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TMI Blog1961 (11) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 - - - - - Dated:- 23-11-1961 - Judge(s) : S. K. DAS., J. L. KAPUR., M. HIDAYATULLAH JUDGMENT The judgment of M. Hidayatullah and J. L. Kapur JJ. was delivered by Hidayatullah J. S. K. Das J. delivered dissenting judgment. S. K. DAS J.--I had taken a view different from that of my learned brethren when this appeal was heard along with Pingle Industries Ltd., Secunderabad v. Commissioner of Income-tax, and that view was expressed in a very short judgment dated April 26, 1960. Now, we have had the advantage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks caught in nets and by means of diving as well. In the process of such collection of shells not to fish chanks shells less than 2 1/4 inches in diameter and if any chank shells less than 2 1/4 inches in diameter be brought inadvertently to shore, to return at once alive to the sea all such undersized shells. (iv) Not at any time hereafter to transfer or underlet or part with possession of this grant or the rights and privileges hereby granted or any part thereof without the written consent of the lessor. (v) At the end or sooner determination of the term hereby created peaceably and quietly to yield to the lessor the rights and privileges hereby granted, and (vi) To report to the Assistant Director of Pearl and Chank Fisheries (South), Tuticorin the actual number of shells kept unsold in different stations after the expiry of the lease period. For the assessment year 1946-47, the respondent firm submitted a return of its income to the Income-tax Officer, Karaikudi Circle, showing its income from sale of chanks purchased from divers at Rs. 7,194, by sale of chanks purchased from Government Department at Rs. 23,588 and Rs. 2,819 by sale of chanks gathered by themselves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture is regarded as on capital account, for it is incurred not in earning profits but in setting the profit-earning machinery in motion. In my opinion this test does not apply in the present case where no profit-earning machinery was set in motion. (2) Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade (See Atherton v. British Insulated and Helsby Cables Ltd.). In elucidation of 'this principle it has been laid down in several decisions that by, " enduring " is meant " enduring in the way that fixed capital endures " and it does not connote a benefit that endures in the sense that for a good number of years it relieves the assessee of a revenue payment. In Robert Addie and Sons Collieries Ltd. v. Commissioners of Inland Revenue Lord Clyde formulated the same test in these words : " What is ' money wholly and exclusively laid out for the purposes of the trade ' is a question which must be determined upon the principles of ordinary commercial trading. It is necessary accordingly to attend to the true nature of the expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r-fetched to hold that by the contract in question the respondent firm acquired property or right of a permanent character, the possession of which was a condition of carrying on its trade. To me it seems that the better view, in a business sense, is that the respondent firm merely acquired by means of the contract its stock-in-trade, rather than a source or enduring asset for producing the stock-in-trade. It was argued before us, as it was argued in the High Court, that what was acquired in the present case was the means of obtaining the stock-in-trade for the business rather than the stock-in-trade itself. I am unable to accept this argument as correct. The contract entered into by the respondent firm was wholly and exclusively for the purpose of obtaining conch shells, which were its stock-in-trade. As I have stated earlier, the contract granted no interest in the sea, sea bed, or sea water etc. It was simply a contract giving the grantee the right to pick and carry away conch shells of a specified type and size which of course implied the right to appropriate them as its own property. In my opinion, in a case of this nature no distinction can be drawn in a business sense bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en expenditure which is and expenditure which is not, incurred solely for the purpose of earning profits or gains." Lord Greene (Master of the Rolls) expressed himself more strongly and adverting to the distinction between capital and income, said : "...there have been since many cases where this matter of capital or income has been debated. There have been many cases which fall upon the borderline : indeed, in many cases it is almost true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons." (Vide Commissioners of Inland Revenue v. British Salmson Aero Engines Ltd. Perhaps, the case before us is not as bad as the cases which the Master of the Rolls had in mind when he made the above observations. It is, however, a truism that each case must turn upon its own facts. Nevertheless the decisions are useful as illustrations of some relevant general principles. The nearest illustration that we can get is the decision of the Privy Council in Mohanlal Hargovind v. Commissioner of Income-tax. That decision was binding on the Indian courts at the time when it was given and as I think that it is still good law and is indistin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract is three years. Indeed, there is no vital difference between the periods in the two cases. (2) In the case before us the contract area is described in a schedule. In the two contracts which were under consideration by the Privy Council the contract area was also indicated in a schedule. The boundaries of the forests in which tendu leaves could be plucked were delimited by the schedule. Same is the case with the contract before us. The contract area in which conch shells of a specified type and size can be picked and gathered is described in a schedule. Such description does not mean that the assessee gets any right other than the right to gather conch shells. In the Privy Council case the assessees were granted no interest in land or in the trees or plants; it was the tendu leaves and nothing but the tendu leaves that were acquired. In the case before us no interest was given in the sea bed or in the sea water or in any of the products thereof. Conch shells of a specified type and size and nothing but such conch shells were acquired by the contract, I do not think that the reference to the coast line off the South Arcot District makes any difference between the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to the decision in Alianza Co. v. Bell and said : "........... the present case resembles much more closely the case described and distinguished by Channell, J. at page 673 of the report in Alianza Co. v. Bell, of the cost of material worked up in a manufactory. That, said the learned judge, is a current expenditure and does not become a capital expenditure merely because the material is provided by something like a forward contract, under which a person for the payment of a lump sum down secures a supply of the raw material for a period extending over several years '." In Kauri Timber Co. Ltd. v. Commissioner of Taxes the company's business consisted in cutting and disposing of timber. It acquired in some cases timber bearing lands, in other cases it purchased the standing timber. The leases were for 99 years. So far as the cases where the land was acquired were concerned there