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TMI Blog1945 (2) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration for each lease is generally a sum which is either paid at the time of the execution of the deed of lease or subsequently by instalments. By some method the correctness of which is not disputed the assessee arrives at a figure which represents the cost of acquiring the sites referable to the accounting a year and debits this amount to the revenue account in computing the profits of the year. This cost of acquiring the sites had been allowed as a revenue expenditure from the very beginning of the assessees business but the Income Tax Officer who made the assessment for the year 1936-37 though that the expenditure was not a revenue but a capital expenditure and therefore disallowed it. The actual amount which the assessee claimed for the previous year, which is the financial year 1935-36, was ₹ 18,638 and after deducting this sum the profit shown by him in the profit and loss account was ₹ 6,132. The ground on which this sum was disallowed by the Income Tax Officer was that the sum neither represented the price of raw material nor rent of land but was a capital expenditure incurred for acquiring the right of removing salt bearing earth and extracting crude s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the 6th December, 1943, the Bench required the Commissioner to ascertain and state the process employed by the assessee in collecting crude saltpetre for his refinery at Hussainiwala. In compliance with this order the Commissioner has made the necessary enquiry and submitted a detailed statement relating to the process of extracting crude saltpetre. This process is as follows :- Earth, bearing saltpetre, is principally obtained in the immediate neighbourhood of human habitation where constant accumulation of organic refuse has created in the soil a high concentration of nitre. The process of procuring nitre beings after sufficient time has been allowed to elapse for the surface of the soil to dry after the rains. Ghumars who are skilled in this particular work then scrape the surface of the earth to the depth of about one quarter of an inch and collect the scrapings together in heaps which are allowed to remain in the sum until they are completely dry. The earth from which the scrapings are taken is not interfered with for a further period of a fortnight or so during which time the nitre again comes to the surface and the same process is repeated. The scrapings are called Kal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er short term leases, (6) that kallar itself is not a marketable commodity and can only be collected by obtaining short term leases from the proprietors of the salt bearing lands, and (7) that the money paid as consideration for the leases is an outlay from circulating capital, the leases themselves not being a fixed capital asset. On these facts the question is whether the money paid by the assessee as consideration for the leases obtained by him from the proprietors for the purpose of collecting the kallar and obtaining crude saltpetre from it is deductible under Section 10 (2) (ix) of the Income Tax Act, as it stood before its amendment by the Act of 1939. That the expenditure was incurred solely for the purpose of earning the profits is not disputed and the only question that requires decision is whether it is an expenditure in the nature of a capital expenditure. It has already been pointed out that in the previous year the expenditure amounted to ₹ 18,638 and that after allowing it as a business expense the assessees profit was ₹ 6,132. If these figures are taken to represent the general state of the assessees trade, they show that against the annual incomings of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being money wholly and exclusively laid cut or expended for the purposes of the trade, or in respect of any capital withdrawn from or any sum employed or intended to be employed as capital in such trade. The general scheme of the English Act is that expenditure which cannot be allowed in computing the profits of the business is expressly stated whereas the Indian Income Tax Act defines the various kinds of expenditure that can be deducted in computing the profits. Under the English Act, therefore, what has to be seen is whether the expenditure is such as is declared by the Act not to be deductible but under the Indian Income Tax Act the question is whether the expenditure for which deduction is claimed is declared by the Act to be allowable. In the present case, the assessee claims the deduction under Section 10 (2) (ix) which before the amendments of 1939 was as follows :- Any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains. It has already been stated that there is no dispute about the expenditure in question having been incurred for the purpose of earning the profits and the sole question that h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The vendor company sold its mines in February, 1929, but retained for a specific period the sole right to treat the tailings dumps, which were known to contain gold. In September, 1929, it sold its rights in the dumps to the assessee company, whose sole business was that of extracting gold from the tailings by a re-treatment process and selling the gold so obtained. On appeal against an assessment to Income Tax under Case I of Schedule D for the year 1929-30, the assessee company contended that its trade was not that of mining, that the tailings dumps at no time formed a part of the land on which they were deposited, that they ought to be regarded as part of its stock-in-trade and that the cost of the tailings treated during the period should be deducted from the proceeds of sales of bullion. The crown contended that the companys rights in the tailings dumps were part of the undertakings which the company was formed to acquire and any sum paid therefore was capital expenditure and that the purchase of the companys rights in the dumps was the held by the Kings Bench Division that the purchase price of the tailings was an admissible deduction is computing the companys profits for Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lease under which the assessee acquires an interest in immovable property and that the consideration for these leases does not represent the price of an ascertained quantity of salt bearing earth. For this reason I consider that the decision in the Golden Horse Shoe case is no guide to the decision the point involved in the present case. In fact certain observations in that case are against the assessees contention inasmuch as the money paid for acquiring the dumps was held to be the price of raw material because the raw material had already been won and gotten, and the decision in that case is liable to the interpretation that if raw material has not been already won and gotten but has to be won and gotten, the consideration paid for acquiring the right to win the raw material would not be the price of the raw material. I do not, however, take the decision in that case as laying down the rule that where the assessee himself extracts and manufactures his own raw material the cost incurred in such extraction and manufacture can never be debited to the revenue account. With the exception of Alianza Companys case on which reliance has been placed not only by the learned counsel for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith ? He had bought as part of the capital of the business his fathers contracts. These enabled him to purchase coal from the colliery owners at what we were told was a very advantageous price, about fourteen shillings per ton. He was able to buy at this price because the right to do so was part of the assets of the business. Was it circulating capital ? My Lords, it is not necessary to draw an exact line of demarcation between fixed and circulating capital. Since Adam Smith drew the distinction in the Second Book of his Wealth of Nations , which appears in the chapter on the Division of Stock, a distinction which has since become