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TMI Blog1960 (4) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration for extracting the stones till the end of the contract period, as per a plan prepared, within the six villages specified therein. The appellant had no right or interest in the land ; nor did he have any other interest in the quarries apart from excavating stones therefrom. The contract specifically provided that the appellant, called the contractor, had no right to manufacture cement from the stones ; he had only the right to excavate, stones from the quarries till the end of the contract period. I may here quote some of the relevant provisions of the quolnama as to how the annual consideratiorn of Rs. 28,000 was to be paid. It said : " 1. The period of contract for excavating stones from the quarries of the villages noted above is for 12 years from 1st Ardibehisht 1346 Fasli to the end of the Farwardi 1358 Fasli and the contractor will be given possession from 1st Ardibehisht 1346 Fasli. 2. The annual contract amount would be Rs. 28,000. 3. For the surety of the contract the sum of Rs. 96,000 O. S. has been received and deposited in the treasury of the jagir towards the advance and earnest money and the security ; a receipt for the same has been issued separately. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income-tax Appellate Tribunal, Bombay. The Accountant Member of the Tribunal held that the payments in question stood on the same footing as royalties and dead rent which are allowable as working expenses in cases of mines and quarries. The President of the Tribunal expressed his finding thus " In the present case, the assessee purchased his stock-in-trade. Instead of paying so much for so many cubic feet, he pays a lump sum every year. Parties might as well agree that the so-called lessee shall pay a sum of money bearing a proportion to the sales or quantum of material extracted or a lump sum for the purpose of convenience. Because these quarry leases are called leases, the assessee does not get an asset of an enduring benefit. In fact, I find that, the leases are renewed from time to time. The lease money is, therefore, in my opinion, not capital expenditure but revenue expenditure and should be allowed in computing the assessee's income from the quarries." In the result, the Tribunal allowed the claim of the appellant that the payment of the two sums of Rs. 27,054 and Rs. 28,158 for the assessment years 1357F. and 1358F. respectively was in its true nature a revenue expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed intended to create or bring into existence an asset or advantage of an enduring character or was it intended to get only the stock-in-trade or the raw materials for the business ? If it was the former, then it was capital expenditure ; if latter, then revenue expenditure. There is no doubt that receipts and payments in connexion with acquiring or disposing of leaseholds of mines or minerals are usually on capital account : Kamakshya Narain Singh v. Commissioner of Income-tax. The reason why the price paid for the purchase of mining rights is a capital expenditure was explained by Channell, J., in Alianza Co. v. Bell, in the following words : " 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 ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and technical aspect. It is not, therefore, necessary to determine whether the quolnama in the present case was in law a lease, or a licence, or a licence coupled with a grant. What we have to consider is the nature of the transaction from the business point of view, and it seems to me that having regard to the terms of the quolnama, the transaction in its true nature and quality was a sale of raw materials coupled with a licence to the appellant to come on the land and remove the materials sold ; the purchase price was to be paid partly in a lump sum and partly in monthly instalments. If that is the true nature of the transaction, there is no difficulty in answering the question raised. The only answer then is that the payments in question were revenue expenditure. I now refer to four decisions which in my opinion come closest to the controversy before us : (1) In re Benarsidas Jagannath, (2) Mohanlal Hargovind v. Commissioner of Income-tax, (3) Abdul Kayoom and Hussain Sahib v. Commissioner of Income-tax and (4) Stow Bardolph Gravel Co., Ltd. v. Poole (Inspector of Taxes). The first is a decision of the Full Bench of the Lahore High Court, the second a decision of the Privy Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such assets or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for running the business ? Judged by that test the present case stands on the same footing as the case of Benarsidas Jagannath. In Mohanlal Hargovind the facts were these. The assessees carried on business at several places as manufacturers and vendors of country made cigarettes known as bidies. 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 forests. Under the contracts, in consideration of 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. The Privy Council distinguished Alianza Co. v. Bell, and overruling the decision in Income-tax Appellate Tribunal v. Haji Sirajuddin, held that the expenditure was to secure raw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, I come to Stow Bardolph Gravel Co. Ltd. That was a case in which it was held that sums paid by a dealer in gravel as consideration for the right to excavate and take away deposits of gravel represented capital expenditure. The decision rested on the fact that the subject matter of the agreement consisted of a deposit of gravel lying some feet beneath the surface of the land and requiring to be won from the land by a process of excavation. I find it difficult to reconcile this decision with the decision in Benarsidas Jagannath and Abdul Kayoom in both of which also excavation or exploration was necessary to win the raw material. If, as I hold, the decision in Benarsidas Jagannath was approved by this court then we must accept that decision as correct in preference to the decision of the Court of Appeal in England. I may point out here what Evershed, M.R., said in the course of his judgment in that case : " The Commissioners for the General Purposes of the Income-Tax were of opinion that these claims to make deductions were not admissible, but Harman, J., was of opinion that the deductions were admissible. I have myself reached a different conclusion from that reached by