1. The question referred to us is:
Whether the decision of the Assistant Commissioner that Rs. 11,775 is not deductible in arriving at the profits of the petitioner's business is correct in law.
2. The facts out of which the question referred arises are that the assessee entered into an agreement with the Secretary of State for India in Council represented by the Revenue Divisional Officer, Gudur, on the 29th June, 1930, for the excavation of lime shells from certain Government lands in the Nellore ' District. Under this agreement he was to have the exclusive privilege of excavating chunam shells within the area specified in the agreement from the 1st July, 1930, to the 30th June, 1933, that is to say, for three years. He also agreed to pay the sum of Rs. 27,750 for this privilege in 12 equal quarterly instalments payable in advance.
3. The Income Tax Officer held that these payments were of a capital nature and were not therefore deductible in computing the income derived from the excavation and sale of lime shells and with that opinion the Commissioner of Income Tax agrees.
4. The agreement in question is Exhibit A and it is true that in it the assessee is described as the lessee and the documents as being a lease. One of the contentions of the assessee is that the sum paid is rent and as such is deductible. A further contention is that the Rs. 27,750 is really the purchase price of the shells lying upon and under the land which under the agreement is to be excavated.
5. Dealing with the latter contention first, I am clearly of the opinion that this cannot by any stretch of imagination be considered a purchase of lime shells. It might be different had the lime shells been previously excavated and heaped up in heaps upon the land. It might then have been argued that it was a purchase of so much raw material: Here the amount of shells won is entirely dependent upon the will or the efforts of the assessee. He need not, if he so desires, dig up more than a few tons of shells. On the other hand, he may be able to obtain a very large weight of them. Nor do I consider that the amount paid can be regarded in any sense as rent. The fact that it is payable by instalments does not make it so. The total amount payable is first mentioned and the payment of that total amount is merely spread over a certain time. In my view, the payment in question was not made in order to carry on an already existing business and to earn a profit out of it. The payment to be made was merely for the purpose of starting that particular venture. Any expenditure made thereafter would, of course, be deductible. But this was an initial expenditure without which the assessee could not have begun winning the shells. I do not think that the fact that the assessee had previously entered into a number of similar agreements affects the question. It seems to me that the observations made by BOWEN, L.J., in City of London Contract Corporation, Limited v. Styles which are referred to in Alagannan Chetty v. The Commissioner of Income Tax, Madras are very much in point. In the former case the assessees took over a business of another company which had a number of unexecuted contracts on hand and the taking-over company paid a lump sum of money to the outgoing company to obtain the benefit of those contracts and claimed it as a deduction. BOWEN, L.J., said:
You do not use it ' for the purpose of your concern but you use it to acquire the concern.
6. In Smith & Son v. Moore (1921) 2 A. C. 13, LORD SUMNER says:
They (the company) said, much as has been said in this case, that before profits can be made out of working a contract, the contract has to be got and the payment of its price is the root of the profits. The Court held that this sum was paid with the rest of the aggregate price to acquire the business and thereafter profits were made in the business ; the sum was not paid as an outlay in a business already acquired, in order to carry it on and to earn a profit out of this expense of carrying it on. The same is true of the appellants. The whole price, paid in cash or in account, was a sum employed or intended to be employed as capital in the trade of the company, and therefore cannot be deducted in ascertaining profits for income tax or excess profits duty.
7. In that case the appellant's father carried on business as a shipping and coal agent for many years prior to his death on March 7, 1915, when the appellant acquired the business under his father's trust disposition and settlement on the terms of taking over the assets of the business at a valuation but without paying anything for goodwill. The assets included certain forward coal contracts made by the father with several colliery owners, for the delivery of coal by the latter in periodic instalments, and prices which ultimately turned out to be very advantageous to the purchaser. These coal contracts were valued at 30,000. The appellant claimed, in arriving at the amount of the profits duty under the Finance Act 1915, to deduct this 30,000 as representing part of the purchase price of the stock-in-trade. VISCOUNT HALDANE and LORD SUMMER held that the deduction was not permissible upon the ground that it was in respect of a capital expenditure and on page 20 (of 2 A.C.) the former says:
My Lords, in the case before us the appellant, of course, made profits with circulating capital by buying coal under the contracts he had acquired from his father's estate at the stipulated price of fourteen shillings and reselling it for more, but. he was able to do this simply because he had acquired, among other assets of his business, including the goodwill, the contracts in question. It was not by selling these contracts, of limited duration though they were, it was not by parting them to other masters, but by retaining them, that he was able to employ his circulating capital in buying under them. I am accordingly of opinion that, although they may have been of short duration, they were, none the less part of his fixed capital. That he had paid a price for them makes no difference. Indeed the description of their value of the accountants, in the words I have earlier referred to, as of doubtful validity in the hands of outsiders, emphasizes this conclusion. The 30,000 paid for the contracts or for its equivalent, therefore, became part of the appellant's fixed capital and could not properly appear in his revenue account. If that be so, then it was a sum employed as capital in his trade, and has to be excluded as a deduction from the profits on which he is assessed.
8. In my view, the sum in question here was a capital expenditure and therefore not a deductible item.
9. The question referred to us must, therefore, be answered in the affirmative. Costs of the Commissioner of Income Tax Rs. 250.
10. I agree.
Sundaram Chetty, J.
11. I agree.