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Petitioner: SIMBHOLI SUGAR MILLS LTD. VS Respondent: COMMISSIONER OF INCOME-TAX, U.P. & V.P.Honorable Justice BHARGAVAS. Dua Singh,Gopal Behari
1963 P T D 677
1963 P T D 677
[Allahabad India]
Before V. Bhargava and Jagdish Sahai, JJ
SIMBHOLI SUGAR MILLS LTD.
versus
COMMISSIONER OF INCOME‑TAX, U.P. & V.P.
I. T. Miscellaneous Case No. 73 of 1954, decided on 8th March 1961.
Income‑tax Act (XI of 1922), S. 10(2)(xv)‑Business expendi ture‑Sugar factory‑Expenses incurred in paying taxes under District Boards Act‑Contribution to school on account of charity‑Repairs -Amount spent to replace part of machinery sold‑"Repair", "Renewal", "Replacement"‑Appellate Tribunal‑Discretion to entertain new ground based on question of fact‑Interference.
The assessee was a limited company which was running a sugar factory within the area falling in the jurisdiction of the District Board of Meerut during the previous year relating to the assessment year 1950‑51. The company earned profits and during the previous year in question had to pay an amount of Rs. 2,000 as District Board tax. The assessee claimed that this amount of Rs. 2,000 should be deducted as an expenditure under sec tion 10(2)(xv) of the Income‑tax Act, 1922 but this claim was rejected by the Income‑tax Officer, the Appellate Assistant Commissioner as well as the Income‑tax Appellate Tribunal.
During the same previous year, the assessee contributed a sum of Rs. 800 to a school where the children of the assessee company's workers used to read and consequently the assessee claimed that this sum was also a deductible expenditure under section 10(2)(xv) of the Income‑tax Act. The Income‑tax Appellate Tribunal held that the school was not maintained by the assessee company and the contribution was purely in the nature of charity and consequently rejected the claim of the assessee in respect of this deduction.
The assessee during the previous year in question had sold a quadruple for a sum of Rs. 46,257. This amount was treated as income under section 10(2)(vii) of the Income‑tax Act by the Income‑tax authorities as well as by the Income‑tax Appellate Tribunal on the ground that the depreciated value of this part of the machinery was zero inasmuch as 100 per cent. depreciation had already been allowed in respect of it in the past. In the appeal before the Income‑tax Appellate Tribunal, the assessee raised one more additional point in respect of the addition of the sum of Rs. 46,254, namely, that the assessee had spent a sum of Rs. 1,98,000 to replace a part of the machinery which was sold for the sum of Rs. 46,257 and consequently this sum of Rs. 1,98,000 was admissible expenditure under section 10 (2) (xv) of the Income‑tax Act. The Tribunal held that this point was not raised either before the Income‑tax Officer or before the Appellate Assistant Commissioner and consequently the Tribunal refused to entertain this new ground. The question which arose for decision was whether the Tribunal's refusal to entertain the new ground was vitiated in law on the ground of being an improper exercise of the discretion vested in the Tribunal to permit or to refuse permission to raise a new ground which had not been taken before the Income‑tax Officer and the Appellate Assistant Com missioner;
Held, (i) the business of running the sugar factory was a trade and consequently, in order to carry on that trade the assessee had to pay the taxes which became payable under the District Boards Act. This was, therefore, an amount which was expended for the purpose of enabling the assessee to carry on the business of the sugar factory within the jurisdiction of the District Board of Meerut and such an expenditure was an expenditure laid out or expended wholly and exclusively for the purpose of the business.
The income on which tax is payable under the District Boards Act is income arrived at by pure guesswork without applying any principles for determining that estimated income. Such income cannot be said to be at all in the nature of profits and gains of the business mentioned in subsection (4) of section 10 of the Income‑tax Act.
Commissioner of Income‑tax v. Visweswardas Gokuldas (1946) 14I T R 110 applied.
Commissioner of Income‑tax v. King & Partridge (1926) A I R 1926 Mad. 368 not followed.
(ii) The contribution made to the school was purely in the nature of charity as it was an ex gratia payment being made by the company to assist a school without any obligations towards the school or towards its workers.
