1961 (11) TMI 3 - SC - Income Tax

Whether on the facts and circumstances of the case the payment of the sum of ₹ 6,111 made by the assessee under the terms of the agreement entered into with the Director of Industries and Commerce, Madras, on 9th November 1945, was not an item of revenue expenditure incurred in the course of carrying on the business of the assessee and, therefore, allowable under the provisions of section, 10 of the Indian Income-tax Act? Held that - This is not a case of so much clay or so much salt-petre or a dump of tailings or leaves on the trees in a forest. The two modes in which the respondent did the business furnish adequate distinguishing characteristics. Here is an agreement to reserve a source, where the respondent hoped to find shells which, when found, became its stock-in-trade but which, in situ, were no more the firm s than a shell in the deepest part of the ocean beyond the reach of its divers and nets. The expenses of fishing shells were its current expenses as also the expenses incurred over the purchase of shells from the divers. But to say that the payment of lease money for reserving an exclusive right to fish for chanks was on a par with payments of the other character is to err. The rights were not transferable, but if they were and the firm had sold them, the gain, if any, would have been on the capital side and not a realising of the chanks as stock-in-trade, because none had been bought by the firm, and none would have been sold by it. In our opinion, the decision of the High Court, with all due respect, was, therefore, erroneous, and the earlier decision of the Full Bench of the same High Court was right in the circumstances of the case. In the result, the appeal is allowed

Issues Involved:
1. Nature of expenditure: Capital vs. Revenue.
2. Applicability of the Privy Council's decision in Mohanlal Hargovind v. Commissioner of Income-tax.
3. Interpretation of the lease agreement terms.
4. Differentiation from the Pingle Industries case.
5. Determination of the enduring benefit or capital asset.

Issue-wise Detailed Analysis:

1. Nature of Expenditure: Capital vs. Revenue
The primary issue was whether the payment of Rs. 6,111 made by the respondent firm under the lease agreement was a capital expenditure or revenue expenditure. The Supreme Court examined the principles laid down in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax and other relevant cases to determine the nature of the expenditure. It was concluded that the expenditure was on revenue account as it was laid out as part of the process of profit-earning and not for acquiring a capital asset or an enduring benefit.

2. Applicability of the Privy Council's Decision in Mohanlal Hargovind v. Commissioner of Income-tax
The respondent firm argued that the payment should be considered a revenue expenditure based on the Privy Council's decision in Mohanlal Hargovind v. Commissioner of Income-tax. The Supreme Court found that the facts of the present case were indistinguishable from those in Mohanlal Hargovind's case. The right to fish for conch shells was akin to the right to pick tendu leaves, and thus, the expenditure was for securing the stock-in-trade and not for acquiring an enduring asset.

3. Interpretation of the Lease Agreement Terms
The lease agreement granted the respondent firm the exclusive right to fish for conch shells in a specified area for a period of three years. The Supreme Court analyzed the terms of the lease, including the obligations to return undersized shells to the sea and to sell certain shells to the government. It was determined that the lease did not confer any interest in the sea bed or sea water but merely allowed the respondent firm to secure its stock-in-trade.

4. Differentiation from the Pingle Industries Case
The Supreme Court distinguished the present case from Pingle Industries Ltd. v. Commissioner of Income-tax. In Pingle Industries, the expenditure was considered capital because it involved acquiring an enduring asset (quarries) for extracting stones over a long period. In contrast, the present case involved securing stock-in-trade (conch shells) for a short period without acquiring any enduring asset or permanent right.

5. Determination of the Enduring Benefit or Capital Asset
The Supreme Court emphasized that the expenditure must be analyzed in the context of the business's nature and the purpose of the expenditure. The right to fish for conch shells was not an enduring benefit or capital asset but a means to secure stock-in-trade. The payment was deemed revenue expenditure as it was part of the process of profit-earning and did not result in the acquisition of a permanent right or asset.

Judgments Delivered:
- S. K. Das J. (Dissenting Judgment): Held that the expenditure was on revenue account and the respondent firm was entitled to the allowance claimed.
- Hidayatullah J. and J. L. Kapur J. (Majority Judgment): Concluded that the payment was capital expenditure, and the High Court's decision was erroneous. The appeal was allowed, but there was no order about costs.

Conclusion:
The Supreme Court, in its majority judgment, allowed the appeal, holding that the payment of Rs. 6,111 was capital expenditure and not allowable as a deduction under section 10(2)(xv) of the Income-tax Act. The decision of the High Court was overturned, and the earlier Full Bench decision of the Madras High Court was upheld.

← Previous Next →