1963 (4) TMI 63 - SC - Income Tax

Whether the expenditure of Rs. 3,19,766 incurred by the assessee in dismantling and shifting the factory from Sitalpur and erecting the factory and fitting the machinery at Garaul was expenditure of a capital nature and not revenue expenditure within the meaning of section 10(2)(xv) of the Income-tax Act ? Whether the assessee was entitled to claim depreciation on the said expenditure of Rs. 3,19,766 ? Held that - Appeal dismissed. The expenses for shifting and re-erection were incurred on capital account & the appellant cannot claim depreciation on the amount spent for acquiring an advantage. The questions referred was clearly correctly answered by the High Court in negative.

Summary

Issues:
1. Nature of expenditure incurred for dismantling and shifting the factory.
2. Entitlement to claim depreciation on the expenditure incurred.

Analysis:

Issue 1: Nature of Expenditure
The case involved determining whether the expenditure of Rs. 3,19,766 incurred by the appellant for dismantling and shifting the factory from one location to another was of a capital or revenue nature under section 10(2)(xv) of the Income-tax Act. The Supreme Court held that the expenditure was capital in nature. The court relied on the principle that if an expenditure is made to bring into existence an asset or advantage for the enduring benefit of a trade, it should be treated as capital expenditure. The court cited the authority of Atherton v. British Insulated and Helsby Cables Ltd. and Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax to support its decision. The court emphasized that the expenditure resulted in a permanent improvement in the profit-making machinery, thus constituting capital expenditure.

Furthermore, the court rejected the argument that an expenditure must result in the acquisition of a material asset or right to be considered capital expenditure. It referenced the case of Granite Supply Association Ltd. v. Kitton to illustrate that enduring benefits for the business could still be considered capital expenditure even without acquiring a material asset. The court concluded that the expenditure in question was clearly incurred for an enduring advantage for the trade and was rightly categorized as capital expenditure.

Issue 2: Entitlement to Claim Depreciation
Regarding the claim for depreciation on the expenditure, the appellant contended that if the expenditure was considered capital in nature, depreciation should be allowed on it under section 10(2)(vi) of the Income-tax Act. However, the court held that no tangible asset had been acquired through the expenditure, making it ineligible for depreciation. The court dismissed the argument that depreciation should be allowed based on the Form of Return under the Act, clarifying that depreciation is only applicable to improvements in capital assets, not merely expenses incurred for trade advantages. Therefore, the claim for depreciation on the expenditure was denied.

In conclusion, the Supreme Court dismissed the appeal, upholding the High Court's decisions on both issues and ordering the appellant to bear the costs of the appeal.