TMI Blog1946 (10) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... ch are not on the record. The terms of the various leases vary from six months to eighteen months. The lessee (the assessee) stipulated to pay to the lessor a consolidated sum in consideration whereof the lessee was given the right to dig earth up to 3 feet (3 feet in one case) for a fixed period. 3. The firm was assessed on a total income of ₹ 10,295 for the assessment year 1941-42, the relevant accounting period being 1st of October, 1939, to 30th September, 1940. The assessee claimed that a total sum of ₹ 2,299 (being the aggregate of ₹ 1,042, ₹ 973 and ₹ 284 relating respectively to the three kilns mentioned above) representing the payments made by the assessee to the lessors under the terms of the various leases, was in fact the value or the price of earth used up in the manufacture of bricks during the year of account, and as such should be deducted as business expenditure under Section 10(2)(xii) of the Act. In computing the assessable income, the Income-tax Officer, however, disallowed the claim. On appeal the learned Appellate Assistant Commissioner confirmed the order of the Income-tax Officer holding that the expenditure incurred for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but a person who had acquired certain rights in the land and the amount invested by him must, therefore, be treated as capital expenditure. The Bench held that the assessee had not purchased so many maunds of earth for so many rupees but had acquired certain rights in the lease-hold premises―the right of taking earth from land for the purpose of moulding bricks. In such cases the land must be regarded merely as one of the means provided by the manufacturer for causing earth to be brought to the manufactory. On these findings we think a question of law arises and we formulate it as follows:― Whether, in the circumstances of the case, the assessee is entitled to a deduction of the three sums, ₹ 1,042, ₹ 973 and ₹ 284 aggregating ₹ 2,299, as revenue expenditure under Section 10(2)(xii) of the Income- tax Act? 8. The questions framed by the assessee wrongly assume that the expenditure was incurred in purchasing earth. In the course of discussion during the hearing of the application for reference the learned accountant, who appeared on behalf of the assessee, as well as the departmental representative agreed to the question for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground that he is the owner of it, or creates any obstruction in the digging of earth, or raises any objection on any other ground, then under such conditions, whatever loss or expense will be incurred by the lessees, the lessors will be responsible to pay it and also refund the lease money already received by them; rather the lessees will have power and right to recover it by whatever means they like. The said akrarnama has, therefore, been executed so that it may serve as an authority. EXHIBIT T.G. English translation of deed, dated 17th January, 1940. We are Bua Singh and Bawa Singh, sons of Budh Singh, caste Jat, residents of village Sultanwind, Tehsil Amritsar. Whereas the canal land measuring 12 kanals, khasra No. 4797, in the vicinity of the well, known as Piroowala, situated in the area of village Sultanwind within the municipal limits of Amritsar, is our milkiat property. We have given the said land for digging earth for manufacturing bricks to the firm Messrs. Benarsidas Jagannath, outside Chatiwindwala Gate, Amritsar, on the following conditions:― (i) We have agreed to take a sum of ₹ 570 as consideration for the earth at the rate of ₹ 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty and I am in possession thereof. Since the land is fit for digging earth and difficulty is caused in its irrigation, it is, therefore, leased out on the following conditions to L. Jagannath, son of L. Atma Ram, caste Agarwal, resident of Katra Karm Singh, Amritsar, on payment of a consolidated sum of ₹ 257-8-0 as consideration for digging earth up to 3 ft. deep, so that the land may improve in its value from the point of view of cultivation:― (i) The lease money referred to above will be paid on the grant of a receipt. (ii) The possession of the said land has been given to the lessee from to-day. The said lessee will dig earth for one year from to-day up to the extent mentioned above and will then deliver back the land to the lessor after clearing and levelling it. (iii) The responsibility for the payment of the land revenue will rest on the lessor. If any of my relations raises any objection with regard to the contents of the deed or Sirajud Din interferes in the possession of the land or obstructs in the digging of earth, then under such conditions, the responsibility for the payment of any kind of loss or expense incurred by the lessee and for the refund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the stipulated period, the contractor can cultivate other lands taken by him on lease from this well. 8. That it is my duty to get these lands irrigated through distributories. 9. That the contractor shall have the right to use the land for traffic purposes by donkeys, mules etc. 10. That in case the area is found less or greater than the specified one, then accordingly the sum will be refunded or recovered. 