1. This is a reference made by the Tribunal of Appeal under Section 66(1) of the Indian Income-tax Act. The relevant facts which are found in the statement of case are these :
2. The assessee company started converting the supply of electric energy from DC to AC system and they were obliged under the provisions of the Indian Electricity Act and under the terms of their licence to change and substitute at their own cost the consumers' equipment such as fans, radios, etc. so as to enable the consumers' equipment to be worked on AC system. In doing so, they had to make alterations in their own cables, service lines and meters. They claimed the entire expenses incurred in the course of conversion during the four accounting years as revenue expenditure. That claim was rejected. Having regard to the decision in The Nagpur E.L. & P. Co. Ltd. v. Com, of I.T.C.P. & Berar (1932) 6 I.T.C. 303 the point was not pressed before the Tribunal. The Income-tax Officer had negatived both the claims, but the Appellate Assistant Commissioner, while upholding the Income-tax Officer's view about the expenditure being of capital nature, held that depreciation on such expenditure was due to the company and allowed the same. The taxing authorities being dissatisfied with that decision preferred an appeal to the Tribunal. Before the Tribunal the question whether this expenditure was of capital nature or revenue expenditure was not argued. It was accepted as capital expenditure. The only contention urged before the Tribunal was that, this being capital expenditure, the company had expended the whole money in changing over from DC to AC system, and just as expenditure in respect of alterations of the company's cables and lines was capital expenditure, the replacement cost of the consumers' fans, radios, etc. was also a part of the capital expenditure of the company. Following that line of reasoning it was urged that as depreciation was allowed in respect of company's cables, etc. depreciation should also be allowed in respect of cost of replacement of fans, radios, etc. as the two stood on the same footing. This argument had appealed to the Appellate Assistant Commissioner but was rejected by the Tribunal. The Tribunal permitted depreciation in respect of company's properties, but rejected the claim for depreciation in respect of the expenditure incurred for replacement of fans, radios, etc., although it held that the expenditure was of capital nature.
3. It was urged on behalf of the assessees that all this expenditure was for alteration of the system of the company, and as depreciation was permitted in respect of one part of the expenditure, it should also be permitted in respect of the other part. In Our view this argument overlooks the express words of Section 10(2)(vi) of the Act. That clause provides for an allowance in respect of depreciation of such buildings, machinery, plant, or furniture, being the property of the assessee, a sum equivalent to such percentage of the written down value as may in any class or case be prescribed. The clause therefore clearly applies only to the property of the assessee; it illustrates the property as being buildings, machinery, plant or furniture; it provides for a written down value thereof on a certain percentage basis, which may be fixed by the rules. The section therefore clearly contemplates, as is ordinarily understood, the depreciation in value of the assessee's own assets. The argument of the assessees is that the cost incurred in replacing the consumers' fans, radios, etc. are also costs incurred in respect of company's property, because without that expense the company's system will not work. It was contended that as the company is allowed to debit to capital expenditure, the cost of repairs or replacement of the pavement when a cable is replaced, and as depreciation is allowed in respect of such expenses, depreciation should be allowed also in respect of the cost of replacement in the present case. This argument overlooks the fact that the expenses incurred in replacing the pavement are in respect of the cable which is placed by the company. It is directly connected with a tangible asset of the company. In our opinion, therefore, that analogy is not proper. It should again be borne in mind that in respect of every expenditure of capital nature the Income-tax Act does not permit depreciation. It is only in respect of the property of the assessee that provision is made for depreciation. If this expenditure, although it is of capital nature, is not considered expenditure in respect of the assessees' property, no depreciation can be permitted. As the expenditure is in respect of the property of the consumers, although it is incurred for working the system of the company, it is still an expenditure not in respect of the property of the assessees. Therefore the case is not covered by Section 10(2)(vi), and in our opinion the conclusion of the Tribunal is correct. The question referred to us is limited to depreciation and it does not raise the question whether this expenditure is of capital nature or is a revenue expenditure. Confining our answer to the question submitted to us, the answer must be in the negative. The assessees to pay the costs of the reference.