TMI Blog1962 (12) TMI 87X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to the Nowrangpur forest are practically the same: 1. That for and in consideration of the sums of money to be paid by the company in the manner and at the times and rates hereinafter specified and subject to the terms and conditions hereinafter appearing the Maharajah agrees to sell and the company agrees to buy all the sal trees, for the manufacture of sleepers and scantlings, which may be marked by the forest department for felling in the reserved, protected and unreserved lands of the Ramgiri Range (hereinafter known as the 'leased area'), the boundaries of which are delineated and shown on the map hereunto annexed and more particularly described in the schedule hereunto appended. 2. That the company shall have the right and liberty within the said area to fell all sal trees so marked as aforesaid and to convert the same into sleepers in the leased area and to export the timber so converted therefrom during a period of six years from July 1, 1944, to June 30, 1950: Provided that the Maharajah, at the request of the company, renews this lease for a further period of five years from July 1, 1950, on terms to be mutually agreed upon failing which both the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve only upon the Government sanction being granted. It was however realised that the Government grant could be for a period of less than five years. In that case, it was agreed that the back-royalty payable would be calculated proportionately. For example, if the total back-royalty for five years was ₹ 2,00,000 and the Government sanction for the said lease was only for two years, the actual back-royalty payable would be 2/5th of ₹ 2,00,000, namely, ₹ 80,000, which would be payable in two annual instalments of ₹ 40,000 each, per year. All this appears clearly from a letter written on behalf of the assessee-company to the Dewan of Jeypore dated 16th January, 1950, a copy of which is annexed as annexure C to the said statement of case. The next thing that happened was that the District Magistrate and Collector of Koraput, acting under the Orissa Preservation of Private Forests Act, 1947, accorded sanction to the extension of lease only for one year from July 1, 1950, to June 30, 1951. It appears that on the 21st March, 1951, an agreement was arrived at between the company and the Jeypore Estate by which it was agreed that the existing rates of royalty were a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 (See annexure G to the statement of case). On the 13th June, 1952, an indenture of lease was executed between the assessee-company and the Jeypore Estate for both the forest areas, in terms similar to the previous leases, for the period of three years from July 1, 1951, to June 30, 1954. A copy of this lease is annexure E to the said statement of case. In this lease the new percentage of royalty agreed on the 21st March, 1951, is mentioned, but there is no mention of any additional back-royalty being payable. In its return for the assessment year 1953-54, the assessee claimed a sum of ₹ 69,157 on account of the additional royalty paid during the year. This amount was not debited to the account but was claimed by the assessee in the computation of the income filed with the return. A sum of ₹ 14,000, described as a lump sum grant but paid as additional royalty was debited in the account and claimed in the return. These figures will be explained if we look at the letter dated 10th June, 1952, from which the figures have been quoted above. The lump sum payment of ₹ 14,000 obviously refers to ₹ 9,000 and ₹ 5,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C mentioned above. Those being the facts of the case, the next thing to be considered is the position in law. The question that has to be solved is the old question of whether the amount involved is in the nature of capital or revenue expenditure. Upon this question, there is a large number of authorities, but the ultimate position has always been accepted to be that each case depends upon its own facts. The Supreme Court has discussed all the cases and has laid down the tests in three cases which are invariably cited, namely, Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax**, Pingle Industries Ltd. v. Commissioner of Income-tax** and Abdul Kayoom v. Commissioner of Income-tax***. A passage appearing in the judgment of Hidayatullah J. in the last mentioned case sums up the legal position and may be stated thus: What is attributable to capital and what to revenue has led to a long string of cases here and in the English courts. The decisions of this court reported in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax[1955] 27 I.T.R. 34 ; [1955] 1 S.C.R. 972 and Pingle Industries case[1960] 40 I.T.R. 67 ; [1960] 3 S.C.R. 681] have considered all the leadin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ords-Hood Barrs v. Inland Revenue Commissioners[1957] 1 All E.R. 832; [1958] 34 I.T.R. 238 (H.L.). The facts in that case were as follows: The assessee was a timber merchant. On September 30, 1947, he entered into an agreement in writing with a company which owned a large estate, to purchase all the timber specified in the agreement, then standing and growing upon the forests referred to in the schedule to the agreement, together with the boughs, branches and other parts of the trees down to the soil. Full and free power and authority for the purchaser, his servants, agents and workmen, to go to and return from the lands upon which the said trees were situate was granted for the purpose of felling, cutting and sawing up and carrying away the same. The purchase price was paid in two large sums and was not a periodical payment. The number of trees and their nature were specified. The purchaser could mark such trees as were presumed to be ripe for cutting and it was only upon the purchaser felling the trees that the property in the timber passed. The agreement contained no time-limit for the felling and carrying away of the timber. The question was whether these two sums paid were in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned judge then proceeds to deal with the