privy Council as germane to the case before them. At the same time, it is also clear to my mind that as to what capital expenditure means, the test suggested is whether or not it has resulted in the creation of a new asset as distinct from the mere maintenance of an existing asset, in other words, whether or not the expenditure has merely restored the situation to its original condition or improved it by extra qualit....
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....ction; it exists for the purpose of increasing consumer's wealth. Its relation to enjoyable goods is twofold; on the one hand it may be said gradually to "ripen" into such goods; on the other hand it is a means of increasing their supply. It is easy to see that raw materials, as they are commonly called, "ripen" into finished commodities. Wool is converted by successive steps into clothing, grain into bread, stone and timber into a house, but a process, the same in essentials, takes place with tools and machinery. Suppose a printing machine lasts for one year only being worn out and worthless at the close of the year. The books printed with its aid are the product not only of the labour applied to make the paper and other materials and of that applied by the compositors and other workmen in the printing office, but also of that applied in the construction of the printing machine itself, which in fact in due course may disappear by wear and tear. So of all machinery and all plant. It wears out sooner or later and may be said sooner or later to ripen into goods that satisfy our wants: (Page 70, ibid). All forms of material wealth wear out in course of time. Some sorts of capital ....
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....f interpretation. The case of the road-bed of a railway needing almost hourly attention which is referred to by Taussing, it may be noticed, helps us to understand the distinction between repair and replacement of a railway line, the former being revenue expenditure normally and the latter being capital expenditure normally, so as to help us to understand aright the reasoning behind the Privy Council decision in Rhodesia Railways v. Income Tax Collector, Bechuanaland*. In the light of what is said by Taussing, it is easy to understand why Lord Macmillan in delivering the judgment of the Privy Council in Rhodesia Railways v. Income Tax Collector, Bechuanaland*, emphasises the consideration that the expenditure of which deduction was sought by the assessee in that case really represented the cost of repairs from year to year for which no deduction had been claimed in the matter of the tax paid in previous years. It is also easy to understand in that light why his Lordship rejects the analogy of a wasting asset relied upon by the Special Tribunal in that case which would really be applicable only to a case where a particular asset got completely exhausted by wear and tear in the proce....
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....ear's working. The working charges deducted and allowed in ascertaining the profits for assessment include the whole cost of getting and raising the minerals, after the pits are sunk, and of manufacturing the metal and selling the iron and coal, and the general expenses of the concern. The phrase 'capital exhausted' does not occur anywhere in the Income Tax Acts. It is taken from a passage in Mr. McCulloch, on Political Economy, where he says:- 'Profits must not be confounded with the produce of industry primarily received by the capitalist. They really consist of the produce on its value remaining to those who employ their capital in an industrial undertaking after all their necessary payments have been deducted, and after the capital wasted and used in the undertaking has been replaced. If the produce derived from an undertaking after defraying the necessary outlay be insufficient to replace the capital exhausted, a loss has been incurred; if the capital is merely sufficient to replace the capital exhausted, there is no surplus, there is no loss, but there is no annual....
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....ial replacement of equipment." "A substantial replacement of equipment" in this connection seems to my mind, to include "a substantial replacement of the machinery and plant which constituted part of the fixed capital with which the business started." The leading case in England on the subject of what is capital expenditure and what is not is British Insulated and Helsby Cables v. Atherton**. In that case the question arose thus:- "A company, which carried on the business of manufacturers of insulated cables, established, under the powers of its memorandum of association, a pension fund for its clerical and technical salaried staff. The fund was constituted by a trust deed which provided that members should contribute a percentage of their salaries to the fund and that the company should contribute an amount equal to half the contributions of the members ; and further that the company should contribute a sum of GBP 31,784 to form the nucleus of the fund and to provide the amount necessary in order that past years of service of the then exist....
