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TMI Blog1960 (4) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... ivered by HIDAYATULLAH, J. S. K. DAS, J.--- This is an appeal by the assessee with leave of the High Court of Hyderabad granted under section 66A(2) of the Indian Income-tax Act, 1922. The short facts are these. The appellant is a private limited company carrying on the business, inter alia, of sale of Shahabad stones (flag stones) which had to be extracted from quarries, dressed and then sold. For the purpose of its business, the appellant took on contract the right to excavate stones from certain quarries in six villages in Tandur Taluk for a period of twelve years under a quolnama dated 9th Mehr, 1343 F., from the then jagirdar of the taluk, named Nawab Mehdi Jung Bahadur. The contract provided that the jagirdar should be paid annually a sum of Rs. 28,000 as consideration for extracting the stones till the end of the contract period, as per a plan prepared, within the six villages specified therein. The appellant had no right or interest in the land ; nor did he have any other interest in the quarries apart from excavating stones therefrom. The contract specifically provided that the appellant, called the contractor, had no right to manufacture cement from the stones ; he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Hyderabad Income-tax Act, corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922. The Tribunal stated that the Income-tax Officer was under some misapprehension or error while examining the appellant's books of account, and held for the assessment year 1357F. that the expenditure of Rs. 27,054 as lease or contract money was capital expenditure, in respect of which the appellant was not entitled to claim any allowance under the relevant provision of the Hyderabad Income-tax Act. For the assessment year 1358F. he similarly held that the sum of Rs. 28, 158 was capital expenditure and not revenue expenditure. There were two appeals to the Appellate Assistant Commissioner who also held that the expenditure was capital expenditure. Then, there was an appeal to the Income-tax Appellate Tribunal, Bombay. The Accountant Member of the Tribunal held that the payments in question stood on the same footing as royalties and dead rent which are allowable as working expenses in cases of mines and quarries. The President of the Tribunal expressed his finding thus " In the present case, the assessee purchased his stock-in-trade. Instead of paying so much for so many cubic fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principles which are easy of application in some cases ; but from time to time cases arise which make the distinction difficult of application. A large number of decisions were cited before us, but no infallible criterion of universal application emerges therefrom and each case must turn on its own facts, though the decisions are useful as illustrations and as affording indication of the kind of considerations which may relevantly be borne in mind in approaching the problem. I shall refer in this judgment to such decisions only as have a bearing on the real controversy between the parties. In view of the submissions made before us, the real controversy in this case appears to me to be this : in the context of the terms of the contract between the parties, was the expenditure incurred intended to create or bring into existence an asset or advantage of an enduring character or was it intended to get only the stock-in-trade or the raw materials for the business ? If it was the former, then it was capital expenditure ; if latter, then revenue expenditure. There is no doubt that receipts and payments in connexion with acquiring or disposing of leaseholds of mines or minerals are usu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quarries as per the plan. In case he requires a further area of land in the village for excavation of stones, this will be done on his application four months in advance. The contractor will have no right to manufacture cement from the stones in the villages noted above." In view of these clauses and the recital in the quolnama that it was a quarry contract for excavating stones only, it is in my view not reasonable to hold that what the appellant acquired in the present case was the means of obtaining raw material rather than the raw material itself. It is, I think, an accepted position now that the expression " capital expenditure " must normally be construed in a business sense and emphasis should be placed upon the business aspect of the transaction rather than on the purely legal and technical aspect. It is not, therefore, necessary to determine whether the quolnama in the present case was in law a lease, or a licence, or a licence coupled with a grant. What we have to consider is the nature of the transaction from the business point of view, and it seems to me that having regard to the terms of the quolnama, the transaction in its true nature and quality was a sale of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 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 assets or advantage for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jagannath in so far as it applied the general principles to the facts of that case. I see no significant distinction between that case and the one before us. In both cases, what was acquired was raw material---earth in one case and stone in the other and the payments made were the price of the raw material. The only distinction pointed out is the difference in the period of the contracts ; that is a relevant factor but not determinative of the problem before us. Even in our case the contract in favour of Government was for five years only. Surely, it cannot be argued that three years in one case and five years in the other will make all the difference. I think that the real test is, in the context of the controversy before us, what was acquired---an enduring asset or advantage, or raw materials for running the business ? Judged by that test the present case stands on the same footing as the case of Benarsidas Jagannath. In Mohanlal Hargovind the facts were these. The assessees carried on business at several places as manufacturers and vendors of country made cigarettes known as bidies. These cigarettes were composed of tobacco rolled in leaves of a tree known as tendu leaves, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court, dissenting from its earlier decisions, held that rent paid by a dealer in chank under an agreement in the form of a " lease " with the Government under which he had an exclusive right," to fish for, take and carry away all the chank shells in the sea off the coast line " of a certain district, was allowable as revenue expenditure. It was further held there that it made no difference whether what was acquired was raw material for a manufacturing business or stock-in-trade which was intended to be sold without being subjected to any manufacturing process. This decision is the subject of Civil Appeal No. 64 of 1956 which has been heard along with this appeal. I do not see how the present case can be distinguished from the Madras case without holding that the Madras decision was incorrect. Last, I come to Stow Bardolph Gravel Co. Ltd. That was a case in which it was held that sums paid by a dealer in gravel as consideration for the right to excavate and take away deposits of gravel represented capital expenditure. The decision rested on the fact that the subject matter of the agreement consisted of a deposit of gravel lying some feet beneath the surface of the land and requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rees ; But my difficulty is that I can find no justification for that conclusion in the material before us." In view of these observations I have considerable hesitation, and I say this with great respect, in accepting the decision as a decision on a general question of law. The decision proceeded on the findings of the Commissioners and on the basis that there were no materials for the conclusion reached by Harman, J. If we proceed on the findings of the Tribunal in the present case, there are enough materials to support the finding that the appellant acquired nothing but raw materials by the transactions in question. I find nothing in the decision in Stow Bardolph Gravel Co. Ltd. which need lead me to the conclusion that the decisions in Benarsidas Jagannath, and Abdul Kayoom, were wrong and require reconsideration. If I may again say so with great respect, the learned Master of the Rolls distinguished the Privy Council decision in Mohanlal Hargovind, by saying that that decision rested upon the particular circumstances of the case and upon the fact I that the Board was able to say that from the moment the contract was entered into and before the leaves had actually been pi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payments at Rs. 8,000 per year were paid in advance as security, and the balance of Rs. 20,000 was payable each year in monthly instalments of Rs. 1,666-10-8 each. In default of punctual payment of these- instalments, interest at Re. 1 per cent. was to be charged. Some other conditions of the quolnama may also be briefly mentioned here. The assessee undertook not to manufacture cement and also to be responsible for the payment of the money in spite of " any celestial or terrestrial or unexpected calamity or unforeseen event ", while the Nawab on his part undertook not to allow any other person to excavate stones in the area of the six villages. It was agreed that in case of default of instalment, the contract would be re-auctioned after one month's notice to the contractor, who would be responsible for any shortfall but would not have the benefit of any extra amount. The assessee was assessed in the Fasli years 1357 and 1358 for the account years 1356 and 1357F. It claimed deduction respectively of Rs, 27,054 and Rs. 28,159 paid to the Nawab in those years, as expenditure under section 12(2)(xv) of Hyderabad Income-tax Act, which is the same as the corresponding provision under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax Act. The assessee then applied, and obtained the certificate as stated, and this appeal has been filed. The arguments in the case involved the interpretation of the quolnama as to the right conveyed there, and the nature of the payments with reference to the provision of the law under which the deduction was claimed. That section reads as follows : " 10. (1) The tax shall be payable by an assessee under the head ' Profits and gains of business, profession or vocation ' in respect of the profits and gains of any business, profession or vocation carried on by him. (2) Such profits or gains shall be computed after making the following allowances namely :--- ... (xv) any expenditure (... not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation." While the Appellate Tribunal looked to the periodicity of the payments, the High Court held that the amount payable was Rs. 3,36,000 divided into annual and re-divided into monthly instalments. The Tribunal also considered the payments as of the nature of rent or royalty or as price for raw material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e bears a capital or revenue character. According to him, decided cases show that capital expenditure is ordinarily once and for all and not of a periodic character, but contends that even a single sum chopped up into instalments is not a payment of a periodic character. He submits that capital expenditure is one which brings into existence an enduring advantage, which, he maintains, is the case here, because the money was spent on the initiation of the business and to obtain a permanent source of raw materials and not only the materials. The quolnama shows that the agreement was for 12 years. The assessee paid an initial sum of Rs. 96,000 as security for the whole contract. He was required to pay Rs. 28,000 per year. The security which was given was being diminished at the rate of Rs. 8,000 per year. It was a guarantee against failure to pay the monthly instalments, but there was no condition that the short payments were to be debited to it. It was rather a guarantee for the overall payment and to reimburse the jagir for any loss occasioned by re-auction of the lease after default by the assessee. Further, the payments were to be made even if no stones were extracted or could n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing benefit of a trade I think there is very good reason (in the absence of special circumstances leading to the opposite conclusion) for treating such an expenditure as properly attributable, not to revenue, but to capital." The words " enduring benefit of a trade have been further explained as meaning not " everlasting ", but in the way capital endures ", see du Parcq, L.J., in Henriksen v. Grafton Hotel Ltd. and Rowlatt, J., in Anglo-Persian Oil Co. v. Dale. Another test propounded by Viscount Haldane in John Smith Son v. Moore, is to distinguish, as economists do, between fixed and circulating capital. This appears to have appealed to Lord Hanworth, M. R., in Golden Horse Shoe (New) Ltd. v. Thurgood ; but in Van den Berghs Ltd. v. Clark, Lord Macmillan observed that he did not find it very helpful. Often enough, where the character of the expenditure shows that what has resulted is something which is to be used in the way of business, the test may be useful ; but in cases close to the dividing line, the test seems useless. A third test was laid down by the Judicial Committee in Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax. There, it was stated that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial for a period extending over several years. . . 