1946 (10) TMI 9 - HC - Income Tax

Summary

Issues Involved:
1. Whether the expenditure incurred for the purchase of earth for manufacturing bricks is a capital expenditure.
2. Whether Section 10(2)(xii) of the Income-tax Act permits deduction of the amount incurred in taking leases of land for the purchase of earth for manufacturing bricks.
3. Whether the Tribunal was legally right in disallowing the expenditure amounting to Rs. 2,299.

Issue-wise Detailed Analysis:

1. Whether the expenditure incurred for the purchase of earth for manufacturing bricks is a capital expenditure:

The applicant, a registered firm engaged in the business of manufacturing bricks, claimed that the payments made under various leases for digging earth used in manufacturing bricks should be considered as business expenditure under Section 10(2)(xii) of the Income-tax Act. The Income-tax Officer disallowed the claim, treating the expenditure as capital in nature. This decision was upheld by the Appellate Assistant Commissioner and the Tribunal. The Tribunal concluded that the lessee (assessee) was not merely purchasing raw material but acquiring certain rights in the land, thus classifying the expenditure as capital expenditure.

2. Whether Section 10(2)(xii) of the Income-tax Act permits deduction of the amount incurred in taking leases of land for the purchase of earth for manufacturing bricks:

The Tribunal framed the question for the High Court as follows: "Whether, in the circumstances of the case, the assessee is entitled to a deduction of the three sums, Rs. 1,042, Rs. 973, and Rs. 284 aggregating Rs. 2,299, as revenue expenditure under Section 10(2)(xii) of the Income-tax Act?" The Tribunal noted that the agreements provided for the purchase of earth alone and did not confer substantial rights in the land. The main object of the agreements was procuring earth for manufacturing bricks, and the expenditure was considered a running business expense.

3. Whether the Tribunal was legally right in disallowing the expenditure amounting to Rs. 2,299:

The High Court examined whether the payments made under the agreements for extracting earth should be treated as revenue or capital expenditure. The Court noted that if a manufacturer purchases land or takes it on lease for starting a business, the expenditure could be regarded as capital in nature. However, if the expenditure is incurred for procuring raw material for an existing business, it should be considered a revenue expense. The Court emphasized that the agreements did not convey property rights but were for the purchase of earth, with the right to dig and remove it. The expenditure was deemed to be of a transitory nature and did not confer any enduring advantage to the trade.

Judgment:

The High Court held that the payments made under the agreements were for the purchase of earth, which is a raw material for manufacturing bricks. The expenditure incurred was a revenue expense and not capital in nature. The Court distinguished between capital and revenue expenditure, stating that the nature of the concern, the ordinary course of business, and the object of the expenditure should be considered. The Court concluded that the expenditure incurred for procuring earth was a part of the profit and loss account and should be allowed as a deduction under Section 10(2)(xii) of the Income-tax Act. The reference was answered in the affirmative, allowing the deductions claimed by the assessee.