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TMI Blog1958 (6) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the case the disallowance of the expenditure as capital in nature was justified in law and (2) whether on the facts and in the circumstances of the case the Tribunal was justified in making presumption on facts and holding that the expenditure was capital in nature unless proved to be otherwise. Only one question had to be referred in pursuance of Original Petition No. 229 of 1955, i.e., in respect of the assessment of 1950-51, and that is whether on the facts and circumstances of the case the disallowance of the expenditure as capital in nature was justified in law. After hearing counsel for both sides we consider that only question No.(1) relating to the assessment to 1951-52 and the question relating to the assessment 1950-51 need be answered in this case. The said two questions are practically the same and we are dealing only with that question in this judgment. 2. The assessee was a lessee of the Government of Cochin for a salt factory which is situated in Malipuram and which was originally started by the said Government. An area of 200 acres was set apart by the Government for this factory and a portion of it was also worked by the Government for some time. They had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. Both the assessee and the Department filed appeals before the Appellant Tribunal against the order of the Appellate Assistant Commissioner, and the Appellate Tribunal cancelled the Appellate Assistant Commissioner's orders and allowed the Department's appeal. Since the Appellate Tribunal also dismissed the assessee's application s for the reference to this court under section 66(2) he filed O.P. Nos. 228 and 229 of 1955 in this court and obtained orders requiring the Appellate Tribunal to make the reference. 3. During the first ten months of year 1124 the assessee had worked only the plot of 20 acres which was first taken up by him and which had been worked also by the Government till 1124, and during the last two months, of 1124 he had worked both that plot and the plot of 15 acres. Since there were no separate accounts in 1124 for these two plots and both capital and revenue expenditure had been incurred during those two months for the plot of 15 acres, before us the assessee claimed only ₹ 51,499-7-6 as revenue expenditure for 1950-51 that being the revenue expenditure he incurred during the first ten months of that year in respect of the original plot of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d lease. There is, however, no evidence that such capital equipment so put up was adequate for the full exploitation of the area. Thus it is clear that the Income-tax authorities considered that the capital works made by the Government were not in existence and had been destroyed, and that the assessee had, therefore, to make a fresh capital outlay and so the amount claimed as revenue expenditure must really have been capital expenditure. In arriving at this conclusion the Income-tax Officer and the Appellate Assistant Commissioner say definitely that they were being guided by information obtained from other sources which, according to the Appellate Assistant Commissioner, was Government source. In the extract given above from the Appellate Assistant Commissioner's order it is expressly stated that this definite information was obtained by the Income-tax Officer from the concerned departmental authority. When the assessee realised from the orders of the Income-tax Officer and the Appellate Assistant Commissioner that evidence received behind his back had been made use of for making the assessment, he applied to the Inspecting Assistant Commissioner for making available to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed a reply from them on October 2, 1951, informing him: Till the leasing out of the site in 1124, Government had spent about ₹ 63,000 for experiment works and partial lay-out. The factory was laying idle for about four years preceding the leasing and the Salt Officer says very little remained out of the original work done by the Government at that time. It was on the basis of this letter that the Income-tax Officer said in his order: I understand very little remained out of the original work done by the Government at that time. Therefore, we fail to understand how he could have said in his reply to the assessee's application: It is not clear as to what the assessee is referring to . After the assessee got the Income-tax Officer's reply he wrote again to the Income-tax Officer saying: In the appellate order passed in I.T.A. 32/53-54 Ernakulam, dated 24th May, 1954 the Appellate Assistant Commissioner observes as follows: This experimental work had however been given up by the Government about four years prior to the lease after spending about ₹ 63,000 for such work and 'partial lay-out' and 'very little remained out of the orig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee to be items of revenue expenditure. This attack has been made mainly by the Appellate Tribunal We may say in this connection that the accounts are kept in the Malayalam language and from an order of the same Tribunal with which we had to deal a couple of days back in Income-tax Reference No. 6 of 1957 we understand that the members of the Tribunal do not know Malayalam and are not in a position to go through accounts, kept in the Malayalam language. Therefore, we cannot ascribe much significance to the criticisms of the Tribunal against the accounts. Both of us Malayalees and we have gone through the account books ourselves and we find that the criticism made by the Tribunal are unjustifiable. The Appellate Tribunal says in its order: It is the duty of the assessee to keep the books of accounts in such a manner as to show clearly the character of each payment from day to day, or reverse. The assessee, we may say, has signally failed to do so. The books maintained are scrappy and the day to day disbursements contain hardly any details which would help allocation. The allocation carried out in the books and in the various statements filed by him before the Depart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e operations. The Income-tax Officer's point is not that any part of the claim is false or fictitious. His only difficulty appears to have been that with so much of expenditure a much larger quantity of salt must have been manufactured and that the entire production might not have been brought to account. His inference that the that the entire factory was not fully developed is correct since it was only on 6 acres of area that salt was manufactured in the year 1124 and on perhaps double this area in 1125 out of the total area of 200 acres of the factory. Salt is not a commodity which can be manufactured and sold in secret since there are numerous rules and regulations governing its manufacture and sale subject to constant supervision by the Excise authorities. The Income-tax Officer's fear that the appellant might not have accounted for the entire production of salt is therefore baseless. When there is no dispute as to the correctness of the expenditure debited in the accounts the only point to be decided is whether the expenditure claimed is of the nature of revenue or capital. On a close scrutiny of the combined maintenance and manufacturing expenses account kept by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ressly sought for such an opportunity when he came to know of the use of the improper evidence. Dealing with a case in which use had been made of improper evidence the Supreme Court has said in Dhirajlal Girdharilal v. Commissioner of Income-tax [1954] 26 I.T.R. 736 at 740: It is well established that when a court of fact acts on material, partly relevant and partly irrelevant, it is impossible to say to what extent the mind of the court was affected by the irrelevant material used by it in arriving at is finding. Such a finding is vitiated because of the use of inadmissible material. In this case, it is absolutely clear that the Income-tax authorities have been influenced greatly by the letter from the Excise Department brought on record without the knowledge of the assessee and without giving him an opportunity to controvert and disprove the statement of fact contained in it. The prejudice caused to the assessee by this act is very great, for there are reasons to consider, from the terms of the lease, that the original works constructed by the Government could not have been destroyed to any appreciable extent. We have already referred to the provision in the lease deed ..... 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