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 mine 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." The application of this proposition finds an example in Mohanlal Hargovind's case, where tendu leaves were the subject of expenditure. The firm in that case had paid for purchasing a right to collect tendu leaves from forests, which right included the right of entry and coppicing and pollarding. No right in the land or the trees and plants was conveyed, and the Judicial Committee laid emphasis on the nature of the business of the firm, and equated the expenditure to one for acquiring the raw materials for the manufacturing business. The cases to which we have referred and many more of the High Courts in India where the principles were applied with the exception of the one last cited, were all considered by this court in Assam Bengal Cement Co. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated." Learned counsel in the present case rested his case upon the decision of the Punjab High Court in Benarsidas' case, and stated that after its approval by this court, the expenditure here could not but be held as on capital account. He relied strongly also upon the decision of the Judicial Committee in Mohanlal Hargovind's case. Reference was made to other decisions, which we will briefly notice later. In Benarsidas' case, the person sought to be assessed was a manufacturer of bricks. He obtained certain lands for digging out earth for his manufacture. Under the deeds which gave him this right, be could dig up to a depth of 3 feet to 3 1/2 feet. He had no interest in the land, and as soon as the earth was removed, his right was at an end. It was held in that case that the main object of the agreements was the procuring of earth as raw materials, and by the expenditure the lessee had not acquired any advantage of a permanent or enduring c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lard the tendu trees, but beyond this gave no interest in land. The Judicial Committee held that these, contracts were in a business sense for the purpose of securing supplies to the manufacturers of one of the raw materials of his business. They granted no interest in land or the plants or trees. The small right of cultivation and the exclusive nature of the grant were of no significance. Then, the Judicial Committee observed as follows : " Cases relating to the purchase or leasing of mines, quarries, deposits of brick earth, land with standing timber etc ..... do not appear to their Lordships to be of assistance." The Board distinguished Alianza Co. Ltd. v. Bell which was said to be a case analogous to purchase or leasing of a mine and Kauri Timber Co.'s case, which was a case of acquisition of land or of standing timber which was an interest in land. In either case, it was a capital asset. Their Lordships finally observed : 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een possible to hold that after the price was paid, the sand and gravel become, in truth, the stock-in-trade of the taxpayer. Taking the facts, however, as found, he held that what was purchased was a part of the land itself, namely, the gravel in situ. He held that there was a distinction between the purchase of a growing crop or leaves and the purchase of gravel. Lord Evershed then analysed the agreement, and observed as follows : " I think that once it has to be conceded that there was no sale of the gravel in the way the judge said there, was, then it must follow that what the company acquired was ..... ' the means of getting the gravel by excavating and making it part of the stock-in-trade '." Reference was then made by him to cases in which what was purchased or taken on lease was land or an interest in land, and Mohanlal Hargovind's case was distinguished on the ground that in that case it was possible to say of tendu leaves that they were acquired as the raw material for manufacture. The argument of Mr. Magnus in the case described as an attempt to substitute sand and gravel for tendu leaves was not accepted, Lord Evershed observing : " But I cannot say the same of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involved. The case in Hood-Barrs v. Commissioners of Inland Revenue was similar to the last cited. In the present case, the assessee acquired a right to extract stones and his lease included not only the stones on the top but also those buried out of sight under tons of other stones, which he could only reach after extracting those above. This case is thus within the rule of those cases in which the right acquired is to a source from which the raw materials are to be extracted. The doubt expressed by Lord Evershed does not apply to the facts here, because the reasons given by Harman, J., cannot be made applicable at all. In Kamakshya Narain Singh v. Commissioner of Income-tax 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 working of a mine, certain observations were made. It was contended that the payments amounted to conversion of a capital asset into cash. The argument was repelled by the Jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the periodicity of payments has any significance. As was pointed out by Lord Greene, M. R., in Henriksen's case : " 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 ". Applying the above test to the present case, it is obvious that the monthly payments of Rs. 1,666-10-8 did not represent the lease amount for a month. This was a case in which the assessee had acquired an asset of an enduring character for which he had to put his hand in his pocket for a very large sum indeed. He paid Rs. 96,000 down, but for the rest he asked for easy terms. The amount paid every month was not in any sense a payment for acquisition of the right from month to month. It was really the entire sum chopped into ..... X X X X Extracts X X X X X X X X Extracts X X X X
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