The main legal point established in the judgment is the interpretation and application of section 43A of the Income Tax Act, the functional test for depreciation, and the distinction between revenue and capital expenditure.

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 assesses. 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 assesses and the assessment year to which all the questions relate is 1974-75 relevant to the accounting year ending on December 31, 1973.

3. First, on the foreign loans secured for the purchase of machinery, the assesses made certain payments, however, incurring extra liability in Indian currency due to fluctuations in exchange rates. Second, the assesses incurred expenses on the repairs of houses owned but allotted to its executives for their residence. Third, the assesses had dug bore-wells and had constructed water storage tanks at the factory premises. Fourth, the assesses had incurred a sum of Rs. 1,00,074 as expenses on the issue of right shares to its shareholders.

4. In its return filed for the aforesaid assessment year, before the Income Tax Officer, Company Circle-II, Bangalore ("the ITO"), the assesses 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 to be fourth and certain other claims.

5. Aggrieved by the said order of the Income Tax Officer to the extent it disallowed its claims, the assesses filed an appeal in Income Tax Appeal No. 440/Co/1974-75 before the Appellate Assistant Commissioner of Income Tax, Bangalore Range-III, 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 was naturally opposed by the assesses on diverse grounds. But, the Commissioner, overruling the objections of the assesses 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 assesses filed an appeal before the Tribunal.

6. On February 16, 1977, the Appellate Assistant Commissioner disposed of the appeal filed by the assesses granting it certain further reliefs as set out in his order. Aggrieved by the said order of the Appellate Assistant Commissioner, the assesses 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 assesses 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 firs