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Commissioner of Income-tax Vs. Banshidhar Sewbhagawan and Co. - Court Judgment

LegalCrystal Citation
Subject;Direct Taxation
CourtGuwahati High Court
Decided On
Case NumberIncome-tax Reference No. 4 of 1971
Judge
ActsIncome Tax Act, 1961 - Sections 256(1)
AppellantCommissioner of Income-tax
RespondentBanshidhar Sewbhagawan and Co.
Appellant AdvocateG.K. Talukdar and D.K. Talukdar, Advs.
Respondent AdvocateB.P. Saraf, Adv.
Excerpt:
- - the question was whether the amounts paid by the assessee to the jagirdar and the government each year were revenue expenditure allowable under section 12(2)(xv) of the hyderabad income-tax act, corresponding to section 10(2)(xv) of the indian income-tax act, 1922.'21. the supreme court after discussing a number of cases held as follows -see [1960]40itr67(sc) :we are, however, satisfied that in this case the assessee acquired by his long-term lease a right to win stones, and the leases conveyed to him a part of land. 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..... pathak, c.j. 1. this is a reference under section 256(1) of the income-tax act, 1961, hereinafter referred to as 'the act', made by the income-tax appellate tribunal, hereinafter referred to as 'the tribunal'. the following question of law has been referred: 'whether, on the facts and in the circumstances of the case, the tribunal was correct, on a proper interpretation of the term's of the lease deed dated march 23, 1961, and the agreement dated april 6, 1961, in holding that the payment made by the assessee represented revenue expen-diture and, as such, in allowing the assessee's claim to the tune of rs. 6,750 only ' 2. the facts of the case may briefly be stated as follows : the case relates to the assessment year 1962-63. the assessee took lease of the ahmeddy tea estate by a deed.....
Judgment:

Pathak, C.J.

1. This is a reference under Section 256(1) of the Income-tax Act, 1961, hereinafter referred to as 'the Act', made by the Income-tax Appellate Tribunal, hereinafter referred to as 'the Tribunal'. The following question of law has been referred:

'Whether, on the facts and in the circumstances of the case, the Tribunal was correct, on a proper interpretation of the term's of the lease deed dated March 23, 1961, and the agreement dated April 6, 1961, in holding that the payment made by the assessee represented revenue expen-diture and, as such, in allowing the assessee's claim to the tune of Rs. 6,750 only '

2. The facts of the case may briefly be stated as follows : The case relates to the assessment year 1962-63. The assessee took lease of the Ahmeddy Tea Estate by a deed of lease dated March 23, 1961, for a period of 22 years beginning from January 1, 1961. The total payment to be made during the period of 22 years is Rs. 1,48,499. Rs 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.

3. 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.

4. 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.

5. 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 of 22 years comprising the period of the lease in question. The Tribunal held that the initial lump-sum payment of Rs. 80,999 and the balance payable as per terms of the lease deed was the payment in the nature of the lease rent.

6. On the above facts the abovementioned question of law has been referred.

7. In the statement of the case the Tribunal has observed as follows :

'The lease was for a period of 22 years, beginning from January 1, 1961. The sum of Rs. 80,998.97 was mentioned as forming part-payment of the rent for the lease. The balance sum was required to be paid in the following manner.

1. First five years nothing will be paid.

2. After that for seven years the lessors will get annually Rs. 2,500, in total Rs. 17,500, and the lessors will distribute the amount according to each of his/her share in the property.

3. Thereafter, for the remaining period, that is, ten years the lessors will het annually Rs. 5,000--in total Rs. 50,000. '

8. It is thus found that the total consideration for the lease amounted to Rs. 1,48,499 out of which Rs. 80,999 was treated as paid at the time of the execution of the lease. After considering the materials on record the Tribunal came to the finding that the right given to the assessee for payment of the balance sum in the manner mentioned hereinabove and the fact that the sum of Rs. 80,999 paid in lump sum for the purpose of discharge of the lessor's liabilities in order to free the garden as mentioned in the lease deed, would go to show that the entire amount represented the rent of the lease. In coming to the above finding the Tribunal noticed the following paragraphs in the lease deed :

' AND WHEREAS the lessee has paid all the said amounts to the different parties and secured receipts thereof and there is no other encumbrance of the said Tea Estate :

AND WHEREAS the said amount, total of which is Rs. 80,998.97 (Rupees Eighty Thousand Nine Hundred Ninety-Eight and Ninety-Seven Naye paise) only will form a part of payment of rent for the lease ; AND THE other PART will be paid as provided herein under :

AND WHEREAS the lessors have agreed to demise unto the lessee the said AHMEDDY TEA ESTATE for the said term and in the manner hereinafter appearing :

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...'