could have been no doubt that the expenditure made in acquiring it was capital expenditure. In the case of the purchase of the standing timber what was acquired was an interest in land. The purchasers bought the trees which they could allow to remain standing as long as they liked. It was pointe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is no question of any excavation etc. in order to win the goods and make such goods part of the stock-in-trade, a point which weighed with the Court of Appeal in Stow Bardolph Gravel Co. Ltd. v. Poole and with my learned brethren in Pingle Industries Ltd. v. Commissioner of Income-tax. No such point is present in this case. I have been unable to find any other distinction between the two cases which would make a difference in the application of the principles for discriminating between capital expenditure and revenue expenditure. To adopt again the language of Lord Greene, I see no ground in principle or reason for differentiating the present case from the case in Mohanlal Hargovind v. Commissioner of Income-tax. On behalf of the respondent firm a further question was agitated, namely, whether an allowance for the cost of gathering the conch shells by nets etc. should not be given, even though the rent paid under the contract was not allowable, under section 10(2)(xv) of the Income-tax Act and a reference was made in this connection to the decision in Hood Barrs v. Commissioners of Inland Revenue. I do not think that we are concerned with that matter in the present appeal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Full Bench decision of the Madras High Court in K.T.M.T.M. Abdul Kayum Hussain Sahib v. Commissioner of Income-tax, Madras relating to this respondent, and dismissed the appeal. The Tribunal, however, acceded to a demand for a case, and referred the following question to the High Court for its decision : " Whether on the facts and circumstances of the case the payment of the sum of Rs. 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. " The reference went before a Divisional Bench which referred the case for decision of a Full Bench. The Full Bench held that the case was covered by the Privy Council case above referred to observing : " In our opinion, the facts in the case before the Judicial Committee are indistinguishable from the facts of the present case. In one case, the leaves had to be picked from the trees by going upon the land, while in the other case the chanks had to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earl and Chank Fisheries (South), Tuticorin the actual number of shells kept unsold in different stations after the expiry of the lease period." An analysis of the agreement shows that the respondent obtained an exclusive right to fish for " chanks " by the method of diving and nets and to appropriate them except those below 2 1/4 inches in diameter, which had to be returned alive to the sea and Valampuri shells which had to be sold compulsorily to Government. The respondent had also to report to its lessors at the end of the term, the number of shells not sold. The right was exclusive, but was not capable of being transferred or underlet, and it was for a fairly long period. The coastline involved was also fairly long. There is no doubt that the payment of Rs. 6,111 was an expenditure wholly and exclusively for the purpose of the business of selling shells, just as the payment to the divers and other sundry expenses were. But an expenditure for the purpose of the business may be of a capital nature, and if it is so, it cannot be claimed as a deduction. The question is whether this payment was of a capital nature. What is attributable to capital and what to revenue has led ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh Pingle Industries case and to bring its case within the ruling of the Privy Council in Mohanlal Hargovind's case. When the former case was argued, the attempt was to bring it also within the rule of the Privy Council, but now, the differences between the two cases are recognised, and Pingle Industries case is said to be entirely different. In deciding the present appeal, it is hardly necessary to do more than analyse once again the facts and circumstances of these two cases to show why those two cases were differently decided, and the present case will then be easily disposed of, not on its similarity to another but on its own facts. We shall begin with the Privy Council case. Mohanlal Hargovind and Co., was a firm of bidi manufacturers, which needed tendu leaves in which tobacco is wrapped to make bidis. Tendu leaves were thus the raw material of the business. Tendu leaves can be bought from dealers who sell tendu leaves in a large way. Now, what did the firm do ? It took leases of forests with a right to pick the leaves. This right carried with it the right to coppice small tendu plants and to pollard the tendu trees. There was, however, no right in the trees or the land an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years. Primarily, this was done to obtain stones for its business. It could have been a contract by which it would have been entitled to so many cubic feet of stones to be extracted in a particular period. It took long-term leases of vast areas in several villages to ensure supplies for a considerable time. The leases were not limited by quantity, nor did they refer to any stones in particular. It could take all or it could take none ; but it could not have carried away all the stones, if the supply outran its efforts. The stones were embedded in earth, layer upon layer, and had to be systematically extracted. Till the stones at the top were removed, it could not remove those at the bottom, and there were still more layers further below. In these circumstances, no specific quantity having been bought or sold either expressly or impliedly, the stones being immovable property or a part thereof and the contract being long-term contracts Mohanlal Hatgovind's case was held inapplicable, and it was held that the assessee in Pingle Industries case had acquired an enduring asset and the expenditure was on capital account. These cases between them show adequately the dividing line, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this business, it was directly buying its stock-in-trade for resale. The other method was to acquire exclusive right to fish for chanks by employing divers and nets. The business then changed to something different. The sale was now of the product of another business, in which divers and equipment were first employed to get the shells. It thus took leases of extensive coastline with all the right to fish for chanks for some years. The shells were not the subject of the bargain at all, as were the tendu leaves ; but the bargain was about the right to fish. There can be no doubt that what it paid the divers when it bought chanks from them with the view of reselling them was expenditure laid out wholly and exclusively for the purpose of its business, which was not of a capital nature. That business was buying goods and reselling them at a profit. But a different kind of business was involved when it went in for fishing for chanks. To be able to fish for chanks in reserved waters it had to obtain the right first. It, therefore, took lease of that right. To Mohanlal Hargovind, the leaves were raw materials, and that firm preferred to buy a number of crops over years rather than buy the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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