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TMI Blog1961 (11) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... istinguishable from the facts on which the decision of the Privy Council in Mohanlal Hargovind v. Commissioner of Income-tax, was rendered, and on the principles laid down by this court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, it must be held that the expenditure of Rs. 6,111 in this case was on revenue account and the respondent firm was entitled to the allowance which it claimed. The short facts are these. The respondent firm carried on a business in the purchase and sale of conch shells (called chanks). It used to acquire the stock of conch shells by (1) purchase from divers, (2) by purchase from the Fisheries Department of the Government of Madras, and (3) by fishing for and gathering such shells from the sea. It disposed of the stock so acquired at Calcutta, the difference between the cost price end selling price less expenses being its profit made in business. On November 9, 1945, it took on lease from the Director of Industries and Commerce, Madras, the exclusive right, liberty and authority to fish for, take and carry away all " chank " shells in the sea off the coast line of the' South Arcot District including the French Kuppams of Pondicherry. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he respondent firm contended that the decision of the Privy Council in Mohanlal Hargovind v. Commissioner of Income-tax applied to this case inasmuch as the payment was to secure the stock-in-trade for its business. The Appellate Tribunal was of the opinion that the Privy Council decision covered the case, but felt itself bound by the decision of the Full Bench of the Madras High Court in Abdul Kayum Sahib Hussain Sahib v. Commissioner of Income-tax. The Tribunal acceded to the demand for a reference to the High Court, and accordingly referred the following question to the High Court for its decision : " Whether on the facts and circumstances of the case the payment of the sum of Rs. 6,111 made by the assessee under the terms of the agreement entered into with the Director of Industries and Commerce, Madras, on 9th November, 1945, was not an item of revenue expenditure incurred in the course of carrying on the business of the assessee and, therefore, allowable under the provisions of section 10 of the Indian Income-tax Act ? " The reference first came before a Division Bench and was then referred to a Full Bench. By its judgment dated April 2, 1953, the Full Bench answered the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inion the application of this test makes it at once clear that the sum of Rs. 6,111 which the respondent firm spent was expenditure laid out as part of the process of profit-earning ; it was not a capital outlay, that is, expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which was a condition of carrying on its trade. Under the contract in question the respondent firm did not acquire any right to immovable property. It acquired no right in the bed of the sea or in the sea. The only right conferred on the respondent firm was the right to fish for, gather and carry away conch shells (in motion under the surface of the sea) of a specified type and size. The respondent firm was under an obligation to return to the sea conch shells less than 2 1/4 inches in diameter. The business of the respondent firm consisted in buying and selling conch shells. No manufacturing process was involved in it. Therefore, the stock-in-trade of the respondent firm was conch shells. It secured this stock-in-trade in many different ways, by purchase from divers, by purchase from Government and private parties, and also by gathering conch shells unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure. I may explain what I have in mind by giving a simple illustration. Take the case of a fisherman who sells fish. Fish is his stock-in-trade. He may buy the fish he requires from other persons ; or he may obtain the supply of fish he requires by catching the fish of a specified size and type in particular waters over a short period under a contract entered into by him and take them away. I do not think that in a business sense any distinction can be made between the two means of obtaining the stock-in-trade. Both really amount to securing the stock-in-trade rather than acquiring an enduring asset or a permanent right for producing the stock-in-trade. And a business man, like the fisherman in the illustration given above, would indeed be surprised to learn that buying of fish for his business is revenue expenditure whereas catching fish in particular waters under a contract entered into by him for the purpose of obtaining his stock-in-trade on payment of a lump sum down, is capital expenditure. (3) The test whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a certain sum payable by instalments, the assessees were granted the exclusive right to pick and carry away the tendu leaves from the forest area described. The assessees were allowed to coppice small tendu plants a few months in advance to obtain good leaves and to pollard tendu trees a few months in advance to obtain better and bigger leaves. The picking of the leaves however had to start at once or practically at once and to proceed continuously. On these essential facts, the Privy Council held that contracts were entered into by the assessees wholly and exclusively for the purpose of supplying themselves with one of the raw materials of their business, that they granted no interest in land, or in the trees or plants, that under them it was the tendu leaves and nothing but the tendu leaves that were acquired, that the right to pick the leaves or to go on to the land for the purpose was merely ancillary to the real purpose of the contracts and if not, expressed would be implied by law in the sale of a growing crop, and that therefore the expenditure incurred in acquiring the raw material was in a business sense an expenditure on revenue account and not on capital, just as muc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wing paragraph : "It appears to their Lordships that there has been some misapprehension as to the true nature of these agreements and they wish to state at once what in their opinion is and what is not the effect of them. They are merely examples of many similar contracts entered into by the appellants wholly and exclusively for the purpose of their business, that purpose being to supply themselves with one of the raw materials of that business. The contracts grant no interest in land and no interest in the trees or plants themselves. They are simply and solely contracts giving to the grantees the right to pick and carry away leaves, which, of course, implies the right to appropriate them as their own property." In the case under our consideration the only right granted to the respondent firm was to take and carry away conch shells of a specified type and size, which, of course, implies the right to appropriate them as the respondent firm's own property. The right to go into the sea and cast nets etc. was merely ancillary to the real purpose of the contract. Nor do I think that the circumstance that the contract conferred an exclusive privilege or right is a matter of any si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... row in size by receiving sustenance and nutriment from sea water and could be later gathered by the respondent firm when they reached the size of 21 inches in diameter or more. This, it