TMI Blog1951 (6) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The actual lessee under the deed of lease was the Eastern Corporation Limited, but we were informed that they were only the managing agents of the assessee company and had assigned the lease almost immediately to the latter under a permissive clause contained in the deed itself. For all practical purposes, therefore, the assessee company was the lessee. The lease is for 20 years, commencing on the 1st Nov., 1938, and ending on the 31st Oct., 1958, but there is a renewal clause under which the lessee may ask for a lease for a further term of 20 years and the Assam Government may grant such lease upon such conditions as they may deem fit to impose. The right conveyed to the lessee is the right to quarry limestone and to convert it into lime or cement and to dispose of the manufactured articles at its will and pleasure. The rent reserved is a half yearly rent certain of ₹ 3,000 for the first two years and thereafter a half-yearly rent certain of ₹ 6,000 which are in the nature of minimum royalties, payable in any event ; but provision is also made for the payment of further royalties in the event of extraction of limestone in excess of a certain quantity. In addition to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and being apparently in some doubt as to what the Tribunal had actually held framed a question in a comprehensive form so as to ask whether the payments had been rightly disallowed as not being an expenditure wholly and exclusively spent for the purpose of the business or as being expenses of a capital nature. The apprehension, we were told, was that if the first ground was not included in the question, it might be said that apart from whether the payments were capital or revenue payments, the Tribunal had found that they were not expenditure laid out wholly and exclusively for the purposes of the business and the claim of deduction might be held to be concluded by that finding. The question actually referred by the Tribunal includes the first ground but omits an express reference to the second and is in the following terms :- Whether, in the circumstances of the case, the Tribunal was right in disallowing two payments of ₹ 5,000 and ₹ 35,000, known as protection fee as not being an expenditure wholly and exclusively laid out for the purpose of the business. There can be little doubt as to what question the Tribunal intended to refer, but it must be said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax by Mr. Meyer that it had never been questioned that the sums had been wholly spent for the purposes of the business in the broader sense. We accordingly reframed the question in the following form to which the parties agreed :- Whether in the circumstances of the case, the two sums of ₹ 5,000 and ₹ 35,000, paid under clause 4 and 5 of the deed of the 14th Nov., 1938, were rightly disallowed as being expenditure of a capital nature and so not allowable under s. 10(2)(xv) of the Indian IT Act. Apart from the terms of the lease, there are no facts in the case, except that at the time the lease was taken, the company had just been formed. Of this we were informed from the Bar. The only finding of fact recorded by the Tribunal, if it can be called a finding, is one of a negative character, viz., there were no materials to establish that there was any competition at all or any likelihood of any competition. The character of the payments must, therefore, be ascertained from the terms of the deed itself, as has always been done in similar cases. The lease shows that even in carrying on its day to day operations, the company would have to work under severe super ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in a year does not exceed 22,00,000 maunds per year whether quarried in the area of this lease or, elsewhere or obtained by purchase from other quarries in the Khasi and Jaintia Hills by the lessees. If, however, in any year the total amount of limestone converted into cement at the lessee's Sylhet factory exceeds 22,00,000 maunds the lessee will be entitled to an abatement at the rate of ₹ 20 for every 1,000 maunds quarried in excess of 22,00,000 maunds and the lessee shall pay the sum of ₹ 35,000 less the abatement calculated on the basis hereinbefore mentioned. Limestone which is not converted into cement at the lessee's factory in Sylhet district will not entitle the lessee to any abatement in the protection fee. The lessor in consideration of the said payment undertakes not to allow any person or company any lease permit or prospecting licence for limestone in the whole of Khasi and Jaintia Hills district without a condition in such lease permit or prospecting licence that no limestone extracted shall be used directly or indirectly for the manufacture of cement. The lessor will be empowered to terminate this agreement for the payment of a protection fee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited to five years. Neither party could enlighten us as to the meaning of the sentence and although we asked them to produce either the original deed or an authentic copy so that we might see if there was any error or omission in the Paper-Book, none was produced. We are, however, not much concerned with the meaning of the sentence, for the payments we have to consider were made within five years and it is nobody's case that the agreement had been terminated. The question before us is whether the amounts of the two protection fees, agreed to be paid in the circumstances I have explained and paid under clause 4 and 5 of the deed for the benefits there mentioned, were capital payments or payments in the nature of revenue expenditure. The question arises because under s. 10(2) of the IT Act, the assessable profits from business are to be computed after making several allowances, one of which, mentioned in clause (xv) of the sub-section, is any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of such business.... As already stated, there is no question that the pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enduring benefit , Rowlatt, J., said in the case of Anglo Persian Oil Co. vs. Dale (1932) 1 KB 124 : 16 Tax Cas 253 that the benefit must endure in the way that fixed capital endures and not in the sense that for a good number of years it relieves the business of a revenue payment. This interpretation of enduring benefit has been universally accepted and approving of it in the same case in the Court of Appeal, Romer, L. J., said that the benefit secured to the business must be a capital benefit. Enduring , however, it was explained by du Parcq, L. J., in the case of Henriksen vs. Grafton Hotel Ltd. (1942) 24 Tax Cas. 453 : 11 ITR Suppl. 