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Issues Involved:
1. 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. Detailed Analysis: Issue 1: Nature of Expenditure - Revenue or Capital Relevant Facts: The assessee firm, engaged in publishing a daily newspaper, incurred Rs. 22,799/- in the purchase of types for the printing machine in the first year of its business. The Income Tax Officer allowed Rs. 1,058/- of this amount, leaving a disputed balance of Rs. 21,741/-. Contentions: - The Income Tax Officer classified the expenditure as capital, arguing that the types formed part of the printing machinery and were initial expenses. - The Assistant Appellate Commissioner disagreed, stating that types are not integral parts of the machinery but consumable items necessary for its operation. - The Tribunal upheld the Income Tax Officer's view, treating the expenditure as capital since it was incurred in the first year of business. Legal Principles: The distinction between capital and revenue expenditure is nuanced and fact-specific. Several judicial precedents provide broad tests: - Bowen L.J. (City of London Contract Corporation v. Styles): Expenditure for acquiring a concern is capital, while expenditure for running it is revenue. - Lord Dunedin (Vallambrosa Rubber Co., Ltd. v. Farmer): Capital expenditure is spent once and for all; revenue expenditure recurs annually. - Rowlatt J. (Ounsworth v. Vickers, Ltd): The test is whether the expenditure meets a continuous demand or is a one-time outlay. - Viscount Cave, L.C. (Atherton v. British Insulated and Helsby, Cables, Ltd.): Expenditure bringing an enduring benefit is capital. - Lord Haldane (John Smith & Son v. Moore): Differentiates between fixed and circulating capital. Supreme Court's View: In Assam Bengal Cement Co. Ltd. v. Commr of I.T. West Bengal, the Supreme Court synthesized the principles: 1. Outlay for initiating or extending a business, or substantial equipment replacement, is capital. 2. Expenditure bringing an enduring benefit is capital. 3. The aim and object of the expenditure determine its nature. Application to Current Case: - Types as Non-Integral Parts: While types are not integral to the printing machine, they are essential for its operation. - Replacement and Durability: Types require frequent replacement, but this does not automatically classify the expenditure as revenue. Replacement also applies to machinery parts. - Aim and Object: The expenditure aimed at acquiring an instrument for profit-making, not merely running the business. Conclusion: The expenditure on types, though necessary for the machine's operation, was for acquiring an instrument to earn profits, not a recurring operational expense. Thus, it is capital expenditure. Judgment: The Tribunal's decision to disallow the expenditure as a revenue expense was upheld. The expenditure was deemed capital in nature, incurred for acquiring an apparatus essential for profit-making, rather than for the continuous operation of the business. Final Answer: The question was answered in the negative, affirming that the expenditure was not allowable as a revenue deduction. The assessee firm was ordered to pay the costs of the reference to the Commissioner.
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