1954 (11) TMI 2 - SC - Income Tax

Whether, in the circumstances of the case, the two sums of ₹ 5,000 and ₹ 35, 000 paid under clauses 4 and 5 of the deed of the 14th November, 1938, were rightly disallowed as being expenditure of a capital nature and so not allowable under section 10(2)(xv) of the Indian Income-tax Act? Held that - The conclusion reached by the Income-tax authorities as well as the High Court in regard to the nature of the payments was correct and the sums of ₹ 40,000 paid by the company to the lessors during the accounting years 1944-45 and 1945-46 were not allowable deductions under section 10(2)(xv) of the Act. Appeal dismissed.

Summary

Issues Involved:
1. Distinction between capital expenditure and revenue expenditure.
2. Deductibility of protection fees under Section 10(2)(xv) of the Indian Income-tax Act.

Detailed Analysis:

1. Distinction between Capital Expenditure and Revenue Expenditure:
The judgment delves into the nuanced distinction between capital expenditure and revenue expenditure. The court acknowledges that the line of demarcation is very thin and has been a subject of extensive judicial interpretation. The judgment references several precedents and legal principles to clarify this distinction:

- Lord Macnaghten in Dovey v. Cory: Warned against formulating precise rules for distinguishing between capital and revenue expenditure, emphasizing the need to consider each case on its own facts and circumstances.
- Bowen, L.J., in City of London Contract Corporation v. Styles: Differentiated between expenditure used to acquire a concern (capital expenditure) and expenditure used for carrying on a concern (revenue expenditure).
- Lord Dunedin in Vallambrosa Rubber Co. Ltd. v. Farmer: Suggested that capital expenditure is generally spent once and for all, while income expenditure recurs annually.
- Viscount Cave in Atherton v. British Insulated and Helsby Cables Ltd.: Emphasized that expenditure made once and for all with a view to bringing into existence an asset or advantage for the enduring benefit of a trade should be treated as capital expenditure.
- Viscount Haldane in John Smith & Son v. Moore: Introduced the test of fixed or circulating capital, where fixed capital is what the owner keeps for profit, and circulating capital is what the owner profits from by parting with it.
- Lord Macmillan in Van Den Berghs, Limited v. Clark: Preferred Viscount Cave's test over the fixed and circulating capital test, emphasizing the enduring benefit criterion.
- Privy Council in Tata Hydro-Electric Agencies, Limited v. Commissioner of Income-tax: Distinguished between expenditure for acquiring an income-earning asset (capital expenditure) and expenditure for earning income (revenue expenditure).

2. Deductibility of Protection Fees under Section 10(2)(xv) of the Indian Income-tax Act:
The appellant company sought to deduct sums paid as protection fees under clauses 4 and 5 of the lease agreement as revenue expenditure under Section 10(2)(xv) of the Indian Income-tax Act. The court analyzed whether these payments constituted capital expenditure or revenue expenditure:

- Clause 4: The company paid Rs. 5,000 annually for protection against competition in the Durgasil area. The court held that this payment provided an enduring benefit for the entire lease period, thus constituting a capital expenditure. It was not merely a recurring operational expense but an investment in a capital asset that enhanced the company's business by eliminating competition.
- Clause 5: The company paid Rs. 35,000 annually for five years for protection against competition in the entire Khasi and Jaintia Hills District. The court found this payment similar in nature to the payment under Clause 4. Despite being spread over five years, the payment provided an enduring benefit for the entire lease term, thereby qualifying as capital expenditure.

The court concluded that both payments were capital expenditures and not allowable deductions under Section 10(2)(xv) of the Indian Income-tax Act. The judgment emphasized that the nature of the asset acquired through these payments was a capital asset, providing enduring benefits to the company's business.

Conclusion:
The court upheld the decisions of the Income-tax authorities and the High Court, concluding that the sums of Rs. 40,000 paid by the company during the accounting years 1944-45 and 1945-46 were not allowable deductions under Section 10(2)(xv) of the Indian Income-tax Act. The appeal was dismissed with costs.