Harman, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire reconsideration. If I may again say so with great respect, the learned Master of the Rolls distinguished the Privy Council decision in Mohanlal Hargovind, by saying that that decision rested upon the particular circumstances of the case and upon the fact I that the Board was able to say that from the moment the contract was entered into and before the leaves had actually been picked, the tendu leaves were part of the raw material of the appellant. He added that he could not say the same of sand and gravel, which were part of the earth itself and which could only become part of the stock-in-trade of the gravel merchant's business when it had, in the true sense, been won, been excavated and been taken into their possession, I do not, however, think that the decision in Mokanlal Hargovind, proceeded on the basis suggested by the learned Master of the Rolls. In clear and express terms Lord Greene said : " nor were the leaves acquired until the appellant reduced them into their possession and ownership by picking them." This shows that the decision of the Privy Council did not proceed on the ground alleged, namely, that even before the leaves had actually been picked, they were part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shortfall but would not have the benefit of any extra amount. The assessee was assessed in the Fasli years 1357 and 1358 for the account years 1356 and 1357F. It claimed deduction respectively of Rs, 27,054 and Rs. 28,159 paid to the Nawab in those years, as expenditure under section 12(2)(xv) of Hyderabad Income-tax Act, which is the same as the corresponding provision under the Indian Income-tax Act. The claim for deduction was refused by the Income-tax Officer, who held that the amount in each year represented a capital expenditure though the whole sum was being paid in instalments. The assessee appealed against the two orders of assessment to the Appellate Officer of Income-tax, and questioned this decision. The appeals involved other matters also, with which we are not now concerned. The appeals were dismissed. The assessee appealed further to the Income-tax Appellate Tribunal, Bombay, and raised the same contention. The Appellate Tribunal accepted the appeals. Different reasons were given by the President and the Accountant Member. According to the latter, the payment of these sums was similar to the payment of royalties and dead rent which is allowable as working expense in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusively for the purpose of such business, profession or vocation." While the Appellate Tribunal looked to the periodicity of the payments, the High Court held that the amount payable was Rs. 3,36,000 divided into annual and re-divided into monthly instalments. The Tribunal also considered the payments as of the nature of rent or royalty or as price for raw materials. The High Court, on the other hand, disagreed, and held that there being no manufacturing business, the money expended could not be regarded as price of raw materials or even as rent but as spent to acquire a capital asset of enduring benefit to the assessee. The High Court referred to numerous decisions in which the question whether a receipt or expenditure is on capital or revenue account has been considered in India and the United Kingdom. Before us also, many of them were again cited as illustrating, if not laying down, certain general principles. We shall refer to some of the leading cases later, but we may say at once that no conclusive tests have been laid down which can apply to all the cases. The facts of one case differ so much from those of another that the enquiry is often somewhat fruitless. If, howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against failure to pay the monthly instalments, but there was no condition that the short payments were to be debited to it. It was rather a guarantee for the overall payment and to reimburse the jagir for any loss occasioned by re-auction of the lease after default by the assessee. Further, the payments were to be made even if no stones were extracted or could not be extracted due to force majeure. There was no limit to the quantity to be extracted. There was also a condition that none but the assessee was allowed to work the quarries, which means that the right was exclusive and in the nature of a monopoly. The payment, though divided into instalments of Rs. 1,666-10-8 per month, was really one for the entire lease and of Rs. 3,36,000. Nothing, however, turns upon it. It is pertinent to say that the assessee in its petition for leave to appeal to this court filed in the High Court, viewed the amount as being Rs. 3,36,000 divided into various parts. This is what it said : " Under the terms of the said lease, the company was required to pay a sum of H. S. Rs. 28,000 per annum to the lessor. The total amount payable for the entire period amounted to Rs. 3,36,000 out of which a su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the character of the expenditure shows that what has resulted is something which is to be used in the way of business, the test may be useful ; but in cases close to the dividing line, the test seems useless. A third test was laid down by the Judicial Committee in Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax. There, it was stated that if the expenditure was part of the working expenses in ordinary commercial trading it was not capital but revenue. The Judicial Committee observed : " What is ' money wholly and exclusively laid out for the purposes of the trade ' is a question which must be determined upon the principles of ordinary commercial trading. It is necessary, accordingly, to attend to the true nature of the expenditure, and to ask oneself the question, Is it a part of the company's working expenses ; is it expenditure laid out as part of the process of profit earning ? " In addition to these three tests, the last of which was applied again by the judicial Committee in Mohanlal Hargovind's case, there are some supplementary tests, which have frequently been alluded to. Lord Sands in Commissioners of Inland Revenue v. Granite City Steamship Co. