BHARGAVA J. - The questions of law referred by the Income-tax Appellate Tribunal for our opinion are :
(1) 'Whether on the facts and in the circumstances of this case and on a true interpretation of section 108 of the U.P. District Board Act, 1922, the amount of Rs. 2,000 paid as District Board tax is not an expenditure admissible under section 10(2)(xv) of the Income-tax Act ?
(2) Whether on the facts and in the circumstances of this case the assessees contribution of Rs. 800 to the local school is not an expenditure admissible under section 10(2)(xv) of the Income-tax Act ?
(3) Whether the Tribunal can refuse to entertain a ground of appeal when that ground was not raised before the Income-tax Officer nor before the Appellate Assistant Commissioner ?'
The assessee is a limited company which was running a sugar factory within the area falling in the jurisdiction of the District Board of Meerut during the previous year relating to the assessment year 1950-51. The company earned profits and during the previous year in question had to pay an amount of Rs. 2,000 as District Board tax. The assessee claimed that this amount of Rs. 2,000 should be deducted as an admissible expenditure under section 10(2)(xv) of the Income-tax Act but this objection was rejected by the Income-tax Officer, the Appellate Assistant Commissioner as well as the Income-tax Appellate Tribunal. It is this decision which gave rise to the first question.
During the same previous year, the assessee contributed a sum of Rs. 800 to a school where the children of the assessee companys workers used to read and, consequently, the assessee claimed that this sum was also a deductible expenditure under section 10(2)(xv) of the Income-tax Act. The Income-tax Appellate Tribunal held that the school was not maintained by the assessee company and the contribution was purely in the nature of charity and, consequently, rejected the claim of the assessee in respect of this deduction. On these facts, the assessee sought reference to this court of the second question.
The assessee during the previous year in question had sold a quadruple for a sum of Rs. 46,257. This amount was treated as income under section 10(2)(vii) of the Income-tax Act by the income-tax authorities as well as by the Income-tax Appellate Tribunal on the ground that the depreciated value of this part of the machinery was zero inasmuch as 100 per cent. depreciation had already been allowed in respect of it in the past. The assessment order indicates that the only point contested by the assessee in respect of this amount added to the income by the Income-tax Officer was that the Income-tax Officer was not entitled to add the whole of this amount treating the whole of it as profits. In the grounds of appeal before the Appellate Assistant Commissioner, the point taken was that the Income-tax Officer had not properly appreciated the manner of calculating profits under section 10(2)(vii) of the Income-tax Act on the disposal of the quadruple and, consequently, the finding arrived at by the Income-tax Officer was not sustainable. There was another ground that in any case the entire sale proceeds could not in fact be held as assessable profits. These points which were urged before the Income-tax Officer and the Appellate Assistant Commissioner were also taken before the Income-tax Appellate Tribunal and the Tribunal rejected these grounds. There was an additional point before the Appellate Assistant Commissioner that the Income-tax Officer had committed an error inasmuch as, when calculating the allowable depreciation, he had deducted the sum of Rs. 45,257 from the value of the machinery of which depreciation was being calculated. This error was set right by the Appellate Tribunal holding that since the depreciated value of this part of the machinery which was sold was held nil there was no justification for deducting this amount from the value of the machinery when calculating the depreciation. These points decided by the Appellate Tribunal are, however, not material for the third question referred but have been mentioned by us only to indicate in what manner the assessee had challenged the addition of this amount of Rs. 46,257 before the Income-tax Officer and the Appellate Assistant Commissioner. In the appeal before the Income-tax Appellate Tribunal, the assessee raised one more additional point in respect of the addition of this sum. The point raised was that the assessee had spent a sum of Rs. 1,98,000 to replace a part of the machinery which was sold for the sum of Rs. 46,257 and consequently this sum of Rs. 1,98,000 was admissible expenditure under section 10(2)(xv) of the Income-tax Act. The Tribunal held that this point was not raised either before the Income-tax Officer or before the Appellate Assistant Commissioner and consequently the Tribunal refused to entertain this new ground. It is on these facts that the Tribunal framed the third question mentioned above at the request of the assessee. It has appeared to us that the third question as framed by the Tribunal does not bring out properly the controversy which actually arose at the time of the hearing of the appeal before the Tribunal. It was at no stage contended even on behalf of the department before the Tribunal that the Tribunal had no power to refuse to entertain a ground of appeal if that ground was not raised before the Income-tax Officer and before the Appellate Assistant Commissioner. In