The judgment of the court was delivered by -
SRINIVASAN J. - Though the assessees in these three cases are different, certain common questions arise. We shall however set out the facts relevant to each reference separately for purposes of clarity :
T.C. No. 157 of 1961 : The assessee in this case claimed development rebate and extra depreciation in respect of an expenditure of Rs. 93,215. The Income-tax Officer found that part of the expenditure was incurred only for the expansion of existing machinery and was not for the installation of new machinery. He accordingly disallowed development rebate (Rs. 23,304) and extra depreciation (Rs. 1,554) relevant to such expansion. On appeal, the Appellate Assistant Commissioner inspected the mills in question. He came to the conclusion that the modifications effect to the old machinery were of a capital nature, but nevertheless could not be considered as new plant and machinery in respect of which alone development rebate and extra depreciation could be allowed. He, therefore, disallowed the claim. In the further appeal to the Appellate Tribunal, it was contended that the Appellate Assistant Commissioner 'erred in disallowing the amount of Rs. 23,304 on account of development rebate and Rs. 1,554 on account of depreciation under section 10(2)(via) in respect of the sum of Rs. 93,000 incurred by the appellants as capital expenditure for installing new machinery in the appellants mill.' In the grounds of appeal, it was finally urged that the Appellate Assistant Commissioner should have held 'that alternatively the appellants were entitled to the deduction of the whole amount of Rs. 93,000 as revenue expenditure'. It would be noticed that while before the Income-tax Officer and Appellate Assistant Commissioner the claim to development rebate was limited to a sum of Rs. 23,000 and odd as falling within the scope of section 10(2)(via) of the Act, before the Tribunal the alternative claim was that the entire expenditure of Rs. 93,000 should have been allowed as amounting to revenue expenditure only. The Tribunal rejected the claim to development rebate, as, in its view, only the minor component parts of the ring-frame had been replaced and such alteration could not be classified as installation of machinery and plant. It then proceeded to examine the claim to deduction of Rs. 93,000 as revenue expenditure. The Tribunal inspected the mill and studied the working of the machinery and the part which the materials played in the process of yarn spinning. It found that the alteration were accounted for by the replacement of certain parts by what was known as Casablance High Drafting System. The manufacturers of those parts purported to claim a higher efficiency in productive capacity by the substitution of those parts in the place of the old parts. The Tribunal thought that mere claims made by manufacturers could not serve to establish that by the use of those parts an asset of an enduring advantage had been secured by the basis of the claims made by the manufacturer would not be sensible. The Tribunal accepted the factual position that the old parts were no longer manufactured and that those parts could be replaced only by parts of a newer type and that the substituted parts served precisely the same function as the old parts, though with the added advantage of their newness and the possible improvement in the working that the manufacturers claimed. For these reasons, the Tribunal took the view that by fitting these new parts the original asset, viz., the spinning frame, was only maintained and no new asset had been brought into existence. It accordingly reached the conclusion that the entire expenditure on the Casablanca conversion materials amounting to Rs. 93,215 was revenue expenditure. On the application of the Commissioner of Income-tax, the two questions set down below stand referred to this court :
'Whether, on the facts and in the circumstances of the case, the Tribunal had jurisdiction to decide whether the sum of Rs. 93,215 constituted an allowable item of expenditure under section 10(2)(v) of the Act ?
(2) Whether, on the facts and in the circumstances of the case, the sum of Rs. 93,215 or any portion thereof is allowable as an expenditure incurred for current repairs under section 10(2)(v) of the Act ?'
It will be noticed that the first of these questions raise the competency of the Tribunal to examine an alternative case set up by the assessee for the first time during the appeal before the Tribunal. We have indicated that before the Income-tax Officer it was only a claim to development rebate, and extra depreciation allowance based on a total capital expenditure of Rs. 93,000 and odd that was put forward, and the position was the same when the matter was brought before the Appellate Assistant Commissioner in the appeal before him. It was only when the further appeal was filed before the Tribunal, the assessee set up the alternative case claiming to be entitled to deduct the entire sum of Rs. 93,000 as revenue expenditure, a case that was not put forward before the Appellate Assistant Commissioner and was not, therefore, canvassed by him in his appellate order under section 31 of the Act. That is how the question of jurisdiction of the Tribunal to examine a new matter which was not adjudicated upon either by the Income-tax Officer or the Appellate Assistant Commissioner is raised by the first of the questions above. The second question is whether any portion of this amount is allowable as a revenue expenditure.
