- (1.) THE following question of law has been referred for the opinion of this Court by the Income -tax Appellate Tribunal, 1058/Chd/1987, for the asst. yr. 1979 -80 : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing expenditure of Rs. 73,180 shown by the assessee in the machinery repairs account as revenue expenditure though this related to the cost of motors and other items resulting in an enduring benefit to the assessee and was in the nature of capital expenditure -
(2.) THE assessee claimed expenditure of Rs. 73,180 on purchase of motors and certain other items of machinery. The AO rejected the claim for treating the said amount as revenue expenditure on the ground that the items purchased by the said amount were not spare parts but independent items and the said amount had, thus, to be treated as capital expenditure. On appeal, the plea of the assessee that most of the items purchased were electric motors for replacement of existing machinery, was upheld. The Tribunal affirmed the said order and held that occasional replacements were necessary having regard to the machinery installed.
(3.) WE have heard learned counsel for the parties and perused the record. The test for determining whether an expenditure is revenue or capital, was laid down by the Hon'ble Supreme Court in Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC) in the following words (p. 43) : "It is not easy to define the term 'capital expenditure' in the abstract or to lay down any general and satisfactory test to discriminate between a capital and a revenue expenditure. Nor is it easy to reconcile all the decisions that were cited before us for each case has been decided on its peculiar facts. Some broad principles can, however, be deduced from what the learned Judges have laid down from time to time. They are as follows : 1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment : vide Lord Sands in CITs of Inland Revenue vs. Granite City Steamship Company Ltd. (1927) 13 TC 1 (CS), at p. 14. In City of London Contract Corporation Ltd. vs. Styles (Surveyor of Taxes) (1887) 2 TC 239 (CA) at p. 243, Bowen L.J. observed as to the capital expenditure as follows : 'You do not use it 'for the purpose of' your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern.' 2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade : vide Viscount Cave, L.C., in Atherton (H.M. Inspector of Taxes) vs. British Insulated and Helsby Cables Ltd. (1925) 10 TC 155 (HL). If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. Thus, if labour saving machinery was acquired, the cost of such acquisition cannot be deducted out of the profits by claiming that it relieves the annual labour bill, the business has acquired a new asset, that is, machinery. The expressions 'enduring benefit' or 'of a permanent character' were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset. 3. Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it." ;