fact the appellate order of the Tribunal from which we have mentioned the facts above shows that the Tribunal was itself clearly of the opinion that it had the power to entertain or refuse to entertain this new ground but it chose to refuse to entertain the new ground of attack for the reason that the assessee had not raised that ground before the Income-tax Officer and the Appellate Assistant Commissioner. In such a case, therefore, the appropriate question which would arise out of the appellate order of the Tribunal is as to whether the Tribunals refusal to entertain the new ground is vitiated in law on the ground of being an improper exercise of the discretion vested in the Tribunal to permit or to refuse permission to raise a new ground which had not been taken before the Income-tax Officer and the Appellate Assistant Commissioner. Since this is the aspect in which the question of law properly arises we think that it will be advisable for us to answer the question in this form and not in the form in which it has been framed by the Income-tax Appellate Tribunal even though the assessee made no application under section 66(4) of the Income-tax Act for the amendment of the question referred to us. In this light we asked learned counsel for the income-tax department as well as learned counsel for the assessee whether a supplementary statement of the case would be necessary for the purpose of answering this question in this particular form and we were informed that no supplementary statement of the case is needed. Having gone through the statement of the case already received and the appellate order of the Tribunal as well as the orders of the Appellate Assistant Commissioner and the Income-tax Officer, we agree that no further facts need be called for from the Tribunal for the purpose of answering the question in the modified form.
So far as the first question referred to us is concerned, it has been decided by the Income-tax Appellate Tribunal against the assessee on only one single finding, viz., that the levy of the District Board tax depended upon the income of the assessee and, consequently, it was not admissible as an expenditure under the Indian Income-tax Act. This form of answer given by the Income-tax Appellate Tribunal indicates that the Tribunal proceeded on the assumption that this sum of Rs. 2,000 paid as tax to the District Board would be an expenditure of the nature mentioned in section 10(2)(xv) of the Income-tax Act because it would be only on that assumption that the question would arise of its not being allowed as a deductible expenditure on the ground of being dependent on income by applying the provisions of section 10(4) of the Income-tax Act. In answering this question, therefore, we consider that we are entitled to proceed on the basis that the Income-tax Appellate Tribunal itself came to the finding that this amount of Rs. 2,000 paid as tax to the District Board was an expenditure laid out or expended wholly and exclusively for the purpose of the business of the assessee company and was not an allowance of the nature described in any of the clauses (i) to (xiv) of section 10(2) of the Income-tax Act. We have mentioned this aspect as, during the course of arguments on this question of law, Mr. Gopal Behari, learned counsel of the department, urged that we should examine this question in detail and arrive at a finding that this sum of Rs. 2,000 paid as tax to the District Board was not an expenditure laid out or expended wholly and exclusively for the purpose of the business of the assessee. In view of the finding recorded by the Tribunal we are of the opinion that the question in this form does not arise out of the appellate order of the Tribunal and it will be beyond the scope of this reference for us to go into this aspect of this question. We may, however, add that, even on merits, we think that the assumption of the Income-tax Appellate Tribunal in this case was perfectly correct. The assessee was carrying on the business of running a sugar factory in the area falling within the jurisdiction of the District Board of Meerut and in order to carry on this business the company had to submit to all the regulations including tax liabilities which might be imposed by the District Board. The State Government had empowered the District Board of Meerut to impose a tax on any person carrying on a trade within its jurisdiction. The business of running the sugar factory was a trade and consequently, in order to carry on that trade at all, the assessee had to pay the taxes which became payable under the District Board Act. This was, therefore, an amount which was expended for the purpose of enabling the assessee to carry on the business of the sugar factory within the jurisdiction of the District Board of Meerut and such an expenditure is clearly an expenditure laid out or expended wholly and exclusively for the purpose of the business. Without incurring that expenditure, the assessee could not possibly carry on the business at all. It was, therefore, expenditure of a nature which falls within the scope of the principle laid down by the Lord Chancellor as well as by Lord Davey in Strong and Co. of Ramsey Ltd. v. Woodifield which case was further approved and explained by the House of Lords in Morgan (Inspector of Taxes) v. Tate & Lyle Ltd. This is an additional reason why the point raised by learned counsel for the department must be rejected.
