1960 PLP 855 (PTD)

(1) Land, (2) Buildings, (3) Spinning plant, (4) Electric installation, (5) Tools and implements, (6) Tubewells and accessories, (7) Furniture and fixture, (8) Guns, (9) Motor car and lorries, and' (10) Library. During the chargeable accounting period, no income was earned by the Rishra Mill, which does not appear to have gone‑into production up to that time. Considering the items of expenditure which have been exhibited, it seems to us that there can be no question but that if these sums had been spent for these purposes at the commencement of the operations of this Company, they would certainly have been regarded as capital expenditure, upon all the recognised maxims applicable to the differentiation of such expenditure from revenue expenditure. It is not necessary for the purposes of this case to embark upon a full examination of all the authorities upon this subject. It would be sufficient to state the main principles which have been laid down in earlier cases for the purpose of distinguishing between the two kinds of expenditure as incurred by a Company, "Capital‑expenditure" it has been said, is that which is spent "once for all" [per Lord Dunedin in the Vallambrose Rubber Company case (5 T C 529)]. It is an expenditure incurred "`with a view to bringing into existence an asset or advantage for the continuing benefit of the trade [per Viscount Cave, L. C., in the British Insulated and Halsby Cables Limited case (1926 A C 205)]. It is money employed "for the purpose of acquiring the concern, not for the purpose of carrying on the concern" City of London Contract Corporation Limited case (2 T C 239), or as stated differently by the Privy Council, it is expenditure "in consideration of the acquisition of the right and opportunity to make profits, that is the right to conduct the business and not for the purpose of producing profits in the conduct of the business Tata‑Hydro Electric Agencies case (64 I A 215). Again, it has been said by Romer, L. J., in the Golden Horse Shoe Limited case ((1934) 1 K B 548) that :‑ "the land upon which a manufacturer, carries on his business is part of his fixed capital. The machinery with which a manufacturer makes the articles that he sells is part of his fixed capital." In the catalogue of expenditure incurred upon the setting up of the Rishra Mill are included land, buildings, machinery, furniture and fixtures, transport equipment and two small items of expendi ture on a library presumably for the advancement of the business, and guns presumably for the protection of the factories. All these items appear to be such as would fall aptly within the description of "fixed capital" contained in the quotation from the judgment of Romer, L. J. above. These were cases arising out of assessments under the Income‑tax Act, but the Gas Lighting Improvement Company case (1923 A C 723) is one concerning the application of excess profits tax imposed under the (British) Finance (No. 2) Act of 1915, whose provisions bore a character which would justify the application to it of the description of an early parent of the Indian Act of 1947. In that case, Lord Phillimore observed as follows upon the distinction to be made between "capital" and "investment" in applying the provisions of the excess profits tax .‑ "You must not include as an investment the capital put into the business itself, because that is the very matter on which excess profits are to be considered." In other words, if out of the capital of the present Company, at its inception, the necessary sums expended on the construction of the Mill at Dacca required to be considered in the aspect of the distinction between "capital" and "investment," in the relevant sense, there could not be a moment's hesitation in holding that these sums were "capital," and did not become an investment, merely because the expenditure was expected to return a profit. Taking the matter to a stage at which profits began to appear from the operation, of the Company, if, thereafter, at any time the Company decided to expand its mill at Dacca, and laid out money on additional buildings or equipment whether fixed or otherwise for that precise purpose, again there would be no doubt whatsoever that this money, although it may have been laid out on the expectation of producing enlarged profits, was not an investment but still retained the quality of being "capital" within the meaning of the taxing Act. The question before the Court is whether the construction of the Rishra Mill, is to be treated as an investment because it represents money laid out for the purpose of making increased profits. The answer returned to the question by the Income‑tax Officer was that the expenditure represented an investment, but the Appellate Assistant Commissioner of Income‑tax accepting an appeal from that order, declared that the expenditure on the new Mill was not to be deducted from the capital in allowing the abatement, and the Income‑tax Appellate Tribunal took the same view. The question being referred to the High Court of East Pakistan, the Division Bench agreed with the view of the Income tax Appellate Tribunal, but furnished no reasons for their agreement beyond those appearing in the following brief sen tence, viz :‑ "We have not been shown anything either by the learned Advocate for the Commissioner of Income‑tax that the expendi ture of which details have been set out above are not capital expenditure and we cannot disturb the findings of fact of the authorities below, and this being the only question of law, we are afraid, we cannot accept the reference." We are constrained to observe that that was by no means a proper or adequate mode of dealing with the question placed before the Court. It is incorrect to say that the question was concluded by findings of a fact for it essentially involved construction of the relevant provisions of the statute, and consequently