TMI Blog1964 (8) TMI 88X X X X Extracts X X X X X X X X Extracts X X X X ..... The relevant year of assessment is the year 1952-53 and the corresponding previous year ended on December 31, 1951. The Income-tax Officer refused to allow the said expenditure of ₹ 35,800 on the ground that it was capital in nature and, on appeal, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. On second appeal the Appellate Tribunal held that the financial overdraft negotiated with the bank was definitely an advantage of an enduring character and, as such, it was capital in nature. The Tribunal, therefore, concluded that the said sum of ₹ 35,800 was incurred by the assessee to secure a capital asset and must, therefore, be regarded as the capital expenditure incurred once and for all. Thus the assessee's claim for deduction or allowance under section 10(2)(xv) was rejected. On the facts and circumstances set out above the following question of law has been referred to this hon'ble court for opinion: Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the sum of ₹ 35,800 incurred by the assessee for the purpose of raising or securing overdraft f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring character. (c)The test for determining an expenditure as capital or revenue has undergone a substantial metamorphosis and the Supreme Court in its latest pronouncement, according to Mr. Banerjee, has sufficiently indicated that the dictum of Lord Cave in Atherton v. British Insulated and Helsby Cables Co. Ltd. [1925] 10 Tax Cas. 155, can no longer be considered as the last word on the point. He has traced the evolution of this branch of law from the earliest period and has made a painstaking endeavour to convince us that the principle for determining an expenditure as revenue or capital is not limited to the test adumbrated in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax [1955] 27 ITR 34 , 44; [1955] 1 SCR 972. According to him, the periodicity of expenditure and tenure or duration of any asset or advantage are no longer essential. Mr. Banerjee has submitted that on the facts of the instant case, the principles to determine the nature of expenditure could be derived from the following factors, namely, (a) the nature of the business; (b) the nature of the expenditure; (c) the nature of the right acquired, and (d) their relations inter se as set out in Abdul Ka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge 116: In my opinion the registration fees paid were not paid for the purpose of acquiring a right of transmissibility, which did not previously exist; the enhanced status of registered mark is only incidental to the registration of an existing asset. But even if it could be regarded as a new right, it is not enduring since in order to keep it up, periodic payments are necessary. The next case to which our attention has been drawn was Mohanlal Hargovind v. Commissioner of Income-tax. [1949] 17 ITR 473 (PC). In that case the assessees carried on business at several places as manufacturers and vendors of country-made cigarettes known as bidis. These cigarettes were composed of tobacco rolled in leaves of a tree known as tendu leaves, which were obtained by the assessees by entering into a number of short-term contracts with the Government and other owners of forest. Under the contracts, in consideration of certain sum payable by instalments, the assessees were granted exclusive or monopoly right to pick and carry away the tendu leaves from the forest area described. It was held that the contracts were entered into by the assessees wholly and exclusively for the purpose of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be run on the road only on payment of a tax of ₹ 10 per trip per motor vehicle. During the relevant year the assessee had to pay only a sum of ₹ 5,000 to the State, the road being not in a motorable condition for several months. The Allahabad High Court held that the sum of ₹ 5,000 paid under the agreement was a revenue expenditure. In that case the assessee by these contracts has derived no additional advantage; the expenditures have been incurred for the maintenance of status quo and to earn profit year to year. The tests mentioned in the said case, it may be urged, are no longer good law after Assam Bengal Co. Ltd. v. Commissioner of Income-tax [1955] 27 ITR 34; [1955] 1 SCR 972. Whatever may be the position, Malik C. J. himself has cautioned at page 22 that the decision of the question whether an item of expenditure is revenue expenditure or capital expenditure depends upon a variety of circumstances. The test laid down by him can only be construed as illustrative and not exhaustive. In fact, he has made it clear that it is impossible to lay down any test which would meet all cases . Our attention was then drawn to another type of case, namely, determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional advantage was obtained by the new firm which the previous firm did not enjoy or was not enjoying. The new firm by the temporary arrangement has been continuing the advantage which the predecessor firm was enjoying and the assessee was only maintaining the status quo. Further, the expenditures incurred were not made once and for all. It was agreed that until the outgoing partner would get a separate quota right the assessee would continue to incur the said expenditure every year. In any event, Rajagopalan J. has come to the finding [1957] 32 ITR 313. It was not capital expenditure. Nothing was laid out by the assessee-firm on the acquisition of any capital asset, any asset of an enduring nature, with the aid of which the assessee-firm could earn profits. It was not even a case of acquisition of any fresh quota rights, whether or not quota rights could be viewed as capital assets. The assessee-firm had its quota rights, and it was bound to get its quota till the authorities complied with its request to order an allocation of quotas between the assessee-firm and the retiring partner. What the assessee agreed to pay him was for the use of the quota with which the assessee could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir own business in India and notice was given to P. Co. terminating their agency. The assessees agreed to pay a sum of ₹ 500 per month for a period of five years or ₹ 30,000 in lump as compensation to a certain extent for the losses of the agency provided P. Co. agreed to assist the assessees' employees in getting a thorough insight into the working of the business and further agreed not to enter into competition with the assessees for five years. A sum of ₹ 10,000 was thus paid to P. Co. in the year of account. The Calcutta High Court held that the expenditure was not of a capital nature inasmuch as the assessees were not nurturing or protecting a new business or purchasing anything in the nature of goodwill but only securing advantages for their undertaking and facilities for future operations and inasmuch as the payment was made out of circulating capital and did not result in any new asset or addition to the fixed capital of the assessees. Apart from the said conclusions arrived at on the facts of that case, Costello J. has made it clear that it is not possible to