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....ted***. This latter was a case in which the question arose whether a certain payment made to a retiring director who had been dismissed by the company in order to avoid publicity injurious to the company's reputation was or was not expenditure of a capital nature. Rowlatt, J., in the first instance and the Court of Appeal presided over by Lord Hanworth, M.R., in confirmation of Rowlatt, J., held that the amount was not in the nature of capital expenditure. A similar result was reached in the case in Anglo-Persian Oil Co., Ltd. v. Dale (H.M. Inspector of Taxes)# where the facts were as follows:- "By agreements made in 1910 and 1914 the appellant company appointed another limited company as its agents in Persia and the East, for a period of years, upon the terms (inter alia) that the agents should be remunerated by commission at specified rates. With the passage of time the amounts payable to the agents by way of commission increased far beyond the amounts originally contemplated by the company, and after negotiation between the parties, the agreements were cancelled in 1922, the a....
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...." of Lord Dunedin in Vallambrosa Rubber Co. v. Farmer** the "lasting advantage" or "enduring benefit" test of Viscount Cave, L.C., in British Insulated and Helsby Cables v. Atherton(1) and the permanent improvement test of Lord Macmillan in the Privy Council case in Rhodesia Railways v. Income Tax Collector, Bechuanaland***. Besides these tests it will be seen from a careful perusal of the two dissentient judgments of Lord Carson and Lord Blanesburgh in British Insulated and Helsby Cables v. Atherton* that there are just one or two more tests which may also have to be borne in mind. The speech of Lord Carson dealing with the fund in question before the House of Lords contains this observation at page 225 of the Report:- "It is clear from the terms of the trust deed, as already pointed out, that in no sense was the sum an investment, that it would be eventually exhausted in payment of the pensions, and that in the event of a winding up of the company it could never form any part of the assets of the company." The tests suggested by the observation are (i) whether the sum in question is one which get....
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.....C., has to be regarded from the standpoint of its relation to the fixed capital of the company, is the point of Lord Blanesburgh's observation which I have quoted. If the expenditure in question in any relevant sense creates a new asset of the company in the nature of a fixed capital asset or any other, then the expenditure is in the nature of capital expenditure according to Lord Blanesburgh, and then it will be within the ambit of the process of distribution in a liquidation of the company's assets, not otherwise. While creating a new asset in the nature of lasting advantage or enduring benefit to the company, the expenditure in order not to be entitled to the deduction contemplated by the Income Tax Act must according to Lord Blanesburgh result in the creation of an asset in the nature of a fixed capital asset or any other. I may add in this connection that there is just another test suggested by Highland Railway Co. v. Balderston*, a case decided in Scotland in the Court of Exchequer, First Division. In that case there was an acquisition by a railway company of a certain section of the railway line which they needed to bring up to the standard of the rest of the mai....
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....st of that line to work along with the main line. If it had been brought up to that standard before they bought it, they would have had to pay so much the more for it; and finding it in that condition, and knowing that they could not use it in connection with the main line without expending this large sum of money upon it, just shows that, although it cannot be said in a proper sense to be part of the price of the line, it is certainly part of the cost of acquiring that line to be wrought along with the main line." Then with regard to the alterations in the main line itself it is pointed out by the Lord President further down at page 488 of the report:- "..........it must be kept in view that this is not a mere relaying of the line after the old fashion; it is not taking away rails that are worn out or partially worn out, and renewing them in whole or in part along with the whole line. That would not alter the character of the line; it would not affect the nature of the heritable property possessed by the company. But what has been done is to substitute one kind of rail for another, steel rai....
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....; "Was it (the sum paid for the tailing) like money used to acquire a mine which was to be worked, in which case it was clear that it would not be deductible; or was it like money used to acquire stockin-trade, was it like money which a draper expended in order to stock his shop, in which case it would be clear that it would be deductible?" Finlay, J., concurring with the Commissioners held that it was not deductible. The company appealed, and the Court of Appeal presided over by Lord Hanworth, M.R., reversed Finlay, J. In so doing, the learned Master of the Roll referred to a number of cases on the subject including the case in Coltness Iron Company v. Black** which I have already discussed in the foregoing, and wound up the discussion with what I have just quoted from his judgment. In my opinion, no particular test can be regarded as sufficient by itself for the purpose of the determination of each and every case; nor are we to suppose that the tests propounded by the majority of the law Lords in British Insulted and Helsby Cables Ltd. v. Atherton* are entitled to greater weight than the tests suggested by the minority of the law Lords in that case. In ....