11. That the repairs and renewals of the well will be borne by the contractor. I will get his name mutated in the revenue office and in case I fail to do so or refuse to do so, I shall pay ₹ 500 towards damages to the contractor and will still have to get his name entered. I solemnly assure the contractor that the aforesaid land is solely owned by me and not in partnership or co-ownership with others, and no one else has any concern in it. The property is neither mortgaged nor sold to any one nor alienated in any way. If, on the contrary, by reason of any defect in the transfer or on account of any claim by a third party, the contractor is dispossessed from the land, I shall be liable in every way, and in addition shall pay all costs and damages to the cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atever quantity of earth is left over, the contractor is entitled to take out such quantity on payment of land revenue. Hence I do hereby execute this meyadi rehan deed in favour of the aforesaid L. Gyan Chand, contractor, on 16 Har, 1994, corresponding to 29th June 1937. Entry at the deed writer's register No. 45. C. L. Aggarwal, P. L. Sud and M. F. Rahman, for the assessee S. M. Sikri and Jindra Lal, for the Commissioner ORDER DIN MOHAMMAD and MEHR CHAND MAHAJAN, JJ.--The question involved in this reference is whether payments made by an assessee for acquiring earth for the manufacture of bricks can be legally deducted for the purpose of determining his assessable income. A Full Bench of the Allahabad High Court (reported as 5 I.T.R. 544, Commissioner of Income-tax v. Tika Ram Sons Ltd.) is clearly against the assessee, but with all respect we consider that the matter does require further consideration. We accordingly forward this case to the Honourable the Chief Justice with a recommendation that the matter be decided by a larger Bench. The order of the Full Bench, dated the 5th December, 1945, was as follows:― ORDER. MUHAMMAD MUNIR, J.& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction for the amount expended by him in acquiring short term leases of salt-bearing sites from which he scraped kallar which he converted into crude saltpetre which was taken to the assessee's refinery and analysed into sodium chloride and potassium nitrate. We held the expenditure to be a running business expense even though the amount was expended by the assessee in not purchasing his raw material from the market but in acquiring it by a process of collection and evaporation on the land which he had acquired from the owners on short term leases. It is admitted by the learned counsel for the Crown that if in this case the assessee had purchased loose earth, which is stated to be a marketable commodity, the amount spent would be a proper business expense, but it is contended that if what is acquired is not raw material but the right to dig raw material the position is different and in support of this contention certain observations of Romer, L.J., in Golden Horse Shoe (New) Ltd. v. Thurgood [1934] 18 Tax Cas. 280 are relied on. This precise point was pressed by the learned counsel for the assessee before the Full Bench in Parma Nand Haveli Ram's case ([1945] 13 I.T.R. 157; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the opinion of this Court:― Whether, in the circumstances of the case, the assessee is entitled to a deduction of the three sums, ₹ 1,042, ₹ 973 and ₹ 284, aggregating ₹ 2,299, as revenue expenditure under Section 10(2)(xii) of the Income- tax Act? The matter originally came up before me and my learned brother Mr. Justice Din Mohammad. In view of a Full Bench decision of the Allahabad High Court in Commissioner of Income-tax v. Tika Ram and Sons, Limited**, the case was referred by us to a Full Bench, as, in our opinion, the question required further consideration. The matter then came up before a Full Bench of three Judges; but, as during the arguments, a question was raised as to the correctness of the Full Bench decision of this Court in the case of In re Messrs. Parma Nand Haveli Ram***, the question was referred to a larger Bench. The only question that arises for decision is whether the payments made under various agreements to the several owners of land for the purposes of extracting the earth for the manufacture of bricks are in the nature of revenue expense or are of a capital nature? It may be observed at the ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrangements evidenced by these transactions are transitory in character and the whole intention and purpose of these so-called leases was to procure raw material for the manufacture of bricks. Once the earth was dug and removed, the right created by these agreements in the assessee had automatically to come to an end. The arrangements evidenced by these documents can neither be given the status of leases nor of permanent grants. All that may be reasonably suggested is that they confer on the assessee temporary rights of easement, even if they are found to vest some very limited and insignificant interest in the land out of which earth had to be dug. But no advantage of a permanent nature or of an enduring character can be held to have been gained by them. In short, the transactions evidenced by these leases were for the sale of earth which had to be excavated with the labour employed by the so-called lessee and not by the labour employed by the so-called lessor. In order to distinguish between a revenue expenditure (i.e., an expenditure which should properly form an item of debit in the profit and loss account of a manufacturer) which is deductible in assessing income-tax and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the expenditure incurred was of a capital nature but when the expenditure incurred neither swells the capital nor improves it, but it only increases or decreases the profit or loss it must be held to be a part of the profit and loss account of the business. The distinction between capital and revenue expenditure is in many cases an easy one. There are, however, a number of cases where it may be difficult to distinguish. The cost of acquisition of plant, machinery or