(iii) The question whether a replacement amounts merely to a repair or to an investment as a part of the capital utilised in purchasing the machinery which was required for earning the taxable profits, would depend upon the nature of the replacement, and this is a question of fact.
The Tribunal was justified in refusing to entertain a new question of fact which was not raised either before the Income‑tax officer or the Appellate Assistant Commissioner.
Renewal is a repair if it is only restoration by renewal or replacement of subsidiary parts of a whole. If, on the other hand, it amounts to a reconstruction of the entirety or of substantially the whole of the subject‑matter it is not a repair but a reconstruc tion. The test, therefore, which decides the question whether a thing is a "repair" or not is to see whether the act actually done is one which in substance is a replacement of defective parts or a replacement of the entirety or a substantial part of the subject‑matter.
Replacements can be of two different types. There can be replacements which amount to repair and there can also be replacements which cannot be treated as repair, and the expen diture would not be deductible under section 10(2)(xv) of the Income‑tax Act in the latter case.
Commissioner of Income‑tax and Excess Profits Tax v. Sri Rama Sugar Mills Ltd. (1952) 21 I T R 191 ; Morgan (Inspector of Taxes) v. Tate & Lyle Ltd. (1954) 26 I T R 195 (H L) and Strong & Co. of Ramsey Ltd. v. Wood field (1906) 5 Tax Cas. 215 (H L) ref.
STATEMENT OF CASE
By this application the assessee requires the Appellate Tribunal to refer to the High Court certain questions of law which are said to arise out of the Tribunal's order in 1. T. A. No. 3439 of 1952‑53. Inasmuch as, in our opinion, questions of law do arise out of the aforesaid order, we hereby draw up a statement of the case and refer it to the High Court of Judicature at Allahabad under section 66(1) of the Income‑tax Act, 1922.
2. The Simbholi Sugar Mills Ltd., Meerut, was assessed to income‑tax for the assessment year 1950‑51 in the status of a company. The assessee ran a sugar mill. It also did some con fectionary business. During the previous year the company paid an amount of Rs. 2,000 as district board tax. The assessee claimed that this amount of Rs. 2,000 should be allowed as an admissible expenditure under section 10(2)(xv) of the Income‑tax Act. The Income‑tax Officer disallowed the expenditure and his finding was confirmed both by the Appellate Assistant Commissioner and the Tribunal. Section 108 of the United Provinces District Boards Act, 1922 (X of 1922) runs as under;
"Board's power of taxation A Board
(a) shall, by notification in the Official Gazette impose a local rate under section 3 of the United Provinces Local Rates Act, 1914, as modified by this Act; and
(6) may continue a tax already imposed on persons assessed according to their circumstances and property (hereinafter refer red to as the `tax on circumstances and property' in accordance with section 114);
Provided that the tax on circumstances and property so imposed shall not be abolished or altered without the previous sanction of the Provincial Government."
The Tribunal held that the levy of district board tax depended upon the income of the assessee and was not, therefore, an admissible expenditure under section 10(2)(xv) of the Income‑tax Act. The order of the Tribunal forms part of the case and is Annexure "A".
3. During the previous year the assessee company made a contribution of Rs. 800 to a local school where the children of the company's workers used to read. The school was run not by the assessee company but was run by the District Board. The assessee company claimed an allowance of this expenditure. This claim was rejected by the Income‑tax Authorities and also by the Appellate Tribunal. The Tribunal held that as the school was not run by the assessee, the contribution of Rs. 800 was in the nature of charity and was not, therefore, admissible expenditure.
4. During the previous year the assessee company sold a quadruple for Rs. 46,257. The quadruple was replaced by a machinery costing Rs. 1,98,000. The assessee claimed before the Tribunal that this amount of Rs. 1,98,000 which was merely cost of replacement of machinery should be allowed as an admissible expenditure under section 10(2)(xv) of the Income‑tax Act. No claim in respect of this amount was preferred before the Income-tax Officer nor before the Appellate Assistant Commissioner. The Tribunal, therefore, refused to entertain this ground observ ing;
"This point was not raised either before the Income‑tax Officer nor before the Appellate Assistant Commissioner. We, therefore, refuse to entertain this new ground."
