TMI Blog1953 (7) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... ire period amounted to ₹ 3,36,000 out of which a sum of ₹ 96,000 was paid at the time of the execution of the lease deed and the balance of ₹ 2,40,000 was agreed to be paid at the rate of ₹ 20,000 per annum in 12 years. For facility of payment it was agreed that this sum of ₹ 20,000 could be paid in equal instalments of ₹ 1,666-10-8 every month. On the expiry of the period of lease, it was renewed for a further period of five years and seven months at an annual rent of ₹ 35,000. The assessee company has also taken on lease stone quarries from the Government. This lease was for a period of five years and the assessee company was required to pay ₹ 9,000 per year and this amount was to be paid in monthly instalments of ₹ 750 each. Under these leases, the assessee company acquired the right to extract Shahabad stones from the quarry (flag stones). After extracting these stones, the assessee company used to sell them after working on them if necessary. The assessee showed in its books of account that a sum of ₹ 37,000 was paid as lease money to the lessor and claimed that this amount should be regarded as revenue expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ras Since reported in [1953] 24 I.T.R. 116, decided on 2nd April, 1953. In other words, the point which the learned counsel for the assessee most strenuously pressed before us was that here was a case of a manufacturing business. On behalf of the department, it is urged that the case of the assessee is not that they polish stones and sell them in the market. Their case is that they extract stones, make them into sizes, and sell them in the market and they cannot be said to be a manufacturing firm. On behalf of the assessee it was urged that the fact that the assessee company has to polish stones was not denied by the department and in the reference made by the department there is an indication to show that the assessee has to work on the stones and as such that question would be deemed to be an admitted fact. The decision of the question referred to depends upon the determination of the nature of the payments made by the assessee under the two documents mentioned. Section 10, sub-section (2), clause (xv), of the Indian Income-tax Act allows certain deductions. The section reads as allows:- Any expenditure (not being in the nature of capital expenditure or personal expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of your concern which means for the purpose of carrying on your concern but you use it to acquire the concern. This case lays down one of the tests, viz., whether the expenditure is for the acquisition of a business or of rights essential to the carrying on of a business. The second test laid down by Lord Dunedin as Lord President of the Court of Section in Vallambrosa Rubber Co. Ltd. v. Farmer [1910] 5 Tax Cas. 529, viz., that capital expenditure is a thing that is going to be spent once and for all and income expenditure is a thing that is going to recur every year. This principle was recognised by Viscount Cave, L.C., in British Insulated and Helsby Cables Co. Ltd. v. Atherton [1926] A.C. 205 and generally recognised to be the leading case on the subject. In that case the appellant company claimed to deduct in the computation of trade profits a sum which it had provided to form the nucleus of the pension fund for its employees. It was held that the sum ought to be debited to capital and could not be deducted. Apart from these, there are other English cases laying down certain different tests as for instance the differentiation between fixed and circulating capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or three years. It was held following the decision in Commissioner of Income tax, Madras v. Chengalvaroya Mudaliar [1934] 2 I.T.R. 395, that the amount was a capital expenditure and not a revenue expenditure and the assessee could not claim a deduction. These two decisions were followed in the case of Abdul Kayum Sahib Hussain Sahib v. Commissioner of Income-tax, Madras [1939] 7 I.T.R. 652. (F.B.), by another Full Bench of that Court. There the assessee acquired the exclusive right for a certain period to collect the chunks from chunk beds belonging to the Ramnad and Shivaganga Samasthan and agreed to pay them a certain amount in equal instalments in consideration of the grant of right. It was held that the amount paid was capital expenditure. The fourth case on this point is that of Commissioner of Income- tax, Madras v. Venkatasubba Reddy and Bros. [1949] 17 I.T.R. 15. In this case the assessee, being a registered firm, was carrying on business to win mica and sell it after refinement. They entered into four agreements with the persons who owned certain patta lands in Nellore District, and who had also obtained what are described as patta land agreements from the Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Madras High Court that the amount expended was a revenue expenditure and not a capital expenditure. A similar question had arisen in a Full Bench case before the Allahabad High Court in Commissioner of Income-tax v. Tikaram Sons, Ltd., Aligarh [1937] 5 I.T.R. 544. In this case, the assessees was carrying on a business of manufacturing bricks. The assessees were proprietors for a part and the lessees of the remainder of piece of land on which it carried on the business and from which it dug the earth for making the bricks. The question arose as to whether the value of the earth dug up and utilised for the manufacture of bricks was of the nature of capital expenditure. It was held that the company by taking up this lease had not purchased so many maunds of earth for so many rupees but had acquired lessee's right in the immovable property which included the right to dig out earth and use it for the purpose of manufacturing bricks. The position seems to be more analogous to that of a company which is working a quarry or a mine rather than to an ordinary manufacturer who purchases raw materials for purpose of his manufacturing business. It, therefore, seems that the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee acquired for his manufacture his own raw material; 3. That the raw material was the crude salt-petre which may or may not be a marketable commodity; 4. That the assessee did not sell crude salt-petre but extracted it only for the purpose of subsequently being analysed into potassium nitrate and sodium chloride which where the finished products; 5. That in the extraction of the crude salt-petre an elaborate process was employed and the raw material for its manufacture was kallar obtained from the sites acquired by the assessee under short term leases, the kallar itself not being a marketable commodity; and 6. That the money paid as consideration for the leases was an outlay from circulating capital, the leases themselves not being a fixed capital asset. The correctness of this decision was questioned in a later case before the same High Court before a Bench of five Judges in Banarsidas Jagannath v. Commissioner of Income-tax [1947] 15 I.T.R. 185. In this case the assessee was a manufacturer of bricks and had obtained certain lands on leases for the purpose of digging out earth for the said manufacture. The period of the leases varied from six months to three y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as Jagannath v. Commissioner of Income-tax [1947] 15 I.T.R. 185 or in Parmanand Havely Ram, In re [1945] 13 I.T.R. 157 and the facts of the present case. The case under consideration is a simple case of an assessee acquiring the right to take out from the quarry stones and selling them. This is not a case like that of Golden Horse Shoe (New) Ltd. v. Thurgood [1934] 1 K.B. 548 in Which after the mineral had been won and gotten it was dumped on the surface. Nor is it a case of sale of any raw material as such. The business consists in extracting stones from the quarry. In the case of an agreement under which an assessee in entitled to excavate all earth to a particular depth to be used as raw material for the manufacture of bricks, it can be said that there is a sale of that quantity of earth. But in the case of an acquisition of the right to extract Shahabad stones it is impossible to say that there is a sale of so many stones. It would be opposed to common sense to say that the acquisition of a right to extract stones is a sale of stones as raw material. It is only in case of the purchase or acquisition of goods which form the stock-in-trade, circulating and floating capital of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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