9. 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.

10. 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 tha right over the export quota. All these go to show, it is submitted by the learned standing counsel, that the lessee acquired ah enduring benefit under the lease deed for a period of 22 years and, therefore, the consideration for the lease should be taken as capital expenditure.

11. The learned standing counsel in support of his submission has mainly relied upon Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax [1955] 27 lTR 34Pmgle Industries Ltd. v.Commissioner of Income- tax

[I960] 40 ITR 67, K.T. M.'T.'M. Abdvsl-Raybom v. Commissions of Income-tax : [1962]44ITR689(SC) , Gotan Lime Syndicate v. Commissioner of Income-tax : [1966]59ITR718(SC) and Commissioner of Income-tax v. Coal Shipments P. Ltd : [1971]82ITR902(SC) .

12. The learned counsel for the respondent submits that the learned Tribunal has correctly held that the payment of the amount in question is the amount of rent under the lease and it is revenue expenditure. It has further been submitted by the learned counsel for the respondent that on consideration of the terms of the deed of lease the learned Tribunal has come to the definite finding that the payment of the sum of Rs. 1,48,499 was the total rent reserved for the total period of 22 years and this is a finding of fact arrived at by the learned Tribunal. In support of his submission the learned counsel for the respondent has mainly relied upon Mohanlal Hargovind of f Jubbulpore v. Commissioner of Income-tax [1949] 17 ITR 473 , G. Venkata Bhooma Reddy v. Commissioner of Income-tax : [1961]43ITR100(AP) , Commissioner of Income-tax v. Panbari Tea Company Ltd. : [1965]57ITR422(SC) , M. A. fabbar v. Commissioner of Income-tax : [1968]68ITR493(SC) , Devidas Vithaldas & Co. v. Commissioner of Income-tax : [1972]84ITR277(SC) and Mewar Sugar Mills Ltd. v. Commissioner of Income-tax : [1973]87ITR400(SC) .

13. We may also observe here that the Supreme Court's decision in R. B. Seth Moolchand Suganchand v. Commissioner of Income-tax : [1972]86ITR647(SC) , which has been referred to in Mewar Sugar Mitts Ltd. v. Commissioner of Income-tax : [1973]87ITR400(SC) is also relevant for the purpose of decision of this case.

14. In the case of Assam Bengal Cement Co. Ltd. : [1955]27ITR34(SC) , the Supreme Court approved the principles laid down by the Full Bench of the Lahore High Court in Benarsidas fagannath, In re [FB] and has also stated the principles to be applied to determine the nature of expenditure and whether it is capital expenditure or revenue expenditure. In Assam Bengal Cement Co. Ltd.'s case : [1955]27ITR34(SC) , at pp. 43, 44, 45, 46, 47 (SC) the Supreme Court has observed as follows :

''In Benarsidas Jagannath, In re , 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 Commissioners of Inland Revenue v. Granite City Steamship Company [1927] 13 TC 1(C S). In City of London Contract Corporation v. Styles [1887] 2 TC 239 (CA) Bowen L.J. observed as to the capital expenditure as follows :

' You do not use it 'for the purpose of your concern', which means, for the purpose of carrying on your concerrn, but you use it to acquire the concern.'

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 : vide Viscount Cave L.C. in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155 . If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. Thus, if labour saving machinery was acquired, the cost of such acquisition cannot be deducted out of the profits by claiming that it relieves the annual labour bill, the business, has acquired a new asset, that is, machinery.

15. The expressions 'enduring benefit' or ' of a permanent character' were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset.

16. Whether for the purpose of the' expenditure, any capital was with drawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to

be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or

floating capital is what he makes profit of by parting with it or letting it change masters, Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the

other hand, is not involved directly in that process and remains unaffected by it.

17. This synthesis attempted by the Full Bench of the Lahore High Court truly enunciates the principles which emerge from the authorities. In cases where the expenditure is made for the initial outlay or for extension of a 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 advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of capital 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. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. One has, therefore, got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductible allowance under Section 10(2)(xv) of the Income-tax Act. The question has all along been considered to be a question of fact to be determined by the income-tax: authorities on an application of the broad principles laid down above and the courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles.....

