The Judgment of the Court was delivered by

K.S Puttaswamy, J.:— In these consolidated references made under section 256 of the Income-tax Act, 1961 (“the Act”), the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore (“the Tribunal”), at the instance of the Revenue, has referred as many as seven questions of law for the opinion of this court for one and the same assessment year of the assessee. In order to appreciate the questions referred, which will be noticed and dealt with, it is necessary in the first instance to notice the facts as found by the Tribunal.

2. M/s. Motor Industries Company Limited, Bangalore, a public limited company incorporated under the Companies Act and engaged in the manufacture of automobile ancillaries, is the assessee and the assessment year to which all the questions relate is 1974-75 relevant to the accounting year ending on December 31, 1973. First, on the foreign loans secured for the purchase of machinery, the assessee made certain payments, however, incurring extra liability in Indian currency due to fluctuations in exchange rates. Second, the assessee incurred expenses on the repairs of houses owned but allotted to its executives for their residence. Third, the assessee had dug bore-wells and had constructed water storage tanks at the factory premises. Fourth, the assessee had incurred a sum of Rs. 1,00,074 as expenses on the issue of right shares to its shareholders.

3. In its return filed for the aforesaid assessment year, before the Income-tax Officer, Company Circle-II, Bangalore (“the ITO”), the assessee claimed the extra liability incurred due to fluctuations in exchange rates as a permissible expenditure, the amounts spent for repairs on the houses owned and allotted to the executives and depreciation allowance on the storage tanks and bore-wells at higher rates as plant and machinery and share issue expenses as revenue expenditure with which claims only we are concerned in these cases. On December 26, 1984, the Income-tax Officer completed the assessment for the aforesaid year (annexure A) accepting the first three and disallowing the fourth and certain other claims.

4. Aggrieved by the said order of the Income-tax Officer to the extent it disallowed its claims, the assessee filed an appeal in Income-tax Appeal No. 440.Co/1974-75 before the Appellate Assistant Commissioner of Income-tax, Bangalore Range-Ill, Bangalore (“the Appellate Assistant Commissioner”). While the said appeal was pending before the Appellate Assistant Commissioner, the Commissioner of Income-tax, Karnataka-I, Bangalore (“the Commissioner”), exercising the powers conferred on him by section 263 of the Act, suo motu proposed to revise the order of the Income-tax Officer on the first three claims which wa's naturally opposed by the assessee on diverse grounds. But, the Commissioner, overruling the objections of the assessee on the first and the third claims, made an order on December 15, 1976 (annexure B), confirming his earlier proposal to disallow the extra expenditure incurred on repayment of loans due to fluctuations in exchange rates and the higher depreciation allowance allowed on storage tanks and bore-wells. Aggrieved by the said order, the assessee filed an appeal before the Tribunal.

5. On February 16, 1977, the Appellate Assistant Commissioner disposed of the appeal filed by the assessee granting it certain further reliefs as set out in his order. Aggrieved by the said order of the. Appellate Assistant Commissioner, the assessee and the Revenue filed appeals before the Tribunal. On consolidating all the three appeals, the Tribunal, by its common order made on July 25, 1978, disposed of them granting further reliefs to the assessee in its appeals and dismissing the appeal filed by the Revenue in its entirety. Hence, these references. With these facts, we now pass on to examine questions Nos. 1 to 3 in the order referred to us, then question No. 7 and thereafter questions Nos. 4, 5 and 6 in that order setting out the questions first and then any other additional facts or findings that are necessary to appreciate them.

6. Question No. 1 referred to us reads thus:

“Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in deciding that the assessee was entitled to the benefit of section 43A on the increase in liability on the last day of the accounting year due to fluctuation in the currency rates in respect of foreign currency loan obtained for purchase of machinery abroad?

7. Sri K. Srinivasan, learned senior standing counsel for the Income-tax Department, appearing for the Revenue, has urged for answering question No. 1 in favour of the Revenue on the very reasons that found favour with the Commissioner. Sri G. Sarangan, learned counsel for the assessee, has urged for answering question No. 1 in favour of the assessee on the very reasons that found favour on this question by the Tribunal.