T.C. No. 175 of 1961 : In this case again, the reference was directed to be made under section 66(i) of the Act on the application of the Commissioner of Income-tax, objecting to the order of the Tribunal granting an allowance of Rs. 1,96,533 as revenue expenditure. Before the Income-tax Officer it was contended that materials to the above value were utilised for the purpose of introducing the Casablanca High Drafting System, as it is called, and it was claimed that this was only revenue expenditure for effecting substitution of worn out parts of the existing machinery. The Income-tax Officer thought that the large amount involved indicated the capital nature of the expenditure and took the view that the whole system of the working of the mill was changed into a new one and that there was an enduring benefit to the mills by this change. He, accordingly, rejected the claim.
The appeal to the Appellate Assistant Commissioner also failed. The Appellate Assistant Commissioner pointed out that originally the assessee had itself treated the expenditure in its accounts as capital expenditure and that only at the time of the assessment was the claim to allowance as revenue expenditure put forward. He repeated the observations of the Income-tax Officer and held that the expenditure was of a capital nature. When the matter came before the Tribunal, the Tribunal directed the Income-tax Officer to carry out a proper investigation and bring on record the necessary evidence touching upon the technical details of the Casablanca Conversion Process and the nature of the economic benefit which the undertaking received. After an examination of the evidence so obtained, the Tribunal came to the conclusion that the contention of the department that the expenditure was of a capital nature could not be sustained and directed the allowance of Rs. 1,96,533 as revenue expenditure. On the department questioning the correctness of that view by an application under section 66(2) of the Act, the following question stands referred :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 1,96,533 or any portion thereof is allowable as expenditure incurred for current repairs under section 10(2)(v) of the Income-tax Act ?'
T.C. No. 178 of 1961 : On facts similar to those in the other two cases, in so far as the replacement of parts referred to as the introduction of the Casablanca System is concerned, the allowance as revenue expenditure of the sum of Rs. 23,533 under section 10(2)(v) is questioned by the department, and the relevant question that stands referred to is :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 25,533 is allowable as expenditure for current repairs under section 10(2)(v) of the Income-tax Act ?'
In addition, at the instance of the assessee, who moved this court under section 66(2) of the Act, the following question also stands referred :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in disallowing the expenditure of Rs. 45,000 ?'
This question arises from the fact that, according to the directions of the Inspector of Factories, certain new windows were fitted to the factory building. This was considered by the departmental officials and the Tribunal to be expenditure of a capital nature and it is the correctness of that view that is canvassed by the above question.
The principal question that is common to all of these references is as regards the nature of the expenditure incurred by the introduction of what is called the Casablanca System, whether it is expenditure of a revenue or a capital nature. Before dealing with the factual position as it has been ascertained by the Tribunal we may refer to certain decisions which distinguish the two types of expenditure and lay down certain broad principles for determining under which head, an item of expenditure would fall. The claim is made by the assessee under section 10(2)(v) of the Act, which reads :
'Such profits or gains shall be computed after making the following allowances, namely :
(v) in respect of current repairs to such buildings, machinery, plant or furniture, the amount paid on account thereof.'
