JAGANMOHAN REDDY C.J. - Two questions have been referred to us under section 66 (1) of the Indian Income-tax Act, 1922, by the Income-tax Appellate Tribunal, namely :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenditure of Rs. 28,027 incurred in replacing petrol engines by diesel engines was of a capital nature not allowable under section 10 (2) (xv) of the Act
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that neither initial depreciation nor development rebate was allowable on the cost of the diesel engine ?'
The assessee is a private limited company engaged in the business of plying trucks. In the accounting year, it had 23 trucks. In respect of three of these trucks, which were previously running on petrol, the assessee replaced the old petrol engines by new diesel engines which was done at a cost of Rs. 28,027. This expenditure was debited to the profit and loss account and claimed as an admissible deduction in arriving at the income, which according to the profit and loss account was Rs. 1,42,160. The Income-tax Officer disallowed this items of expenditure holding it to be of capital nature, and after making the necessary adjustments such as for depreciation, he arrived at a net income from the business of only Rs. 29,463.
On appeal before the Appellate Assistant Commissioner, the assessees contentions were that the expenditure should have been allowed as revenue expenditure under section 10 (2) (xv) of the Act, and that in the alternative, initial depreciation or development rebate should have been allowed. The Appellate Assistant Commissioner did not accept those contentions and confirmed the assessment.
In appeal before the Tribunal, the same contentions were raised as before the Appellate Assistant Commissioner but the Tribunal also rejected them.
In so far as the first question is concerned, in our view, it admits of no doubt that the expenditure incurred in replacing petrol engines by diesel engines is a capital expenditure, inasmuch as it was incurred for the creation of an advantage of an enduring benefit and forms part of the assets of the undertaking.
In Atherton v. British Insulated & Helsby Cables Ltd. Viscount Cave, in the course, of his speech, said :
'........ when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade,....... there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.'
This has been referred to and followed with approval by their Lordships of the Supreme Court in several cases as a test for determining whether any expenditure is a capital expenditure, or a revenue expenditure. Mr. Srinivasa Rao for the assessee is unable to persuade us that the test is otherwise, though he contends that each case must be determined on the facts and circumstances of that case. While we agree that each case has got to be determined on the facts and circumstances of that case, the test to be applied is clear. What is an advantage of an enduring benefit of a trade is a matter to be determined on the facts and circumstances of each case and we think that in this case the replacement of petrol engines by diesel engines is an advantage of enduring benefit and forms part of the assets of the undertaking. In Rhodesia Railways Ltd. v. Income-tax Collector, Bechuanaland protectorate where there was a substitution of one kind of rail for another-steel rails for iron rails-their Lordships of the Privy Council have held that that is a material alteration, and a very great improvement in the corpus of the heritable estate belonging to the company, and so stated, surely is a charge against capital. This case has been cited as an authority where similar matters were to be considered. We have the least doubt that in the instant case, the expenditure incurred is of a capital nature.
In so far as the second question is concerned, the assessee is entitled to a development rebate under section 10 (2) (vib), and if he is entitled to development rebate, then the initial depreciation under section 10 (2) (vi) is not available to him because the terms of clause (vi) prohibit it where development rebate clause (vib) has already been allowed. Until the decision of their Lordships of the Supreme Court in Commissioner of Income-tax v. Mir Mohammed Ali there were two views in this respect, one of which was which was held by the Madras High Court in Mir Mohd. Ali v. Commissioner of Income-tax and the other by the Bombay High Court in Maneklal Vallabhdas Parkeh v. Commissioner of Income-tax. The view taken by the Bombay High Court in the latter case was that installation of machinery within the meaning of section 10 (2) (vib) meant that it should be the installation of a new machinery in replacement of the old one, and that diesel engines cannot be termed as machinery. On the other hand, in the former case, the Madras High Court took a different view, while our own court preferred to follow the view taken by the Bombay High Court in Sri Kantiah v. Commissioner of Income-tax. This matter has been set at rest by the majority judgment of their Lordships of the Supreme Court in Commissioner of Income-tax v. Mir Mohammad Ali where not only diesel engines have been held to be machinery but also that the expression 'installations' was held not necessarily to mean machinery fixed in position but would apply even when it is inducted or introduced. Sikri J., for himself and Subba Rao J. (as he then was), adopted the definition of 'machinery' as given by their Lordships of the Privy Council in Corporation of Calcutta v. Chairman, Cossipore & Chitpore Municipality namely, 'machinery' means 'some mechanical contrivances which by themselves or in combination with one or more other mechanical contrivances by the combined movement and inter-dependent operation of their respective parts generate power or evoke, modify, apply or direct natural forces with the object in each case of effecting so definite and specific a result.' It was further stated that although that definition was not given in a tax case, none the less it should prevail under the Income-tax Act also, as the word 'machinery' was an ordinary and not a technical word. The case before the Supreme Court was also a case of replacement of petrol engines by diesel engines in lorries and is, therefore, on all fours with the facts of this case. Having regard to this final authority, the second question must be answered in favour of the assessee.
Accordingly, our answer to the first question is in the affirmative and in favour of the department while to the second question is in the negative and in favour of the assessee, who is entitled to development rebate under section 10 (2) (vib) of the Act. Inasmuch as there is partial success for the department and the assessee, there will be no order as to costs.