8. That the assessee was compelled to make extra payment due to fluctuations in exchange rates over which it had no control is not in dispute at all. While the Income-tax Officer accepted this claim without any discussion, the Commissioner disallowed the same for these reasons:

“4. With regard to the proposal to withdraw the depreciation allowed by the Income-tax Officer on the extra liability incurred by the assessee as a result of periodical variation in the market rate of exchange, the assessee's contention is that the provisions of section 43A of the Act would apply to its case. I do not agree. The provisions of section 43A are applicable only when there is a change in the rate of exchange at any time after the acquisition of an asset and do not come into play in day-to-day fluctuations in exchange rates. If the assessee's contention that it is applicable even to a case of periodical valuation were to be accepted, then every time there is fluctuation in exchange rate, the value of plant and machinery will have to be altered. Apparently, this is not the intention with which the provisions of section 43A were introduced. The provisions of section 43A were introduced to avoid hardship to the assessee consequent on the devaluation of the rupee on June 6, 1966. The assessee's contention that these provisions are applicable even to cases of periodical fluctuation of rates is not acceptable and is accordingly rejected.”

9. But, the Tribunal disagreed with these reasons and conclusion and held that the claim of the assessee squarely attracted section 43A of the Act and had been rightly allowed by the Income-tax Officer.

10. We have carefully examined the detailed analysis made by the Tribunal on this claim of the assessee. We are of the view that every one of the reasons on which the Tribunal accepted the claim of the assessee that forms part of this question is sound and the same squarely falls within the purview of section 43A of the Act. We are also of the view that this claim of the assessee also attracts the Board's Circular No. F 1 (408/67-TPL dated October 19, 1967) (reproduced at pages 1610 to 1612 of Chaturvedi and Pithisaria's Income Tax Law, 3rd edition) which has properly interpreted the scope and ambit of section 43A of the Act. From this, it follows that our answer to question No. 1 must be in the affirmative.

11. Question No. 2 referred to us reads thus:

“Whether, on the facts and in the circumstances of the case, the Tribunal is correct in deciding that depreciation at the general rate of 10% and extra shift allowance was admissible in respect of storage tanks, bore-wells and other plant connected with the water supply system of the assessee?”

12. Sri Srinivasan, in urging for answering this question in favour of the Revenue, was bitterly critical of the Tribunal's finding on the same without applying the “functional test” relevant to the same as ruled by a Division Bench of the High Court of Allahabad in Commissioner Of Income-Tax, Lucknow-Ii v. Kanodia Warehousing Corporation., [1980] 121 ITR 996. Sri Sarangan, in refuting the contention of Sri Srinivasan, has urged that the “functional test” evolved by the High Court of Allahabad was a doubtful test.

13. While the Income-tax Officer accepted the claim of the assessee without any discussion, the Commissioner held against the assessee on this claim for these reasons:

“Normal depreciation and extra shift allowance are admissible to plant and machinery employed in carrying on a business or trade or a mechanical or industrial business. The question is whether storage tanks, bore-wells etc., can be considered as plant for the purpose of allowing normal depreciation and extra shift allowance? The Bombay High Court in the case of Jayasingrao Piraji Rao Ghatge v. CIT, [1962] 46 ITR 1160 has held that a water storage tank constructed by a person in connection with his business of supplying water to farmers is not ‘plant’ within the meaning of section 10(2)(vi) of the 1922 Act and depreciation allowance cannot, therefore, be granted in respect of such a tank. The same principle applies to a bore-well also. When a storage tank is not ‘plant’ even for a person whose business is to supply water, it cannot be so for the assessee who is a manufacturer of automobiles and other accessories. I hold that the assessee is not entitled to extra shift allowance on storage tanks, bore-wells, etc., and that depreciation is admissible only at the rate applicable to third class factory buildings. As a matter of fact, the asses-see-company itself was treating these assets as part of its building and was claiming depreciation at 15% in the immediately preceding year.”

14. But, the Tribunal without examining the real controversy expressed thus:

“… We also agree with the assessee that storage tanks, bore-wells, etc., are independent capital assets. It is not necessary that every building should have a storage tank or bore-well; nor is it necessary that for a storage tank or bore-well to exist, it should be attached to a building. ‘Plant’ as understood in income-tax law clearly covers these assets. The Income-tax Officer has correctly worked out the depreciation on these assets, treating them as plant. The Commissioner's order is set aside and the Income-tax Officer's order restored.”

15. At the very outset, we are constrained to say that the Tribunal had not really examined the question or claim with the earnestness and thoroughness that the same required, before it. As the final fact-finding authority, the Tribunal was bound to examine the same, bearing in mind the correct principles and record its findings. We are of the view that the Tribunal had not kept before it the relevant legal principles and had decided the question in a somewhat cursory way.

16. While Sri Srinivasan has urged that the Tribunal should be directed to re-examine the question applying the “functional test”, Sri Sarangan has urged that such a test was an unknown and an unsound test and this court cannot lay down such a test for the guidance of the Tribunal.