18. The expression 'enduring benefit ' also has been judicially interpreted. Romer L.J. in Anglo-Persian Oil Company Ltd, v. Dale [1931] 16 TC 253 (CA) agreed with Rowlatt J., that by enduring benefit is meant enduring in the way that fixed capital endures.

' An expenditure on acquiring floating capital is not made with a view to acquiring an enduring asset. It is made with a view to acquiring an asset that may be turned over in the course of trade at a comparatively early date.'

19. Latham C. J. observed in Sun Newspapers Ltd. & Associated Newspapers Ltd. v. Federal Commissioner of Tax 61 CLR 337:--

'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 '. '

20. The facts of the Pingle Industries Ltd.'s case : [1960]40ITR67(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 Government for a period of five years under which the appellant had to pay Rs. 9,000 per year in monthly instalments of Rs. 750 each. The question was whether the amounts paid by the assessee to the jagirdar and the Government each year were revenue expenditure allowable under Section 12(2)(xv) of the Hyderabad Income-tax Act, corresponding to Section 10(2)(xv) of the Indian Income-tax Act, 1922.'

21. The Supreme Court after discussing a number of cases held as follows --See : [1960]40ITR67(SC) :

'We are, however, satisfied that in this case the assessee acquired by his long-term lease a right to win stones, and the leases conveyed to him a part of land. The stones in situ were not his stock-in-trade in a business sense but a capital asset from which after extraction he converted the stones into his stock-in-trade. The payment, though periodic in fact, was neither rent nor royalty but a lump payment in instalments for acquiring a capital asset of enduring benefit to his trade. In this view of the matter, the High Court was right in treating the outgoings as on capital account.'

22. The following passages in the majority judgment of the Supreme Court in the case of Pingle Industries Ltd. : [1960]40ITR67(SC) are helpful for determining the issue in the case before us

' Learned counsel in the present case rested his case upon the decision of the Punjab High Court in Benarsidas's 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 [1949] 17 ITR 473 Reference was made to other decisions, which we will briefly notice later.

In Benarsidas's 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, he 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 character. It is, however, to be noticed that the duration of the leases 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 or of the nature like exhibit T. E. are admissible deductions, while sums spent for obtaining leases for a substantially long period varying from 10 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 by this court does not extend beyond the summary of the tests settled in it, and the tests have to be applied to the facts of each case in the manner indicated by this court. But the actual decision was not before this court, and cannot be said to have been approved. The agreements in the present case are long-term contracts. They give the right to extract stones in six villages without any limit by measurement or quantity. They give the right exclusively to quarry for a number of years. This case is thus very different on facts. Further, the duration of the right wlyeh seems to have weighed with the Full Bench in the Punjab High Court has little to do with the character of the expenditure even if it be a relevant factor to consider. In Henriksen's case : [1943]11ITR10(Cal) , the right was only for 3 years, but monopoly value having been paid for it, the result was a capital asset of an enduring character.

In Mohanlal Hargovind's case [1949] 17 ITR 473 , the person assessed was a bidi manufacturer who had obtained short-term contracts with Government and other forest owners to obtain tendu leaves from the forests. These tendu leaves with tobacco are used to roll into cigarettes. The contracts gave a right of entry into forests to collect the leaves and also to coppice the plants and to pollard 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. v. Bell [1904] 2 KB 666 (KB) which was said to be a case analogous to purchase or leasing of a mine and Kauri Timber Co.'s case [1913] AC 771 (PC) 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.'

23. The Supreme Court then observed at page 89 (see also pages 90, 91) as follows:

'Here, the stones are not lying on the surface but are part of a quarry from which they have to be extracted methodically and skilfully before they can be dressed and sold. 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 ofctfhe cases already mentioned, and which have-not often been viewed together. In Alianza's case [1904] 2 KB 666 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]27ITR146(Cal) , 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 the case involved payment of certain annual sums by way or 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 Judicial Committee in these words :

'These are periodical payments, to be made by the lessee under his covenants in consideration of the benefits which he is granted by the lessor. What these benefits may be is shown by the extract from the lease quoted above, which illustrates how inadequate and fallacious it is to envisage the royalties as merely the price of the actual tons of coal. The tonnage royalty is indeed only payable when the coal or coke is gotten and despatched : but that is merely the last stage. As preliminary and ancillary to that culminating act, liberties are granted to enter on the land and search, to dig and sink pits, to erect engines and machinery, coke ovens, furnaces and form railways and roads. All these and the like liberties show how fallacious it is to treat the lease as merely one for the acquisition of a certain number of tons of coal, or the agreed item of royalty as merely the price of each ton of coal. The contract is in truth much more complex. The royalty is 'in substance a rent; it is the compensation which the occupier pays the landlord for that species of occupation which the contract between them allows', to quote the words of Lord Denman in R. v. Westbrook [1847] 10 QB 178. He was referring to leases of coal mines, clay pits and slate quarries. He added that in all these the occupation was only valuable by the removal of portions of the soil. It is true that he was dealing with occupation from the point of view of rating, but occupation has the same meaning in its application to matters of taxation such as are invoked in this case.'

