1. This is a reference by the Income tax Appellate Tribunal Madras Bench, under section 66 (2) of the Indian Income-tax Act, 1922. The relevant assessment year is 1958-59; and the accounting period for the timber trade and the transport service with which we are concerned, the period from 1-1-1132 M. E. to 18-8-1132 M. E. The questions referred are :
' (1) Whether on the facts and in the circumstances of the case, the disallowance of Rs. 5,154 representing the payments made to Sridharan and Velayudhan to shut off thecompetition while buying timber which form ed part of the assessees business is justified in law ?
2. Whether on the facts and in the circumstances of the case, the addition of Rs. 30,000 to the income returned by the assessee in respect of bus transport business is lawful '
Question No. 1 :
2. The claim for deduction in respect of Rs. 5,154 was based on the assertion that the assessee had paid Rs. 2,677 to one Velayudhan Pillai and an equal sum to one Sridharan Pillai, forest contractors, in order to persuade them not to compete at the auction of a coupe by the Forest Department and thus secure a portion of the stock-in-trade for the assessee's timber business at an advantageous price. The claim was denied by the Income-tax Officer on the ground that, the expenditure was of a capital nature. He said :
'This is clearly not an expenditure incurred in the course of exploiting the contract but an expenditure of a capital nature incurred before securing the contract for him. Hence disallowed.'
3. The Appellate Assistant Commissioner agreed with the Income-tax Officer. He dealt with the matter in the following terms :
'It has not been proved that this venture is a joint one. On the other hand, as pointed out by the Income-tax Officer, these were payments to enable the assessee to get the con-tract and to avoid competition in bidding the coupes and this is a payment made to acquire the coupe contract for himself, and it is clear therefore, that this payment for acquiring the contract is in the nature of a capital expense and not a revenue expense. The disallowance made by the Income-tax Officer of these two amounts is therefore, justified'.
4. It will be noted that, both the Income tax Officer and the Appellate Assistant Commissioner have proceeded on the basis that the payments alleged to have been made by the assessee were as a matter of fact made; but none the less they did not entitle him to a deduction as the expenditure should be considered to be a capital and not a revenue item of expenditure.
6. The Tribunal has dealt with this matter in three sentences which are by no means clear or consistent. The last of the three sentences which, perhaps, is the material one reads as follows :
'The disallowance is sustained on the simple ground that they had not been proved as proper deductions .
In view of this sentence we propose to assume that the Tribunal has not differed from the conclusion of the Income-tax Officer and the Appellate Assistant Commissioner that the payments were as a matter of fact made, and that the only controversy is as to whether the expenditure should be considered as an Item of capital or revenue expenditure.
6. Almost all the cases bearing on the frequent controversy between capital versus revenue have been cited before us. There to nodoubt, however, that the outstanding legal touchstone to resolve the recurring issue still remains. Lord Cave's helpful phrase 'an enduring advantage' in British Insulated and Hels-by Cables, Ltd. v. Atherfon, 1926 AC 205.
7. The case nearest to the one before us is Mohanlal Hargovind v. Commissioner of Income Tax, . In that case, the assessee, a manufacturer of bidis by rolling tobacco in tendu leaves, entered into contracts granting him the exclusive right to pick and take tendu leaves from a forest area. The question was whether the expenditure involved was of a capital or revenue nature. The Privy Council said :
'The question, therefore, resolves itself into a short one-- is expenditure of this character made in acquiring one of the raw materials of the appellants' manufacture capital expenditure within the meaning of this Act? There is no definition of that expression which must in their Lordships' opinion be constru-ed in a business sense save in so far as there may be rules of construction applicable to it. Their Lordships feel no doubt that in a business sense this expenditure is an expenditure on revenue account and not on capital account just as much as if the tendu leaves had been bought in a shop'.
8. If the assessee had purchased the tim-ber for his timber trade from a forest depot we are sure that, it would not have been contended that the price paid was a capital and not a revenue expenditure. The position cannot be different simply because he secured the right to obtain the timber for his trade not from a forest depot but from the forest itself by cutting the trees and removing them to his place of business from a small and specified area and that within the short space of twelve months.
9. In the light of the principles laid down by the Privy Council in the case above-mentioned as well as in the other leading cases on the subject and in the circumstances of the case before us, like the nature of the assessee's trade, the volume of his business and the duration of the contract, we feel no hesitation in saying that what he acquired by the pavments to Velayudhan Pillai and Sridharan Pillai was not an asset of an enduring character but a portion of his stock-in-trade for the year at a reasonable or advantageous price. It follows that the deduction of Rs. 5,154 claimed by the assessee should have been at towed and that the first question referred has to be answered in the negative and in favour of the assessee. Question No. 2 :
10. The Income-tax Officer added Rs. 80,000 to the Income returned by the assessee in respect of hts transport business. The addition was confirmed by the Appellate Assistant Commissioner. The Appellate Tribunal dealt with the matter as follows:
'The profit before depreciation per bus has been taken only at Rs. 2,100. We cannot say that this is excessive particularly in thelight of the assessee's own return of Rs. 4,200 gross income per bus before depreciation for the earlier assessment year 1957-58. This contention too is thus rejected'.
11. It is agreed that the assessee's return for 1957-58 will show not a gross in-come of Rs. 4,200 per vehicle but only Rs. 8,600 and that the Tribunal was wrong in stating the figure as Rs. 4,200. It is also clear that the accounting period for the assessment year 1967-58 comprised full twelve months whereas the accounting period for the assess ment year 1958-59 the period with which we are concerned--consisted only of just over 7 months and a half. But the mistakes of the Tribunal however, are immaterial, for even after their correction the gross profits of the assessee for the assessment year 1958-69 on the basis of the assessment for 1957-58 will be over Rs. 2,100 per bus taking the number of effective buses, as has been done by the Appellate Assistant Commissioner and apparently fay the Appellate Tribunal, at forty-six. In these circumstances we see no reason to differ from the conclusion reached by the Tribunal and answer the second of the two question referred in the affirmative and against the assessee.
12. The reference is answered as above, but without any order as to costs. A copy of this judgment under the seal of the High Court and the signature of the Registrar will be sent to the Appellate Tribunal as required by Sub-section (5) of Section 66 of the Indian Income-tax Act, 1922.