The expression used is 'current repairs' and it is the significance of this expression that has to be understood. In New Shorrock Spinning and ., v. Commissioner of Income-tax, the learned judges pointed out that the expression 'repairs' is used in contra-distinction to renewal or restoration. A repair is effected for the purpose of preserving or maintaining an existing asset and not to bring a new asset into existence or to obtain a new or fresh advantage. If the expenditure was incurred for the purpose of bringing a new asset into existence or a new advantage for the business, then such an expenditure would be of a capital nature. The principle is very clear and it is only its application in a stated set of circumstances that causes some difficulty. The facts dealt with in this decision are somewhat similar to those that obtain in the present references. In that case, the assessee-company, which was a textile mill, replaced certain parts in a large number of looms. The parts which were so replaced consisted of a device for maintaining a certain tension. The original parts had become completely worn out. The parts newly fitted were of a different construction. It was also found that if parts similar to those that had been used in the past were to be fabricated, they not being available in the market, the cost would be disproportionately high. The newly fitted parts were of a different type and were superior to the old parts in their operational efficiency. The old parts had been in use for 60 years and the Tribunal disallowed the claim on the ground that since the expenditure on this head had not been incurred as and when the need arose but was incurred after a lapse of 60 years, it could no longer be regarded as current repairs. The learned judges found that the expenditure was in reality incurred only for the purpose of preserving or maintaining the asset and the long duration referred to was of no relevance in considering this aspect of the matter. It was nevertheless current repairs and the reference was answered in favor of the assessee. This decision would appear to be of considerable importance, for great similarity between the facts of this decision and the present cases will be noticed.
The Casablanca System, as it is called, consists of the replacement of certain roller stands and fluted rollers fitted with rubber aprons to the spinning machinery. It was found that the wear and tear of certain of the moving parts of the machinery was not uniform and periodically such parts had to be replaced. When it came to the question of replacing the worn out roller stands, the assessee found the old type of replacement parts not available in the market. The identical parts could not, therefore, be secured, and the Tribunal in the statement of the case also refers to the fact that wherever such parts were available, they were costlier than the parts produced by a different manufacturer, that is, the Casablanca company. Though, according to the manufacturers, the provision of these parts was referred as the Casablanca High Drafting System, it virtually amounted to nothing more than the replacement of certain parts, which, however, were a modified version of the older parts. The progress of textile technology necessarily discards old and unwieldy parts and seeks to replace them with lighter and more efficient parts. The departmental officials thought that the claims made by the manufacturer about the efficiency of these parts introduced a factor of new advantage to the business and for that reason took the view that a new and enduring asset had been brought into existence by the replacement of such parts. Actually, however, it was noticed that the average production even after fitting these parts was not higher than when the machinery was worked with the old parts. Whether a new asset is brought into existence or a new advantage is derived is a question of fact and upon the material the Tribunal decided in the negative. Even apart from that, general considerations would also show that the replacement of worn out parts does not by itself bring a new asset into existence. The replaced part may be new and may be a new asset; but in having regard to the nature of the expenditure, one should consider the productive unit as a whole and not pick out parts therein which are new. If such a view is taken, then even replacement of parts which are really in the nature of current repairs can be held to be not eligible for the allowance under section 10(2)(v), for as the part is undoubtedly new, it is a new asset and because of its newness it confers some advantage. That does not appear to be the correct view to take.
An illuminating decision is that of the House of Lords in Hinton v. Maden and Ireland Limited. In that case, a shoe manufacturing company incurred certain expenditure on knives and lasts. The question arose whether it was capital or revenue expenditure. Lord Reid observed :
'..... I accept the position that this expression capital expenditure must be considered as an ordinary expression in untechnical English. So treating it, my first inquiry would be : what would a reasonable businessman understand by the expression, and would be regard this expenditure as capital expenditure or not ?'
After observing that the expressions 'capital expenditure' and 'revenue expenditure' were incapable of exact definition, the learned Lord said that the whole circumstances should be looked at in order to find out in which class the expenditure falls. Lord Keith in this judgment dealt with the matter thus :
'I have come to the view that in this case the expenditure on replacement should properly be treated as revenue expenditure... we are told that the average life of an upper knife is twelve months. The limit of life for sole knives and lasts would appear, with possible exceptions, to average three years. The company itself in its own accounts treated its whole stock of knives and lasts as having a life of only two years and wrote off the total cost in two years. In my opinion, it is quite unreal to regard constantly recurring expenditure on such articles, having so short a life, as capital expenditure. It can hardly be said to be expenditure on assets of an enduring nature.'
Lord Denning instanced several cases. He observed :
'Suppose a firm of builders has a carpenters shop fitted with wood-working machines but also hand saws and chisels for the men to use. The initial cost of the machines and the tools is capital expenditure. The machines have a long life and the cost of renewing them is a capital expenditure. But the tools have a short life and the cost of renewing them is revenue expenditure.'