17. The term “plant” itself has not been defined in the Act, though section 43(3) defines that term for the purposes enumerated in that and other allied sections as including “ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession”. An inclusive definition enlarges the ordinary meaning and brings into its fold what may not normally fall within its ordinary meaning. Storage tanks and bore-wells are not included in the definition of the term “plant” occurring in section 43(3) of the Act. We have, therefore, necessarily to ascertain whether the bore-wells dug and storage tanks constructed at the factory fall within the meaning of the term “plant” or not. Whether the items “bore-wells and storages tanks” are plant or not depends on their relation to the nature of the business carried on by an assessee. There cannot be any hard and fast rule in such matters and each case has to be decided on the facts and circumstances of that case only but with due regard to the above principle. When this test is properly applied to each case, it may turn out that in the case of one assessee, they may be “plant” but in the case of another they may not be plant. We are, therefore, of the view that the “functional test” evolved by the Allahabad High Court in Kanodia Warehousing Corporation's case, [1980] 121 ITR 996, on a review of all the rulings bearing on the question, is a relevant principle. We are in respectful agreement with the views propounded by their Lordships of the Allahabad High Court in that case.

18. What emerges from our above discussion is that the Tribunal had not correctly applied the legal principle in determining the question and the question itself has not been examined and decided with due regard to the relevant principles. We have, therefore, no alternative but to answer this question in the negative.

19. Question No. 3 referred to us reads thus:

“Whether, on the facts and in the circumstances of the case, the Tribunal is correct in deciding that notional expenditure on depreciation and expenditure on repairs and property tax in respect of the buildings, owned by the assessee and used as residential quarters of its employees, cannot be treated as expenditure resulting in benefit or amenity granted to the employees by the assessee and considered as “perquisite” for the purpose of section 40A(5)?”

20. Sri Srinivasan had urged for answering this question in favour of the Revenue. Sri Sarangan has naturally urged for answering the same in favour of the assessee.

21. When we analyse question No. 3, it is manifest that the same consists of three claims, namely, (i) expenditure on repairs; (ii) depreciation on buildings; and (iii) payment of property tax on buildings. The Income-tax Officer did not allow all the amounts spent by the assessee on repairs of buildings owned by it and allotted to its executives with which the Appellate Assistant Commissioner concurred. But, on appeal, the Tribunal held in favour of the assessee on repairs to buildings in these words:

“7. Before us, learned counsel for the assessee has pointed out that the buildings belonged to the assessee-company. Whether it was allotted to an employee for the purpose of residence or not, expenditure has to be ncurred by the assessee in maintaining the building and depreciation had to be claimed on account of deterioration of the buildings. Neither any expenditure of money on repairs nor allowance of depreciation to the assessee can add by way of an amenity or benefit to the employee who occupies the building during his term of employment.

8. After hearing learned counsel for the Department, who has relied on section 40A(5)(a)(ii), we see no reason to sustain the addition. Section 40A(5)(a)(ii) refers to a case where the assessee incurs an expenditure which results directly or indirectly in the provision of any perquisite to an employee or incurs any expenditure or is entitled to any allowance in respect of any asset of the assessee used by an employee either wholly or partly for his own purposes or benefit. An expenditure or allowance referred to in this sub-clause should be such, which while it may refer to an asset of the assessee used by the employee, it should all the same constitute an amenity or benefit to the employee. Where the expenditure does not add to the benefit or amenity, available to the employee even if the employer incurs the expenditure, whatever be the reason therefor, it cannot be added as a perquisite to the employee or disallowed in the employer's assessment for a similar reason. The building in the present case belongs to the assessee. The repairs to the building helps to retain the building as a good asset with which the assessee as an employer is concerned and protect it from deterioration or destruction. Depreciation allowance claimed enables the assessee either to set aside the amount to replace the building or to compensate him for the wear and tear of the building. Neither of these items renders any service to the employee, who, for the temporary period of his employment, resides in the building. Even if not doing the repairs would result in an accident or danger to the employee resident therein, it will be preposterous to hold that doing repairs is a positive service to the employee. The more correct thing would be to say that asking an employee to stay in a building in a state of repair would be a disservice to him and danger to him. There is no provision in the Income-tax Act which stipulates that avoiding a disservice to an employee or not subjecting him to a danger or disaster would amount to a perquisite to an employee. The repairs done to the building or the depreciation claimed in respect of the building are expenses directly related to the assessee as an owner of the property and those expenses or allowance cannot be disallowed under section 40A on the ground of perquisites. The addition of Rs. 8,534 sustained in this connection is deleted.”