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of the business of the firm, and equated the expenditure to one for acquiring the raw materials for the manufacturing business. The cases to which we have referred and many more of the High Courts in India where the principles were applied with the exception of the one last cited, were all considered by this court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax. In that case, Bhagwati, J., referred to a decision of the Punjab High Court in Benarsidas Jagannath, In re, where Mahajan, J. (as he then was), summarized the position and the various tests. This court quoted with approval this summary, and observed at page 45 : " In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be could dig up to a depth of 3 feet to 3 1/2 feet. He had no interest in the land, and as soon as the earth was removed, his right was at an end. It was held in that case that the main object of the agreements was the procuring of earth as raw materials, and by the expenditure the lessee had not acquired any advantage of a permanent or enduring character. It is, however, to be noticed that the duration of the leases was from six months to three years. The Full Bench referred to some other leases in which the duration was longer, and observed : " There are other agreements which are not before us and it seems that the items mentiofied in the question referred relate to those agreements as well. We do not know the nature of the agreements, but the question can be answered by saying that expenses incurred during the year of assessment for purchase of earth on basis of agreements of the nature mentioned in the case of Benarsidas or of the nature like exhibit T.E. are admissible deductions, while sums spent for obtaining leases for a substantially long period varying from 10 to 20 years cannot be held to be valid deductions if they amount to an acquisition of an asset of an enduring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest in land. In either case, it was a capital asset. Their Lordships finally observed : In the present case the trees were not acquired nor were the leaves acquired until the appellants had reduced them into their own possession and ownership by picking them. The two cases can, in their Lordships' opinion, in no sense be regarded as comparable. If the tendu leaves had been stored in a merchant's godown and the appellants 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 ground in principle or reason for differentiating the present case from that supposed." It is to be noticed that the Privy Council case was not applied but distinguished by the Court of Appeal in England in Stow Bardolph Gravel Co. Ltd. v. Poole. In that case, the company was doing the business of selling sand and gravel. It purchased two unworked deposits, and it claimed that the payment should be deducted from its profits as being expenditure for acquiring its trading stock. It was held that the company had acquired a capital asset and not a stock-in-tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was distinguished on the ground that in that case it was possible to say of tendu leaves that they were acquired as the raw material for manufacture. The argument of Mr. Magnus in the case described as an attempt to substitute sand and gravel for tendu leaves was not accepted, Lord Evershed observing : " But I cannot say the same of the sand and gravel, part of the earth itself, which was the subject of the contract in the present case and which I think could only become part of the stock-in-trade of this gravel merchants' business when it had, in the true sense, been won, been excavated and been taken into their possession." We are in entire agreement that such a distinction is not only palpable but also sensible. The present case is a fortiori. Here, the stones are not lying on the surface but are part of a quarry from which they have to be extracted methodically and skilfully before they can be dressed and sold. These deposits are extensive, and the work of the assessee carries him deep under the earth. Such a deposit cannot be described as the stock-in-trade of the assessee, but stones detached and won can only be so described. Before we deal with the other cases, we wis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty on coal raised and a provision for minimum royalty. These were regarded as not capital receipts but as assessable income. In dealing with the nature of the working of a mine, certain observations were made. It was contended that the payments amounted to conversion of a capital asset into cash. The argument was repelled by the Judicial Committee in the words : " These are periodical payments, to be made by the lessee under his covenants, in consideration of the benefits which he is granted by the lessor. What these benefits may be is shown by the extract from the lease quoted above, which illustrates how inadequate and fallacious it is to envisage the royalties as merely the price of the actual tons of coal. The tonnage royalty is indeed only payable when the coal or coke is gotten and despatched : but that is merely the last stage. As preliminary and ancillary to that culminating act, liberties are granted to enter on the land and search, to dig and sink pits, to erect engines and machinery, coke ovens, furnaces and form railways and roads. All these and the like liberties show how fallacious it is to treat the lease as merely one for the acquisition of a certain number of ton ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an asset of an enduring character for which he had to put his hand in his pocket for a very large sum indeed. He paid Rs. 96,000 down, but for the rest he asked for easy terms. The amount paid every month was not in any sense a payment for acquisition of the right from month to month. It was really the entire sum chopped into small payments for his convenience. Not can the amount be described as a business expense, because the outgoings every month were not to be, taken as spent over purchase of stones but in discharge of the entire liability to the jagir. Some of the cases to which we were referred may now be briefly noted. In re Hakim Ram Prasad was a case of renting of a cinema of a cinema projector for 10 years. The amount paid was thus hire for the machine. In Commissioner of Income-tax v. Globe Theatres Ltd., the assessee advanced Rs. 10,000 to a company for the construction of a cinema house which was never built. Since the amount was not salami or premium but only advance rent, it was held deductible Commissioner of Income-tax v. Kolhia Hirdagarh Co. Ltd., was a case of commission on every ton of coal raised, and it was held to be revenue expenditure. These cases are ent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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