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Issues Involved:
1. Whether the expenditure of Rs. 86,496 incurred in the purchase, erection, and fitting of a new boiler for replacing the old one was capital expenditure within the meaning of Section 10(2)(xv) of the Indian Income-tax Act, 1922. Issue-wise Detailed Analysis: 1. Nature of Expenditure: Capital or Revenue The primary issue revolves around determining whether the expenditure incurred by the assessee company for purchasing, erecting, and fitting a new boiler to replace an old one should be classified as capital expenditure or revenue expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922. The assessee company argued that the expenditure was a revenue expenditure, claiming that the new boiler was merely a replacement of the old one, having the same pressure and performing the same work. The Income-tax Officer and the Appellate Assistant Commissioner disallowed the claim, treating it as capital expenditure. However, the Appellate Tribunal reversed this decision, accepting the assessee's contention that the expenditure was for replacing a part of the machinery used in sugar manufacturing, not for creating a new asset or improving the existing one. 2. Legal Framework and Principles The judgment delves into the legal principles and tests for distinguishing between capital and revenue expenditure. The scheme under the Indian Act, particularly Section 10, enumerates permissible deductions for computing business profits. Clause (xv) allows deductions for expenditures laid out wholly and exclusively for business purposes, provided they are not capital expenditures. The judgment references English law and principles, noting that under the English Act, expenditures are deductible if not expressly prohibited by statute or if they align with ordinary principles of commercial accountancy. The decision in "British Insulated and Helsby Cables Limited v. Atherton" is cited, which establishes that expenditures made to bring into existence an asset or advantage for the enduring benefit of a trade should be treated as capital expenditures. 3. Analysis of Relevant Case Law The judgment extensively analyzes case law to elucidate the distinction between capital and revenue expenditure. Buckley, L.J.'s opinion in "Lurcott v. Wakely and Wheeler" is highlighted, defining "repair" as restoration by renewal or replacement of subsidiary parts of a whole. The Privy Council's decision in "Rhodesia Railways Ltd. v. Income-tax Collector, Bechuanaland" is also discussed, where the replacement of railway tracks was treated as revenue expenditure because it merely restored the track to its original condition without creating a new asset or improving the existing one. 4. Application of Principles to the Present Case Applying these principles, the judgment concludes that the expenditure in question was for replacing an old boiler with a new one of the same capacity and function. It did not result in creating a new asset or improving the existing one. Therefore, the expenditure should be classified as revenue expenditure. The judgment also addresses the argument that the boiler should be treated as a separate unit, analogous to the reservoir in "Margrett v. Lowestoft Water and Gas Company." However, it rejects this analogy, emphasizing that the boiler was part of the machinery used for sugar manufacturing and not a separate unit. 5. Conclusion The judgment concludes that the expenditure incurred by the assessee company for replacing the old boiler with a new one was a revenue expenditure deductible under Section 10(2)(xv) of the Indian Income-tax Act, 1922. The Appellate Tribunal's decision to allow the deduction was upheld, and the reference was answered in the negative, against the Commissioner of Income-tax. Separate Judgments: - SATYANARAYANA RAO, J.: Concurred with the Tribunal's view, emphasizing the principles of commercial accountancy and the nature of repairs versus replacements. - RAGHAVA RAO, J.: Dissented, arguing that the replacement of the boiler constituted a capital expenditure, as it resulted in a substantial extension of the machinery's serviceableness and created an asset of lasting advantage to the company. Final Decision: Due to the difference of opinion, SATYANARAYANA RAO, J.'s judgment prevailed under Section 98, Civil Procedure Code, read with Section 66A of the Income-tax Act, resulting in the reference being answered in favor of the assessee.
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