1965 (12) TMI 44 - SC - Income Tax

Whether, on the facts and in the circumstances of the case, and on the correct interpretation of the three enclosures to the letter of the assessee dated the 8th day of July, 1954, to the Income-tax Officer concerned, the sum of ₹ 83,157 was allowable as an expenditure of a revenue nature ? Held that - It is in the light of persistent efforts made by the company to secure renewal of the agreements for what the High Court called a sufficiently large period that the nature of the payment has to be determined. It was only with a view to persuade the State authorities to grant a new lease for a period of four or five years that an offer to pay those amounts in addition to the stipulated royalty was made. There was no legal obligation to pay those amounts under the terms of the original agreements, and the company offered as a special case to pay those additional amounts on the understanding that the Government will give approval for renewal of the agreement. The amounts agreed to be paid did not form part of the price of the company s stock-in-trade, right to collect which was conferred by the agreement dated June 13, 1952. There is no doubt that payment of premium in consideration of the owner of property agreeing to grant a right to take and remove the stock-in-trade of the taxpayer is in the nature of capital expenditure. We, therefore, agree with the High Court on the alternative ground which appealed to them. Appeal dismissed.

Summary

Issues:
1. Interpretation of additional payments made by a company in addition to royalty stipulated in an agreement for acquiring logs.
2. Determination of whether the additional payments constitute revenue or capital expenditure for the purpose of income tax assessment.

Analysis:
The case involved a company that had agreements with an estate to collect and convert timber into sleepers and scantlings. The company made additional payments to the estate beyond the stipulated royalty under the agreement. The Income-tax Officer disallowed the company's claim to deduct these additional payments as an allowable expenditure under the Income-tax Act. The Appellate Assistant Commissioner allowed the deduction, considering the payments as "additional royalty" and part of the company's stock-in-trade cost. The High Court, however, held that the payments were capital expenditure, not revenue. The High Court reasoned that the company did not purchase standing timber but acquired the right to extract sleepers, which was a capital asset of enduring nature. The High Court also noted that the payments were made in consideration of extending the agreement, providing a benefit of enduring nature to the company.

The Tribunal referred the question of whether the additional payments were allowable as revenue expenditure to the High Court. The High Court concluded that the payments were capital expenditure, as they provided a long-term benefit to the company. The High Court emphasized that the payments were not part of the price of the company's stock-in-trade but were made to secure the renewal of agreements for a significant period, constituting capital expenditure. The company's persistent efforts to secure agreement renewals for an extended period indicated the nature of the payments as capital expenditure. The payments were conditional and offered to persuade the authorities to grant a lease for a longer duration, indicating their capital nature.

The Supreme Court disagreed with the High Court's characterization of the additional payments as capital expenditure. The Court held that the payments made by the company were for acquiring its stock-in-trade, which constituted revenue expenditure. The Court clarified that the additional payments were not part of the price of the stock-in-trade but were offered to secure agreement renewals. The Court emphasized that the payments were made to persuade the authorities to grant lease renewals and did not form part of the stock-in-trade cost. Therefore, the Court concluded that the additional payments were revenue expenditure and not capital in nature.

In conclusion, the Supreme Court dismissed the appeals, upholding that the additional payments made by the company were revenue expenditure and not capital expenditure, allowing the company to deduct them as allowable expenditure under the Income-tax Act.