This observation indicates that where only a replaceable part of a composite piece of machinery is renewed, such part having a comparatively lesser lease of life than the machinery itself, it would be reasonable to regard the cost of such renewal as revenue expenditure.
In Corera v. Commissioner of Income-tax, to which one of us was a party, the case of repairs of considerable value to certain cargo boats was considered. It was pointed out that merely because a large sum was involved, it could not lead to the conclusion that it was a reconstruction. The nature of the expenditure must be viewed as a whole in order to see whether the repairs effected only restored the machinery to its original condition or whether by reason of the repairs any additional advantage or features which improved its income-earning capacity were introduced.
A decision which even more clearly emphasises these points of view is Commissioner of Income-tax v. Sri Rama Sugar Mills Ltd. In that case, the assessee had in its factory three boilers; one of the boilers had deteriorated in its efficiency and it was replaced by a new boiler. The considerable expenditure involved was accepted by the Appellate Tribunal as revenue expenditure, but the department contested the position. On a reference, Satyanarayana Rao J. pointed out that where only a restoration of subsidiary parts is involved, even if such parts are renewed, it amounts to nothing more than repair. But if it is a reconstruction of the entirely or substantially the whole of the subject-matter, then it is not a repairs, that is to say, the machinery has to be looked at as a whole and it has to be examined whether the replacement is in substance a reconstruction of the entirety of the machinery. Though the boiler in that case was a wholly new unit, yet it was only a subsidiary part of the entity of the machinery used for the purpose of the manufacture. The machinery was accordingly only brought to its original condition, though by the renewal of a major part thereof.
Mr. Ranganathan, learned counsel for the department, has referred to Nagpur Electric Light and Power Co. Ltd., v. Commissioner of Income-tax. In that case the assessee-company had incurred expenditure for replacing the consumers fans and motors and renewal of the service lines consequent on the change from direct current to alternating current system of supply and the claim was made that it was revenue expenditure. The decision to that case was that it was capital expenditure, for a change of system was involved. The change of system rendered useless the fans and motors that previously existed. As a condition of the renewal of the license to the company, the company, the company had to replace the fans and motors of the consumers at the cost of the company. The expenditure was necessary in order that the company should carry out the change from one system to the other. The learned judges took the view that it was accordingly capital expenditure.
Mr. Ranganathans main reliance upon this decision is that in the present cases also a change of system of spinning yarn has been introduced. He really relies upon the name that has been given to these parts by the manufacturers as the Casablanca High Drafting System as if the mode of spinning yarn by the use of these replaced parts is totally different from what obtained previously. On the facts, however, except for the name, there is no change of system in the method of spinning and that is the conclusion which the Tribunal has reached, and rightly, in our opinion. The parts that were replaced perform precisely the same functions as the old parts, though the manufacturers claim that there was added efficiency. A new part must always have a higher degree of efficiency than an old and worn out part and the manufacturers advertising slogans alone cannot justify any claim that an added advantage has been derived by the use of these new parts. Mr. Ranganathan again refers to Sitalpur Sugar Works Ltd. v. Commissioner of Income-tax. That was a case however where an entire factory was dismantled and refitted of a better site, and the question arose as to the nature of the expenditure involved thereby. Even on the facts, it is obvious that the shifting of the site of the factory was with a view to run the concern with greater advantage t o the trade and their Lordships of the Supreme Court held that that expenditure was capital expenditure. We are unable to derive any assistance from this decision for the present purpose.