Coming to the discussion of the question in the form in which it was dealt with by the Income-tax Appellate Tribunal, we find that the Tribunal recorded the finding of fact in such language that there was no reference to profits and gains of the business carried on by the assessee. On the other hand, reference was made to the income of the assessee. We can take it that the Tribunal in using the word 'income' was using it in the meaning given to it by the District Board Act. In section 114 of the District Board Act under which this tax was levied on the assessee company, taxable income is defined as 'estimated income' with some clauses indicating what is not to be included in the taxable income. The word 'income' used by the Tribunal in the appellate order must, therefore, be interpreted as meaning estimated income which estimated income must have been worked out by the District Board in accordance with the provisions of the District Boards Act in order to assess the tax payable by the assessee company. We have looked at the District Boards Act and the rules framed thereunder and we have not been able to find any rules or provisions laid down for determining the estimated income. In fact, the rules are silent altogether as to how the income is to be estimated. There is a provision that a list of assessees with the amount of tax assessed under section 114 of the District Boards Act is to be prepared and objections are to be invited against such list before finalising the amount of tax payable but it is nowhere laid out down in the Act or the rules that when such objections are filed it would be necessary of the assessing authority to determine the actual income of the taxpayer. The income, therefore, on which tax is payable under the District Boards Act is income arrived at by pure guesswork without applying any principles for determining that estimated income. Such income cannot be said to be at all in the nature of profits and gains of the business mentioned in sub-section (4) of section 10 of the Income-tax Act. On these facts, it appears to us that the principle which would be applicable to the case before us will be that laid down by the Privy Council in Commissioner of Income-tax v. Visweswardas Gokuldas The case reported in Commissioner of Income-tax v. King & Partridge will not be applicable as that was a case in which the tax which was sought as a deduction was no doubt at first sight under the local Act calculated on the basis of the estimated income but later on, when objections were filed, the tax was made dependent on the return filed by the taxpayer. The case of Commissioner of Income-tax v. Visweswardas Gokuldas which came up before the Privy Council was, on the other hand, quite similar to the case before us as in that case also the amount paid as tax under one of the local laws was held to be a deductible expenditure and not equivalent to profits and gains mentioned in section 10(4) of the Income-tax Act on the ground that the tax was being imposed on the basis of estimated income and not on the basis of determined profits or gains. In these circumstances, this question must be answered in favour of the assessee in the negative so as to hold that this sum of Rs. 2,000 was an expenditure admissible under section 10(2)(xv) of the Income-tax Act.
The facts bearing on the second question are also very brief and have already been mentioned by us earlier. The only facts found by the Tribunal are that the sum of Rs. 800 was paid as a contribution to the school where the children of the assessee companys workers used to read. There is no finding, and it appears that there was not even a suggestion, that there was any contract between the company and the authorities of the school under which it could have been held that the payment was related to any rights or favours being granted to children of the companys workers. The school was not being maintained by the assessee company. There was not even any agreement between the assessee and its workers under which the assessee was bound to maintain or assist in the maintenance of a school for the education of the children of the companys workers as a part of the conditions of service of the workers. In all these circumstances, the Tribunal, in our opinion, was quite right in coming to the view that the contribution was purely in the nature of charity as it was an ex gratia payment being made by the company to assist a school without any obligations towards the school or towards its workers. This amount was, therefore, rightly disallowed, and the second question must, therefore, be answered against the assessee in the affirmative.
