TMI Blog1948 (9) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... nts from the Government for mica mining. The four documents relate to different mines, namely, the Kubera Mine, the Lakshminarasimha Mine, and the Deepadurga Mine. The last mine does not appear to have been worked at any time before the dates of the agreements, but in the other two mines, work had been carried on but was suspended at the time of the execution of the agreements relating to them. Under these four documents, the assessees, in consideration of payment of sums of money in instalments, were granted the mining rights in the respective mines. The periods for which the assessees were entitled to enjoy the mining rights vary from 5 to 9 years. The assessees claimed a deduction of the amounts paid by them under the four documents above mentioned under Section 10 (2) of the Indian Income-tax Act. Mr. Subbaraya Aiyar, learned counsel, stated to us that the deductions were claimed under clause (xii) of that sub-section (now clause xv). The amounts, however, were disallowed by the Income-tax Officer on the ground that they were paid for acquiring a right and the expenditure was therefore one of capital nature. On appeal, the Appellate Assistant Commissioner came to the same concl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure. As pointed out in Halsbury's Laws of England, Vol. 17, Section 325 :- It is difficult to lay down a definite series of tests which will cover all cases. But certain tests may be discovered in the decided cases which can be regarded as sufficiently accurate to form the basis of a working rule. Courts however are more interested in deriving assistance from decided cases on similar or analogous facts and circumstances rather than in an academic statement of a rule of thumb. The following passage from the speech of Lord Macmillan in Van Den Berghs Ltd. v. Clark [1935] A.C. 431, at p. 438; 3 I.T.R. Eng. Cas. 17 represents the use which can be made of decided cases:- My Lords, the problem of discriminating between an income receipt and a capital receipt and between an income disbursement and a capital disbursement is one which in recent years has frequently engaged your Lordships' attention. In general the distinction is well recognised and easily applied, but from time to time cases arise where the item lies on the borderline and the task of assigning it to income or to capital becomes one of much refinement, as the decisions show. The Income Tax Acts n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h it had provided to form the nucleus of a pension fund for its employees. It was held that the sum ought to be debited to capital and could not be deducted. The Lord Chancellor laid down the test in the following manner :- But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. The fact that the asset acquired is of a wasting nature cannot be taken into account and will not make any difference in the legal position that the expenditure for acquiring such an asset would be capital expenditure. (See Alianza Go. v. Bell [1904] 2 K.B. 666; [1905] 1 K.B. 184). The following instances were given as illustrating the application of the rule, namely, moneys expended by a brewing firm with a view to the acquisition of new licensed premises, expenses incurred in transferring a manufacturing business to a new premises, expenditure incurred by a ship-building firm in deepen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case :- If the metaphor of working a mine be applied, it might be said that the purchase of the dumps was a capital outlay. Romer, L.J., puts the question to be decided thus :- Are the dumps the raw material of the appellant's business or do they merely provide the means of obtaining that raw material ? and answers it that in his opinion they are the raw material itself. Some of the other decisions cited to us in the course of argument by either counsel may be now dealt with. In Bonner v. Basset Mines, Ltd. [1912] 6 Tax Cas. 146, a mining company claimed to be allowed as a deduction the cost of deepening a main shaft. But the deduction was not allowed as it was held to be in the nature of a capital expenditure. The decision in this case turned on the evidence as to the nature of the extension of the shaft and having regard to the evidence, it was held that the assessee by lengthening the shaft to a considerable extent had in effect opened up a new mine, so to speak, in the same way as they would have opened up a new mine if they had started a fresh shaft. In Robert Addie Sons' Collieries, Ltd. v. Commissioners of Inland Revenue [1924] 8 Tax Cas. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly been remarked that it is very hard that there is no provision for allowing the company a sinking fund or anything of that sort to replace that capital expenditure. But there it is ; it is a capital expenditure. If they sell the lease that they have acquired, or part of it, at an advantage, I cannot but think that that is a receipt on account of capital, and here what they have done is to get rid of some areas which they thought would be unremunerative; they thought it well to pay for it. In my judgment all receipts and payments in connection with acquiring and disposing of leaseholds of minerals to be worked by collieries in this way are capital transactions for this purpose. The three Madras decisions which were relied upon by the Income- tax Officer and the Appellate Assistant Commissioner may now be referred to. In Commissioner of Income-tax v. Chengalvaroya Mudaliar [1934] I.L.E. 58 Mad. 1; 2 I.T.R. 395 the assessee entered into an agreement with the Secretary of State for India in Council for the excavation of lime shells from certain Government lands. Under that agreement, he was to have the exclusive privilege of excavating lime shells within a specified area for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee to show that the words the annual lease amount appearing in the instrument in question there, made a material difference completely failed. These two decisions were followed in Abdul Kayum Sahib Hussain Sahib v. Commissioner of Income-tax, Madras [1939] 7 I.T.R. 652, by another Full Bench of this Court. There, the assessee acquired the exclusive right for a certain period to collect chunks from chunk beds belonging to the Ramnad and Sivaganga Samasthanams and agreed to pay them a certain amount in instalments in consideration of the grant of the right. It was held that the amount paid was capital expenditure and was not therefore an admissible deduction. For the assessee, reliance was placed on the case of Golden Horse Shoe (New) Ltd. v. Thurgood [1934] 1 K.B. 548; 18 Tax Cas. 280. But that case was distinguished thus :- Now in the present case what the assessee paid for was the right to win conch shells. He was not purchasing the right to any specified quantity of conch shells. It was merely the right to win what he could from the beds where the conch shells were lying. What he got was the means of obtaining the material for his business, not the material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to leases of plots of land for the purpose of excavating earth for the manufacture of bricks. The leases mentioned a certain rate per bigha as the cost of, or compensation for, the earth excavated. It was held that the price of or compensation for the earth mentioned in the deeds was akin to royalties on coal extracted from coal mines, and that the expenditure incurred was of a capital nature. The decision in Commissioner of Income-tax v. Tika Bam d Sons Ltd. [1937] I.L.R. 19J7 All. 903; 5 I.T.R. 511 was approved and followed. The facts in In re Parma Nand Haveli Ram [1945] 13 I.T.R. 157 decided by the Lahore High Court were as follows : The assessee was a manufacturer of potassium nitrate and sodium chloride. He manufactured his own crude saltpetre at different places and brought it to his refinery and analysed it into potassium nitrate and sodium chloride which are the finished products. Saltbearing land was acquired by the assessee in different villages from the proprietors on short-term leases, the period of leases varying from one to two years. The assessee employed his own labourers on the sites who scraped and collected the salt-bearing earth and by an elaborate proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquiring the sites for the purpose of extracting crude saltpetre was not expended in acquiring the assessee's business but for the purpose of running it. The period of the leases ranged from one year to two years and for that reason these leases according to him could not be said to bring into existence an asset or an advantage for the enduring benefit of the trade. The learned Judge, however, went on to observe :- The result may perhaps be different where the land worked is the property of the assessee, or is acquired by him on a long-term lease, because in such a case the rights in the land would be a fixed capital asset. That the final conclusion of the learned Judge was greatly influenced by the fact that in the case before him the leases were for short periods is amply evident from the following passage at the end of his judgment:- We have not been referred to any case where ... in the case of an annual lease or leases, it has ever been held that the expenditure incurred in acquiring the leases is not a proper debit item to be charged against the incomings of the year. The case where the assessee owns a mine or acquires it under a long term lease is essenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al should be deducted. But the argument was not accepted. In this case, there is an exhaustive discussion of case law, both in Britain and India, by Sen, J. In this state of the authorities, counsel took up the following positions. For the department, it was contended that the amounts in question which were paid under the four documents were capital expenditure, as they were expended as outlay for the initiation of the business. It was expenditure necessary for the acquisition of property, or rights of a permanent character, the possession of which was a condition of carrying on the business. The business of the assessee was to win mica and sell it. It was not the business of a manufacturer and the expenditure was not for the purchase of raw material for the manufacturing business. The mining rights which were obtained under the four documents would be in the nature of an asset or an advantage for the enduring benefit of the business, and it is not necessary that the benefit should be everlasting. The three decisions of this Court and the decisions in Ganeshilal Bhattawala, In re [1938] 6 I.T.R. 489, Commissioner of Income-tax v. Tika Bam Sons, Ltd [1937] I.L.R. 1937 All. 908; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding the business and for replacing equipment cannot be treated as revenue expenditure. In Commissioner of Income-tax v. Chengalvaroya Mudaliar(6), the learned Chief Justice points out:- The payment to be made was merely for the purpose of starting that particular venture........I do not think that the fact that the assessee had previously entered into a number of similar agreements affects the question. Nor does the fact that two of the mines had been worked before make any difference. The money paid by the assessee was of taking over such mines, it is exactly similar on principle to the case in City of London Contract Corporation, Ltd. v. Styles [1887] 2 Tax Cas. 239, in which the assesses took over the business of another company which had a number of unexecuted contracts on hand and the assessees paid a lump sum of money to obtain the benefit of those contracts. Vide also John Smith Son v. Moore [1921] 2 A.C. 13, in which the price paid for similar forward coal contracts was held to be part of the assessees fixed capital and not allowable as a revenue expenditure. The point which the learned counsel for the assessee most strenuoulsy pressed was that here was a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n whether the raw material is obtained for a number of years or only for a year or so cannot affect the decision of the case and alter the nature of the revenue expenditure into capital expenditure, The judgment of the Fuller Bench of five Judges in In re Benarsidas Jagannath [1947] 15 I.T.R. 185 was delivered by Mahajan, J., and the learned Judge states the question in controversy in that case thus :- The question in controversy, however, is that when 'in the course of a business and in order to produce bricks expeditiously and economically (and not when the business is being started for the first time) a manufacturer makes certain of the supply of earth (which would be the raw material for his finished product) by taking a plot of land on lease, either of short or moderate duration but not such as to amount to a conveyance of land, can the expenses incurred in entering into such a transaction be classed as those of a capital nature ? He answered the question thus : ...in the present case privileges acquired to excavate a specified quantity of earth from a certain area of land during a period of six months to three years cannot be held to amount to the es ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
