TMI Blog1944 (12) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... was payable in 12 quarterly instalments of ₹ 2,583-5-4 each, the first instalment falling due on the 15th December, 1937. The lease was of harra produce from the entire forest area within the limits of Panabaras-cum-Aundhi Zamindari estate, tahsil Balod, district Drug. The estate consists of 205 villages which have been specified in the agreement. The lessee agreed to deposit l/6th of the consideration money, namely, ₹ 5,166-10-8 as security which amount, if not forfeited, was to be set off against the last instalments of the lease money. Under clause 2 the lessor agreed to permit the lessee to pluck, sell, sub-let, remove from the said forest, the harra produce and the lessee undertook not to remove or sell any other kind of produce. The clause recits that the lessor has given possession of the trees within the entire area of the said estate for the purpose of plucking the harra fruits. Under clause 8 the lessee undertook to remove all harra to his own custody outside the said forest area within six months of the expiry of the period of the lease. The lessor was to allow the lessee, free of charge, grass and leaves for thatching, and wood for preparing temporary huts. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 of the Act specifies the heads of income chargeable to income-tax. Profits and gains of business have been specified as one of the heads of income chargeable to income-tax. Under Section 3 tax for a year is chargeable in respect of the total income of the previous year. Section 10 is in these terms:- (1) The tax shall be payable by an assessee under the head 'profits and gains of business.................' in respect of the profits or gains of any business ....... carried on by him. (2) Such profits or gains shall be computed after making the following allowances, namely : - (xii)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 purpose of such business.............. The expenditure claimed by the assessee was laid out or expended wholly and exclusively for the purpose of such business. This has not been disputed by the Income-tax authorities. The clause (xii) prohibits a deduction which is in the nature of a capital expenditure. The question for decision in this reference is whether the expenditure incurred by the assessee was in the nature of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 188 ; 11 ITR 513 . Similarly reference may usefully be made to English cases as to the meaning of the expression capital expenditure. The expression capital expenditure has not been defined either in the English or the Indian Income-tax Act. No precise, full and accurate definition of the phrase is to be found in the cases. It is not possible to lay down any hard and fast rule or to enumerate any rigid or scientific principle which can be applied to determine whether a particular payment is in the nature of capital expenditure. Various tests have been formulated in several cases in determining whether an expenditure is a capital expenditure or a revenue expenditure. In Vallambrosa Rubber Co., Ltd. v. Farmer [1910] 5 Tax Cas 529, at p. 536, Lord Dunedin as President suggested one test: that a capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year. This is however not decisive in every case. Instances may be cited where payment, though made once and for all has been held to be a revenue and not a capital expenditure: Smith v. Incorporated Council of Law Beporting for England and Wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... educt any yearly sum to meet the exhaustion of the caliche. The law has been clearly and lucidly stated by Channell, J., at page 673 in these terms:- In the ordinary case, the cost of the material worked up in a manufactory is not a capital expenditure; it is a current expenditure, and does not become a capital expenditure merely because the material is provided by something like a forward contract, under which a person for the payment of a lump sum down secures a supply of the raw material for a period extending over several years............The question.........is what is the nature of the adventure or concern which this particular company is carrying on. If it is merely a manufacturing business, then the procuring of the raw material would not be a capital expenditure. But if it is like the working of a particular mine or bed of brick earth, and converting the stuff worked into a marketable commodity, then the money paid for the prime cost of the stuff so dealt with is just as much capital as the money sunk in machinery or buildings..........This company must be treated as a company formed for the purpose of working and developing the bed of caliche. If it carried on a gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within a stated period. The question was whether under the Land and Income Assessment Act, 1908, the company was entitled to make a deduction from the gross proceeds of its business in respect of the value of the standing timber which it had cut in determining the profits for assessment for income purposes. Toe leases were for a period of 99 years and there was no obligation upon the company immediately to cut down and remove the timber. Lord Shaw at page 776 observed:- It appears to the Board that the present case involves no refinement of distinction ; for the transaction under which these timber rights were acquried was not one under which a mere possession of goods by a contract of sale was given to the appellant company, but was one under which they obtained an interest in, and possession of, land. So long as the timber, at the option of the company, remained upon the soil, it derived its sustenance and nutriment from it. The additional growths became ipso jure the property of the company. All rights of possession necessary for working the business of cutting or even for preserving uninjured the standing and growing stock of timber were ceded under the leases. All this, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a prendre which was a right, privilege or benefit in, over or derived from land and that the payments under the agreements were not admissible deductions for income-tax purposes. In Commissioner of Income-tax, Madras v. Manavedan Tirumalpad [1930] ILR 54 Mad. 21, the assessee had purchased a forest with trees growing thereon and that as the trees were cut down and carried away the capital was thereby decreased and he claimed exemption from the assessment of the profits derived from the sale of timber. The decision was that the amounts received by the owner of unassessed forest lands by the sale of timber trees thereon are income liable as such to income-tax. In Commissioner of Income-fax v, Chengalvaroya Mudahar [1934] ILR 58 Mad. 1 ; 2 ITR 395, the assessee had the exclusive privilege for the excavation of lime shells for the period of three years for ₹ 27,750 payable in twelve quarterly instalments. The assessee claimed a deduction of ₹ 11,775 on two grounds, (i) that the sum was in part payment of ₹ 27,750 and was paid as rent and (ii) that ₹ 27,750 was really the purchase price of the shells lying upon and under the land which under the agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment is of two lines but the decision can be supported on principle. In Commissioner of Income-tax v. Tika Ram and Sons, Ltd [1937] 5 ITR 544 ; ILR [1937] All 908, the asses-see was a proprietor of a part of the property and a lessee of the rest. The earth used to be dug up and utilized for the purpose of bricks. He claimed a deduction of ₹ 2,500 under Section 10(2)(ix) of the Indian Income-tax Act, 1922, before its amendment. This was disallowed. At page 909 it was stated :- If the company had been purchasing merely raw materials for the purpose of manufacturing bricks, it would certainly have been entitled to a deduction of the price of such materials from the total income realised by the sale of the bricks during the year. But the position here is not that of a company which is merely carrying on the business of manufacture by purchasing raw materials and converting such materials into marketable commodities . At page 910 :- The position seems to be more analogous to that of a company which is working a quarry or mine rather than to an ordinary manufacturer who purchases raw materials for the purpose of his manufacturing business . The decision in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as would be any railway trucks or lorries provided by him for the same purpose. After quoting the observations of Lord Sumner in John Smith and Son v. Moore [1921] 2 AC 13 , at page 38 : The business carried on was not that of buying and selling contracts, but of buying and selling coals, and the contracts, which enabled the seller of the coals to acquire the coals, were no more the subject of his trading as a stock in trade for sale than a lease of a brickfield would be the subject of a sale of bricks. At page 565 Romer, L.J., put the following question, Are the dumps the raw material of the appellants' business or do they merely provide the means of obtaining that raw material ? and answered that they were the raw material itself, and concluded the judgment by stating that it was a circulating capital. The decision in the case was that the amount expended in acquiring the tailings was in the nature of an expenditure on the raw material of the company's trade and that as such for the purpose of assessing the company's profits or gains the cost of the tailings treated during the period of assessment was a proper deduction from the proceeds realized by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... property has been defined in Section 2(9) of the Registration Act to include standing timber, growing crops and grass, fruit upon and juice in trees, and property of every other description, except immovable property. Immovable property has been defined in Section 2(6) of the Act to include land, buildings, hereditary allowances, rights to ways etc., or any other benefit to arise out of land, and things attached to the earth or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops, nor grass. The, combined effect of these two definitions is that growing crops are movable property. Under Section 3 of the Transfer of Property Act immovable property does not include standing timber, growing crops or grass. Movable property has not been defined in the Act. The definition of goods in the Indian Sale of Goods Act is as follows:- 2. (7) 'goods' means every kind of movable property other than actionable claims and money ; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. This definition ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o bind the contract, or in part payment, or unless some note or memorandum in writing of the contract be made and signed by the party to be charged or his agent in that behalf. There is no such corresponding law in India. The notes on the case Duppa v. Mayo [1669] 1 Wms. Saund. 275, at p. 277; 85 ER 336, at p. 343 by the learned editor Sir Edward Vaughan Williams in the first volume of Saunders' Reports correctly summarised the English common law on the subject. These were further explained and applied in Marshall v. Green [1875] 1 CPD 35. They have been subsequently modified by the definition contained in the English Sale of Goods Act which is in terms different from the definition given in the Indian Sale of Goods Act. They are thus of doubtful application so far as the Indian Acts are concerned. The contention of the assessees was that the purchase was of forest produce and not a lease of immovable property. Reference was made to the executive instructions on the preparation of forest contract agreements in the Forest Manual contained in Volume II at page 107. They do not however bear out the contention advanced. The relevant observations are reproduced below:- .. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. s case (supra ) was about the nature of the right which a person gets under a written agreement to enter upon land, collect and take away tendu leaves for making bidis over a period of years. The decision was that it was not a lease but an exclusive licence coupled with a grant amounting to a profit a prendre and that such an agreement fell within Section 17(1)(b) of the Registration Act and required registration. At page 441 it is stated :- These 'leases' are not 'leases' of leaves or crops. That is, the subject-matter is not the sale or transfer of leaves or crops. The subject- matter is the transfer of a right. We have therefore to consider not what leaves or crops are, but what the right is................. The so-called 'lease' here in question is a licence and a grant. As a licence, it is within the meaning of Section 52 of the Easements Act and it does not amount to an interest in property. But to it is added a grant, viz., a grant permitting the grantee over a period of years to sever from the land certain things which are attached to the earth. A tree is attached to the earth and with it all its parts................Are the leaves of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit or whether it confers an interest in the property gold under the Sale of Goods Act, for whichever way the matter is viewed, the result is the same in this particular case because of the terms of the document under consideration. There is something more than a mere licence to enter in order to cut and remove ascertained timber sold and that something more creates rights and interest in immovable property. The principle in Kauri Timber Co. Ltd. s case (supra) , though based on the statement of the law contained in the notes on the case of Duppa s case (supra) by the learned editor Sir Edward Vaughan Williams in the first volume of Saunders' Reports p. 277c, deducible from the cases cited therein, is applicable as the view there taken is consistent with the law as stated in the decisions of the Divisional Bench in Messrs. Mulji Sickka and Co. s case (supra) and Narmadaprasad s case (supra) . The right to collect lac is a right relating to immovable property: see Parmanand v. Birkhu [1909] 5 Nag. LR 21, at p. 23, Sonu v. Bhadaria [1922] 19 Nag. LR 186, at p. 188 and Imam All v. Rani Priya-wati Devi ILR [1938] Nag. 31. The right to collect hurra fruit is a right to im ..... 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