So far as the third question is concerned the only facts mentioned by the Tribunal in the appellate order are that the point raised before the Tribunal was not raised either before the Income-tax Officer or before the Appellate Assistant Commissioner and it was on this ground that the Tribunal refused to entertain this new ground. It has been urged by learned counsel for the assessee that in refusing to entertain this ground the Tribunal acted arbitrarily and did not exercise its discretion in a judicial manner. This argument was urged on the assumption that the question which was being sought to be raised before the Tribunal was a pure question of law. No doubt, there have been some decisions of some of the High Courts that, if a new question is sought to be raised before the Income-tax Appellate Tribunal and it is a pure question of law, it would not be proper exercise of the discretion by the Tribunal to refuse to entertain that question on the mere ground that it was raised for the first time before the Tribunal; but that is an aspect which we need not enter into, because in our opinion the question in this case was not a pure question of law but was a mixed question of fact and law. The point raised before the Tribunal was that the sum of Rs. 1,98,000 was spent only on a replacement of the old quadruple which was sold for a sum of Rs. 46,257 and the learned counsel assumed that every replacement is an admissible expenditure. It appears to us that this assumption is not at all correct. It will always depend upon the nature of the replacement as to whether that replacement amounts merely on a repair or to an investment as a part of the capital utilised in purchasing the machinery which is required for earning the taxable profits. In this connection our attention was drawn by learned counsel for the assessee to a decision of the Madras High Court in Commissioner of Income-tax and Excess Profits Tax v. Sri Rama Sugar Mills Ltd. In that case one of the three boilers of the factory being run by the assessee company deteriorated in its efficiency during the relevant accounting period and the assessee replaced it by a new but exactly similar boiler. It was held by the Madras High Court that the expenditure in putting up the new boiler was a revenue expenditure deductible under section 10(2)(xv) of the Income-tax Act. Learned counsel desires that we should apply the principle laid down by the Madras High Court to our case also. This, however, ignores the real ratio decidendi of the case before the Madras High Court which was explained by Satyanarayana Rao J. in his judgment. He held :
'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 subject-matter 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.'
These views expressed by Satyanarayana Rao J. make it clear that replacements can be of two different types. There can be replacements which amount to repair and there can also be replacements which cannot be treated as repair and the expenditure on them would not be deductible under section 10(2)(xv) of the Income-tax Act. He also laid down the test. We may say with respect that we agree with the test laid down by Satyanarayana Rao J. in his judgment and, consequently, in our opinion the assessee could have succeeded before the Tribunal only if facts were found to show that, after applying the test, the replacement by the assessee was of the nature which would amount to repair. For this purpose, it would have been necessary for the Tribunal to go into questions of fact as to whether the replacement of the old quadruple was only a replacement of a defective part or whether it amounted to a replacement of the entirety or at least a substantial part of the machinery in question. For investigating the nature of the replacement, it would have been necessary for the Tribunal to take evidence and it would have been only thereafter that the Tribunal could have correctly formed an opinion whether this replacement was or was not in the nature of a repair. While such facts still required investigation, the Tribunal could very justifiably hold that it was not an appropriate case where a new ground should be allowed to be raised before it, when it was not raised before the Income-tax Officer and the Appellate Assistant Commissioner who could have more properly investigated those facts. In the circumstances, even the question as reframed by us in the form in which it actually arises out of the appellate order of the Tribunal must be answered against the assessee.
We accordingly answer the questions as indicated above. In the circumstances of this case we direct that parties shall bear their own costs of this reference. We fix the fee of learned counsel for the department at Rs. 250.
Questions answered accordingly.