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TMI Blog1954 (4) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) Do. (directly purchased) ₹ 1,214 (c) do. Out of Salary Bills ₹ 785 (d) do. Wages Bills ₹ 2,688 ₹ 7,504 In its books of account the company treated the service connection receipt amounting to ₹ 8,674 as revenue receipt and included this amount in its total return of income which was ₹ 2,52,728. The company treated however the amount of ₹ 7,504 which was spent on the service connection as capital expenditure. The company consequently claimed depreciation on the amount of ₹ 7,504 which had been spent on the service connection. In the course of assessment proceeding Income-tax Officer refused to accept the company's claim that the amount of ₹ 8,674 should be treated as capital receipt and not as revenue receipt. The Income-tax Officer considered that the amount of ₹ 8,674 should be treated as revenue receipt and was liable to be taxed in the hands of the assessee. The Income-tax Officer howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the expenditure incurred on the service connection did not bring into existence an asset or an advantage of lasting character. Counsel also made the submission that the Appellate Tribunal misdirected themselves in law in holding that the decision of the Bombay High Court in Poona Electric Supply Company's case (supra) was not applicable to the present case. In my opinion the argument of Mr. Dutt must be accepted as correct and the Appellate Tribunal had no justification for holding that the decision of the Bombay High Court in Poona Electric Supply Company's case (supra) was distinguishable. The Tribunal observed that in the Bombay case the contribution made by the Government was for the purpose of extending the mains, but in the present case the contribution made by the consumer was for the purpose of installation of service line. The Tribunal also said that the utility of service connection was confined to a particular consumer and if for any reason service was disconnected the wires and other materials used for installing the service connection have no recovery value. I do not think these considerations have any bearing on the question as to whether the expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion) for treating such an expenditure as properly attributable not to revenue but to capital. It is true that the period for which the service connection would last will be about 10 years or thereabouts. But that does not mean that the asset which is brought into existence is not of an enduring benefit to the business . In my opinion the service connection which has been installed by the assessee in this case has enough durability to justify its being treated as a capital asset. To put it differently, the service connection which has been installed by the assessee must be regarded as reaching the dignity of capital asset and expenditure on the creation of this asset must be treated as a capital expenditure and not an expenditure from revenue. This view is in accordance with the principle laid down by the Court of Appeal in Henriksen v. Grafton Hotel, Ltd. [1941-42] 24 Tax Cas. 45. In that case the respondent company was the tenant of a fully licensed hotel, the lease providing that the tenant should pay all charges imposed in respect of the licenses by virtue of the Licensing (Consolidation) Act, 1910. On the renewal of the license in March, 1934, and in March, 1937, sums in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice connection was a capital receipt in the hands of the company. The argument was that the money paid towards the recoupment of the expenditure of capital asset must be treated as a capital receipt. In my opinion the argument must be accepted as correct. It is true in the books of account the assessee company has treated the receipt from the consumers for installing service connection as revenue receipt. But the company was bound to adopt this method of accounting since rule 32, read with Annexure V, required that receipts from the consumers for service connection should be shown as revenue receipt. This mode of accounting is not however binding upon this court or upon the Income-tax authorities. In determining the question whether the receipt is of a capital nature or of income nature we have got to look to the substance of the matter and we have to examine what is the true effect and character of the payment made by the consumers. The amount, was paid by the consumers as required by para 6 of the Schedule to the Indian Electricity. Act. Paragraph 6 states that the licensee is bound to comply with the requisition of an owner or an occupier of a house for supply of electricity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y than it was put by Mr. Hills when he said : Was this a trade receipt ?', and my answer is most unhesitatingly : No. It appears to me that it was nothing whatever of the kind. It was a grant which was made by a government department with the idea that by its use men might be kept in employment, and it was paid to and received by the Dock Company without any special allocation to any particular part of their property, either capital or revenue, and was simply to enable them to carry out the work upon which they were engaged, with the idea that by so doing people might be employed. I find myself quite unable to see that it was a trade receipt, or that it bore any resemblance to a trade receipt. It appears to me to have been simply a grant made by the Government for the purposes which I have mentioned, and in those circumstances cannot be included in revenue for the purposes of tax. The same view has been taken by the English Court of Appeal in another case, Boyce v. Whitwick Colliery Company, Ltd. [1934] Tax Cas. 655. In that case a colliery company and an Urban District Council had entered into, an agreement for the supply of surplus water from the company' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nery for the purpose and the District Council had agreed that, in consideration of their so doing, the Council would repay to the colliery company, by thirty yearly instalments, the cost to which the colliery company had been thereby put, I cannot conceive that anyone could contend successfully that the sums so paid by the District Council to the colliery company were liable to income-tax, even though, at the end of the thirty years, the buildings and plant, which presumably by that time would not be worth very much, should, remain the property of the colliery company. A taxpayer can make a capital expenditure upon the land of a third party; it is, none the less, a capital expenditure even if it is upon the land of a third party and not upon his own land. Applying the principle of these authorities to the present case I am clearly of opinion that the payment of ₹ 8,674 on account of the cost of service connection is a capital receipt in the hands of the assessee company, and ought not to be included in the company's income for the assessment year 1947-48. An argument was advanced by Mr. R. J. Bahadur that the question whether a certain item of receipt is of a capital ..... X X X X Extracts X X X X X X X X Extracts X X X X
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