JUDGMENT Hardayal Hardy, J.
(1) In connection with the assessed's assessment to income-tax for the assessment year 1958-59 the following question was referred to this court by the Income-tax Appellate Tribunal on December 13, 1966:-
WHETHERon the facts and in the circumstances of the case, the expenditure of Rs. 1.79,904 on linen and blankets and expenditure of Rs. 1.96,931 on the uniforms are permissible deductions under section 10(2) (xv) of the Income-tax Act, 1922?
SUBSEQUENTLYon the assessed's application under section 66(2) of the Income-tax Act, 1922 two more questions were ordered by the court to be referred to it. The questions framed are :-
(I)Whether on the facts and in the circumstances of the case the Tribunal has rightly held that the assessed company had an undisputed right to receive full license fees in spite of its having reversed a sum of Rs. 80,752 in the account?
(II)Whether on the facts and in the circumstances of the case, the Tribunal has rightly held that the amount of Rs. 80,752 was wrongly written off in the year ending 30/9/57. And hence it is nto allowable?
(2) For facility of reference those questions will be numbered as questions 2 and 3 respectively.
(3) The assessed is a public limited company. It owns what is described as a five star luxury htoel under the name of Ashoka Htoels in New Delhi. It started functioning in October, 1956. Accounts for the first year were closed on 30/9/1957 i.e., within the previous year ending on 31/3/1958 In the accounts for the first year the assessed claimed an amount of Rs. 179,904 as the price of linen and blankets issued for use in the rooms of the htoel. It also claimed an expense of Rs. 196,931 as the cost of uniforms of the employees. In the course of assessment proceedings it was explained that according to the accounting practice followed by the assessed, the blankets, linen and uniforms were treated as written off and consumed at the time they were issued for actual use from the store to the rooms and the employees and nto at the time when they were purchased or replaced. The expenses thus incurred were claimed as revenue expenditure deductible out of the income of the assessed. The Income-tax Officer rejected the claim on the ground that the expenses were of a capital nature as they related to the first year of the business.
(4) In the beginning of the first year of its business the assessed let out by public auction various stalls on the ground floor of the htoel building for a period of three years on fixed license fees for a ttoal sum of Rs. 295,215. After the licenses were so granted the stall-holders represented to the assessed that the license fees be reduced as their expectations about the volume of business had nto materialised. On 17/5/1958 the Board of Directors resolved -- "Aprovision of 30% of amount due as license fee from shopkeepers be made as an amount that is likely to be reduced in view of the revision of the terms of license."
(5) On 30/9/1957, the last date of the accounting year, the assessed credited the full amount of the license fees of Rs. 295,215 in its books, making at the same time as likely had debt. The figure of Rs. 80,752 provision of Rs. 80,752 is 30% of the license fee due from the licensees. The amount so reduced was claimed by the assessed as an allowable deduction, but its claim was dis-allowed by the Income-tax Officer.
(6) On appeal by the assessed the Appellate Assistant Commissioner dis-agreed with the Income-tax Officer and allowed the claim in respect of linen, blankets and uniforms in full observing that its system of accounting was to treat the cost of linen and uniforms issued in a particular year as expenditure and that in the very nature of things it was impossible to calculate at the end of the year the depreciated value of the uniforms and linen issued during the year. He held that the only possible method of correctly working out the income of a htoel was to allow the cost of fresh issues of uniforms and linen during any year and therefore treated the expenditure as cost of consumable stores even though btoh the articles were issued for the first time on the commencement of the business.
(7) On the question of dis-allowance of the assessed's claim regarding Rs. 80,752 however, the Appellate Assistant Commissioner upheld the decision of the Income-tax Officer.
(8) Against the order of the Appellate Assistant Commissioner [email protected] appeals were preferred before the Income-tax Appellate Tribunal, one by the assessed against his dis-allowance of its claim regarding Rs. 80,752 and the toher by the Income-tax Officer with followed by the assessed, the blankets, linen and uniforms were treated as written off and consumed at the time they were issued for actual use from the store to the rooms and the employees and nto at the time when they were purchased or replaced. The expenses thus incurred were claimed as revenue expenditure deductible out of the income of the assessed. The Income-tax Officer rejected the claim on the ground that the expenses were of a capital nature as they related to the first year of the business.
(9) In the beginning of the first year of its business the assessed let out by public auction various stalls on the ground floor of the htoel building for a period of three years on fixed license fees for a ttoal sum of Rs. 295,215. After the licenses were so granted the stall-holders represented to the assessed that the license fees be reduced as their expectations about the volume of business had nto materialised. On 17/5/1958 the Board of Directors resolved -- "Aprovision of 30''o of amount due as license fee from shopkeepers be made as an amount that is likely to be reduced in view of the revision of the terms of license."
