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Issues Involved:
1. Whether the payments of Rs. 5,000 and Rs. 35,000 made by the assessee company to its lessor under certain lease terms were of the nature of business or capital expenditure. 2. Whether these payments were deductible under section 10(2)(xv) of the Indian Income Tax Act. Detailed Analysis: 1. Nature of Payments (Business or Capital Expenditure) The primary issue was whether the payments made by the assessee company to the lessor were capital payments or revenue expenditures. The lease, obtained from the Government of Assam, included two special covenants: - Clause 4: An annual payment of Rs. 5,000 as a "protection fee" to prevent the lessor from granting any lease, permit, or prospecting license for limestone in the Durgasil area without a condition that no limestone shall be used for the manufacture of cement. - Clause 5: An annual payment of Rs. 35,000 for five years as a "further protection fee" to prevent the lessor from granting similar permissions in the entire Khasi and Jaintia Hills district. The Income Tax Officer (ITO) held that these payments were for acquiring a right or privilege rather than meeting working expenses, thus categorizing them as capital payments. This view was upheld by the Appellate Assistant Commissioner (AAC) and the Tribunal. 2. Deductibility Under Section 10(2)(xv) Section 10(2)(xv) of the Indian Income Tax Act allows for the deduction of any expenditure laid out or expended wholly and exclusively for the purposes of the business, provided it is not in the nature of capital expenditure. The Tribunal had cryptically concluded that the payments were not "expenditure wholly and exclusively spent for the purpose of carrying on the business." Upon review, it was clarified that the real question was whether the payments were capital payments or revenue expenditures. The Tribunal's finding was interpreted as meaning the payments were capital in nature, not related to the actual business operations but rather to securing rights and opportunities for conducting the business. Judgment Analysis: Nature of Payments: The court analyzed the nature of the payments by referring to established legal principles distinguishing capital and revenue expenditures. It cited several key cases, including: - Vallambrosa Rubber Co. Ltd. vs. Farmer: Roughly suggested that capital expenditure is spent once for all, whereas income expenditure recurs annually. - British Insulated and Helsby Cables, Ltd. vs. Atherton: Established that expenditure made to bring into existence an asset or advantage for the enduring benefit of a trade is capital expenditure. - Anglo Persian Oil Co. vs. Dale: Clarified that the benefit must endure in the way fixed capital endures, not merely for a good number of years. The court concluded that the payments in question were made to secure an enduring benefit, namely, the prevention of competition in the limestone and cement manufacturing business. This benefit was not annually renewable but was secured for the entire period of the lease or for five years in the case of the further protection fee. Deductibility: Given that the payments were capital in nature, they did not qualify for deduction under section 10(2)(xv) of the Indian Income Tax Act. The court emphasized that the payments were made to acquire a significant advantage that would last for a substantial period, thus reinforcing the capital structure of the company rather than meeting operational expenses. Conclusion: The court answered the reframed question in the affirmative, stating that the payments of Rs. 5,000 and Rs. 35,000 were rightly disallowed as being expenditure of a capital nature and not allowable under section 10(2)(xv) of the Indian Income Tax Act. The Commissioner was entitled to the costs of the reference, certified for two counsel. Separate Judgments: The judgment was delivered by Chakravartti, J., with Das Gupta, J., concurring.
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