Thus, the contention of the learned counsel for the assessee that we should treat this guolnama as merely showing a licence and not a lease creating interest in land is not correct, A lease to take out sand was described in Kanji and Moolji Brothers v. Shanmugam Pillai AIR 1932 Mad 734 as amounting to a transfer of interest in immovable property and also so, in connection with the Registration Act in Secretary of .State for India v. Kuchwar Line and Stone Co. . It is thus clear that what the assessee acquired was land, a part of which in the shape of stones he was to appropriate under the covenants. He was 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 [1944]2 ITR 10 :

'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'. '

24. In Gotan Lime Syndicate v. Commissioner of Income-tax : [1966]59ITR718(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. A. Palkhivala, and the learned counsel for the revenue, the Attorney-General, both cited a number of cases before us but we agree with Hidayatullah J.'s observations in Abdul Kayoom v. Commissioner of Income-tax : [1962]44ITR689(SC) that ' none of the tests (laid down in various authorities) is either exhaustive or universal. Each case must depend on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases......by matching the colour of one case against the colour of another '.'

25. The Supreme Court has further observed in the same case as follows--See : [1966]59ITR718(SC) :

'It is not the law that, in every case, if an enduring advantage is obtained, the expenditure for securing it must be treated as capital expenditure, for, as pointed out by Channell J., in Alianza Company v. Bell [1904] 2 KB 666 (KB) : ' ...in the ordinary case, the cost of the material worked up in a manufactory is not a capital expenditure; it 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 '. This illustration shows that it is not in every case that an expenditure in respect of an advantage of an enduring nature is capital expenditure. The reason underlying the illustration is that the payments made to enter into a forward contract have relation to the raw material eventually to be obtained. Viscount Cave acknowledged that in certain cases' an expenditure for obtaining an enduring advantage need not be capital expenditure for he inserted the words ' in the absence of special circumstances leading to an opposite conclusion ' within brackets. '

26. In Commissioner of Income-tax v. Coal Shipments P. Ltd. : [1971]82ITR902(SC) the Supreme Court has observed as follows:

'Although we agree that payment made to ward off competition in business to a rival dealer would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time, the same result would not follow if there is no certainty of the 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.'

27. In Commissioner of Income-tax v. Panbari Tea Company Ltd. : [1965]57ITR422(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 the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital income and the latter a revenue receipt. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the court, having regard to the otter circumstances, to ascertain the intention of the parties.'

28. In M.A.. Jabbar v. Commissioner of Income-tax : [1968]68ITR493(SC) the Supreme Court has observed as follows :

' We may, however, make a reference to the decision of this court in Gotan Lime Syndicate v. Commissioner of Income-tax : [1966]59ITR718(SC) . In that case also, Rule 13 of the Rajasthan Minor Mineral Concession Rules, 1955, which was applicable, provided that the lease shall be in respect of plots comprising of 5 square miles each. The lessee was even entitled to transfer his lease or any right, title or interest therein to a person holding a certificate of approval on payment of a fee, subject to the previous sanction of the Director of Mines and Geology, and subject to some other conditions. Rule 18 prescribed a period of 5 years for a lease and the lease was renewable at the option of the assessee for a further period of five years. Even on these facts, this court held that the lessee in that case, in obtaining the lease and paying lease money, had not incurred an expenditure of a capital nature, and was entitled to claim that the lease money paid by him was a revenue expenditure. In that case also, thus, the lease was in respect of plots, so that interest in land was conveyed, but the court, on considering the object of the lease and the manner in which the rights under it were to be exercised, came to the finding that no capital expenditure was involved and that the only right acquired was the right to obtain raw material from the leased land. The payment was not for securing an enduring advantage. In the case before us, the facts are much stronger in favour of the assessee. The period of lease is shorter and the only object 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]56ITR52(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 relatedto the, acquisition of an asset or a right of a permanent character. It was for the specific object of enabling the assessee to remove sand lying loosee on the surface which was the stock-in-trade of the business of the assessee, so that the expenditure has to be regarded as revenue expenditure.'

