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TMI Blog1976 (4) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,48,499. As the lessors had some liabilities the assessee made initial payment of Rs. 80,999 and the balance is to be paid in the following manner : (1) First five years nothing will be paid. (2) Thereafter, for seven years the lessors will get annually Rs. 2,500 total-- Rs. 17,500. (3) Thereafter, for the remaining period of ten years, the lessors will get annually Rs. 5,000--total Rs. 50,000. The payment of Rs. 80,999 was divided into five years and the assessee claimed Rs. 16,200 as lease rent. The Income-tax Officer allowed a sum of Rs. 2,509 and disallowed the balance considering that a substantial portion of Rs. 1,48,499 was capital expenditure in nature. On appeal the Appellate Assistant Commissioner disallowed the entire amount of Rs. 16,200 holding that under the lease deed the assessee did not acquire stock-in-trade but it acquired an asset of enduring nature, namely, absolute right to pluck the green leaves from the tea garden bushes and to extend the garden and obtain the produce thereof, and export quota right, etc. On second appeal by the assessee, the Tribunal allowed a sum of Rs. 6,750 taking the average of the payment of Rs. 1,48,499 during the period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Lessors doth hereby demise unto the Lessee for the period of 22 years aforesaid, the entire AHMEDDY TEA ESTATE..." On going through the lease deed as a whole and more particularly the paragraphs quoted hereinabove, the Tribunal came to the finding that the sum of Rs. 80,999 was debts from different creditors incurred by the tea estate and these debts were paid by the lessee and this payment was considered as part payment of the rent fixed. The payment of the balance of the rent reserved was also spread over during the period of the lease as found in the lease deed itself. The learned Tribunal thus found that the sum of Rs. 1,48,499 was the total rent reserved and spread over for the total period of the lease, that is, 22 years, and the payment represented revenue expenditure. The learned standing counsel for the department submits that the lease period is 22 years and the lessee has various rights under the lease deed, such as, working in the tea estate, plucking green leaves, manufacturing tea from the green leaves plucked, selling them in the market, maintaining nurseries, extending the acreage of tea cultivation and the right over the export quota. All these go to show, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of expenditure and whether it is capital expenditure or revenue expenditure. In Assam Bengal Cement Co. Ltd.'s case [1955] 27 ITR 34, at pp. 43, 44, 45, 46, 47 (SC) the Supreme Court has observed as follows : "In Benarsidas Jagannath, In re [1947] 15 ITR 185 (Lah) [FB], a Full Bench of the Lahore High Court attempted to reconcile all these decisions and deduced the following broad tests for distinguishing capital expenditure from revenue expenditure. The opinion of the Full Bench was delivered by Mr. Justice Mahajan, as he then was, in the following terms : 'It is not easy to define the term "capital expenditure" in the abstract or to lay down any general and satisfactory test to discriminate between a capital and revenue expenditure. Nor is it easy to reconcile all the decisions that were cited before us for each case has been decided on its peculiar facts. Some broad principles can, however, be deduced from what the learned judges have laid down from time to time. They are as follows :- 1. 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 : vide Lord Sands in Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source, whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question, however, arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advanta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that may be turned over in the course of trade at a comparatively early date.' Latham C.J. observed in Sun Newspapers Ltd. Associated Newspapers Ltd. v. Federal Commissioner of Taxation 61 CLR 337, 355 :-- 'When the words "permanent" or "enduring" are used in this connection it is not meant that the advantage which will be obtained will last for ever '. " The facts of the Pingle Industries Ltd.'s case [1960] 40 ITR 67 (SC) may be summarised : "The assessee-company which carried on, inter alia, the business of selling Shahabad flag stones, obtained from a Jagirdar under a contract the right to extract stones from quarries situated in six named villages for a period of 12 years on the annual payment of Rs. 28,000. To safeguard payment the sum of Rs. 96,000 was paid in advance as security of which Rs. 8,000 was to be adjusted annually against Rs. 28,000 and the balance of Rs. 20,000 was payable in monthly instalments of Rs. 1,666-10-8. The assessee had only the right to excavate stones and undertook not to manufacture cement and the Jagirdar undertook not to allow any other person to excavate stones in those areas. There was also another similar lease taken from the