was argued, brought the present case nearer the decision in Kauri Timber case. I am unable to agree. It is to be remembered that live shells move under the surface of the sea and they do not remain at the same place, as trees do. A shell less than 2 1/4 inches in diameter returned alive to the sea may move away from the contract area and may never be gathered by the respondent firm. In these circumstances the appellant is not entitled to call to his aid the test of " further vegetation " or " sustenance and nutriment " referred to in the Kauri Timber case. From whatever point of view we may look at the case, it seems to me that the facts of the present case are indistinguishable from those of the case in Mohanlal Hargovind v. Commissioner of Income-tax. In Mohanlal Hargovind's case the right was to pluck tendu leaves ; in our case the right is to gather conch shells of specified type and size. This distinction, it is obvious, makes no difference. In the High Court it was contended on behalf of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Industries case, this appeal was allowed. Later, a review petition (No. 16 of 1960) was filed on the ground that this appealwas not governed by the decision in Pingle Industries case, and that as it was not fully argued, it should be reheard. It is unnecessary to go into the reasons why the rehearing was granted, except to say that there was perhaps a misunderstanding about the concessions made by counsel. We were, therefore, satisfied that we should grant the rehearing, and have since heard full arguments in this appeal. K.T.M.T.M. Abdul Kayum and Hussain Sahib (respondent) is a registered firm, and carries on business in conch shells locally known as " chanks ", which are found on the bed of the sea all along the coast-line abutting on the South Arcot District. The respondent took on lease from the Director of Industries and Commerce, Madras, " the exclusive right, liberty and authority to take and carry away all chanks found in the sea " for a period of three years ending on June 30, 1947. The consideration was Rs. 6,111 per year payable in advance. For the year of assessment, 1946-47 (the year of account ending June 30, 1945) the respondent in showing its profits from busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of goods. The High Court, however, certified the case as fit for appeal, and the Commissioner of Income-tax has filed this appeal. The material terms of the agreement in the case are as follows : " 1. The lessor hereby grants unto the lessees the full free an exclusive right, liberty and authority to fish or take and carry away all chank shells in the sea off the coast line of the South Arcot District including the French kuppams of Pondicherry more particularly described in the schedule hereto to hold the premises to the lessees from the first day of July, 1944 for a period of three years ending 30th June, 1947, paying therefor the yearly rent of Rs. 6,111 (rupees six thousand one hundred and eleven only) to be paid yearly in advance, the first payment to be made within fifteen days from the date of intimation of acceptance and the second and third payments to be made on or before the 15th June, 1945 and 1946, respectively at the Government Treasury at Tuticorin or Madras ... 3. The lessee hereby covenants with the lessor as follows : ... (ii) To deliver to the Assistant Director of Pearl and Chank Fisheries, Tuticorin, all Valampuyi shells that may be obtained by the les ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ificant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases (as said by Cordozo) by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. 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. A trader may spend money to acquire his raw materials, or his stock-in-trade, and the payment may often be on revenue account but not necessarily. A person selling goods by retail may be said to be acquiring his stock-in-trade when he buys such goods from a wholesaler. But the same cannot be said of another retailer who buys a monopoly right over a long period from a producer of those goods. The amount, he pays to secure the monopoly, though a part of the expenditure to secure his stock-in-trade is not of the same character as the price he pays in the first illustration. By that payment, he secures an en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d ancillary to the main purpose of the contract, which was acquisition of tendu leaves, and tendu leaves alone, and it was observed that even if this right of going on the land and plucking the leaves was not expressed in the contract, it would have been implied by law. Their Lordships then observed that the High Court diverted its view from, these points, and attached too much importance to cases decided upon quite different facts. They then observed that " cases relating to the purchase or leasing of mines, quarries, deposits of brick earth, land with standing timber ..." were of no assistance, and concluded : " If the tendu leaves had been stored in a merchant's godown and the appellant had bought the right to go and fetch them and so reduce them into their possession and ownership it could scarcely have been suggested that the purchase price was capital expenditure. Their Lordships see no grounds in principle or reason for differentiating the present case from that supposed." That case thus involved no right in land or trees ; the licence to be on the land was merely an accessory right ; the right of cultivation was insignificant. The term was short, and the collection of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is a condition of carrying on its trade at all ? " The same question was again posed by the Judicial Committee in Tata Hydro-Electric Agencies Ltd., Bombay v. Commissioner of Income-tax. The answer to this question in each of the two cases of Mohanlal Hargovind and Pingle Industries is entirely different. The difference can be noticed easily, if we were to read here what Channell J. said in Alianza Co. Ltd. v. Bell : " 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 secures a supply of the raw material for a period extending over several years ... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it had no claim. The chanks were on the bed of the sea. Their exact existence was not known, till the divers found them, or they got netted. Chanks which were there one day might have been washed back into the deep sea, and might never be washed back into a place where they would be within reach. Similarly, other chanks not there one day might come within reach on another day. All these matters make the case entirely different from the case of a purchase from the divers. In obtaining the lease, the respondent obtained a speculative right to fish for chanks which it hoped to obtain and which might be in large quantities or small, accord ing to its luck. The respondent changed the nature of its business to fishing for chanks instead of buying them. To be able to fish, it had to arrange for an area to fish, and that arrangement had to be of some duration to be effective. This is not a case of so much clay or so much salt-petre or a dump of tailings or leaves on the trees in a forest. The two modes in which the respondent did the business furnish adequate distinguishing characteristics. Here is an agreement to reserve a source, where the respondent hoped to find shells which, when fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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