29. In Mewar Sugar Mitts Ltd. v. Commissioner of Income-tax : [1973]87ITR400(SC) the Supreme Court has held in the facts and circumstances of that case that the royalty paid to the State Government was of a revenue nature and deductible under Section 10(2)(xv) of the Indian Income-tax Act, 1922, because the payment made was directly related to the sugar and oil manufactured by the appellant. In that case the Supreme Court has observed as follows:

'In Gotan Lime Syndicate v. Commissioner of Income-tax : [1966]59ITR718(SC) which was a case dealing with the amount of dead rent payable per acre and the amount of royalty payable for a maund of lump lime and per maund of limestone, it was held that in the absence of material to show that any part of the royalty had to be treated as premium and referable to the acquisition of the mining lease, the royalty payment, including the dead rent, had relation only to the lime deposits to be got, and had, therefore, to be treated as a revenue expenditure; and although the appellant did derive an advantage--assuming that that advantage was to last at least for a period of five years--there was only an annual payment of royalty or dead rent which was not a direct payment for securing an enduring advantage but was relatable to the raw material to be obtained. It was further emphasised that the reason why royalty has to be allowed as revenue expenditure is the relation which it has to the raw materials to be excavated or extracted ; that the more you take the more royalty you pay and that the minimum payment or the dead rent also has the same characteristic, i.e., it is an advance payment in respect of a certain amount of raw material to be excavated. In a similar case dealt with by the Andhra Pradesh High Court in Singareni Collieries Co. Ltd. v. Commissioner of Income-tax : [1967]66ITR553(AP) , to which one of us (Jaganmohan Reddy C.J.) was a party, dead rent payable under the lease was characterised as having a direct relation to the working of the coal from the mine and so it was a revenue expenditure. In another case, Associated Stone Industries (Kotah] Ltd. v. Commissioner of Income-tax : [1971]82ITR896(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.'

30. In Devidas Vithaldas & Co. v. Commissioner of Income-tax : [1972]84ITR277(SC) the Supreme Court has observed as follows (page 284]T:

' 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 no.t 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 the legal character of the transaction which is the source of the receipt in question can be ignored and substituted by what the taxing authority considers the substance of the matter. The assessing authority is undoubtedly entitled and is, indeed, bound to determine the true legal relationship resulting from a transaction. If the parties have chosen to conceal, by a device, the true legal relation, it is open to it to unravel such device and to ascertain the true nature of the relationship. If the transaction is embodied in a document, the liability to tax depends upon the meaning and content of the language used in it in accordance with the ordinary rules of construction. Commissioner of Income-tax v. B. M. Kharwar : [1969]72ITR603(SC) .

In distinguishing between capital and revenue expenditure, the courts have applied in different cases different tests. None the less, it is recognized that none of them by itself is conclusive, and the determination one way or the other has to be made on the facts and circumstances of each case.'

31. Keeping in view the above principles laid down by the Supreme Court, let us consider the relevant facts of this case.

32. The Tribunal has in its order held that the assessee's business was manufacture and sale of tea and as such the payment that had been made by the assessee was for the acquisition of stock-in-trade and the said expenses should be held to be allowable as business expenditure. The Tribunal has further observed that the assessee had taken over the tea estate on lease in order to work on the same for growing and manufacturing tea and carrying on incidental work, that the tea estate was a capital asset but the assessee had not taken up the ownership of such asset and no part of the consideration paid was for acquiring a capital asset and the payment being only for the use thereof in the assessee's profit-earning activity.

33. From the lease deed (annexure 'A' to the statement of the case) it is found that the lessors who are the absolute and joint owners of the Ahmeddy Tea Estate owed debts to different parties for a sum of Rs. 80,998.97 and the lessors being unable to repay these debts and the lessee having paid the said debts of Rs. 80,998'97 the lessors agreed to lease the Ahrneddy Tea Estate for a term of 22 years beginning from 1st January, 1961, on the terms laid down in the lease deed. From the _lease deed it appears 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 balahoVrent 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.