22. We are of the view that the entire approach made by the Tribunal is not sound. After all, each and every amount spent on buildings cannot be treated as spent on repairs. The term “repairs” has a special meaning. What is necessary for the upkeep and maintenance of a building which necessarily includes periodical colour/whitewashing and painting can undoubtedly be treated as repairs. But, the amounts lavishly or even unnecessarily spent just to satisfy the ego or the eccentricities of an employee cannot be treated as an amount spent on repairs. Bearing this and other relevant principles, the Tribunal had to decide the claim of the assessee on repairs which it had failed to do. We have, therefore, no alternative but to answer on the expenditure on repairs as above.

23. On the other two claims, viz., depreciation on buildings and payment of property taxes, there is hardly any ground for us to take exception to the views expressed by the Tribunal on them. We must, therefore, hold that the Tribunal was right in deciding these claims in favour of the assessee.

24. Question No. 7 referred to us reads thus:

“Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that an amount of Rs. 1,00,074 incurred by the assessee on the issue of right shares, constitutes revenue expenditure deductible in computing the business income?”

25. Sri Srinivasan, in urging for answering this question in favour of the Revenue, has strongly relied on the ruling of the Supreme Court in India Cements Ltd. v. Commissioner Of Income Tax, Madras., [1966] 60 ITR 52 as approving the principle enunciated by the High Court of Bombay In re Tata Iron and Steel Company Limited, AIR 1921 Bom 391. But, Sri Sarangan, in urging to answer this question against the Revenue, has contended that the Supreme Court in India Cements' case, [1966] 60 ITR 52 (SC) had not approved the principle enunciated by the High Court of Bombay in Tata's case, AIR 1921 Bom 391.

26. For the relevant period that the assessee incurred a sum of Rs. 1,00,074 towards issue of right shares is not in dispute. Before the Income-tax Officer, the assessee claimed the said sum as a revenue expenditure. The ITO rejected the same and held the same as capital expenditure with which the Appellate Assistant Commissioner concurred. But, on appeal, the Tribunal noticing the rival contentions urged before it and referring to the ruling of the Supreme Court in India Cements' case, [1966] 60 ITR 52 (SC) had held that the same was revenue expenditure.

27. We are clearly of the view that the Tribunal had not correctly applied the ratio in India Cements' case, [1966] 60 ITR 52 (SC) that really concludes the controversy. We, therefore, first propose to examine whether the question is concluded by the ruling of the Supreme Court in India Cements' case, [1966] 60 ITR 52 (SC) or not.

28. In Tata's case, AIR 1921 Bom 391, the company had paid or incurred a sum of Rs. 28,00,000 to the underwriters for issue of 7,00,000 preference shares of Rs. 100 each and claimed that sum as revenue expenditure under the Income-tax Act of 1918 that was then in operation. In rejecting that claim of the assessee, Macleod C.J expressed thus (at page 392):

“If then it is admitted that the cost of raising the original capital cannot be deducted from profits after the first year, it is difficult to see how the cost of raising additional capital can be treated in a different way. Expenses incurred in raising capital are expenses of exactly the same character whether the capital is raised at the floatation of the company or thereafter: Texas Land and Mortgage Company v. William Holtham, [1894] 63 LJ 496 (QB).”

29. Shah J., in a separate judgment, concurred with the view expressed by the learned Chief Justice, however, referring to and relying on Texas Land and Mortgage Company's case, [1894] 3 TC 255 (QB) relied on by the learned Chief justice.

30. In India Cements' case, [1966] 60 ITR 52, the Supreme Court, considering whether the amount spent for securing a loan from the Industrial “Finance Corporation was a business expenditure or not, ruled that the Bombay High Court was wrong in relying on Texas Land and Mortgage Company v. William Holtham, ([1894] 3 TC 255) in holding that the share expenses were capital expenditure. But, after so holding on the above aspect that was in issue, the court stated thus [see [1966] 60 ITR 52, 61]:

“But, we do not say that the Tata Iron and Steel Co.'s case, [1921] 1 ITC 125 was wrongly decided. Obtaining capital by issue of shares is different from obtaining loan by debentures.”

31. We are of the firm view that the court really approved the principle enunciated by the High Court of Bombay on additional share issue expenses to be treated as capital expenditure only as in the case of original share issue expenses. We see no merit in the contention of Sri Sarangan that the negative words employed by the Supreme Court cannot be construed as the court expressing its approval of the principle enunciated by the High Court of Bombay in Tata's case, AIR 1921 Bom 391. We are of the considered opinion that the question is directly concluded by the ruling of the Supreme Court in India Cements' case, [1966] 60 ITR 52 and the same has, therefore, to be answered in the negative.

