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TMI Blog1953 (4) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... Hussain v. Commissioner of Income-tax [1939] 7 I.T.R. 652 which followed the earlier decisions of this Court in Commissioner of Income-tax v. Chengalvaroya Mudaliar [1934] 2 I.T.R. 395 ; I.L.R. 58 Mad. 1 and Chengalvaroya Chettiar v. Commissioner of Income-tax [1937] 5 I.T.R. 70 ; I.L.R. 1937 Mad. 792, it was thought necessary when the matter came before a Division Bench to place it before a Full Bench. The case was, therefore, posted before us for decision. The relevant facts appear from the statement of the case by the Appellate Tribunal. The assessee is a registered firm carrying on business in chanks. For the purpose of his business, the assessee had to engage divers to collect chanks from the sea, which are sold after sorting. On the 9th of November, 1945, there was an agreement between the Director of Industries and Commerce, Madras, and the assessee, the material portions of which are as follows:- The lessor hereby grant unto the lessees the full, free and exclusive right, liberty and authority to fish for, take and carry away all the chank shells in the sea off the coast line of the South Arcot district including the French (Kuppams of Pondicherry more particularly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital expenditure is not defined in the Act but it has to be understood in a business sense except in so far as there may be rules of construction applicable to it. Vide Mohanlal Hargovind v. Commissioner of Income- tax, C.P. Berar [1949] 17 I.T.R. 473. There is a considerable volume of case law both in England and in India on this subject but they do not enable us to lay down a definite and tangible test to distinguish capital expenditure from revenue expenditure and draw the boundary line between the two. The decisions however are of considerable assistance in deducing certain relevant general principles which afford guidance in deciding whether on the facts of the case the expenditure under consideration falls under the one head or the other. No useful purpose would, therefore, be served in examining critically the innumerable cases, English and Indian, which have considered the question from one aspect or the other. But some of the decisions, which have become landmarks in deciding the question, may be usefully referred to. It may be taken that until 1926, i.e., until the decision of Viscount Cave, Lord Chancellor, in Atherton's case [1926] A.C. 205, even a working princi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mship Co. Ltd. [1927] 13 Tax Cas. 1 at page 14 laid down yet another test, which has also been adopted in a number of cases. Broadly speaking, outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business or for a substantial replacement of equipment. This undoubtedly helps to determine whether the expenditure is a capital expenditure and whether the asset is a capital asset or not. If an amount is spent for starting a business, or if the business is already existing to extend and expand the business or even if it be to replace substantial machinery and other equipment of the business, it would undoubtedly be a capital expenditure. Another principle is to find out whether the expenditure is in relation to the fixed or circulating capital. In the former case, it will be expenditure of a capital nature while in the latter it will be revenue. Fixed capital is what the owner turns to profit by keeping it in his own possession while circulating capital is what he makes profit of by allowing it to rotate in the business. The circulating capital, which is turned over in the business, in the process of being turned over, yields profit or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to an agreement with the Government for the excavation of lime shells from certain Government lands. Under that agreement, he was to have the exclusive privilege of excavating chunam shells within the area specified in the agreement for a period of three years on condition of his paying a sum of ₹ 27,750 in twelve equal quarterly instalments for the privilege conferred upon him. The document was in the form of a lease. The point raised was whether the sum so paid could be treated as revenue expenditure and was a permissible deduction. The answer given by the Full Bench was that it was a capital expenditure. The terms of the agreement were construed as not constituting the assessee the purchaser of the lime shells as the lime shells were not previously excavated and heaped up on the land, and the amount paid was not rent in any sense of the term notwithstanding the fact that it was payable in instalments. Reference was made in the judgment to the decision of the House of Lords in John Smith Son v. Moore [1921] 2 A.C. 13. The appellant's father in that case carried on business as a shipping and coal agent for a number of years. Prior to the death of the father, the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner of Income-tax v. Chengalvaroya Mudaliar [1934] 2 I.T.R. 395 ; I.L.R. 58 Mad. 1. With reference to the present assessee, the earlier decision in Abdul Kayum Sahib Hussain v. Commissioner of Income-tax [1939] 7 I.T.R. 652 decided in circumstances similar to the present case that the expenditure was capital expenditure. The learned Judges followed two earlier decisions. At page 657, their Lordships observed:- Now in the present case what the assessee paid for was the right to win conch shells. He was not purchasing the right to any specified quantity of conch shells. It was merely