Governm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was from six months to three years. The Full Bench referred to some other leases in which the duration was longer, and observed : 'There are other agreements which are not before us and it seems that the items mentioned in the question referred relate to those agreements as well. We do not know the nature of the agreements, but the question can be answered by saying that expenses incurred during the year of assessment for purchase of earth on basis of agreements of the nature mentioned in the case of Benarsidas [1947] 15 ITR 185 (Lah) [FB] or of the nature like exhibit T. E. are admissible deductions, while sums spent for obtaining leases for a substantially long period varying from I0 to 20 years cannot be held to be valid deductions if they amount to an acquisition of an asset of an enduring advantage to the lessee.' It appears that the Full Bench was persuaded to this view from two considerations. The first was that what acquired was earth with no interest in land and the other was the short term of the leases. The approval given to Benarsidas case [1947] 15 ITR 185 (Lah) [FB] by this court does not extend beyond the summary of the tests settled in it, and the tests have t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old. These deposits are extensive, and the work of the assessee carries him deep under the earth. Such a deposit cannot be described as the stock-in-trade of the assessee, but stones detached and won can only be so described. Before we deal with the other cases, we wish to state the distinguishing features of the cases already mentioned, and which have not often been viewed together. In Alianza's case [1904] 2 KB 666 (KB) the sale was not of the caliche as such but of the right to win it from a deposit thereof, and it was treated as an expenditure of a capital nature. In Stow Bardolph's case [1955] 27 ITR 146, 57 (CA), the finding was that sand and gravel had to be won, and it was held that they could not be treated as stock-in-trade till they were actually won ...... In Kamakshya Narain Singh v. Commissioner of Income-tax [1943] 11 ITR 513 (PC) the case involved payment of certain annual sums by way of salami for mining rights, and these were regarded as capital income. There were also two other payments, namely, royalty on coal raised and a provision for minimum royalty. These were regarded as not capital receipts but as assessable income. In dealing with the nature of the wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not purchasing stones, and the price paid could not in any sense be referable to stones as stock-in-trade. The stones extracted might have become his stock-in-trade, but the stones in situ were not so. Nor do we agree that the periodicity of payments has any significance. As was pointed out by Lord Greene M.R. in Henriksen's case [1943] 11 ITR (Suppl) 10 (CA) : 'If the sum payable is not in the nature of revenue expenditure, it cannot be made so by permitting it to be paid by annual instalments. These payments by instalments in respect of monopoly value have not the annual quality of the payments for the grant of the annual excise licence, but are of a different character altogether.... Here the appellants were minded to acquire an asset in the shape of a licence for a term of years.' The learned Master of the Rolls added that the annual payments gave a false appearance of periodicity'. " In Gotan Lime Syndicate v. Commissioner of Income-tax [1966] 59 ITR 718, 724 (SC) the Supreme Court has observed as follows : "These appeals raise the difficult question of distinguishing between revenue expenditure and capital expenditure. The learned counsel for the assessee, Mr. N. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duration of the advantage and the same can be put to an end at any time. How long the period of contemplated advantage should be in order to constitute enduring benefit would depend upon the circumstances and the facts of each individual case. In Commissioner of Income-tax v. Panbari Tea Company Ltd. [1965] 57 ITR 422, 425 (SC) the Supreme Court has observed as follows : "Under section 105 of the Transfer of Property Act, a lease of immovable property is a transfer of a right to enjoy the property made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms. The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent. The section, therefore, brings out the distinction between a price paid for a transfer of a right to enjoy the property and the rent to be paid periodically to the lessor. When the interest of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of the lease is to remove sand lying loose on the surface, without exercising any other right on the land included in the lease. In Bombay Steam Navigation Co. (1953) Private Ltd. v. Commissioner of Income-tax [1965] 56 ITR 52, 59 (SC), this court explained the principle of determining the nature of an expenditure. This court held : 'Whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure.' Clearly, in the present case, the expenditure incurred by the assessee was not related to the acquisition of