TMI Blog1954 (11) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... sting question as to the line of demarcation between capital expenditure and revenue expenditure. On the 14th November, 1938, the appellant company acquired from the Government of Assam a lease of certain limestone quarries, known as the Komorrah quarries situated in the Khasi and Jaintia Hills District for the purpose of carrying on the manufacture of cement. The lease was for 20 years commencing on the 1st November, 1938, and ending on the 31st October, 1958, with a clause for renewal for a further term of 20 years. The rent reserved was a half-yearly rent certain of Rs. 3,000 for the first two years and thereafter a half-yearly rent certain of Rs. 6,000 with the provision for payment of further royalties in certain events. In addition to these rents and royalties two further sums were payable under the special covenants contained in clauses 4 and 5 of the lease as " protection fees ". Under clause 4 the protection was in respect of another group of quarries called the Durgasil area, the lessor undertaking not to grant any lease, permit or prospecting licence regarding the limestone to any other party therein without a condition that no limestone should be used for the manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er quarried in the area of this lease or elsewhere or obtained by purchase from other quarries In the Khasi and Jaintia Hills by the lessees. If, however, in any year the total amount of limestone converted into cement at the lessee.'s Sylhet factory exceeds 22,00,000 maunds the lessee will be entitled to an abatement at the rate of Rs. 20 for every 1,000 maunds quarried in excess of 22,00,000 maunds and the lessee shall pay the sum of Rs. 35,000 less the abatement calculated on the basis hereinbefore mentioned. Limestone which is not converted into cement at the lessee's factory in Sylhet district will not entitle the lessee to any abatement in the protection fee. The lessor in consideration of the said payment undertakes not to allow any person or company any lease permit or prospecting licence for limestone in the whole of Khasi and Jaintia Hills district without a condition in such lease permit or prospecting licence that no limestone extracted shall be used directly or indirectly for the manufacture of cement. The lessor will be empowered to terminate this agreement for the payment of a protection fee at any time after it has run for 5 years by giving six months' notice in wri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration is absolutely final or determinative, but in a rough way I think it is not a bad criterion of what is capital expenditure as against what is income expenditure to say that 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 test was adopted by Rowlatt, J., in Ounsworth (Surveyor of Taxes) v. Vickers Limited and after quoting the above passage from the speech of Lord Dunedin he observed that the real test was between expenditure which was made to meet a continuous demand for expenditure as opposed to an expenditure which was made once for all. He however suggested in the course of his judgment another view-point and that was whether the particular expenditure could be put against any particular work or whether it was to be regarded as an enduring expenditure to serve the business as a whole, thus laying the foundation for the test prescribed by Viscount Cave, L.C., in Atherton's case. Atherton v. British Insulated and Helsby Cables Ltd. laid down what has almost universally been accepted as the test for determining what is capital expenditure as distinguished from revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d capital as what the owner turns to profit by keeping it in his own possession, and circulating capital as what he makes profit of by parting with it and letting it change masters. This test was adopted by Lord Hanworth, M.R., in Anglo-Persian Oil Co. v. Dale, where he observed :--- " I am inclined to think that the question whether the money paid is provided from the fixed or the circulating capital comes as near to accuracy as can be suggested. Lord Cave's test that where money is spent for an enduring benefit it is capital, seems to leave open doubts as to what is meant by ' enduring ' ............................ It seems rather that the cases of Hancock' and of Mitchell v. B. W. Noble, Ltd, and of Mallett v. Staveley Coal Iron Co." give illustrations that the test of fixed or circulating capital is the true one ; and where, as in this case, the expenditure is to bring back into the hands of the company a necessary ingredient of their existing business---important, but still ancillary and necessary to the business which they carry on---the expenditure ought to be debited to the circulating capital rather than to the fixed capital, which is employed---in and sunk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consistency with Lord Cave's principle of discrimination." As regards the test of fixed and circulating capital he observed at page 432:-- I have not overlooked the criterion afforded by the economists' differentiation between fixed and circulating capital which Lord Haldane invoked in John Smith Son v. Moore' and on which the Court of Appeal relied in the present case, but I confess that I have not found it very helpful." The Privy Council in Tata Hydro-Electric Agencies, Limited, Bombay v. Commissioner of Income-tax, Bombay Presidency and Aden, pronounced at page 226 :-- "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 the case before them they came to the conclusion that the obligation to make the payments was undertaken by the appellants in consideration of their acquisition of the right and opportunity to earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, at page 116 :---- "The legal touchstone which is almost invariably applied is the familiar dictum of Viscount Cave in Atherton's case ......... Romer, L.J., felt that this definition had placed the matter beyond all controversy---see his remarks in the Anglo-Persian Oil Co.'s case. But Lord Macmillan in Van Den Bergh's case felt that Romer, L.J., had been unduly optimistic and the learned Law Lord was of the opinion that the question whether a particular expenditure fell on one side of the line or other was a task of much refinement. But on the whole I think that the definition of Viscount Cave is a good working definition ; and if one were to supplement it with the definition suggested by Mr. Justice Lawrence in Southern v. Borax Consolidated Ltd., whether an expenditure had in any way altered the original character of the capital asset, we have a legal principle which can be applied to any set of given facts." In Benarsidas Jagannath, In re, a Full Bench of the Lahore High Court attempted to reconcile all these decisions and deduced the following broad tests for distinguishing capital expenditure from revenue expenditure. The opinion of the Full Bench was delivered by Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it ". This synthesis attempted by the Full Bench of the Lahore High Court truly enunciates the principles which emerge from the authorities. 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 is not incurred either for extension of the business or for the substantial replacement o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x authorities on an application of the broad principles laid down above and the Courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles. The expression " once and for all " used by Lord Dunedin has created some difficulty and it has been contended that where the payment is not in a lump sum but in instalments it cannot satisfy the test. Whether a payment be in a lump sum or by instalments, what has got to be looked to is the character of the payment. A lump sum payment can as well be made for liquidating certain recurring claims which are clearly of a revenue nature, and on the other hand payment for purchasing a concern which is prima facie an expenditure of a capital nature may as well be spread over a number of years and yet retain its character as a capital expenditure. (Per Mukherjea, J., in Commissioner of Income-tax v. Piggot Chapman Co.) The character of the payment can be determined by looking at what is the true nature of the asset which has been acquired and not by the fact whether it is a payment in a lump sum or by instalments. As was otherwise put by Lord Greene, M. R., in He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in order to determine whether in the present case the expenditure incurred by the company was capital expenditure or revenue expenditure. Under clause 4 of the deed the lessors undertook not to grant any lease, permit or prospecting licence regarding limestone to any other party in respect of the group of quarries called the Durgasil area without a condition therein that no limestone shall be used for the manufacture of cement. The consideration of Rs. 5,000 per annum was to be paid by the company to the lessor during the whole period of the lease and this advantage or benefit was to enure for the whole period of the lease. It was an enduring benefit for the benefit of the whole of the business of the company and came well within the test laid down by Viscount Cave. It was not a lump sum payment but was spread over the whole period of the lease and it could be urged that it was a recurring payment. The fact however that it was a recurring payment was immaterial, because one had got to look to the nature of the payment which in its turn was determined by the nature of the asset which the company had acquired. The asset which the company had acquired in consideration of this recur ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