5. On these facts the following questions of law arise;
"(1) Whether on the facts and in the circumstances of this case and on a true interpretation of section 108 of the U. P. District Boards Act, 1922, the amount of Rs. 2,000 paid as district board tax is not an expenditure admissible under sec tion 10(2)(xv) of the Income‑tax Act?
(2) Whether on the facts and in the circumstances of this case the assessee's contribution of Rs. 800 to the local school is not an expenditure admissible under section 10(2)(xv) of the Income‑tax Act?
(3) Whether the Tribunal can refuse to entertain a ground of appeal when that ground was not raised before the Income-tax Officer nor before the Appellate Assistant Commissioner?"
6. The statement of the cnse was placed before the parties. The Commissioner of Income‑tax has no suggestion to make. The assessee admits the correctness of the facts stated in the statement of the case but merely wants an enlargement of para graph 3 of the aforesaid statement. On the facts and evidence on record the enlargement sought by the assessee is not permis sible. The statement is finalised.
S. Dua Singh for the Assessee.
Gopal Behari for the Commissioner.
JUDGMENT
BHARGAVA, J.‑The questions of law referred by the Income-tax Appellate Tribunal for our opinion are;
(1) "Whether on the facts and in the circumstances of this 94se and on a true interpretation of section 108 of the U. P. District Boards Act, 1922, the amount of Rs. 2,000 paid as District Board tax is not an expenditure admissible under section 10(2)(xv) of the Income‑tax Act?
(2) Whether on the facts and in the circumstances of this case the assessee's contribution of Rs. 800 to the local school is not an expenditure admissible under section 10(2)(xv) of the Income‑tax Act?
(3) Whether the Tribunal can refuse to entertain a ground of appeal when that ground was not raised before the Income-tax Officer nor before the Appellate Assistant Commissioner?"
The assessee is a limited company which was running a sugar factory within the area falling in the jurisdiction of the District Board of Meerut during the previous year relating to the assess ment year 1950‑51. The company earned profits and. during the previous year in question had to pay an amount of Rs. 2,000 as District Board tax. The assessee claimed that this amount of Rs. 2,000 should be deducted as an admissible expenditure under section 10(2)(xv) of the Income‑tax Act but this objection was rejected by the Income‑tax Officer, the Appellate Assistant Com missioner as well as the Income‑tax Appellate Tribunal. It is this decision which gave rise to the first question.
During the same previous year, the assessee contributed a sum of Rs. 800 to a school where the children of the assessee company's workers used to read and, consequently, the assessee claimed that this sum was also a deductible expenditure under section 10(2)(xv) of the Income‑tax Act. The Income‑tax Appellate Tribunal held that the school was not maintained by the assessee company and the contribution was purely in the nature of charity and, consequently, rejected the claim of the assessee in respect of this deduction. On these facts, the assessee sought reference to this Court of the second question.
The assessee during the previous year in question had sold a quadruple for a sum of Rs. 46,257. This amount was treated as income under section 10 (2)(vii) of the Income‑tax Act by the Income‑tax Authorities as well as by the Income‑tax Appellate Tribunal on the ground that the depreciated value of this part of the machinery was zero inasmuch as 100 per cent depreciation had already been allowed in respect of it in the past. The assess ment order indicates that the only point contested by the assessee in respect of this amount added to the income by the Income‑tax Officer was that the Income‑tax Officer was not entitled to add the whole of this amount treating the whole of it as profits. In the grounds of appeal before the Appellate Assistant Commissioner, the point taken was that the Income‑tax Officer had not properly appreciated the manner of calculating profitsun der section 10(2)(vii) of the Income‑tax Act on the disposal of the quadruple and, consequently, the finding arrived at by the Income‑tax Officer was not sustainable. There was another ground that in any case the entire sale proceeds could not in fact be held as assessable profits. These points which were urged before the Income‑tax Officer and the Appellate Assistant Commissioner were also taken before the Income‑tax Appellate Tribunal and the Tribunal rejected these grounds. There was an additional point before the Appellate Assistant Commissioner that the Income‑tax Officer had committed an error inasmuch as, when calculating the allowable depreciation, he had deducted the sum of Rs. 45.257 from the value of the machinery of which depreciation was being calculated. This error was set right by the Appellate Tribunal holding that since the depreciated value of this part of the machinery which was sold was held nil there was no justification for deducting this amount from the value of the machinery when calculating the depreciation. These points decided by the Appellate Tribunal are, however, not material for the third question referred but have been mentioned by us only to indicate in what manner the assessee had challenged the addition of this amount of Rs. 46,257 before the Income‑tax Officer and the Appellate Assistant Commissioner. In the appeal before the Income‑tax Appellate Tribunal, the assessee raised one more additional point in respect of the addition of this sum. The point raised was that the assessee had spent a sum of Rs. 1,98,000 to replace a part of the machinery which was sold for the sum of Rs. 46,257 and consequently this sum of Rs. 1,98,000 was admissible expenditure under section
