Skip to content


Commissioner of Income-tax Vs. Kalinga Otto (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 128 of 1977
Judge
Reported in(1981)25CTR(Cal)1,[1983]139ITR710(Cal)
ActsIncome Tax Act, 1961 - Sections 10(2) and 256(1); ;Licensing (Consolidation) Act, 1910; ;Madras Plantations Agricultural Income Tax Act, 1955
AppellantCommissioner of Income-tax
RespondentKalinga Otto (P.) Ltd.
Appellant AdvocateS.C. Sen and ;M.L. Bhattacharji, Advs.
Respondent AdvocateK. Roy and ;R.N. Dutt, Advs.
Cases ReferredMadras v. G.J. Coelho
Excerpt:
- sabyasachi mukharji, j. 1. in this reference under section 256(1) of the i.t. act, 1961, we are faced with the familiar but not too easy question whether the particular expenditure should be allowed as a revenue expenditure or not. this reference arises out of the assessment far the assessmentyears 1964-65 to 1966-67 and the relevant accounting years were calendar years 1963 to 1965, respectively. the assessee is a company which carried on, at the relevant time, the business of execution of contracts. there was an agreement entered into between hindustan steel limited, hereinafter called hsl and dr. c. otto & co., gmbh (german company), the assessee-company, incidentally the name of which has been subseuently changed and we have, by an order passed today, altered that name, and.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Section 256(1) of the I.T. Act, 1961, we are faced with the familiar but not too easy question whether the particular expenditure should be allowed as a revenue expenditure or not. This reference arises out of the assessment far the assessmentyears 1964-65 to 1966-67 and the relevant accounting years were calendar years 1963 to 1965, respectively. The assessee is a company which carried on, at the relevant time, the business of execution of contracts. There was an agreement entered into between Hindustan Steel Limited, hereinafter called HSL and Dr. C. Otto & Co., Gmbh (German company), the assessee-company, incidentally the name of which has been subseuently changed and we have, by an order passed today, altered that name, and hereinafter the said company is called the assessee-company. The contract was for (1) expansion of coke oven plant, and (2) construction of houses/bungalows including furniture, sanitary and electrical installations in Rourkela Township. It would be appropriate, in our opinion, to describe the heading of the contract which was as follows ;

'Contract for the Expansion of Coke Oven Plant at Rourkela, Orissa, India, on a 'Turn-Key' basis including design, supply, civil engineering works, erection, putting into operation, demonstration of performance and supervision of maintenance.'

2. While we are on the subject-matter of the contract, we must emphasise that this was one transaction and that was clarified by the expression that it was a contract on a 'turn-key basis'. The nature of the contract, as we shall presently note, would provide us the real key to the solution of the problem before us. It will be necessary to refer, in view of the contentions urged before us, to the relevant provisions of the said contract. Clause 3 of the said contract, principal whereof was the Hindusthan Steel Ltd., hereinafter referred to as HSL, was as follows;

'The contractor shall design, supply, execute the complete civil engineering works, erect and put into operation and provide the technical 'know-how' connected with proper and satisfactory maintenance of the plant for the complete Coke Oven Plant and auxiliaries as detailed in the above tenders, including the changes necessary and efficacious, a summary of which is given in annexure I. The entire job will be done by the contracter on a 'turn-key' basis ; in other words, it will be the contractor's contractual obligation to deliver, in consideration of the price to be paid to him, a completely erected plant as summarised in annexure II and put the same into operation and provide the technical 'know-how' connected with proper and satisfactory operation and maintenance of the plant. Claims for additional payment will not be admitted unless otherwise specifically provided in this memorandum of agreement or agreed to at a later date. The purchaser's obligation in connection with the contract work will be restricted to the matters as described hereunder.'

3. The price of the contract is provided at Clause 5 which covers the value of design, supply, complete civil engineering works, erection, putting into operation, demonstration of performance, supervision of maintenance andproviding the technical 'know-how' connected with proper and satisfactory operation and maintenance of the plant, which is referred to in annex. II, which formed a part of the agreement and the price provided for the same was indicated in German currency as DM 30,687,650 and Rs. 39,567,000. The annexure to the same is also given at page 76 of the Paper Book. The break-up and the summary of total price is given in annex. I. The price is inclusive of two items which are also indicated in the said Clause 5. It is not material for our present purpose to deal with the break-up given in the said annexure. There are mutual obligations, both of the principal as well as of the contractors, and we will mainly have to concentrate on the said mutual obligations of the principal and the contractors. Sub-clause (1) of Clause 15 deals with erection and provides as follows :