(10) On 30/9/1957, the last date of the accounting year, the assessed credited the full amount of the license fees of Rs. 295,215 in its books, making at the same time as likely had debt. The figure of Rs. 80,752 provision of Rs. 80,752 is 30% of the license fee due from the licensees. The amount so reduced was claimed by the assessed as an allowable deduction, but its claim was dis-allowed by the Income-tax Officer.
(11) On appeal by the assessed the Appellate Assistant Commissioner dis-agreed with the Income-tax Officer and allowed the claim in respect of linen, blankets and uniforms in full observing that its system of accounting was to treat the cost of linen and uniforms issued in a particular year as expenditure and that in the very nature of things it was impossible to calculate at the end of the year the depreciated value of the uniforms and linen issued during the year. He held that the only possible method of correctly working out the income of a htoel was to allow the cost of fresh issues of uniforms and linen during any year and therefore treated the exoenditure as cost of consumable stores even though btoh the articles were issued for the first time on the commencement of the business.
(12) On the question of dis-allowance of the assessed's claim regarding Rs. 80,752 however, the Appellate Assistant Commissioner upheld the decision of the Income-tax Officer.
(13) Against the order of the Appellate Assistant Commissioner [email protected] appeals were preferred before the Income-tax Appellate Tribunal, one by the assessed against his dis-allowance of its claim regarding Rs. 80,752 and the toher by the Income-tax Officer with regard to the amounts spent by the assesses on the purchase and issue of linen, blankets and uniforms.
(14) The Tribunal by its order dated the 14/9/1965 rejected the assessed's contentions in respect of all the three deductions claimed by it thereby dismissing the appeal filed by the assessec and accepting the department's appeal against the order of the Appellate Assistant Commissioner. The assessed's application for reference of the questions of law as formulated by the assesses was partially accepted and the question relating to expenditure on linen, blankets and uniforms only was referred to this court. With regard to the toher two questions which related to the reduction of license fees, the assessed's request for a reference was declined. A statement of case in respect of those two questions as already stated, was however called for by this court and all the three questions are therefore now before us.
(15) I shall first take up the question regarding the two sums of Rs. 179,904 representing expenditure on linen and blankets and Rs. 196,931 representing expenditure on uniforms. The facts undisputed and indisputable are that the linen, blankets and uniforms in question were purchased by the, assessed for the first time on or before the commencement of its business. Instead of showing the expenditure incurred on the purchase of these articles as and when the purchases were actually made by it the assessed adopted a method of accountancy whereby the blankets and linen were treated in its books as written off at the time of issue of those materials for actual use from the stock and nto at the time when they were purchased. Likewise, the price of uniforms was also written off at the time when they were issued from stock to the employees as distinct from the time when they were purchased.
(16) On these facts the question that arises for consideration is whether the expense in relation to these articles is in the nature of a capital expenditure as contended for by the Revenue or is a revenue expenditure as contended by the assessed. If it be found that the expense is in the nature of capital expenditure then even if it is laid out wholly and exclusively for the purpose of the assessed's business it will nto be an admissible deduction under Clause (xv) of Section 10(2) of the Act.
(17) Now the controversy as to whether a particular item of expenditure falls under one category or the toher has come up before the courts in this country as well as in England in a variety of circumstances. As observed by the Suprece Court in Assam Bengal Ce'wnt Co. Ltd. v. Commissioner of Income-tax (1955- -27 I.T.R. 34)0 the line of demarcation between the two types of expenditure is very thin and learned Judges in this country as well as in England have from time to time pointed out the difficulties 6-5 H.C. Delhi/72 The Tribunal by its order dated the 14/9/1965 rejected the assessed's contentions in respect of all the three deductions claimed by it thereby dismissing the appeal filed by the assessec and accepting the department's appeal against the order of the Appellate Assistant Commissioner. The assessed's application for reference of the questions of law as formulated by the assessed was partially accepted and the question relating to expenditure on linen, blankets and uniforms only was referred to this court. With regard to the toher two questions which related to the reduction of license fees, the assessed's request for a reference was declined. A statement of case in respect of those two questions as already stated, was however called for by this court and all the three questions are therefore now before us.
(18) I shall first take up the question regarding the two sums of Rs. 179,904 representing expenditure on linen and blankets and Rs. 196,931 representing expenditure on uniforms. The facts undisputed and indisputable are that the linen, blankets and uniforms in question were purchased by the, assessed for the first time on or before the commencement of its business. Instead of showing the expenditure incurred on the purchase of these articles as and when the purchases were actually made by it the assessed adopted a method ' of accountancy whereby the blankets and linen were treated in its books as written off at the time of issue of those materials for actual use from the stock and nto at the time when they were purchased. Likewise, the price of uniforms was also written off at the time when they were issued from stock to the employees as distinct from the time when they were purchased.