premises for carrying on a business would clearly be in the nature of a capital expenditure; on the other hand, the pay of the establishment and the rents of the premises taken on lease for the business would be items of revenue expenditure. But it may be difficult to draw a line in cases which stand on the margin. It is not easy to define the term capital expenditure in the abstract or to lay down any general and satisfactory test to discriminate between a capital and a revenue expenditure. Nor is it easy to reconcile all the decisions that were cited before us for each case has been decided on its peculiar facts. Some broad principles can, however, be deduced from what the learned Judges have laid down from tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissioner of Income-tax, in reply to a question by me was forced to admit that the expenditure in the present case did not satisfy any of the above tests. Judged in the light of the above rules, the expenditure in question was in my opinion of a revenue nature. Though it was incurred once and for all, yet it did not bring in an asset of an enduring advantage to the trade. Learned counsel for the Commissioner of Income-tax urged that the transactions evidenced by the agreements in question were not in the nature of purchases of raw material but were in the nature of the acquisition of some interest in land which interest in land was not the raw material for the concern of the assessee and hence the sums spent on these acquisitions could not be debited in the revenue account. To support this argument, he placed reliance on certain observations made by Lord Romer, L.J., in Golden Horse Shoe (New) Ltd. v. Thurgood (H.M. Inspector of Taxes). They are as follows:― Unfortunately, however, it is not always easy to determine whether a particular asset belongs to the one category or the other. It depends in no way upon what may be the nature of the asset in fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal as would be any railway trucks or lorries provided by him for the same purpose. The land is regarded as a capital asset of the same nature as the coal contracts that were held to be fixed capital in Smith v. Moore. In that case, Lord Sumner said: 'The business carried on was not that of buying and selling contracts, but of buying and selling coals, and the contracts, which enabled the seller of the coals to acquire the coals were no more the subject of his trading as a stock-in-trade for sale than a lease of a brickfield would be the subject of a sale of bricks.' In my view, the above observations do not support the contention of the learned counsel for the Commissioner of Income-tax. The purchase of a coal mine and land brings in an asset of a capital nature to the trade of a gas manufacturer, though the object in view is to procure coal. Not only is the expenditure in such a case incurred once and for all but it is incurred with a view to bringing into existence an asset or an advantage for the enduring benefit of the trade. Mr. Sikri argued that, as in the illustration given by Lord Romer, the land purchased was regarded merely as one of the means provided by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other assets of his business, including the goodwill, the contracts in question. The sum paid for unexecuted contracts was, therefore, held to be capital expenditure on the ground that these were obtained by the son at the time of the acquisition of the business as a part of his capital. Lord Haldane's opinion, therefore, is of no use to Mr. Sikri. Lord Finlay gave the opinion that the coal represented by the contracts was circulating capital. It was bought for use in the business and was so used....................................... The contracts gave the means of getting coal, and there is no difference for this purpose between having coal stored in your yard and having a contract which enabled you to get it from time to time as you want it. This, indeed, was admitted by the Lord Advocate in argument when he was asked the question specifically by Lord Haldane........... The contracts cannot be regarded either in whole or in part as a fixed asset like a coal mine, they are merely the machinery for getting coal, and the coal which they commanded is the article by the resale of which the appellant made his profit. Mr. Sikri conceded that the view taken by Lord Finlay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I would like to observe that in deciding a border line case like this it is relevant to consider how a tradesman in this business treats such an expense in his accounts. The expenditure thus incurred forms part of the profit and loss statement and as a matter of fact in the previous years the Income-tax Department was itself treating such an expenditure as a legitimate deduction as business expense. The mode adopted to procure earth is the usual and the normal mode employed for procuring raw material by brick kiln concerns in this country. Reliance was placed by learned counsel for the Commissioner of Income-tax on the Full Bench decision of the Allahabad High Court in Commissioner of Income-tax v. Tika Ram and Sons Ltd. [1937] 5 I.T.R. 544; I.L.R. 1937 All. 908 In that case a manufacturer of bricks purchased a certain area of land and took on lease another area of land as premises for his kiln and business and it was held that the price paid for the land and acquiring the leasehold was not an admissible deduction under Section 10(2)(xii) of the Act. The case clearly falls under rule (1) mentioned in the earlier portion of this judgment. The sums spent in that case were used t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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