an asset or a right of a permanent character. It was for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 96 (SC) to which one of us (Hegde J.) was a party, the royalty was payable at a certain rate or rates on the stone excavated and an additional royalty was leviable at a certain rate on polished stone. On these facts it was held that the nature of the payment was no different from that of the minimum royalty paid and the excess royalty was not paid for getting some additional capital asset or even an enduring benefit but was paid on the basis of commercial expediency not of a capital expenditure." In Devidas Vithaldas Co. v. Commissioner of Income-tax [1972] 84 ITR 277 (SC) the Supreme Court has observed as follows : As has been observed in a number of decisions, it is not always easy to distinguish whether an agreement is for the payment of price in stipulated instalments or for making annual payments in the nature of income, that there is no single test of universal application for a solution of the question, and that, therefore, the court has to look not only into the document relating to the transaction, but also the surrounding circumstances to decide its true nature, the name which the parties give to it being of little consequence. This, of course, does not mean that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears that the total rent for the total period of 22 years has been stipulated at Rs. 1,48,499, out of which a sum of Rs. 80,998.97 has been treated to form a part payment of the rent for the lease and the payment of the balance rent has been made payable in the following manner : 1. First five years nothing will be paid. 2. After five years the lessors will get annually Rs. 2,500 for seven years--total being Rs. 17,500, and 3. After twelve years the lessors will get annually Rs. 5,000 for ten years--the total amount being Rs. 50,000. The relevant paragraphs of the lease deed may be quoted below : NOW THEREFORE THIS INDENTURE WITNESSETH that in consideration of the rent hereby reserved and of the covenant on the part of the lessee hereinafter contained the Lessors doth hereby demise unto the Lessee for the period of 22 years aforesaid, the entire AHMEDDY TEA ESTATE of which the tea plantation area is 42.53 acres as per returns submitted before the Government and Tea Board situated at Tiojoliagaon, Monza Bogdung, P. S. Chabua in the District of Lakhimpur being Registered No. 336 with Tea Board, particularly and more fully described in the Schedule written hereinafter TOGETH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is quite clear that the assessee has taken lease of Ahmeddy Tea Estate for 22 years at a total rent of Rs. 1,48,499 out of which a sum of Rs. 80,998.97 has been paid in advance and the balance sum of Rs. 67,500 has been spread over for seventeen years after expiry of five years from the commencement of the lease. Thus, the assessee-company, whose business is manufacture and sale of tea, has entered into the lease for extension of its business of manufacture and sale of tea. Under the terms of the lease the assessee has got possession of the tea estate and it can exercise most of the rights of the owners of the tea estate as quoted hereinabove. The existing plantation area of the tea estate is 42.53 acres and the lessee has been allowed to extend the tea plantation area even by cutting jungles by about 40 acres more or less. The lessee has got all the rights of working in the tea estate as quoted hereinabove. The lessee can maintain nurseries (i.e., tea seed and shade trees) improve the garden by constructing roads, bridges, making drains, improve labour quarters and the lessee also has the right over export quota. It can sell and purchase export quota and do all other works in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enduring benefit and the consideration has been paid and was payable for acquiring this enduring benefit and for extension of its business. That being so, the expenditure in the instant case has the real nature of capital expenditure. In the instant case the major portion of the consideration of the lease has been paid at the time of execution of the lease and the balance has been made payable by annual instalments after five years. But the payment in the instant case being of capital nature, it cannot be converted into that of revenue nature because the portion of the payment has to be made by annual instalments, as has been observed by the Supreme Court above. The Tribunal is under the impression that since the lease is not of the land only for a certain period, the payment is revenue expenditure and the payment was made for stock-in-trade and by way of assessee's profit earning activity. In our opinion the learned Tribunal's finding in this regard is not correct. The terms of the lease clearly show that the assessee, apart from the right of plucking green leaves from existing tea plantation, has many other rights including the right to open new plantation over about 40 acre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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