facts of the particular case before him, noting that the time during which the timber could be felled was almost indefinite and also that the purchaser had not the means to fell the entire amount of timber within a short time. The learned judge proceeded to say as follows[1958] 34 I.T.R. 238, 256, 257]: The fact, however, remains that, when the agreements were completed, he had no right of property in a single tree. He had merely a right to select and thereafter to cut. Even by selection he acquired no property in the trees. He could obtain no property in any part of a tree till he had felled it to the ground. I find it impossible to hold that this very peculiar right is capable of being treated as stock-in-trade of the appellant. The nature of the right, the indefiniteness of the period for its exercise, and the lack of identification of the trees on which the right was to be exercised, to which may be added the size of the transaction and the absence of any evidence of intention or means to complete it within any foreseeable time, all, in my opinion, negative the idea that the appellant had anything that could be called stock- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made at the commencement of the agreement. Next he remarked that in the English case the selection and the marking of the trees were to be done by the purchaser at his own convenience, whereas in this case the trees were to be identified and marked by the Forest Department. He next points out that in the English case there was no time-limit for felling or extracting the timber, whereas the agreement in this case was for 3 years and the sleepers were to be removed within one year of the completion of operation in each strip. Mr. Chaudhuri, therefore, argues that the case comes nearer to the facts of the Privy Council case than that of the House of Lords. As has been stated above, it is very difficult to equate the facts of one case with another, and even a single fact might turn the scale. However, what we have got to find out is the principles upon which our decision should rest. If I have understood the principle laid down in the cases above mentioned, it is this: If a trader or businessman buys a quantity of goods which forms his stock-in-trade, and this he may do in an infinite number of ways, then it is a part of his revenue expenditure. In other words, he is buying stock-in-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portant facts, but to see whether there is a common principle which can be applied. In my opinion, the principle that has been laid down in the House of Lords case is applicable to the facts of this case. I shall now enumerate why this is so. Coming to the agreements in question in this case, we find that in the first instance, like the English case, there is reference to the sale and purchase of the trees themselves. But it has been made clear in the agreement that it is not an agreement for the purchase of the trees. For example, the agreement is entitled Agreement for extraction and sale of sal sleepers, specials and scantlings from the Kotpad, Omerkote and Nowrangpur range forests . In the agreement itself, it has been clearly stated that only such trees could be felled which were of the specified girth and marked for felling by the Forest Department. The vendor was to specify the particular area which was to be worked from time to time. The most important term of the agreement is that property would only pass when the timber had been felled and converted into sleepers and when such sleepers had been passed for delivery. The next most important thing to be considered is tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Forest Department within a particular area for the purpose of converting the same into sleepers. It is, therefore, almost in the nature of a monopoly right for the period concerned. Analysing the facts, therefore, we arrive at the following conclusions. Firstly, it is not a sale of the standing timber. The agreement confers a right upon the purchaser to enter into the forest and extract sleepers . That connotes that it would have to enter the forest, to wait for certain trees to be marked, and then to cut down such trees according to its requirements for the supply of sleepers to the railways and others, as and when it liked, within the specified period of three years. It may be that within this period it would not be able to implement all its contracts, but regard being had to the history of these contracts, it certainly hoped for a continuation of the contracts for a subsequent period. In my opinion, therefore, what was being acquired was not stock-in-trade but the right to acquire it and, therefore, upon the principles laid down above, it was an acquisition of a capital asset of an enduring nature and not an expenditure on revenue account. Although this conclusion woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ple laid down was to the effect that payment for the purpose of acquiring a further benefit or the extension of existing rights, which were about to expire, was in the nature of a capital expenditure and not a revenue one. In other words, the business of the assessee depended upon acquiring sources from which it could get its stockin-trade. The acquisition of such a right, for a future period, was not a matter of course. It acquired that right by the payment of a consideration. Such a payment made for the acquisition of a benefit of an enduring nature was in the nature of a capital expenditure and not a revenue one. Adverting to the principle laid down by Lord Morton, we find that, on the facts of this case, it was not a purchase of the raw material of the trade or of the stock-in-trade, but the purchase of a capital asset from which the assessee would be able to derive its raw material or stock-in-trade as and when the requirements of its business make it expedient to do so. In whatever manner the agreement is analysed, we do not think that it could possibly be said, as it was said in the Privy Council case mentioned above, that it was analogous to a sale over the counter. Inde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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