CHANDRA REDDY C.J. - The following question referred by the Income-tax Appellant Tribunal, Hyderabad, falls to be answered by us, namely :
'Whether, in computing the business income under section 10 from the contract of supply of gulmohwa flower, the assessee family is entitled to a deduction of Rs. 12,000 ?'
The salient facts culminating in this reference could be stated concisely thus :
The reference relates to the assessment year 1953-54. The assessee family derives income from several sources, one of them being the supply of gulmohwa flower for working a distillery. For the year 1951-52, Messrs. Pingal Venkatarama Reddi and Mamchand obtained a contract for the supply of gulmohwa flower from the Government. The assessee took over the said contract of lease for the purpose of execution and paid Rs. 12,000 as compensation to the original contractors. While submitting the return for the accounting year 1952-53, the assessee claimed deduction of this amount under section 10(2)(XV) of the Income-tax Act and showed a net profit of Rs. 10,000 in regard to this business.
The proper Income-tax Officer disallowed this claim, when computing the profits under this contract on the ground that this payment was 'in the nature of capital expenditure'.
The appeal carried by the assessee to the Appellate Assistant Commissioner was successful. The view of the Appellate Assistant Commissioner was that the expenditure incurred by the assessee in this behalf was of a revenue nature since 'no enduring benefit could be said to have accrued on account of this payment.'
Aggrieved by this decision, the Department preferred an appeal to the Income-tax Appellate Tribunal. The Tribunal came to the conclusion that the lay-out was for the purpose of securing a source of revenue from which certain income was derived subsequently by its exploitation and not for carrying on the business of supply of gulmohwa flower. In other words, the Tribunal felt that it was not a revenue deduction but was capital expenditure. However, the Tribunal, on the request of the assessee, referred the question extracted above for the opinion of this court under section 66 of the Indian Income-tax Act.
The decision of the question depends upon whether the payment made to Messrs. Pingal Venkatarama Reddy and Mamchand was an outgoing on capital account or an allowable deduction. The question whether a particular receipt or expenditure is capital or revenue in nature often presents a knotty problem. Though the distinction between a capital receipt or expenditure and a revenue receipt or expenditure is well recognised, cases arise in which it is difficult to apply the distinction. No conclusive test to judge the nature of the expenditure has been so far laid down which is of universal application. The test cannot be enunciated with any degree of certainty and precision. However, in the instant case, the principle is easy of application. To determine whether the expenditure bears the capital or revenue character, certain tests have been propounded in some of the decided cases on the subject. The main attribute of capital expenditure is that it brings into existence a benefit of an enduring nature. Money is spent on the initiation of a business to secure a permanent source of income on material and not merely for obtaining raw material. If on the other hand money expended is part of the working expenses in the ordinary commercial trading sense if could be treated as revenue expenditure. To put it differently, it would be a revenue deduction if money is spent to run the business or to work it with a view to produce some profit. We may here usefully extract the tests propounded in some of the decisions of English courts.
We will begin with the proposition enunciated by Lord Dunedin in Vallambrosa Rubber Co. Ltd. v. Farmer. The learned Law Lord observed thus :
'... in a rough way, I think it is not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing which is going to recur every year.'
The principle was further qualified by Lord Cave in British Insulated and Helsby Cables Ltd. v. Atherton in these observations :
'When an expenditure is made, not only one and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.'
In Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax 4 the Judicial Committee stated that if the expenditure was part of the working expenses in ordinary commercial trading, it was not capital but revenue. Their Lordships remarked :
'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 expenditure, and to ask oneself the question, Is it a part of the companys working expenses; is it expenditure laid out as part of the process of profit earning ?'
An example of the last of the tests is found in Mohanlal Hargovind v. Commissioner of Income-tax 6 rendered by the Privy Council. There, the assessees carried on business at several places as manufacturers and vendors of country made cigarettes known as beedies. For purchasing the right to collect tendu leaves from the forest area, the assessee paid certain sums of money. The contract included the right of entry into the forest for coppicing small tendu plants a few months in advance and to pollard tendu trees a few months in advance to obtain better and bigger leaves. The contract did not comprehend any right in the land or trees and plants. On these facts, the Judicial Committee decided that since the contract was entered into by the assessees wholly and exclusively for the purpose of supplying themselves with one of the raw materials of their business, the expenditure was on revenue account. They equated the expenditure to one for acquiring raw materials for manufacturing in the business. Emphasis was laid by their Lordships on the nature of the business of the firm and on the fact that no interest in land or in the trees or plants was granted. The Judicial Committee distinguished the case before them from the one relating to purchase or leasing of mines in the following words :
'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.'
