(1) The short question arising in this reference is whether the amount of Rs.21, 741/- incurred in the purchase of types for the printing machine in the first year of its business by the assessee firm is a revenue expenditure allowable as a deduction under S.10 (2) (xv) of the Income-tax Act, 1922. Under Clause (xv) of S.10 (2) what is allowed as a deduction is,
'any expenditure not being an allowance of the nature of described in any of the clauses (I) to (xiv) inclusive and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expanded wholly and exclusively for the purpose of such business, profession or vocation'.
(2) The assessee firm is a registered firm carrying on business of publishing a daily newspaper in Gujarati called 'Jansatta'. The business was commenced from 4th November 1953, but in the very first year of its business, there was a change in the personal on 26th August 1954, and therefore, the accounts for that year i.e. Samvat Year 2010(4th November 1953 to 26th October 1954) were split up into two parts one from 4th November 19953 to 25th August 1954 and the other from 26th August to 26th October 1954. The assessee firm laid out Rs. 22,799/- in Samvat Year 2010 and certain other amounts during the following years, i.e. Samvat Year 2011 and calendar years 1956 and 1957, on the purchase of type for the purpose of business, and during the assessment for the assessment years 1955-19959 claimed thee amounts as allowable expenditure. We are concerned in this reference only with the amount of Rs. 22,799/- spent on the purchase of types during the first year, i.e. Samvat Year 2010. The authorities allowed, however, Rs. 1058/- out of the said amount, so that the controversy in this reference is for the balance of Rs. 21,741/- only.
(3) The Income-tax officer negatived the contention urged by the assessee firm on the ground that these types formed part and parcel of the printing machinery and that ass the expenditure was concerned in the first year of the business, the purchase of these types would be initial or capitol expenditure. On appeal, the Assistant Appellate Commissioner disagreed with the view taken by the Income-tax Officer that these types formed part and parcel of the printing machinery, and observed:
'The point as to whether this was a capital expenditure or not would depend on the consideration whether the 'type' was an integral part of printing machinery or was a material which would enable the printing machinery to be used. I do not consider that type can be treated as integral part of the printing machinery. According to me, it is like fuel to an engine which can make the engine move, but which is not a part of the engine. In the same way without the type it may not be possible to use the printing machinery, but it cannot be said that it was a part of the printing machinery. I therefore, do not agree with the Income-tax Officer that the purchase of the types was a capital expenditure as a part of and parcel of the printing machinery. Normally, types are to be treated as an expenditure which is of a revenue nature and replacements has been accepted by the Income-tax Officer for the later years. In so far as this year is concerned, as no replacements have been met from the types, I consider that the appellant has n claim to get any deduction therefrom'.
On a further appeal to the Tribunal, the Tribunal also negatived the assessee's claim for deduction on the ground that the amount of Rs. 21,741 being the amount laid out in the purchase of type in the first year of then business should be classified as wholly capital and the amount of Rs. 1,058, which was allowed and which was spent during the latter part of the accounting year, i.e. from August 26, 1954 to October 26, 1954,would be allowed as expenditure for removal of part of the outlay of the earlier period. It is this disallowance of the sum of Rs.21, 741 which has been challenged in this reference.
(4) It was contended by Mr.Nanavati that types in a printing machine are not an integral part of the printing machine, that a printing machine is complete without type are needed for making the machine print and are, therefore, in the nature of consumable goods necessary for carrying out the business of printing the newspaper and therefore their costs would be expenditure of revenue nature laid out for the purpose of such business. The contention, in other words, was that the expenditure incurred in the purchase of these types was in the nature of trading or operational expenses and that, therefore, they were allowable under clause (xv) of S. 10(2).