On the facts, the following have been found by the Tribunal. The Income-tax Officer in his remand report stated that by the fitting of the Casablanca roller stands and fluted rollers there was considerably less breakage of the yarn than on the other frames. There was accordingly less wastage and more production. He claimed that the literature of the company with regard to these parts showed that the system was highly efficient and capable of easy manipulation, and relying on the literature on the subject, which appears to be nothing more than the manufacturers advertisement extrolling their product, he thought that higher efficiency was guaranteed by this system and, therefore, an assets of an enduring nature had been brought into existence. The Tribunal pointed out that the only substantial difference between this system and the old system was that the roller stands in the new system were placed at a slight inclination with the additional use of a leather apron attached to the roller stands. The claim to increased efficiency was no doubt put forward by the manufacturers. But the Tribunal pointed out that even assuming that there was some improvement in the component parts and the improvement of these parts was boosted by the manufacturers, it did not necessarily follow that any enduring advantage or a new asset had been brought into existence. The need for going in for these Casablanca parts arose, for the old parts were no longer available. That statement was accepted by the Tribunal and was not contradicted by the department. The result was that only the original asset was held to have been preserved and maintained. As we said, on a question of fact, the Tribunal found that the fitting of these minor parts had no effect upon the machinery as a whole. In a reference under section 66 of the Act, we are bound by this decision on a question of fact.
It follows therefore that, in so far as the expenditure incurred by the different assessee by the replacement of parts by the Casablanca High Drafting System is concerned, that expenditure is undoubtedly of a revenue nature. The relevant questions will be answered in the affirmative.
The second question in T.C. No. 178 of 1961, which relates to the disallowance of the expenditure of Rs. 45,000 has to be answered against the assessee. It is not disputed that this expenditure was incurred in fitting new windows to the factory building. It was done under the instructions of the Factories Inspector. We fail to see how such expenditure, which involves the reconstruction of the building itself can be regarded as an expenditure incurred for the maintenance of the capital asset. On the other hand, this alteration to the building was obviously directed in the interests of the workers employed and must manifestly result in a benefit of an enduring kind for the business. That this is a capital expenditure seems to be beyond dispute. In fact, learned counsel rightly refrained from pressing this matter.
One question of some importance arises in T.C. No. 157 of 1961. It is necessary to restate the position, for it involves the determination of the extent of jurisdiction of the Tribunal. In this case, up to the stage of the appeal to the Appellate Assistant Commissioner, the matter proceeded on the basis that the replacement constituted new plant and machinery in respect of which development relate and extra depreciation should be granted.
The claims on the heads were only to the extent of Rs. 23,304 and Rs. 1,554 respectively which were disallowed by the Income-tax Officer, and it was only that disallowance that was canvassed before the Appellate Assistant Commissioner, who found that the expenditure, which was of a capital nature, was occasioned by modifications to the existing old machinery and that the claim on account of development relate and extra depreciation could not be allowed in such a case. In the further appeal to the Tribunal, it was contended that the sums claimed as allowances were in respect of the expenditure of Rs. 93,000 incurred as capital for installing new machinery. An alternative claim was put forward that the entirety of the expenditure of Rs. 93,000 should be allowed as revenue expenditure. That was not the question which had been raised either before the Income-tax Officer or before the Appellate Assistant Commissioner. But the Tribunal accepted the contention that the entire sum of Rs. 93,000 constituted revenue expenditure. Even assuming that it could reach that conclusion, the question would still arise whether, since the allowance claimed before the Appellate Assistant Commissioner was only in the sums of Rs. 23,304 and Rs. 1,554 the Tribunal was competent to grant allowance of a much larger sum that what was claimed. It is that question that has to be considered.
In the statement of the case, the Tribunal observes that the department had sufficient notice of the ground of appeal by which deduction of the whole amount of Rs. 93,000 was claimed and that the department had taken no objection against the admission of such a ground. That does not however deal with the question whether the Tribunal had jurisdiction to make an allowance of more than what was the subject-matter of the appeal before the lower appellate authority.
The appellate powers of the Appellate Tribunal are set down in section 33 of the Indian Income-tax Act. An order made by the Appellate Assistant Commissioner under section 31 of the Act may be appealed from. The powers of the Appellate Tribunal are specified in section 33(4), which reads thus :
'The Appellate Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit, and shall communicate any such orders to the assessee and to the Commissioner.'