classical, economists have never been able to define much more precisely what the line or demarcation is. Adam Smith described fixed capital as what the owner turns to profit of by parting with it and letting it change masters. The latter capital circulates in this sense. My Lords, in the case before us the appellant, of course, made profit with circulating capital, by buying coal under the contracts he had acquired from his fathers estate at the stipulate price of fourteen shillings and reselling it for more, but he was able to do this simply because he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital and not an admissible deduction from profits for Income Tax purposes, the ground of the decision being that the expenditure was incurred not in respect of circulating capital but in respect of the original capital outlay and to dispose of a liability. I do not understand how this case helps us in the decision of the present case because in the case cited both the lease, being long terms leases, were a fixed capital asset and therefore the amount paid as consideration for their surrender and in order to escape the liability imposed by them was clearly a capital expenditure, whereas in the present case the leases are for a period of one or two years and the consideration for them is paid out of the money reserved for current expenditure of the assessee. In Coltness Iron Company v. Black the question was whether the expenditure incurred by a company of coal and iron masters in sinking new pits was a capital expenditure or revenue expenditure. The substantial contention before the House of Lords was that an assessee is entitled to allowance for exhausted capital in computing his profits. The contention was repelled, as it has been repeatedly repelled in a series of other cases. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner of Income Tax Madras, and Abdul Kayum Sahib Hussain Sahib v. Commissioner of Income Tax, Madras, and the Allahabad case in Commissioner of Income Tax v. Tika Ram. In Commissioner of Income Tax, Madras v. U. Chengalvaroya Mudaliar, the assessee had entered into an agreement which was described as a lease for a period of three years for the excavation of lime shells from certain lands and by that agreement was to have the exclusive privilege of excavating the same in consideration of a certain sum payable in instalments. It was held that the payment was a capital expenditure and therefore not a deductible item under Section 10 (2) (ix), because the payment was not as price paid for the purchase of shells inasmuch as the amount of shells to be won was entirely dependent upon the will or the efforts of the assessee and also because the payment was not made in order to carry on an already existing business but to start that particular venture. It will, therefore, be clear that that case is distinguishable from the present case because the assessee in that case was not a manufacturer and the payment was held to have been made not for the purpose of running an existing business b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore that case is distinguishable from the present case not only because the assessee was the owner of a part of the land and presumably a long term lessee of the other but also because it was a single venture concern and the consideration for the lease could well be treated as an initial expenditure of acquiring the business. The learned judges emphasized the fact that in the process of carrying on the assessees business the subject of the lease was not completely consumed or exhausted but that as earth was dug out fresh earth or clay because available and that the case could not be regarded as one where the materials were completely and wholly used up in the process of manufacture. The decision might well have been otherwise if it has been found, as it has been found in the present case, that the subject of the lease was completely and wholly used up in the process of manufacture because, as already pointed out, the assessee in the present case acquires a large number of leases in the course of a single year and they are all for a period of one or two years. The subject of the lease is therefore wholly and completely used up in the process of manufacture. The Alianza companys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in the three years over which the average extends. It is not necessary to deal with that point at present, and I do not decide it; I merely say that I do not think it would be necessary. The question in this case which we have to consider is what is the nature of the adventure or concern which this particular company is carrying on. If it is merely a manufacturing business, then the procuring of the raw material would not be a capital expenditure. But if it is like the working of a particular mind or bed of brick earth, and converting the stuff worked into a marketable commodity, then the money paid for the prime cost of the stuff so dealt with is just as much capital as the money sunk in machinery or buildings. In my opinion the particular adventure here belongs to the latter category. This company must be treated as a company formed for the purpose of working and developing the bed of caliche. If it carried on a general business of purchasing and developing similar properties it is possible the matter might be otherwise; but here it is formed merely to work this particular bed, and consequently the money sunk in purchasing this bed is a capital and not a current expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t make any profit by selling the crude saltpetre. According to the ordinary method of calculating the profits or gains of a business, therefore, the assessee must deduct from his sales the money expended in acquiring salt bearing earth under the short term leases, because such expenditure must enter into the costs of production of the finished product. In the course of arguments both parties cited a large number of English cases which define the considerations which affect the determination of the question whether a certain expenditure is capital or revenue. Applying those considerations we find that the money expended by the assessee in acquiring the sites for the purpose of extracting crude saltpetre is not expended in acquiring the assessees business but for the purpose of running it. It may be interesting to point out here that the different Income Tax Commissioners who had to deal with this case have given different grounds for the view that the expenditure is capital. The Income Tax Officer was of the opinion that the money was an initial expenditure incurred for the purpose of acquiring the business and not for the purpose of running the business. The Commissioner, who first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge for the enduring benefit of the trade. The expenditure is a running expenditure which is a very important and in this case the determining consideration to answer the question whether the expenditure is capital or revenue. Since the expenditure is not capital according to the three broad tests just mentioned and because it is unquestionably a revenue expenditure according to ordinary principles of trade, it should, I think, be held to be a revenue expenditure. The result may perhaps be different where the land worked is the property of the assessee, or is acquired by him on a long term lease, because in such a case the rights in the land would be a fixed capital asset. But where as in this case the assessee must from year or so, the expenditure does not become capital merely by reason of the fact that what is acquired is not kallar but the right to collect kallar, and such expenditure is as much a revenue expenditure as the expenditure in purchasing raw material by a manufacturer or stock-in-trade by a trader. In the case of Knowles v. McAdam, Kelly, C. B. made some observations which are fully applicable to the present case, with this exception that whereas the Chief Baron w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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