lay down any hard and fast rule or to enunciate any rigid and scientific proof which ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 28,000 and the balance of ₹ 20,000 was payable in monthly instalments of ₹ 1,666 10as. 8ps. The assessee had only the right to excavate stones and undertook not to manufacture cement and the jagirdar undertook not to allow any other person to excavate stones in those areas. There was also another similar lease taken from the Government for a period of five years under which the appellant had to pay ₹ 9,000 per year in monthly instalments of ₹ 750 each. The question was whether the amounts paid by the assessee to the jagirdar and the Government each year were revenue expenditure allowable under section 12(2)(xv) of the Hyderabad Income-tax Act corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922. It was held (per Kapur and Hidayatullah JJ.; S.K. Das J. dissenting) that the expenditures incurred were outgoings on capital account and were not allowable deductions. It has been urged by Mr. Banerjee that the Supreme Court in this case has substantially modified its previous approval of Lord Viscount Cave's tests in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax [1955] 27 ITR 34, 44; [1955] 1 SCR 972, inasmuch as the endurin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss in the purchase and sale of conch shells took on lease from the Government the exclusive rights, liberty, and authority to fish for, take, and carry away all chank shells in the sea off the coast line of a specified area for a period of three years on a consideration of a yearly rent of ₹ 6,111. Kapur and Hidayatullah JJ. (S.K. Das J. dissenting) held that the yearly rent of ₹ 6,111 paid by the assessee was an amount paid to obtain an enduring asset in the shape of an exclusive right to fish; the payment was not related to the chanks, which it might or might not bring to the surface; it was not an amount spent in acquiring its stock-in-trade. It was, therefore, an expenditure of a capital nature, and though it was incurred for the purpose of the assessee's business, it was not allowable under section 10(2)(xv). Mr. Banerjee has relied on a passage at page 703, where Hidayatullah J. has stated : What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles which are followed in such cases. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h case, yet certain broad principles and tests can be spelt out from the vast array of English and Indian decisions. In Assam Bengal Cement Co. Ltd.'s case (supra), the Supreme Court has approved the propositions of law laid down by Mahajan J. in Benarsidas Jagannath, In re [1955] 27 ITR 34 (SC) and, incorporating the conclusions of a large number of cases, has summarized the broad tests which are of great practical importance. Bhagwati J., at page 44 of the said report, has set out the principles as follows: 1.Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment: vide Lord Sands in Commissioners of Inland Revenue v. Granite City Steamship Co. [1927] 13 Tax Cas. 1, 14 In City of London Contract Corporation v. Styles [1887] 2 Tax Cas. 239, 243, Bowen L.J. observed as to the capital expenditure as follows : 'You do not use it for the purpose of your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern.' 2.Expenditure may be treated as properly attributable to capital when it is made not only once and for all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should not be a recurring expenditure; (ii) the expenditure brings into existence an asset or advantage; (iii) the asset or advantage is for the enduring benefit of the business. It is urged on behalf of the assessee that the Supreme Court has given a go-by to Viscount Cave's dictum inasmuch as in Pingle Industries 's case (supra), at page 91, Hidayatullah J. has given periodicity of payment no significance. Similarly, in Abdul Kayoom 's case (supra), at page 703, the enduring character has no longer been considered to be of any importance. In our opinion, the Supreme Court in Pingle Industries 's case (supra) and Abdul Kayoom 's case ( supra) has not only affirmed the principles enunciated in its previous decision in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax [1955] 27 ITR 34 ; [1955] 1 SCR 972, but has enlarged the scope of those principles in their application to the particular facts and circumstances of a case. Taking the ratio of the said three Supreme Court decisions, it appears that the principles laid down there are not exhaustive or mutually exclusive. It is one thing to say that expenditures which are made once and for all and wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y as a whole. Enduring benefit need not be permanent or everlasting; nor it implies benefit of any nature, direct or indirect, immediate or remote. Thus enduring benefit is a mixed question of law and fact. As the overdraft facility enjoyed by the assessee in the instant case creates a security and confidence and opens the gateway to borrow money in general and to meet the liabilities in adverse situation, it connotes a substantial asset or an advantage to the assessee and the benefit which the assessee gets is an enduring benefit. It is quite possible that the overdraft facility in a particular case may involve a temporary short-term loan or accommodation covering a small sum in which case it may be possible to come to the conclusion that the overdraft facility has not yielded an asset or an advantage of an enduring character. In the instant case, as stated earlier, there are no extenuating circumstances which compel us to conclude that the overdraft facility is not of an enduring benefit. Under these circumstances the overdraft facility in the instant case is a capital asset and payment for the acquisition thereof is a capital expenditure. Expenditure is not for the borrowing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax [1951] 20 ITR 287 ,, R.B.N.J. Naidu v. Commissioner of Income-tax [1956] 29 ITR 194 , Hochstrasser (Inspector of Taxes) v. Mayes [1961] 42 ITR 457 , 469 (HL), and Commissioner of Income-tax v. Indian Woollen Textile Mills [1964] 51 ITR 291 (SC), Mr. Banerjee has concluded that the onus of proving the said expenditure as capital expenditure is shifted to the department which has failed to place sufficient material for coming to the said conclusion. According to him, the Tribunal must consider the evidence covering all essential materials. The Tribunal, in the instant case, has not considered all essential materials. Its conclusion, according to Mr. Banerjee, amounts to misdirection in law. We are of opinion that there is no substance in the contention. Dr. Pal, learned counsel for the department, has accepted all the four primary facts mentioned above by Mr. Banerjee and has submitted that on the basis of those facts the Income-tax Officer is justified in coming to the conclusion that the expenditure is of capital nature. As stated above, ordinarily, the overdraft facility gives an advantage of an enduring character because the person in whose favour the overdraft facilit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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