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.... the head of capital expenditure. There occurs afterwards in the judgment a further observation in relation to other items of expenditure thus described:- "The largest item is one of Rs. 1,925 which is described as the cost of an old car purchased from Tirali Srinivasa Aiyangar. The evidence of the assessee about that, which seems to have been accepted, is that he bought the car not to use it as a car but to resolve it into its component elements and use the parts for casual repairs to his existing fleet of cars. The remaining items are for the renewal of various parts of the cars actually engaged in the business of the assessee." Dealing with the case of these items from the standpoint of Section 10, sub-section (2), clause (v), the learned Judges say:- "It is obviously arguable that most of the repairs in this case can be described as current repairs though of course the matter is one of degree. If a carburetter of a motor car ceases to function, we should incline to the view that the renewal of the carb....
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....hen he proceeds to observe:- "The answer to both these questions depends upon the primary question, whether the expenditure is in the nature of revenue expenditure. I would say in reply to the first question, that ordinarily the substitution in a machine of new parts for old and worn out parts is in the nature of repairs or revenue expenditure. This is quite evidently true of the substitution, e.g., of new tyres for old and worn out tyres in a motor car. But the statement needs to be qualified in some manner, because it is clear that by successive substitutions, an old motor car might be converted into a new one and that process would really be equivalent to selling the old car and buying the new one, a matter of capital expenditure. The question is really one of degree and it may perhaps be said that the cost of any substitution of new parts which substantially change the identity of the machine, effect a substantial improvement or result in a substantial extension of the period of the serviceableness, would be capital rather than revenue expenditure. But even such tests as these are not ....
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....ector, Bechuanaland**, the replacement has only resulted in the restoration of the machinery to its original condition and not in an improvement of it in quality or calibre. Right or wrong, it is true that a Privy Council decision was binding authority on Courts in India till the other day when the Constitution came into force. It is true too that, right or wrong, a Privy Council decision remains of great weight as persuasive if not binding authority, notwithstanding the Constitution. I am however not prepared to follow the case in Rhodesia Railways v. Income Tax Collector, Bechuanaland**, as concluding the matter before me for more reasons than one. In the first place, it does not appear in the Privy Council case that the new materials supplied in place of the old were in replacement of old ones after they had become completely worn out and unfit for use. A general scheme of renewal seems to have been undertaken by the Railway Company in that case which included the supply of new rails, sleepers and fastenings wherever found necessary by the Railway Company. New things were used in place of the old ones for about half the line renewed, and the renewal seems to have brought back th....
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....scount Cave in British Insulated and Helsby Cables v. Atherton, as the one which governed the matter before their Lordships. In fact the Privy Council decision does not even so much as refer to the House of Lords decision. After a careful study of the two decisions in British Insulated and Helsby Cables v. Atherton### and Rhodesia Railways v. Income Tax Collector, Bechuanaland#, I feel clear that the test suggested by the latter is not identical with the one laid down by the majority of the law Lords in the former. The lasting advantage or enduring benefit test of Viscount Cave, one of the majority law Lords, seems to my mind to be sufficiently satisfied in the present case by the replacement by the new boiler of the old worn out boiler rendered completely unfit for further use. The permanent improvement test of Lord Macmillan which suggests that the new boiler ought to be of superior quality to the old is not, in my opinion, within either the express language or the necessary implication of Viscount Cave's test, nor is it applicable to the case before us, consistently with Viscount Cave's more general test notwithstanding that here the new boiler served merely to ensure th....