TMI Blog1962 (5) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... third leases were for a period of six years each. The question is whether the lease monies paid by the assessee are admissible expenditure under section 10(2)(xv). The authorities below treated the expenditure as capital expenditure and disallowed the deduction. The Tribunal, however, at the instance of the assessee has stated the case to us on the question mentioned above. The Tribunal has only made annexures of the three lease deeds and its appellate order and has made no attempt whatsoever to incorporate in the statement any facts or findings. When the reference came up for hearing before this court on an earlier occasion it, by an order dated October 24, 1960, asked the Tribunal for a further statement of the case in respect of the particular amounts and the dates on which they were paid in regard to particular leases and which were claimed as admissible deductions in the two years in question. That statement has since been submitted to this court by the Tribunal and is contained in the supplementary paper book in a tabular form. It has been pointed out by this court and by other courts including the Supreme Court more than once that the statements of cases submitted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wo feet will be cut (paragraph 6); to appropriate all kinds of produce of the jungle during the term of the lease (paragraph 8); to sublet his lessee rights on the same terms (paragraph 9); to use the existing kachha houses, thatched with grass and other houses existing on the demised premises (paragraph 10); to erect sheds thatched with grass or covered with iron sheets for purposes of the lease and for taking care of the cattle but not to construct buildings or pucca houses (paragraph 11); the main object of the lease was stated to be the improvement of cattle-breeding and the lessee was therefore to have the right to establish a cattle-breeding farm in the jungle and to use the jungle in any manner for this object (paragraph 12). The lessee was liable to keep the jungle safe from fire (paragraph 12); to cut the jungle on all sides within a line of 60 feet (paragraph 13); to look after the young plants which were planted after the date of the lease (paragraph 16); to pay the lease money regularly and to restore the jungle after the expiry of the term of the lease. The lessor was entitled to shoot game in the jungle and to give leave to his friends and relatives to use the jung ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agraph 12); the lessee was to prevent poaching and to protect young plants already planted or to be planted after the date of the lease; for the purpose of keeping intact the future produce of the jungle the lessee was to leave trees having a girth of less than 1? feet (paragraph 9); the lessor and his friends and relations were to have the right to shoot in the jungle and the lessee was bound to help them (paragraph 7). The object for which the assessee company was formed were dealing in purchase and sale of wood, fuel and produce of the jungle. The objects are fully set out in the extract from the memorandum of association of the assessee company included in the paper book. It is stated thereunder: The objects for which the company is established are to deal in all products and by-products of forests and all major and minor forest produce including vegetable extract, forest product, produce of the soil and trees of every nature and description, cattle-breeding....and to set up and operate factories for kathha. In support of their conclusion the Tribunal relied upon the decision of the Privy Council in Kauri Timber Co. Ltd. v. Commissioner of Taxes [1913] A.C. 771. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aring lands. The principle was long settled that whenever at the time of the contract it was contemplated that the purchaser should derive a benefit from the further growth of the things sold, from further vegetation and from the nutriment afforded by the soil, the contract is to be considered as for an interest in land, but where the process of vegetation is over or the parties agree that the things sold shall be immediately withdrawn from the land, the land is to be considered as a mere warehouse of the things sold and the contract as one for goods. It is true that the case was under the provisions of the New Zealand Income Tax Acts but the principles laid down are general and the case was decided not merely from the legal but the practical and the accountancy point of view also. The distinction upon which the decision of the question, whether an expenditure is a capital expenditure or a revenue expenditure depends, is whether the expenditure is incurred to acquire trading stock as such or to acquire a source of supply. In other words whether the expenditure is to acquire stock-in-trade or an asset of an enduring nature. The principles which emerge from the Privy Council ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n two feet. In the third lease the exclusion is only in respect of trees having a girth of less than one and a half feet, while in the second lease there is no exclusion of any trees by reference to their girth. In the two leases in which there is reference to exclusion by girth, there must be many trees which are just under the prohibited girth and it is inevitable that in the course of thirty years' term of the first lease and in the course of the six years' term of the third lease the trees so excluded would exceed the prohibited girth and become liable to be cut and carried away. In the meanwhile they would inevitably derive sustenance and nutriment from the soil. In the case of the second lease where there is no prohibition to cutting of trees by reference to their growth many trees would derive considerable sustenance from the soil even though the term of the second lease is also only six years and thus very much less than the term of the lease in the Privy Council case. If this is so even in the case of timber which as already stated takes a long time to grow this is much more so in the case of other forest produce and fuel wood. A forest is a living organism. It gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest in land. Thus except in the matter of the term of the leases the present case is on a much lower footing than the Privy Council case. So far as the duration of the lessee right as a determinative factor on a question of this kind is concerned the Supreme Court in Pingle Industries Ltd. v. Commissioner of Income-tax [1960] 40 I.T.R. 67, 87; [1960] 3 S.C.R. 681 observed as follows: .....the duration of the right which seems to have weighed with the Full Bench in the Punjab High Court (viz., Benarsidas Jagannath, In re [1947] 15 I.T.R. 185) has little to do with the character of the expenditure even if it be a relevant factor to consider. The case before the Supreme Court was one relating to a contract regarding the right to extract stones from quarries but as observed by the Privy Council in the Kauri Timber case [1913] A.C. 771 (P.C.), the principles applicable to leases of timber lands are not different from leases of coal mines or nitrate deposits. It follows that the observation of the Supreme Court regarding the indecisiveness of the duration of the lease on a question of this kind even though made in the case of a stone quarry should equally apply in the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business. The assessee did not acquire timber and forest produce but only a right to collect them at any time it liked before the periods of the leases expired. It had the right of allowing the timber and the forest produce to remain attached to the soil and to receive sustenance from it. The forests were not to be used exclusively in the business of timber and forest produce; they were also to be used in the business of cattle-breeding, and is not known how much of the rent paid for the leases was attributable to the use of the forests in the business of cattlebreeding and how much to the use of the forests in the business of timber and forest produce. If an expenditure is partly deductible and partly not deductible it is for the assessee to show which is the part that is deductible and, if he fails, the whole of the expenditure should be disallowed. In this case the assessee has failed to show how much of the rent paid for the leases could be attributable to the use of the forests in the business of timber and forest produce. The present case is governed more by the cases of Kauri Timber Co. Ltd. [1913] A.C. 771, Coltness Iron Co. [1881] 6 App. Cas. 315 and Alianza Co. [1906] ..... X X X X Extracts X X X X X X X X Extracts X X X X
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