10 (2) (xv) of the Income-tax Act. The Tribunal held that this point was not raised either before the Income‑tax Officer or before the Appellate Assistant Commissioner and consequently the Tribunal refused to entertain this new ground. It is on these facts that the Tribunal framed the third question mentioned above at the request of the assessee, It has appeared to us that the third question as framed by the Tribunal does not bring out properly the controversy which actually arose at the time of the hearing of the appeal before the Tribunal. It was at no stage contended even on behalf of the department before, the Tribunal that the Tribunal had no power to refuse to entertain a ground of appeal if that ground was not raised before the Income‑tax Officer and before the Appellate Assistant Commissioner. In fact the appellate order of the Tribunal from which we have mentioned the facts above shows that the Tribunal was itself clearly of the opinion that it had the power to entertain or refuse to entertain this new ground but it chose to refuse to entertain the new ground of attack for the reason that the assessee had not raised that ground before the Income‑tax Officer and the Appellate Assistant Commissioner. In such a case, therefore, the appropriate question which would arise out of the appellate order of the Tribunal is as to whe ther the Tribunal's refusal to entertain the new ground is vitiated in law on the ground of being an improper exercise of the discre tion vested in the Tribunal to permit or to refuse permission to raise a new ground which had not been taken before the Income-tax Officer and the Appellate Assistant Commissioner. Since this is the aspect in which the question of law properly arises we think that it will be advisable for us to answer the question in this form and not in the form in which it has been framed by the Income‑tax Appellate Tribunal even though the assessee made no application under section 66 (4) of the Income‑tax Act for the amendment of the question referred to us. In this light we asked learned counsel for the Income‑tax Department as well as learned counsel for the assessee whether a supplementary statement of the case would be necessary for the purpose of answering this question in this particular form and we were informed that no supplementary statement of the case is needed. Having gone through the statement of the case already received and the ap pellate order of the Tribunal as well as the orders of the Appellate Assistant Commissioner and the Income‑tax Officer, we agree that no further facts need be called for from the Tribunal for the purpose of answering the question in the modified form.
So far as the first question referred to us is concerned, it has been decided by the Income‑tax Appellate Tribunal against the assessee on only one single finding, viz., that the levy of the District Board tax depended upon the income of the assessee and, consequently, it was not admissible as an expenditure under the Indian Income‑tax Act. This form of answer given by the Income‑tax Appellate Tribunal indicates that the Tribunal pro ceeded on the assumption that this sum of Rs. 2,000 paid as tax to the District Board would be an expenditure of the nature mentioned in section 10 (2) (xv) of the Income‑tax Act because it would be only on that assumption that the question would arise of its not being allowed as a deductible expenditure on the ground of being dependent on income by applying the provisions of section 10 (4) of the Income‑tax Act. In answering this question, therefore, we consider that we are entitled to proceed on the basis that the Income‑tax Appellate Tribunal itself came to the finding that this amount of Rs. 2,000 paid as tax to, the District Board was an expenditure laid out or expended wholly and exclusively for the purpose of the business of the assessee company and was not an allowance of the nature described in any of the clauses (i) to (xiv) of section 10(2) of the Income‑tax Act. We have men tioned this aspect as, during the course of arguments on this question of law, Mr. Gopal Behari, learned counsel for the depart ment, urged that we should examine this question in detail and arrive at a finding that this sum of Rs. 2,000 paid as tax to the District Board was not an expenditure laid out or expended wholly and exclusively for the purpose of the business of the assessee. In view of the finding recorded by the Tribunal we are of the opinion that the question in this form does not arise out of the appellate order of the Tribunal and it will be beyond the scope of this reference for us to go into this aspect of this question. We may, however, add that, even on merits, we think that the