34. The relevant paragraphs of the lease deed may be quoted below :

'Now THEREFORE THIS INDENTURE WITNESSETH ttat 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, Mouza 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 TOGETHER WITH all rights of working in the Tea Estate, pluck green leaves, remove jungles, engage labourers and staff and sell the green leaves plucked or manufacture the tea and sell them in the market, manage the tea garden, maintain nurseries (i. e., tea seed and shade trees) and pay all existing revenue and taxes and charge or any tax imposed in future, improve the garden by constructing roads, bridges, making drains, improve labour quarters according to Government specification, extend the tea plantation area even by cutting jungle and the total new plantation extension will be either 40 acres or more or less as per availability of the area and sanction of the Tea Board from time to time and have the right over export quota, can sell and purchase export quota and do all other necessary works in the Tea Estate for its improvement, maintenance, proper upkeeping and to correspond with all authorities in his own right for the garden management, improvement, etc., being a Lessee and having the authority to manage the Tea Estate excepting and reserving unto the Lessors to retain their right to reside in the Bungalow of the Tea Estate where they are now with its compound measuring about 4 Bighas and paddy land about 33 acres (99 Bighas) enjoyed by the Lessors and paddy land about 8 acres (24 Bighas) enjoyed by the labourers, Government land revenue and local rates for these paddy land areas should be paid by the Lessors and the Lessors also retain the factory house which is not in proper order with machineries thereon and ONE shOP owned by the Lessor No. 5 situated at the extreme corner of the Garden Land measuring about 2 Kothas AND all yield of the Tea Estate will be belonging to the Lessee.'

' THE LEASE may be renewed for similar period on fresh terms and conditions and for this purpose the Lessee will inform the Lessors about 3 calendar months before the expiry of this Lease.

PROVIDED always that if any part of the rent hereby reserved shall be in arrear for thirty days next after the days whereon the same shall have become due or if there shall be any breach of any of the Lessee's covenants herein contained the Lease may be terminated at the option of the Lessors.

PROVIDED also that if the Lessee duly pays the rent hereby reserved and performs the covenants herein contained, he shall hold the Tea Estate during the said terms without any interruption.'

35. It 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 estate for its improvement, maintenance and proper upkeeping, etc. 1 e i, under the terms of the lease the lessee can open up new plantation over above 40 acres of land and for doing all these the lessee will have to invest large amounts. Under the terms of the lease the lessee will be entitled to take all measures by spending its own money for better crops. These measures may be short-term measures as well as long-term measures as the lease is for 22 years. Under the terms of the lease the lessee may also invest sufficient money to have new plantation over above 40 acres of land, and thus may extend the business of manufacture and sale of tea. After opening up new plantation over above 40 acres of land and by spending a lot of money only, the lessee will be able to collect green leaves seasonally. The expenditure that is incurred in the instant case by the assessee is certainly for extension of its business of manufacture and sale of tea. Considering the terms of the lease, the nature of the right to extend the plantation area of the tea estate, the long period of 22 years of the lease, other rights to work and manage the tea estate, and also other ancillary rights, it has to be held that the lessee has acquired an enduring benefit for a period of 22 years on the terms of the lease by spending and agreeing, tto spend the amounts in question described as rent. There is a renewal clause in the lease by which the lessee is entitled to have the lease renewed for similar period on fresh terms and conditions. The payment for the lease has been made not only for the green leaves that are existing at the time of the lease but for the green leaves that may be coming out every season on the existing plantation as well as for the green leaves that would be coming out every season from the new tea plantation that may be done by the lessee during the period of the lease. Under the terms of the lease, by investing sufficient money, the lessee may bring into existence tea plantation over 40 acres of land which is almost equal to the existing area of tea plantation, that is, 42.53 acres of land. On consideration of the terms of the lease it is found that the lease in the instant case is really not for the purpose of merely obtaining stock-in-trade as been observed by the learned Tribunal but much more than that. Under the terms of the lease, the assessee has acquired an 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.

36. 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.

37. The Tribunal is under the impression that since the ease 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 acres of land. In our opinion this is not a case of mere acquisition of stock-in-trade, as has been held by the learned Tribunal. Considering the terms of the lease in question and applying the principles laid down by the Supreme Court as quoted above, it is quite clear that the payment made towards the consideration of the lease deed in the instant case is nothing but capital expenditure.

38. In the result we hold that the Tribunal was not correct in holding that the payment made by the assessee as consideration of the lease, deed dated March 23, 1961, and the agreement dated April 6, 1961, represented revenuee expenditure.

39. The question of law referred is answered in the negative and against the assessee.

40. In the facts and circumstances of the case, we make no order as to costs.

K. Lahiri, J.

41. I agree.


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