'15. Erection : (i) Based on a period of 4 months transportation time from f.o.b. stage to erection site for imported materials, erection will start by the 15th month and end by 34th month from the date of commencement of contract. The contractor will assemble and erect the contractplant and equipment supplied by him and satisfactorily put up the plant with his personnel. All expenses in connection with the erection work, including cost of erection personnel and provisions of erection tackle, tools and equipment and materials necessary for erection and the cost of their insurance, freight to and from erection site and Customs Duty and any other duties and taxes for the same, are included in the contract price for erection.'

4. Sub-clause (ii) of Clause 15 provides, inter alia, as follows :

'The contractor agrees that after completion of the work, the purchaser will be given the first option to take over such tools and tackles on the basis of their depreciated value. In this event, the purchaser shall also be entitled to deduct suitable sums for such of the defects which require modification for the efficient working of such tools and tackles.'

5. It is also material to refer to Sub-clause (iii) of the said Clause 15 which is in the following terms :

'All removable property including fixtures erected or acquired by the contractors for carrying out the erection/construction of the plant or in connection thereof and all furniture excluding refrigerators, airconditioning units, radios and record players, will become the property of the purchaser without any further payment as soon as the contractor has completed his work, excepting labour quarters mentioned in Article 19(xvi).'

6. While on this, we may incidentally note the expression that the items mentioned in this sub-clause 'will become' the property of the purchaser. Something would turn up on the construction of this expression.

7. The next clause to which we should refer is Clause 18 which deals with the obligations of the principals. Sub-clause (i) of Clause 18, inter alia, provides that the purchaser should provide, free of cost, to the contractor the following in addition to those mentioned earlier and in Article 25 of the General Conditions of Contract. Sub-clause (i) of Clause 11, inter alia, stipulated as follows :

'(i) Hand over the necessary and adequate erection site in a proper condition within 2 months from the date of commencement of contract to start the work. Principals shall ensure that the availability of erection site does not stand in way of progress of work.'

8. Sub-clauses (v), (vi) and (vii) of Clause 18, inter alia, provided as follows :

'(v) Make available adequate building ground in the neighbourhood of the work-site with water and electric connections at one central point for the construction of labour quarters. The contractor shall pay charges for water and electricity as per Purchaser Rules applicable to the Contractor.

(vi) Make available land on the work-site for the construction of office, store sheds and magazines.

(vii) Make available suitable unfurnished quarters to the best of his ability for the contractor's Indian and German Engineers and provide water and electricity at a central point. The contractor shall pay rent for accommodation and charges for electricity and water at the rates applicable to the purchaser's employees.'

9. Incidentally, we may mention that Sub-clause (vii) of Clause 18 is the counter part obligation of the contractor stipulated in Clause 19, Sub-clause (iv). Clause 19, as we have mentioned hereinbefore, dealt with the obligation of the contractor and Sub-clause (ii), inter alia, provided the following obligations :

'(ii) Laying and building of all permanent rail tracks and roads with drainage within the area of the Coke Oven Plant expansion.'

10. Sub-clause (iv) of Clause 19 of the obligation was as follows :

'(iv) Construction and furnishing of the site office, delegation of office personnel to the plant-site, inclusive of all costs for telegrams, postage, telephones, stationary and other office requirements.'

11. Sub-clause (xi), inter alia, provided as follows :

'(xi) Furnishing the bungalows to be erected by the contractor.'

12. The expression 'furnishing the bungalows to be erected by the contractor' seems to be a little mistaken, because, the obligation of the contractor was not to erect the bungalow which was to be furnished by the contractor, but the bungalows had to be erected and supplied or provided for by the principals. Sub-clause (xvi) provided as follows :

'(xvi) Building of temporary quarters for the accommodation of workers. These will remain contractor's property and can be dismantled and removed upon completion of the contract unless the purchaser decidedto purchase these quarters from the contractor. The price will not exceed Rs. 70,000.'