10, does not mean everlasting , but only means that the benefit must be of sufficient durability to justify its being treated as a capital asset. The asset need not be anything tangible [per Lawrence, J., in Collins vs. Joseph Adamson Co.(1938) 1 KB 477 : 21 Tax Cas. 400] nor capable of being shown at a value in the balance sheet [per Lord Greene, M. R., in Associated Portland Cement Manufacturers Ltd. vs. Kerr (1946) 27 Tax Cas 103], but may even be of a negative character [per Romer, L. J., in Anglo Persian Oil Co. vs. Dale (supra)]. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparatively modern re-statement of the principle occurs in the judgment of the Privy Council in the case of Tata HydroElectric Agencies Ltd. vs. Commissioner of Income-tax, Bombay (1937) 5 ITR 202 : 64 IA 215, where certain payments were held to be capital payments in the view that the obligation to make them had been undertaken by the company in consideration of their acquisition of the right and opportunity to make profits, that is, of the right to conduct the business and not for the purpose of producing profits in the conduct of the business. Unlike capital expenditure, revenue expenditure has not been the subject of judicial definition in a crystallised form. But the definition of capital expenditure itself suggests what revenue expenditure is. Expenditure for the purposes of a business can only be capital or revenue expenditure and any expenditure that cannot be brought under the first category must necessarily fall under the second. One is practically the converse of the other. If a positive definition of business expenditure of a revenue character is required, it may perhaps be said, that it must belong to the operational expenses of the business, laid out either to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neighbourhood which were potential sites for similar industries that might be set up by other parties and which exposed the infant company to the risk of serious competition. In those circumstances, the company undertook to make two payments to its lessor in order to buy up his option to let out the neighbouring quarries to other parties for the manufacture of cement. There can be little doubt that the company undertook that expenditure, not with a view to meeting any expenses of carrying on the business, but with a view to securing conditions of security in which its business might be carried on. That such conditions would be an advantage to the company, cannot possibly be disputed. Passing on now to the second enquiry under the test, how long was the advantage going to endure ? There can be no question that the advantage procured by the payment under clause 4 of the deed was going to endure for the entire period of the lease. The same appears to be the position under clause 5 as well, for although the lessee's covenant in that clause is limited to five years, the lessor's covenant does not appear to be similarly limited. The bargain appears to be that the lessee undertak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... once and for all ? It was to be an annual payment of equal sums and we are concerned in the present case with such payments for two years if there be any difficulty in the case at all, it lies in this point. But, in my view, there is really no difficulty. That the expenditure should be one made once and for all does not mean that it must be made in a single sum and at one time. It is well-settled that a mere lump sum payment, by itself, proves nothing as to the character of the payment, because a capital payment may be made in instalments and a number of revenue payments may be compressed into a single sum. It is true that where the consideration is fixed at a single sum and then its payment in instalments is arranged for, the case is simple. Of that class are the monopoly value cases, such as Kneeshaw vs. Abertolli and Henriksen vs. Grafton Hotel Ltd. (supra). But it cannot be said, simply because the arrangement was for the payment of an annual sum, without a total consideration being fixed and named, that the payments are not capital payments. It seems to me that when an expenditure is made or undertaken for the acquisition of an asset or advantage and when, on the one hand, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during a substantial part of it and undertakes to pay a consideration to the grantor of the security, the expenditure on account of such consideration, although it may take the form of yearly or half yearly payments, is in the nature of an initial outlay and the payments, having no connection with the carrying on of the business cannot properly be debited against the Revenue receipts. On behalf of the assessee company, it was contended by Mr. Mitra that the payments were items of revenue expenditure, because the object with which they were made and the result which they produced was that by them competition was avoided and the company was enabled to obtain remunerative prices for its goods. They were not payments once and for all, but periodical payments made year to year in order to obtain for each year a chance of making higher profits in that year. They were thus directed at augmentation of profits and were revenue expenditure. They could not be regarded as capital expenditure, because by them or by the undertaking to make them, no capital asset or advantage, nor anything in the nature of goodwill had been acquired. The lease in fact contained three agreements, by the first o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et or the payment for it being a capital nature. The advantage may be impalpable, intangible or inculculable and yet be a capital asset. The argument that the payments in the present case were aimed at earning higher profits is pointless for the object of all business outlay, whether capital or revenue, is production of profits. Nor can it be said that, in any event, the payment under clause 5 must be held to be revenue expenditure, because, in regard to it, a rebate is to be allowed in case the production exceeds a certain quantity. That provision relates only to the measure of the payment and has nothing to do with its character. The payment being agreed to for other purposes and its amount being otherwise fixed, the fact that a variation is provided for and the measure of the variation is fixed by reference to the figure of production, does not make it