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United Commercial Corporation Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Miscellaneous Case No. 206 of 1963
Judge
Reported in[1970]78ITR800(All)
ActsIncome Tax Act, 1922 - Sections 10(2) and 66
AppellantUnited Commercial Corporation
RespondentCommissioner of Income-tax
Appellant AdvocateSwasi Dayal, Adv.
Respondent AdvocateB.L. Gupta and ;R.R. Misra, Advs.
Excerpt:
.....case that if an enduring advantage is obtained, the expenditure for securing it must be treated as capital expenditure, for 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. when an expenditure 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, i think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for..........stamp fees) paid by the assessee? (2) whether the cost of the chimney in the brick-kiln is a capital expenditure?' 2. when the case was taken up by the court on august 28, 1969, it was noticed that the total expenditure of rs. 13,205 for acquisition of the lease consists of two parts, rs. 12,525 and a sum of rs. 680 on account of incidental charges. the court found difficulty in ascertaining details of the sum of rs. 12,525. the court, therefore, called for a restatement of the case. in accordance with that direction, the appellate tribunal has submitted a supplementary statement. that supplementary statement has given details of the amount of rs. 12,525. now we find that the total amount of rs. 13, 205 consists of two parts. the bulk of this amount consists of four sums paid to.....
Judgment:

1. This is a reference under Section 66 of the Indian Income-tax Act, 1922. Messrs. United Commercial Corporation is the assessee. The assessmentyear is 1958-59. The .assessee is a firm carrying on the business of manufacturing bricks and certain other business. In connection with the brick-kiln business, it acquired a piece of land on a lease for seven years for digging earth for manufacturing bricks. The assessee incurred an expenditure of Rs. 13,205 in obtaining the lease. Again, the assessee spent a sum of Rs. 1,729 for erecting a chimney for the brick-kiln. The assessee claimed deduction for these two sums as revenue expenditure. This claim was disallowed by the income-tax -authorities and by the Appellate Tribunal. At the request of the assessee, the Appellate Tribunal referred the following questions of law to this court:

'(1) Whether, on the facts and in the circumstances of the case, the assessee was entitled to the deduction of Rs. 13,205 being the lease amount (including stamp fees) paid by the assessee?

(2) Whether the cost of the chimney in the brick-kiln is a capital expenditure?'

2. When the case was taken up by the court on August 28, 1969, it was noticed that the total expenditure of Rs. 13,205 for acquisition of the lease consists of two parts, Rs. 12,525 and a sum of Rs. 680 on account of incidental charges. The court found difficulty in ascertaining details of the sum of Rs. 12,525. The court, therefore, called for a restatement of the case. In accordance with that direction, the Appellate Tribunal has submitted a supplementary statement. That supplementary statement has given details of the amount of Rs. 12,525. Now we find that the total amount of Rs. 13, 205 consists of two parts. The bulk of this amount consists of four sums paid to four lessors. The balance accounts for incidental charges like stamp duty and registration fee.

3. Whether certain expenditure is capital expenditure or revenue expenditure depends on circumstances of the case. Mr. Swami Dayal appearing for the assessee cited a number of cases on the point. In Gotan Lime Syndicate v. Commissioner of Income-tax, [1966] 59 I.T.R. 718; [1966] 2 S.C.R. 596 (S.C.) it was held by the Supreme Court that it is not the law in every case that if an enduring advantage is obtained, the expenditure for securing it must be treated as capital expenditure, for 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.

4. In Singareni Collieries Co. Ltd v. Commissioner of Income-tax, [1966] I.T.R. 553 (A.P.) the assessee-company which carried on coal mining business acquired lease in respect of several coal fields for a sum of Rs. 45 lakhs, the lease period being 99 years. The company had to pay yearly dead rent in respect of any coal field not worked. It was held that, the dead rent is relatable to royalty that will have to be paid. Such payment was revenue expenditure. In the instant case we are not concerned with the payment of any royalty or dead rent.

5. The case of Benarsidas Jagannath, In re, [1947] 15 I.T.R. 185 (Lah.). [F.B] is a decision of a Full Bench of the Lahore High Court. In that case the assessee was a manufacturer of bricks. He obtained certain land on leases for the purposes of digging out earth for the manufacture of bricks. He had a right to dig earth up to 3 or 3 1/2 feet. He had no interest left in the land as soon as earth was dug out and removed. The periods of the leases varied from six months to three years. It was held that payments were deductible under Section 10(2)(xii) of the Indian Income- tax Act, 1922.

6. In M. A. Jabbar v. Commissioner of Income-tax, [1968] 68 I.T.R. 493; [1968] 2 S.C.R. the appellant carried on the business of supplying lime and sand. He took a lease for 11 months and obtained exclusive lease and liberty to enter, occupy and use for quarrying purpose and to raise and carry away sand within or upon the land constituting the base of a river. It was held that the appellant acquired under the lease merely the right to remove sand for a short time of 11 months. He did not acquire any fixed or capital asset of an enduring nature. The payment was deductible as a revenue expenditure.

7. The distinction between capital expenditure and revenue expenditure came up for discussion before the House of Lords in Atherton v. British Insulated and Helsby Cables Ltd, [1925] 10 T.C. 155 [1926] A.C. 205(H. L.) Viscount Cave L. C. observed at pages 192 and 193 thus:

'When an expenditure 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, 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.'

8. In Abdul Kayoom v. Commissioner of Income-tax, [1962] 44 I.T.R. 689; [1962] Supp. I.S.C.R. 518 (S.C) the assessee carried on business in the purchase and sale of conch shells. I took from Government a lease for exclusive rights, liberty and authority to fish for and take and carry away shell in the sea off the coastline for a period of three years on a consideration of yearly rent of Rs. 6, 111. It was held by the Supreme Court that the amount of Rs. 6,111 paid by the assessee was an amount paid to obtain an enduring asset in the shape of an exclusive right to fish. The expenditure was not deductible under Section 10 (2) (xv).

9. In the present case a copy of the lease obtained by the assessee, is on the record. The lessee acquired right to dig earth in the land covered by the lease and carry away such earth. The lessee was authorised to construct a temporary shed and kachcha well on the land. In the case cited by Mr. Swami Dayal, the periods of leases were short. In the case decided by the Lahore High Court, the periods of different leases varied from six months to three years. In Jabbar's case the period of lease was 11 months. In the present case the period of the lease was seven years. This is a comparatively long period. By obtaining the lease, the assessee acquired an enduring benefit for the purpose of manufacturing bricks. The Tribunal was right in holding that expenditure amounting, to Rs. 13,205 was capital expenditure.

10. Question No. 2 presents little difficulty. The Tribunal has taken theview that a chimney for a brick-kiln has a long life. When a manufacturerof bricks erects a chimney for the brick-kiln, the chimney constitutes anenduring benefit for the business. The expenditure on the chimney is clearly capital expenditure.

11. We answer the first question referred to this court in the negative, andagainst the assessee. We answer question No. 2 in the affirmative, andagainst the assessee. The assessee shall pay the Commissioner of Income-tax, U. P., Rs. 200 as costs of this reference.


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