was at least a mixed question of fact and law. While the learned Judges may be right in saying that they had not been "shown" that the items of expenditure in question were "not capital expenditure" yet that was not a sufficient answer to the question before them. For, it is by no means clear that everything which may fall within the meaning of the expression "capital expenditure" for the purposes of the Income‑tax Act, must necessarily fall within the meaning of the word "capital" and equally, must be excluded from the meaning of the word "investment" for the purposes of the Business Profits Tax Act. While the facts in the present case are so clear that the application of the distinction between capital and invest ment admits of no doubt, the requirements of businesses of different kinds are so varied that cases may well arise in which sums laid out by a company for the protection of its interests may be treated as capital expenditure for the purposes of the Income tax Act as held in the Assam‑Bengal Cement Company Limited case (A I R 1953 Cal. 368), but sums spent for a similar purpose in a different manner may not qualify for abatement as capital under a statute relating to taxation of excess profits (vide the Gas Lighting Improvement company case, cited above). The point raised by the reference was a difficult one, and it might have been expected to engage the thoughtful attention of the Division Bench to a far greater extent than it succeeded in doing. In stating the grounds of appeal to this Court stress has clearly been laid upon the circumstance that it was the income from the business in Pakistan which alone could attract the tax, for the purposes of the case. The first ground stresses, the point that the money was spent in India, and seems to suggest that for this reason it should not be allowed in "abatement" of the tax assessable on the Company's profits within the taxable territory. The second ground carries the matter somewhat further and exhibits the underlying fallacy of the argument. It is that because the money has been spent upon a new mill in India, the income from which cannot be chargeable to the tax in the taxable territory, therefore, it must be deemed to be an investment, and not "capital" for the purposes of abatement. The third ground repeats the second ground in a slightly different form. It is clear that in the second ground, the appellant Commis sioner is attempting to apply the provisions of the taxing statute in a converse sense. While the statute provides that the profits from an investment shall not be included within the taxable profits for the purposes of the tax, the argument of the Commissioner is that because of the expected income from the new mill being out of reach of the tax by reason of territorial limitations, therefore, the money spent on the mill should be treated as an investment. The argument is not a permissible one. The statute in question is a fiscal statute and must be strictly interpreted. Its requirement in the relevant regard is that it should be first decided whether an item of expendi ture is in reality an investment, and thereafter the profits derived from such investment are to be excluded from the taxable profits, and the investment itself is to be excluded in allowing the abate ment. Plainly, it would amount to legislation, since it does not follow in logic from the expression in the Act, to lay down that if the income from any outlay by a Company is, for any reason, out of reach of the tax, then that amount of outlay is to be treated as an investment. As to the circumstance that the expenditure has been incurred outside the taxable territories, it does not appear to us that the point is one of materiality. The Company, as already stated, was incorporated outside the taxable territories and all the capital is held outside. Its principal business is the manufacture for sale and profits of textiles, and just as there could be no bar to the Company setting up another textile mill within the taxable terri tories in which case the expenditure would clearly be relatable to capital, so there can be no possible objection to the Company setting up another textile mill in the country of its incorporation, Mr. Basu appearing for the Company has shown us a copy of the amended Memorandum of Association of the Company, drawn up, it seems clearly, after the year 1956, when the Companies Act was extensively amended in India. One of the aims numbered (f) (1) reads as follows :‑ "To start one or more cotton, spinning and weaving mills in India, Pakistan and elsewhere, and for the purposes thereof acquire land, buildings, plants, machineries either by purchase or otherwise." The setting up of a new mill is strictly within this particular aim. Applying the canons which have been outlined in the foregoing portions of this judgment, the setting up of a cotton mill is a "once for all" expenditure incurred for the purpose of bringing into existence an asset or advantage for the continuing benefit of the trade, and for setting up another unit of the "very concern" which is the principal aim of the Company. It is immaterial, within the terms of the Act where such expenditure is incurred, and this is the more so in a case of a non‑resident Company. The view accepted by the Income‑tax Appellate Tribunal maintains the tax on the same basis as before, and we are entirely agreed that by incurring this expenditure in India, the Company has not rendered itself liable to be taxed more heavily than before, upon the profits which it earns in Pakistan. These are the reasons by which we were guided in making the short order by which the appeal of the Commissioner was dis missed on the 3rd June 1960. S. A. RAHMAN, J.‑I agree and would only like to add that a strict interpretation of Rules 2 and 2‑A of Schedule II to the Excess Profits Tax Act would lead to the same conclusion. Appeal dismissed.