(5) As has been often remarked in various decisions, the line of demarcation between capital expenditure and revenue expenditure is a very thin one and therefore, Courts of Law have refrained from attempting to define or lay down any precise definition and have been content to set out only broad tests. These broad tests are however, only workable guides and ultimately, the question always depends upon the facts and circumstances of each case. Bowen L.J. in City of London Contract Corporation v. Styles, (1887) 2 Tax Cas 239, explained the difference between the two types of expenditure by observing that the expenditure in the acquisition of the concern would be capital expenditure and the expenditure in carrying on he concern would be revenue expenditure. Commencing on this dictum, Lord Dunedin in Vallambrosa Rubber Co., Ltd. v. Farmer, (1910) 5 Tax Cas 529, thought that the dictum laid down by Bowen L.J. was not absolutely final or determinative. He believed that it was not a bad criterion of what was capital expenditure as against what was income expenditure to say that capital expenditure was a thing that was going to be spent once and for all, and income expenditure was a thing that was going to recur every year. Rowlatt J. in Ounsworth v. Vickers, Ltd (1915) 6 Tax Cas 671 observed that the real test was between the expenditure which was made to meet a continuous demand for expenditure as opposed to an expenditure which was made once and for all. He suggested, however, another viewpoint and that was whether the particular expenditure could be put against any particular work or whether it was to be regarded as an enduring expenditure to serve the business as a hole. The famous dictum of Viscount Cave, L.C. in Atherton v. British Insulated and Helsby, Cables, Ltd., (1925) 10 Tax Cas 155, was that when an expenditure is made not only once and for all, but with a view to bringing into existence an asset or as an advantage for the enduring benefit of a trade, there was 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. In John Smith & Son v. Moore, (1920) 12 Tax Cas 266, Lord Haldane suggested yet another test, and that was test of fixed and circulating capital. That test was also accepted by Lord Hanworth in Anglo Persian Oil Co Ltd v. Dale, (1932) 1 KB 124. The test, how ever, of fixed or circulating capital was not accepted by Lord MacMillan in Van Den Berghs, Ltd. v. Clark, 1935 AC 431. In Tata Hydro-Electric Agencies Ltd, Bombay v. Commr of Income-Tax, Bombay, 64 I. A. 215, : AIR 1957 P C 139, the Privy Council observed that what was money wholly and exclusively laid out for the purpose of the trade was a question which must be determined upon the principles of ordinary commercial trading. It was necessary accordingly, to attend the true nature of the expenditure, and to ask oneself the question, was it a part of the Company's working expenses; was it expenditure laid out as part of the process of profit earning? The distinction there made was between the acquisition of an income earning asset and the process of the earning of the income. The expenditure in the acquisition of that asset was capital expenditure and the expenditure in the process of the earning of the profits was revenue expenditure. A similar view was also expressed by Dixon J. In Sun Newspapers Ltd. and the Associated Newspapers Ltd. v. Federal Commissioner of Taxation, 61 CL R 337 , where the learned Judge observed as follows:
'But in spite of the entirely different forms, material and immaterial, in which it may be expressed, such sources of income or consist in what has been called a 'profit yielding subject' the phrase of Lord Blackburn in United Collieries Ltd. v. Inland Revenue Commrs. 1930 SC 215. As general conceptions it may not be difficult to distinguish between the profit-yielding subject and the process of operating it. In the same way expenditure and outlay upon establishing, replacing and enlarging the profit yielding subject may in a general way appear to be of a nature entirely different from the continual flow of working expenses which are or ought to be supplied continually out of the returns of revenue. The latter can be considered, estimated and determined only in relation to a period or interval of time, the former as a point of time. For the one concerns the instrument of earning profits and the other the continuous process of its use or employment for that purpose'.
A case which comes near enough to the present case is Commrs. of Inland Revenue v. Granite City Steamship Co.Ltd., (1927) 13 Tax Cas 1, where it was held that if the necessity for the expenditure in question has not arisen out of the capital -asset in earning the profits, the expenditure would be capital expenditure. The respondent company there owned one ship only which was seized in 1914 by the German Government and handed back to the respondents in1918 in a condition which necessitated extensive repairs. These repairs were completed before the ship sailed in March 1919 on her first voyage after here recovery by the respondents. The cost of the repairs, (10,152 was debited in the respondents' profit and loss account for the year ended August 31,1920 and was included in the sum of (1,03,167 claimed by the respondent as damages from the German Government. Eventually, the respondents accepted in full settlement of their claim a sum of ( 46,750 which was treated as payment of capital not assessable to income-tax. The respondents claimed to deduct the sum of ( 10,152, in computation for income-tax purposes their profits for the year ended August 1920. Negativing the claim of the repondents, Lord Sands stated that broadly speaking, the outlay would be deemed to be capital when it was made for the initiation of a business, for the extension of a business r for a substantial replacements of equipment. Lord Dunedin's dictum, namely, that capital expenditure is a thing that is going to be spent once and for all and income expenditure is a thing that is going to recur every year, qualified that dictum by observing that he would adopt as reasonable the remark of Rowlatt J. that stress ought not be laid on the phrase 'every year' and that the real test was between expenditure which was to meet a continuous demand as opposed to expenditure which wax made once and for all. A full Bench of the High Court in In Re Benarasidas Jagannath after examining the various decisions on the subject, formulated three broad principles which emerged from those decisions. These three principles were, (1) outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business or for a substantial replacement of equipment, (2) expenditure maybe attributable to capital when it 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, the expressions 'enduring benefits' or 'of a permanent character' were introduced to make it clear that the asset or he right to acquire must have enough durability to justify its being treated as a capital asset; and (3) whether for this purpose of the expenditure, any capital was withdrawn, or in other words, whether the object of incurring the expenditure was to employ what was taken in as a capital of the business. Again it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. The Supreme Court in Assam Bengal Cement Co.Ltd v. Commr of I.T. West Bengal : 27ITR34(SC) , approved the synthesis attempted by the Lahore High Court from the various decisions and also approved the three principles enunciated by it a emerging from the authorities, and Bhagwati J. speaking for the Bench, observed that in case where the expenditure was made for the initial outlay or for the extension of the equipment, there could be no doubt that it would be capital expenditure. The capital asset of the business was either acquired or substantially replaced and that outlay whatever be its source whether it was drawn from the capital or the income of the concern was certainly in the nature off capital expenditure. He then observed that the question would arise for consideration when the expenditure was incurred while the business was going on and was not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure could be looked at either from the point of view of what was acquired or from the point of view of what was the source from which the expenditure was incurred. If the expenditure was made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it was properly attributable to capital and was of the nature of capital expenditure. On the other hand, if it was made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it was revenue expenditure. Lastly, he observed that in all cases, it would be the aim and object of the expenditure, which would determine the character of the expenditure, whether it was capital expenditure or revenue expenditure. It is thus clear that whereas a question might arise whether the expenditure is incurred while the business is going on and is not concurred either for the extension of the business or for substantial replacement of its equipment, where such expenditure is capital or revenue expenditure no such question can arise in the case of expenditure incurred as and way of initial outlay.
