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Issues Involved:
1. Whether the lease money paid by the assessee company to Nawab Mehdi Jung Bahadur and to the Government is capital expenditure or revenue expenditure. Issue-Wise Detailed Analysis: Nature of Lease Payments: The primary issue for determination was whether the lease payments made by the assessee company to Nawab Mehdi Jung Bahadur and the Government should be classified as capital expenditure or revenue expenditure. The assessee company, operating under "Pingle Industries," had leased stone quarries and was required to make annual payments under the lease agreements. Arguments from the Department: The department's advocate argued that the lease payments were capital expenditures. The reasoning was that these payments were necessary outlays for acquiring property or rights of a permanent character essential for conducting the business. The business involved extracting Shahabad stones from the quarries and selling them, which did not constitute a manufacturing business. The rights acquired under the lease agreements provided an enduring benefit to the business and were not merely for purchasing raw materials. Arguments from the Assessee: The assessee's advocate contended that the business was of a manufacturing nature, as it involved not only extracting stones but also working on them to make them marketable. The advocate relied on a decision from the Madras High Court, which suggested that such activities could be considered manufacturing, thereby implying that the lease payments were revenue expenditures. Legal Provisions and Definitions: The court examined Section 10(2)(xv) of the Indian Income-tax Act, which allows deductions for expenditures wholly and exclusively for business purposes, provided they are not capital expenditures. The Act does not explicitly define "capital expenditure" or "revenue expenditure," necessitating reliance on case law to draw distinctions. English Case Law: The court referred to several English cases to derive principles for distinguishing between capital and revenue expenditures. Key cases included: - City of London Contract Corporation Ltd. v. Styles: Established that expenditure for acquiring a business or rights essential to its operation is capital expenditure. - Vallambrosa Rubber Co. Ltd. v. Farmer: Differentiated capital expenditure as a one-time outlay versus recurring income expenditure. - British Insulated and Helsby Cables Co. Ltd. v. Atherton: Reinforced the principle that sums provided for long-term benefits should be debited to capital. - Golden Horse Shoe (New) Ltd. v. Thurgood: Held that expenditure for acquiring raw materials for manufacturing was revenue expenditure. Indian Case Law: The court reviewed several Indian cases to understand how similar issues had been adjudicated: - Commissioner of Income-tax, Madras v. Chengalvaroya Mudaliar: Payments for exclusive excavation rights were deemed capital expenditures. - Commissioner of Income-tax, Madras v. Chengalvaraya Chettiar: Reinforced the above decision. - Abdul Kayum Sahib Hussain Sahib v. Commissioner of Income-tax, Madras: Payments for exclusive collection rights were capital expenditures. - Commissioner of Income-tax, Madras v. Venkatasubba Reddy and Bros.: Payments for mining rights were capital expenditures. - Banarsidas Jagannath v. Commissioner of Income-tax: Payments for short-term leases for brick manufacturing were revenue expenditures. Conclusion: The court concluded that the lease payments made by the assessee company were capital expenditures. The reasoning was that the payments were for acquiring the right to extract stones, which constituted an acquisition of rights essential for the business rather than a purchase of raw materials. The business did not involve manufacturing in the traditional sense, and the rights obtained provided an enduring benefit. Therefore, the payments could not be classified as revenue expenditures. Final Judgment: The court answered the reference by stating that the lease money paid by the assessee company to Nawab Mehdi Jung Bahadur and the Government is capital expenditure and not revenue expenditure. No order was passed regarding the costs of the court. Reference Answered Accordingly.
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