1961 (1) TMI 84 - HC - Income Tax

Summary

Issues Involved:
1. Whether the payment of Rs. 12,000 made by the assessee for acquiring a contract of supply of gulmohwa flower is a capital expenditure or a revenue expenditure.
2. Whether the assessee is entitled to a deduction of Rs. 12,000 under section 10(2)(xv) of the Indian Income-tax Act.

Issue-wise Detailed Analysis:

1. Nature of Expenditure: Capital or Revenue

The primary issue in this case is whether the payment of Rs. 12,000 made by the assessee for acquiring the contract of supply of gulmohwa flower is to be classified as capital expenditure or revenue expenditure. The Income-tax Officer initially disallowed the deduction on the grounds that the payment was "in the nature of capital expenditure." The Appellate Assistant Commissioner, however, allowed the deduction, reasoning that the expenditure was of a revenue nature since "no enduring benefit could be said to have accrued on account of this payment."

The Tribunal, upon appeal by the Department, concluded that the expenditure was capital in nature as it was for securing a source of revenue rather than for carrying on the business of supply of gulmohwa flower. The Tribunal referred the question to the High Court for an opinion under section 66 of the Indian Income-tax Act.

2. Tests and Principles Applied

The High Court examined various judicial precedents to determine the nature of the expenditure. The court referred to the principles laid down in several cases, including:
- Vallambrosa Rubber Co. Ltd. v. Farmer: Capital expenditure is a one-time expense, whereas revenue expenditure recurs annually.
- British Insulated and Helsby Cables Ltd. v. Atherton: Expenditure made to bring into existence an asset or advantage of enduring benefit is capital.
- Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax: Expenditure part of working expenses in ordinary commercial trading is revenue.
- Mohanlal Hargovind v. Commissioner of Income-tax: Expenditure for acquiring raw materials for business is revenue.
- Stow Bardolph Gravel Co. Ltd. v. Poole: Purchase of land or deposits is capital expenditure.
- Pingle Industries Ltd. v. Commissioner of Income-tax: Long-term leases for extracting resources are capital expenditure.

The court noted that the main attribute of capital expenditure is that it brings into existence a benefit of an enduring nature. Conversely, if the expenditure is part of the working expenses in the ordinary commercial trading sense, it is treated as revenue expenditure.

3. Application to the Present Case

Applying these principles, the court observed that the expenditure incurred by the assessee was for carrying on the business and could be equated to the purchase of stock-in-trade. The sub-lease represented the raw material required for the business, similar to purchasing gulmohwa flower scattered over a particular area.

The court also referred to the Punjab High Court's decision in In re Benarsidas Jagannath, where expenditure for securing raw materials without acquiring any interest in the land was considered revenue expenditure.

4. Conclusion

The High Court concluded that the expenditure of Rs. 12,000 incurred by the assessee was for running the business with a view to earning a profit and, therefore, was revenue expenditure. The court held that the assessee was entitled to a deduction under section 10(2)(xv) of the Indian Income-tax Act, as the expenditure was incurred to work the business with the object of making a profit.

Judgment:

The reference was answered in favor of the assessee, entitling them to a deduction of Rs. 12,000. The assessee was also entitled to recover costs from the Department.