It has been stated that one of the grounds of appeal taken before the Tribunal was that the Appellate Assistant Commissioner should have held that alternatively the appellants were entitled to the deduction of the whole amount of Rs. 93,000 as revenue expenditure. Apart from the department having had sufficient notice of the ground and no objection being taken before the Appellate Tribunal to an examination of the merits of the claim on that basis, it is seen that the Appellate Tribunal, in order to decide satisfactorily the points before it, actually inspected the spinning mill and studied the working of the machinery and the part which the materials referred to as the Casablanca High Drafting System played in the process of yarn spinning. That the Appellate Tribunal is entitled to investigate questions of fact would appear to be beyond dispute, for it is a court both of fact and of law. Indeed, when the Appellate Assistant Commissioner came to hold that it was not a case of installation of any new machinery but of replacement of certain parts, though in a modified form, the question obviously arose whether the expenditure involved was capital or revenue. For reasons that he gave, the Appellate Assistant Commissioner was of the opinion that the expenditure was of a capital nature. That decision has inherent in it the denial of the claim that the expenditure could come under the head of revenue expenditure. When the specific ground was taken by the assessee that the entirety of the expenditure should be regarded as revenue expenditure in the circumstances of the case and when it cannot be denied that the Appellate Tribunal has the power to take additional evidence with regard to the matter, it is difficult to see how the Appellate Tribunal can have no jurisdiction to determine a question of fact, the question of fact being the nature of the alterations said to have been effected in the mills. It is only in an appreciation of these facts that any inference as to the capital or revenue nature of the expenditure could be drawn. The mere fact that before the Appellate Assistant Commissioner the claim of the assessee was not put in that form does not appear to us to dissent title the Appellate Tribunal from reaching the correct conclusion with regard to the matter.
Our attention has been drawn to a decision of the Privy Council in Ram Chandra Bunji Dev v. Secretary of State for India. In a suit by a zamindar for possession of jagir lands held by a paik whom he had dismissed, the findings of the lower courts were that the paik was a private servant of the zamindar and not one whom by his kabuliath the zamindar had no power to dismiss. When the matter came in second appeal to the High Court, it was contended for the first time that the jagir was for the purpose of maintaining some police officer appointed by the Government. The High Court held that this was the real issue to be tried and remitted the matter for rehearing. The Judicial Committee found that the zamindar relied only upon the kabuliath. In support of his kabuliath, the High Court found no reason to differ from the subordinate tribunals. The High Court could allow the appeal only on grounds of law and as the High Court had agreed with the courts below on the construction of the kabuliath no other question of law could arise. The kabuliath contained no reference to any lands having been charged with police duties. If the issue had been properly raised by pleadings, the onus would have been upon the zamindar to establish that fact. Their Lordships accordingly had no difficulty in reaching the conclusion that the High Court could not in the exercise of its jurisdiction as the second appellate court permit a new issue to be raised.
The analogy of this decision has been pressed before us as disentitling the Appellate Tribunal from holding that the entire sum of Rs. 93,000 was revenue expenditure. It is pointed out that the allowance, though claimed under different heads, was limited to a sum of about Rs. 23,000 and that even if the Tribunal could lawfully reach the conclusion that the expenditure was of a revenue nature, its finding could give relief to the assessee only to this extent of Rs. 23,000. We are not convinced that the principle which governs the jurisdiction of a second appellate court under the Civil Procedure Code can properly be applied to the proceedings before the Income-tax Appellate Tribunal. It is true that the Appellate Tribunal is also a court of second appeal. But its jurisdiction is not limited in the same manner as the High Court sitting in second appeal. When the Appellate Tribunal has the jurisdiction to investigate and adjudicate upon questions of fact and where, as we have pointed out, the refusal of the relief by the Appellate Assistant Commissioner on the basis that the expenditure was of a capital nature involved a finding that it was not of a revenue nature, the Appellate Tribunal could with propriety reverse that decision. When once it came to the conclusion that the expenditure was of a revenue nature, the entirety of the expenditure has under law to be allowed as an allowance and it does not depend upon the claim to any particular amount being made by the assessee. In this view, therefore, we would hold that the Tribunal had jurisdiction and answer the question accordingly.
In the result, except for the question relating to the expenditure of Rs. 45,000 relevant to T.C. No. 178 of 1961, the other questions are answered in favour of the assessees. The assessees will be entitled to their costs Counsels fee Rs. 100 in each case.