assumption of the Income‑tax Appellate Tribunal in this case was perfectly correct. The assessee was carrying on the business of running a sugar factory in the area falling within the jurisdiction of the District Board of Meerut and in order to carry on this business the company had to submit to all the regulations including tax liabilities which might be imposed by the District Board. The State Government had empowered the District Board of Meerut to impose a tax on any person carrying on a trade within its jurisdiction. The business of running the sugar factory was a trade and consequently, in order to carry on that trade at all, the assessee had to pay the taxes which became payable under the District Board Act. This was, therefore, an amount which was expended for the purpose of enabling the assessee to carry on the business of the sugar factory within the jurisdiction of the District Board of Meerut and such an expenditure is clearly an expenditure laid out or expended wholly and exclusively for the purpose of the business. Without incurring that expenditure, the assessee could not possibly carry on the business at all. It was, therefore, expenditure of a nature which falls within the scope of principle laid down by the Lord Chancellor as well as by Lord Davey in Strong & Co. of Ramsey Ltd. v. Woodifield ((1906) 5 Tax Cas. 215) which case was further approved and explained by the house of Lords in Morgan (Inspector of Taxes) v. Tate & Lyle Ltd. ((1954) 26 I T R 195). This is an additional reason why the point raised by learned counsel for the department must be rejected.
Coming to the discussion of the question in the form in which it was dealt with by the Income‑tax Appellate Tribunal, we find that the Tribunal recorded the finding of fact in such language that there was no reference to profits and gains of the business being carried on by the assessee. On the other hand, reference was made to the income of the assessee. We can take it that the Tribunal in using the word "income" was using it in the meaning given to it by the District Boards Act. In section 114 of the District Boards Act under which this tax Was levied on the assessee company, taxable income is defined as "estimated income" with some clauses indicating what is not to be included in the taxable income. The word "income" used by the Tribunal in the appellate order must, therefore, be interpreted as meaning estimated income which estimated income must have been worked out by the District Board in accordance with the provisions of the District Boards Act in order to assess the tax payable by the assessee company. We have looked at the District Boards Act and the rules framed thereunder and we have not been able to find any rules or provisions laid down for determining the estimated income. In fact, the rules are silent altogether as to how the income is to be estimated. There is a provision that a list of assessees with the amount of tax assessed under section 114 of the District Boards Act is to be prepared and objections are to be invited against such list before finalising the amount of tax payable but it is nowhere laid down in the Act or the rules that when such objections are filed it would be necessary for the assessing authority to determine the actual income of the taxpayer. The income, therefore, on which tax is payable under the District Boards Act is income arrived at by pure guesswork without apply ing any principles for determining that estimated income. Such income cannot be said to be at all in the nature of profits and gains of the business mentioned in subsection (4) of section 10 of the Income‑tax Act. On these facts; it appears to us that the principle which would be applicable to the case before us will be that laid down by the Privy Council in Commissioner of Income-tax v. Visweswardas Gokuldas ((1946) 14 I T R 110). The case reported in Commis sioner of Income‑tax v. King & Partridge (A I R 1926 Mad. 368) will not be applicable as that was a case in which the tax which was sought as a deduc tion was no doubt at first sight under the local Act calculated on the basis of the estimated income but later on, when objections were filed, the tax was made dependent on the return filed by the taxpayer. The case of Commissioner of Income‑tax v. Visweswvardas Gokuldas which came up before the Privy Council was, on the other hand, quite similar to the case before us as in that case also the amount paid as tax under one of the local laws was held to be a deductible expenditure and not equivalent to profits and gains mentioned in section 10 (4) of the Income‑tax Act on the ground that the tax was being imposed on the basis of estimated income and not on the basis of determined profits or gains. In these circumstances, this question must be answered in favour of the assessee in the negative so as to hold that this sum of Rs. 2,000 was an expenditure admissible under section 10(2)(xv) of the Income‑tax Act.
The facts bearing on the second question are also very brief and have already been mentioned by us earlier. The only facts found by the Tribunal are that the sum of Rs. 800 was paid as a contribution to the school where the children of the assessee company's workers…
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