32. But, we will also assume that the question is not concluded by the ruling of the Supreme Court in India Cements' case, [1966] 60 ITR 52 (SC) as urged by Sri Sarangan and examine the same afresh.

33. When share issue expenses are treated as capital expenditure, there cannot be any good ground to hold that expenses for issue of additional shares by way of right shares can be treated in any other way. Any issue of additional shares and the expenditure incurred thereon can only have the character of share expenses and capital expenditure only and cannot be anything different. Every one of the reasons on which share issue expenses are treated as capital expenditure justify us to hold that the same mutatis mutandis governs the expenses incurred for issue of additional shares also. We cannot, on principle or authority, hold otherwise. We are of the view that that is how the Bombay High Court has enunciated the principle and we are in respectful agreement with those views.

34. We are of the view that the ruling of the High Court of Madras in CIT v. Kisenchand Chellaram (India) (P.) Limited, [1981] 130 ITR 385 relied on by Sri Sarangan, does not lay down a different proposition on this question. But, assuming that it does, then, with great respect to their Lordships, for the very reasons set out by us, we regret our inability to subscribe to the views expressed in that case.

35. On the foregoing discussion, it follows that our answer to question No. 7 must be in the negative. With this we now pass on to examine questions Nos. 4, 5 and 6 in their order.

36. Question No. 4 referred to us reads thus:

“Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the house rent allowance and car allowance are not to be treated as ‘perquisites’ for the purpose of section 40A(5) as they were cash payments?”

37. Sri Srinivasan has urged for answering this question in favour of the Revenue. Sri Sarangan has urged for answering this question in favour of the assessee.

38. In Commissioner Of Income-Tax, Karnataka Ii. v. Mysore Commercial Union Ltd., [1980] 126 ITR 340, a Division Bench of this court, consisting of Srinivasa Iyengar and Rama Jois JJ., had occasion to examine a similar question and answer the same against the Revenue. For the very reasons stated in Mysore Commercial Union's case, [1980] 126 ITR 340, we are of the view that this question must be answered in the affirmative.

39. Question No. 5 referred to us reads thus:

“Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that premium paid by the employer towards personal accident insurance of employees cannot be treated as ‘perquisite’ for the purpose of section 40A(5) of the Act?”

40. Sri Srinivasan has urged for answering this question in favour of the Revenue. Sri Sarangan has urged for answering this question in favour of the assessee.

41. In Mysore Commercial Union's case, [1980] 126 ITR 340, a Division Bench of this court had examined a similar question and answered the same against the Revenue. For the very reasons stated in Mysore Commercial Union's case, we are of the view that this question must be answered in the affirmative.

42. Question No. 6 referred to us reads thus:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing a sum of Rs. 35,000 incurred by the assessee on account of tea, coffee, etc., supplied to its employees?”

43. Sri Srinivasan has urged for answering this question in favour of the Revenue. Sri Sarangan has urged for answering this question in favour of the assessee.

44. In Mysore Commercial Union's case, [1980] 126 ITR 340, this court had examined a similar question and answered the same against the Revenue. For the very reasons stated in Mysore Commercial Union's case, we are of the view that this question must be answered in the affirmative. In the light of our above discussion, we answer the questions referred to us as hereunder:

Questions Answers Question No. 1: In the affirmative, against the Revenue and in favour of the assessee. Question No. 2: In the negative. We hold that the Tribunal should apply the functional test evolved by the Allahabad High Court in Kanodia Warehousing Corporation's case, [1980] 121 ITR 996 and redetermine the fact situation afresh. Question No. 3: On the claim of expenditure on repairs, the Tribunal had not correctly applied the legal principle and must, therefore, redetermine the claim applying the principles set out at para. 16 of this order. But, the determination made by the Tribunal on depreciation of buildings and payment of property taxes is correct. Hence, our answer on these claims is in the affirmative, against the Revenue and in favour of the assessee. Question No. 4: In the affirmative, against the Revenue and in favour of the assessee. Question No. 5: In the affirmative, against the Revenue and in favour of the assessee. Question No. 6: In the affirmative, against the Revenue and in favour of the assessee. Question No. 7: In the negative, in favour of the Revenue and against the assessee.

45. In view of the divided success and failure of the parties, we consider it proper to direct them to bear their own costs. We, therefore, direct the parties to bear their own costs.