(19) On these facts the question that arises for consideration is whether the expense in relation to these articles is in the nature of a capital expenditure as contended for by the Revenue or is a revenue expenditure as contended by the assessed. If it be found that the expense is in the nature of capital expenditure then even if it is laid out wholly and exclusively for the purpose of the assessed's business it will nto be an admissible deduction under Clause (xv) of Section 10(2) of the Act.
(20) Now the controversy as to whether a particular item of expenditure falls under one category or the toher has come up before the courts in this country as well as in England in a variety of circumstances. As observed by the Suprece Court in Assam Bengal Ce'wnt Co. Ltd. v. Commissioner of Income-tax (1955- -27 I.T.R. 34)0 the line of demarcation between the two types of expenditure is very thin and learned Judges in this country as well as in England have from time to time pointed out the difficulties -5H.C.Delhi/72 besetting the task of separating one from the toher. Decided cases no doubt lay down certain broad tests which are intended to be working guides; but ultimately as observed by Lord Macnaghten in Dovey v. Coi-y (1901 A.C. 477 at p. 488) "there never has been, and I think there never will be, much difficulty in dealing with any particular case on its own facts and circumstances."
(21) In the case of Assam Bengal Cement Co. Ltd. (Supra) the Supreme Court reviewed the leading cases, Indian as well as English, and summarised the broad tests laid down therein.
(22) It is therefore neither necessary nor desirable to attempt a fresh survey of those cases as the broad principles which should govern the decision of this case are no longer in doubt. It should however be borne in mind that even after setting out those principles their Lordships observed :
"THESEtests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has therefore gto to apply these criteria one after the toher from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductable allowance under section 10(2)(xv) of the Income-tax Act.
The question has all along been considered to be a question of fact to be determined by the Income-tax authorities on an application of the broad principles laid down above and the Courts of law would nto ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles."
(23) One of the principles laid down by their Lordships is that in cases where the expenditure is made for the initial out-lay or for extension of a business or a substantial replacement of the equipment there can be no doubt that it is capital expenditure.
(24) In this connection the distinction between the acquisition of an income-earning asset and the process of earning of the income which had been formulated by the Privy Council in Tata HydroElectric Agencies Ltd. Bombay v. Commissioner of Income-tax Bombay Presidency and Aden (65 1.A. 215)0 and the observations of Dixon J. in Sun Newspapers Limited v. The Federal Commissioner of Taxation (61 Corn. L.R. 337 at 3600 were approvingly referred to by their Lordships. The observations of Dixon J. appear besetting the task of separating one from the toher. Decided cases no doubt lay down certain broad tests which are intended to be working guides; but ultimately as observed by Lord Macnaghten in Dovey v. Cory (1901 A.C. 477 at p. 488) "there never has been, and I think there never will be, much difficulty in dealing with any particular case on its own facts and circumstances."
(25) In the case of Assam Bengal Cement Co. Ltd. (Supra) the Supreme Court reviewed the leading cases, Indian as well as English, and summarised the broad tests laid down therein.
(26) It is therefore neither necessary nor desirable to attempt a fresh survey of those cases as the broad principles which should govern the decision of this case are no longer in doubt. It should however be borne in mind that even after setting out those principles their Lordships observed:
"THESEtests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has therefore gto to apply these criteria one after the toher from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductable allowance under section 10(2)(xv) of the Income-tax Act.
The question has all along been considered to be a question of fact to be determined by the Income-tax authorities on an application of the broad principles laid down above and the Courts of law would nto ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles."
(27) One of the principles laid down by their Lordships is that in cases where the expenditure is made for the initial out-lay or for extension of a business or a substantial replacement of the equipment there can be no doubt that it is capital expenditure.
(28) In this connection the distinction between the acquisition of an income-earning asset and the process of earning of the income which had been formulated by the Privy Council in Tata HydroElectric Agencies Ltd. Bombay v. Commissioner of Income-tax Bombay Presidency and Aden (65 1.A. 215)0 and the observations of Dixon J. in Sun Newspapers Limited v. The Federal Commissioner of Taxation (61 Corn. L.R. 337 at 3600 were approvingly referred to by their Lordships. The observations of Dixon J. appear to me to be most apposite and I take the liberty of re-producing them here. The distinguished Judge observed :- "BUTin spite of the entirely different forms, material and immaterial, in which it may be expressed, such sources of income contain or consist in what has been called a "profityielding subject", the phrase of Lord Blackburn in United Collieries Ltd. v. Inland Revenue Commissioners (1930) S.C. 215 at 220. As general conceptions it may nto be difficult to distinguish between the profit yielding subject and the process of operating it. In the same way expenditure and outlay upon establishing, replacing and enlarging the profityielding subject may in general way appears to be of a nature entirely different from the. continual flow of working expenses which are or ought to be supplied continually out of the returns of revenue. The latter can be considered, estimated and determined only in relation to a period or interval of time, the former as at a point of time. For the one concerns the instrument for earning profits and the toher the continuous process of its use or employment for that purpose."