(6) Considering these tests laid down in the various authorities we have to examine whether the expenditure in question can be said to be revenue expenditure. Now it may be true, as was urged by Mr.Nanvati that thee types are not part of the printing machinery and that a printing machinery would be complete even without them. It is also true that no one can say that the printing machine is not complete merely because the types are not there. But it cannot be doubted that they are ancillary to such a machine and without them such a machine cannot be put to use for which it is acquired. The types no doubt, would require replacement from time to time by reason of the usual wear and tear, but the fact that they would require replacement would not necessarily mean that the expenditure incurred in purchasing them would be revenue expenditure, for, replacement would also be there even in the case of the machinery itself which, as a whole or in parts, would necessitate replacement from, time to time. The fact that types would require replacement earlier than parts of the machinery would not, in our view, make any difference in their character and cannot, therefore, becalled either raw materials in the business of publishing a newspaper or consumable stores, such as for instance, paper or ink or any such other materials necessary for working the printing machinery. It is true that the sum of Rs.1, 058/- was allowed in the accounting year Samvat Year 2010 and various amounts were likewise also allowed in the subsequent years, but these were allowed as expenditure incurred for replacing the types. Whatever was the basis for allowing these expenses, the fact remains that they were expenses incurred after the business had commenced and were not treated by the authorities as outlay for the initiation of the business which the amount in question in this reference represented. As the supreme court observed, the aim and object of the expenditure in question was not, and could not be said to be, running the business or working it with a view to produce profits. In a sense, if court, it can be said that without the types the business could not run, but that can also be said equally off the machine itself. That would not make the purchase price of types trading or recurring expenses involved in running the business. In our view, the aim and the object of the expenditure in question was the purchase or acquisition of the apparatus or the instrument for earning profits as distinguished from the expenditure incurred in the continual process of its use or employment for that purpose, as remarked by Dixon J. in 61 C L R 337. Mr. Nanavati, however, urged that the test laid down by Lord Sands in (1927) 13 Tax Cas 1, would not be a proper test in this cause and the test that should be applied in this case would be the second test as summarised in the Lahore decision, and urged that the expenditure incurred by the assessee firm in purchasing types was not for something of an enduring benefit to the business because the types have not sufficient durability to give them the character of a capital asset. The test of durability, however, would be applicable in the case of acquisition of a capital asset and would be a relative and not an inflexible one, depending upon the nature and character of the asset as the instrument of making profits of the business. One such instrument may endure for a longer period than the other depending upon its inherent durability. But the question would be, is it a recurrent expenditure in running the business and in making profits of such a business. On the facts and circumstances of the present case, the real test would be the one laid down by the Supreme Court, namely, what was the aim and object of the expenditure. Was it for running the business or was it one concerning the instrument for earning profits? Obviously, the expenditure incurred was not for the continual process of the use of such instrument for earning profits, but was an expenditure concerning the instrument for earning profits. If that distinction is borne in mind, there would be no difficulty in arriving at a proper conclusion as to the nature of the expenditure in question and its aim and object. For the reasons aforesaid, it is not possible to sustain the contention urged on behalf of the assessee firm that the expenditure in question cannot be said to be one for initial outlay or that the expenditure was in the natural of operational or trade expenses. The Tribunal, therefore, was right in disallowing these expenses.
(7) Our answer to the question, therefore, will be in the negative. The assessee firm will pay to the Commissioner the costs of this reference.
(8) Reference answered.