Their Lordships further remarked thus :
'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 comparable. If the tendu leaves had been stored in a merchants godown and the appellants had bought the right to go and fetch them and so reduce them into their possession and ownership it could scarcely have been suggested that the purchase price was capital expenditure. Their Lordships see no ground in principle or reason for differentiating the present case from that supposed.'
In Stow Bardolph Gravel Co. Ltd. v. Poole the Court of Appeal in England distinguished Mohanlal Hargovind v. Commissioner of Income-tax 1 in the following circumstances. In that case, the company was carrying on the business of selling sand and gravel. It acquired for consideration two unworked deposits and the purchase money was claimed as an allowable deduction from the profits as expenditure for purchasing its trading stock. This was not accepted by the Revenue and also by Harman J., who heard the appeal. Dealing with the facts of the case, Lord Evershed M.R. stated that what was purchased was a part of the land itself, namely, the gravel in situ and that there was distinction between the purchase of a growing crop or leaves and the purchase of gravel. He then remarked :
'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.'
He also stated that if the taking of sand and gravel involved merely taking them up and putting them into trucks, the finding could have been otherwise.
These dicta found acceptance in Pingle Industries Ltd. v. Commissioner of Income-tax. However, on the facts of that case, their Lordships reached the conclusion that the outlay was of a capital nature and the assessee could not, therefore, invoke section 10(2)(XV) of the Indian Income-tax Act. In that case, 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 located in six named villages for a duration of twelve years on payment of Rs. 28,000 annually. The assessee could only excavate stones and had undertaken not to manufacture cement and the jagirdar undertook not to allow any other person to excavate stones in those areas. By a majority judgment, the Supreme Court held that since what the assessee acquired by his long term lease was the right to win stones and what the leases conveyed to him was 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. In their Lordships opinion, the payment was made to acquire a capital asset of enduring benefit to his trade and that, therefore, the amount was spent on capital account and not an allowable deduction.
The following are some of the reasons for their Lordship coming to this conclusion :
'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.'
It is seen from this judgment that stress is laid on the duration of the lease or the contract. If the lease is of very short duration and if money is expended to run the business with a view to earn a profit, the expenditure will be on revenue account.
If these principles are applied to the present case, there can be little doubt that the assessee had incurred this expenditure for the purpose of carrying on the business. The expenditure could be easily equated to purchase of stock-in-trade. The obtaining of the sub-lease represents the raw material required for the business of the family. It is as if the assessee had bought gulmohwa flower scattered over a particular area, the acquisition of the sub-lease being to pick flowers.
In this connection, the judgment of the Punjab High Court in In re Benarsidas Jagannath also affords us some guidance in this enquiry. What happened there was this. A manufacturer of bricks obtained certain lands for digging out earth for his manufacture. Under the contract, he could dig up earth to a depth of 3 feet to 3 1/2 feet but no interest in the land was conveyed to him. As soon as the earth was removed, his right was at an end. The duration of the lease was from six months to three years. In those circumstances, it was held that the main object of the agreement being the securing of earth as raw materials and the lessee not having acquired any advantage of a permanent or enduring character, the expenditure was not on capital account.
In Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, after referring to the case cited above, Bhagwati J. remarked :
'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 the source from which the expenditure is incurred. If the expenditure is made from 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 had 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 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.'
The principles enunciated in this passage are very helpful in the determination of the question relating to the character of the expenditure. An application of these rules to the instant case will establish that the amount in dispute is an allowable deduction.
That apart, there can be little doubt that the instant case is governed by the principle laid down in Mohanlal Hargovind v. Commissioner of Income-tax 1, the situation in both being similar. The sole aim and object of the assessee, which normally is the determining factor in deciding the nature of the expenditure, was to run the business and make a profit out of it.
It follows that the assessee was entitled to a deduction under section 10(2)(XV) of the Indian Income-tax Act as the expenditure was incurred to work the business with the business with the object of making a profit.
We, therefore, answer the reference in favour of the assessee. He is entitled to get his costs from the Department. Advocates fee Rs. 150.
Question answered in the affirmative.