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Issues Involved:
1. Whether the payment made by the assessee was in the nature of capital expenditure or revenue expenditure. Detailed Analysis: Nature of Payment: Capital or Revenue Expenditure The primary issue raised in this reference was whether a certain payment made by the assessee, Kolhia Hirdagarh Company Limited, was in the nature of capital expenditure or revenue expenditure. The payment in question was made to Rai Bahadur Seth Goverdhandas, who had sold his mining rights to Messrs. Choonilal Manilal Ltd., which later floated the assessee company. Agreement Details By the agreement dated 14th September 1939, the consideration for the purchase of mining rights included: - A cash payment of Rs. 75,000. - Fully paid-up shares worth Rs. 25,000. - A minimum annual dividend of four annas per ton of coal raised. Modification of Agreement Due to legal constraints on paying fixed dividends irrespective of profits, a fresh agreement was made on 6th March 1941. This agreement modified the consideration: - Goverdhandas gave up dividends on preference shares up to 6th March 1941. - Preference shares were converted into ordinary shares. - The company agreed to pay a commission of four annas per ton of steam and rubble coal and three annas per ton of slack coal raised and sold. Tribunal's View The Tribunal held that the payment of Rs. 9,849 for the account year 1941 was revenue expenditure. Analysis of Transaction The court emphasized the importance of understanding the real nature of the transaction, considering both the documents and surrounding circumstances. The court divided the consideration into two categories: 1. A specific sum of Rs. 75,000 and 500 preference shares. 2. A commission based on the coal production. Key factors considered: 1. The commission was for an indefinite period. 2. The payment was related to turnover, not profits. 3. No specific amount was fixed for the commission. Precedents and Case Law The court referred to several cases to support its decision: - Commissioners of Inland Revenue v. 36/9 Holding Ltd. (In Liquidation): This English case was almost indistinguishable from the present case. It involved an indefinite commission based on turnover, which was held to be revenue expenditure. - Raja Bahadur Kamakshya Narain Singh v. Commissioner of Income-tax, Bihar and Orissa: This Privy Council case held that royalties are revenue expenditure. - Maharajkumar Gopal Saran Narain Singh v. Commissioner of Income-tax, Bihar & Orissa: This case dealt with an annual payment being income in the hands of the vendor, not capital. - Minister of National Revenue, Canada v. Catherine Spooner: This case caused some difficulty as it held that a share of oil production was a capital receipt, but the court distinguished it based on the nature of the transaction and the fact that it involved payment in kind. Conclusion The court concluded that the payment made by the assessee was revenue expenditure, considering: - The indefinite period of payment. - The relation to turnover rather than profits. - The absence of a specific sum fixed as part of the purchase price. Both questions submitted were answered in the affirmative, and the Commissioner was ordered to pay the costs. Agreement by Tendolkar, J. Tendolkar, J. agreed with the judgment.
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