the right to win what he could from the beds where the conch shells were lying. What he got was the means of obtaining the material for his business, not the material itself. This case is clearly governed by the decisions in Commissioner of Income-tax v. Chengalvaroya Mudaliar [1934] 2 I.T.R. 395 ; I.L.R. 58 Mad. 1 and Commissioner of Income-tax v. Messrs. P.T. Chengalvaroya Chettiar and P.L.M.M.V. S. Company, Madras [1937] 5 I.T.R. 70 ; I.L.R. 1937 Mad. 792. The decision in Golden Horse Shoe (New) Limited v. Thurgood [1934] 1 K.B. 548; 18 Tax Cas 280, was distinguished as in that case the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital expenditure in the Act, it must be construed in a business sense unless that sense is excluded by the rules of construction applicable to it. Viewed in that light, their Lordships had no doubt in holding that in a business sense the expenditure was expenditure on revenue account and not on capital account in the same manner as if the tendu leaves had been bought in a shop. Lord Greene observed:- Under the contracts it is the tendu leaves and nothing but the tendu leaves that are acquired. It is not the right to pick the leaves or to go on to the land for the purpose. Those rights are merely ancillary to the real purpose of the contracts and if not expressed would be implied by law in the sale of a growing crop. It was also pointed out that the cases relating to the purchase or leasing of mines, quarries, deposits of brick-earth, land with standing timber etc. were of no assistance in deciding the question before their Lordships. Two decisions however were relied on before their Lordships. One was the decision in Alianza Co. v. Bell(1) which was affirmed by the Court of Appeal in [1905] 1 K.B. 184 and by the House of Lords in [1906] Appeal Cases 18. In that case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . That emphasises the fact that what was acquired in that case was the land itself, which was the source from which the timber was obtained. The case, therefore, was distinguished by Lord Greene for he stated at page 478 of 17 I.T.R. thus:- In the present case, the trees were not acquired: nor were the leaves acquired until the appellants had reduced them into their own possession and ownership by picking them. The two cases can, in their Lordships' opinion, in no sense be regarded as comparable. If the tendu leaves had been stored in a merchant's godown and the appellants had bought the right to go and fetch them and so reduce them into their possession and ownership, it could scarcely have been suggested that the purchase price was capital expenditure. Their Lordships see no ground in principle or reason for differentiating the present case from that supposed. So that notwithstanding the facts, that the quantity of tendu leaves purchased was uncertain and undefined, and there was also the additional burden of going upon the land and picking the leaves, it was held by the Judicial Committee that the contract was one for the purchase and sale of goods. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Sidda Reddy Venkata Subba Reddi and Bros. [1949] 7 I.T.R. 15 which was given before the decision of the Judicial Committee and contended that the principle of the decision in Mohanlal's case [1949] 17 I.T.R. 473 applies only to raw material acquired for or in connection with a manufacturing process, and as in the present case the assessee was merely a dealer in chanks without subjecting them to any manufacturing process, the principle of Mohanlal's case [1949] 17 I.T.R. 473 should not be applied. The learned Chief Justice in Commissioner of Income- tax, Madras v. Sidda Reddy Venkata Subba Reddy and Bros. [1949] 7 I.T.R. 15 elaborately considered the decisions bearing upon the point and distinguished the cases cited before him, observing that the principles therein laid down did not apply to the business of an assessee, who did no manufacturing business, i.e., the test laid down in the English cases and the Indian decisions would apply only if the raw material is acquired in the course of the manufacturing business. This is clear from his observations at pages 32 and 33. In the case before the learned Judges, the assessees, who were doing the business of winning mica and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the raw materials of the appellant's manufacture capital expenditure within the meaning of this Act?) was formulated, no point was made of it in the actual decision of the case. The very timber case, viz., Kauri Timber Co. Ltd. v. Commissioner of Taxes [1913] A.C. 771, referred to by Lord Greene, was not a case of a manufacturer. The assessee's business in that case consisted of merely cutting and selling timber. Had not the Judicial Committee on the facts of that case come to the conclusion that what was acquired was not interest in the land but was merely the purchase of timber, the amount expended in acquiring the timber would have been clearly a revenue expenditure. Lord Shaw at page 778 in that report quotes from Saunder's Reports the following passage:- The principle of these decisions appears to be this that wherever at the time of the contract it is contemplated that the purchasers should derive a benefit from the further growth of the thing sold from further vegetation and from the nutriment afforded by the land, the contract is to be considered as for the interest in land ; but where the process of vegetation is over, or the parties agree that the thing s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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