a cost of carrying on the business. Mr. Mitra took us practically through the whole range of cases on the subject and, very fairly, drew our attention not only to cases in his favour but also to some that might be cited against him. The cases are merely illustrations of various kind of expenditure which were held to be of ei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns. The expenditure which fell to be considered in the case was the amount which a particular member had paid to the Association in a certain year under this arrangement. Very similar was the case of R. S. Munshi Gulab Singh Sons vs. Commissioner of Income-tax, Lahore (1946) 14 ITR 66, also relied on by Mr. Mitra, where the owners of three rival concerns in the printing and publishing trade entered into an arrangement by which they agreed to quote uniform rates in the tenders submitted by them for Government orders and in consideration of that agreement each (see the judgment, though the head-note mentions the assessee only) undertook to pay the others a certain share of the estimated profits from such Government orders as might be secured and executed by him, the estimate being made by deducting certain agreed costs from the tendered cost. The expenditure that fell to be considered in this case was the amount paid in a certain year by one of the parties to the agreement. It is clear that these were cases where, in the course of carrying on their respective businesses and the actual process of profitmaking, certain rival traders in the same line of business came to an arrangement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on their own account in the old zones of their agencies, but this term was not given any consideration in either of the cases except that in the case of the Anglo Persian Oil Co. Ltd. (supra), one of the judges in the Court of Appeal, Lawrence, L.J., mentioned it and observed that it did not alter the character of the payment which was otherwise a payment for the cancellation of a service agreement in order to effect a saving in the working expenses of the employer. These two cases, therefore, have no relevancy to the case before us. Nor is the case of Jagat Bus Service vs. Commissioner of Income-tax U.P. and Ajmere Merwara (1950) 18 ITR 13 of any assistance. There a firm obtained a monopoly of the right of plying motor vehicles on hire on a certain road for a period of five years on condition of paying a certain fixed sum every year, but a rebate was allowable in case the roads remained impassable for a certain number of days. The expenditure which fell to be considered was the payment made in a particular year of the annual sum, less rebate, and it was held to be of the nature of revenue expenditure. A payment of that kind is very different from the payment we have to consider, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hers. What the last circumstance had to do with the payment, as made by the transferee firm, being of a capital or revenue nature is not easy to see. But, in any event, even if the decision be right I feel in no way embarassed by it in deciding the present case, where the payment is not to a person, previously engaged in the same line of business, in consideration of his withdrawing therefrom. I may add that the learned Judges appear to have had before them only the decision of the High Court in the Associated Portland Cement Manufacturers' case (1945) 2 All E.R. 535 and not also the decision of the Court of Appeal (1946) 1 All ER 68 : 27 Tax Cas. 103. The other decision is that in Commissioner of Income-tax, West Bengal vs. Lahoty Brothers Ltd. (1951) 19 ITR 425. The facts of that case are not at all clear, for, although it is stated that a joint family transferred a kerosene agency business to the assessee company for a certain consideration and then undertook not to compete with the company for a further consideration, it appears from clause 5 of the agreement, reproduced in the judgment, that one of the reasons for which the joint family was forbearing to compete was that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was that the land which was a potential site for a competing concern, was sterilised for purposes of boiler making for a period of twenty years. The payments in the present case also prevented the emergence of competitors in the other quarries of the district and sterilised them for purposes of cement making for a period of twenty years, at least some of the quarries for that period and some for five years. The case of Associated Portland Cement Manufacturers Ltd. vs. Kerr (supra) has already been referred to. There, large sums were paid to two retiring directors of a company in consideration of their agreeing not to carry on or be concerned in the manufacture or the selling of cement, the business of the company, in any part of the world without the company's consent and the payments were held to be capital expenditure. It seems to me observed Lord Greene, M.R., that the effect of buying off potential competitors must of its very nature affect the company's goodwill. If all potential competitors could be bought off, the goodwill of the business would obviously be very greatly benefited. In the present case also, all the potential competitors were bought off, though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt for earning profits, and was not concerned with the use or employment of that instrument for the profit earning purpose. The true meaning of the expression once and for all was also explained and it was observed that the test was not recurrence, but whether what had been done was to provide for a periodical reward or outlay to cover the use and enjoyment of the subject for periods commensurate with the payment or whether final provision had been made so as to secure future use and enjoyment of the subject for the stipulated period. Judged by these tests, which are all deductions from Atherton's case (supra), the expenditure in the present case is capital expenditure. It is to use the words of, Dixon, J., an expenditure for maintaining the strength of the capital structure of the company, the organisation set up for the earning of profits and not an expenditure connected with the process by which the organisation operates to obtain regular returns for regular outlay. It is an expenditure for the benefit of the business as a whole and not an expenditure for meeting any of the wide variety of working needs which have to be met out of the returns of the trade. The benefit i ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
