Rigby J:

This is an appeal at the instance of the Comptroller of Income Tax, under s. 77 of the Income Tax Ordinance, 1947, from a decision of the Board of Review. The short but important point for consideration is as to whether or not the Board was right in holding that certain work carried out by the respondents on their land could properly be regarded as income expenditure, as distinct from capital expenditure, and therefore wholly deductible under s. 14(1)(c) of the Ordinance. Section 14(1)(c) enacts:

14.(1) For the purpose of ascertaining the income of any person for any period from any source chargeable with tax under this Ordinance, in this Part referred to as 'the income', there shall be deducted all outgoings and expenses wholly and exclusively incurred during that period by such person in the production of the income, including:

(c) any expenses incurred for repair of premises, plant, machinery or fixtures employed in acquiring the income, or for the renewal, repair or alteration of any implement, utensil or article so employed:

Provided that no deduction shall be made...... for the cost of reconstruction or rebuilding of any premises, buildings, structures or works of a permanent nature.

The relevant facts for consideration may be taken from the statement of agreed facts put by both parties before the Board of Review. The respondent company are the owners of a rubber estate which has been in existence for nearly 50 years. The estate fronts the Perak River and is low lying, which necessitates drainage. The drainage is into the Perak River. The river is, however, tidal at this point and it is necessary to provide against possible feed back from the river, especially at high tides.

The present drainage system is controlled by ten watergates each of which closes automatically when the level of the water in the river exceeds that on the estate and opens automatically when the level of the water on the estate exceeds that in the river. The ten gates are connected by means of unlined channels. The waters on the estate are channelled to the gates and the water from any part of the estate could find its way out through any gate. The system would work to some extent if one or more gates were blocked. In the course of the hearing evidence was also adduced, and uncontradicted, that if one gate was out of action it would delay the clear age of the water inside the estate from the immediate area of that gate, although the water would eventually manage to drain out through the other gates, If there was a high tide there would be an ingress of water during that high tide which would lead to flooding of the estate. It was further stated that the old gate was leaking from below and was not possible to repair.

The matter for consideration before the Board of Review concerned a new gate installed in 1956. The old gate leaked and it was decided to install a new gate. The new gate is approximately 30 feet away and is of a similar construction to the one replaced, viz. it is automatic and is made of concrete. The new gate fulfils the same function as the one replaced and is linked in the same way with the other gates.

The cost of construction of the new watergate was $15,300. The respondent company maintained that the replacement, without material improvement, of the one watergate was necessary to ensure the proper functioning of the drainage system as a whole and as such it was a "repair of premises" employed in the production of income. As such they claimed that the whole cost of such repair was a properly deductible item under s. 14(1)(c) to be set off against their gross taxable income for the relevant period of assessment.

On the other hand the Comptroller contended that the construction of the new gate was, in fact, a replacement and not a repair and, as such, it was capital and not income expenditure and therefore the cost of such replacement was not wholly deductible as of right under s. 14 but an allowance toward