13. Clause 26 stipulated--The principals, that is to say, Hindustan Steel Ltd. agreed to Dr. G. Otto & Co., being the assessee herein entrusting all Indian supplies and services to their Indian Associates, M/s. Kalinga Otto (Private) Ltd., who should also be the recipients of all rupee payments on behalf of the contractor. It was clarified that this however did not relieve the contractor of his responsibilities, obligations and performances under the contract. Therefore, the question is the nature of the right of the assessee, the duties that the assessee had to discharge resulting in incurring the expenditure, which is the subject-matter of dispute in this reference. As we have mentioned before, three years are involved. The ITO in his order for the first year observed dealing with this aspect as follows :

'In the contract expenses account assessee has claimed expenses for maintenance of bungalows amounting to Rs. 1,30,130. These expenses relate to cost of furniture and fittings, electrical wiring etc. It was stated that according to the agreement with Hindustan Steel Ltd. these furniture and fittings will belong to Hindustan Steel Ltd., after the contract work ends, without further payment. It was stated that according to the agreement, Hindustan Steel Ltd., would pay for the construction of the bungalows at the work site. As these expenses are capital expenses, these expenses are disallowed...

Rs. 1,30,130

_________________

Rs. 4,61,966'

14. He repeated his reasons in his order for the second year wherein he has stated as follows :

'(g) In contract expenses account, assessee has claimed as revenue expenses Rs. 1,38,501 which expenses were incurred for painting and for providing furniture, furnishing, crockery, electrical fittings and fans in the houses belonging to M/s. Hindustan Steel Ltd., which were let out to the assessee-company for its engineers. According to the contract with M/s. Hindustan Steel Ltd., all irremovable property including fixtures erected by the assessee for carrying out the construction of the plant and all furniture excluding refrigerators, airconditioning units, radios and record players will become the property of the Hindustan Steel Ltd., without any further payment as soon as the assessee completed the contract work. On account of this clause, namely, that the furniture and fittings will ultimately go to M/s. Hindustan Steel Ltd., without any further payment, assessee has submitted that these expenses incurred by them for furniture, etc., are revenue expenses as these expenses should be deemed to be included in the total contract amount receivable. It is, however, seen thataccording to the contract M/s, Hindustan Steel Ltd., were expected to give unfurnished quarters only to the assessee on rent. Therefore, the cost of of furnishing the quarters is a capital expense and it is disallowed : Rs. 1,38,501.'

15. For the subsequent year he more or less reiterated the same reasons and observed as follows :

'(d) In contract expenses account, assessee has claimed as revenue expenses Rs. 54,578 which expenses were incurred for painting and for providing furniture, furnishing, crockery, electrical fittings and fans in the houses belonging to M/s. Hindusthan Steel Ltd. which were let out to the assessee-company for its engineers. According to the contract with M/s. Hindusthan Steel Ltd., all irremovable property including fixtures erected by the assessee for carrying out the construction of the plant and all furniture, excluding refrigerators, air-conditioning units, radios and record players will become the property of the M/s. Hindusthan Steel Ltd. without any further payment as soon as the assessee completed the contract work. On account of this clause, namely that the furniture and fittings will ultimately go to M/s. Hindusthan Steel Ltd. without any further payment, assessee has submitted that these expenses incurred by them for furniture, etc., are revenue expenses, as these expenses should be deemed to be included in the total contract amount receivable. It is, however, seen that according to the contract, M/s. Hindusthan Steel Ltd. were expected to give unfurnished quarters only to the assessee on rent. Therefore, the cost of furnishing the quarters is a capital expense and it is disallowed : Rs. 54,578.'

16. The matter went up in appeal before the AAC. He observed, dealing with the rival contentions of the parties, as follows :

'It was urged by the learned representative that M/s. Hindusthan Steel Ltd. was to make available to the contractor only unfurnished quarters for the occupation of their personnel. The contractor was required to furnish them as provided in the contract. Such furnished quarters were to he handed over to M/s. Hindusthan Steel Limited, consideration for which was included in the contract value as per the terms of the agreement. The expenditure which was incurred wholly and solely according to stipulated conditions of the contract for the purpose of earning of income represented deductible revenue expenditure even though expenses on construction of quarters and furnishing of such quarters were involved. It was stressed by him that the ITO failed to appreciate the nature of the contract, the obligations cast on the contractor and the responsibility imposed thereby.

I have gone through the relevant clauses of the agreement subsisting between the appellant and M/s. Hindusthan Steel Ltd. I find that theconditions stipulated above were part and parcel of the obligations cast on the appellant for performance of the jobs and earning of the 'Rate' mentioned therein. The appellant was not entitled to receive the sums due from M/s. Hindusthan Steel Ltd., without complying with the terms and conditions mentioned in the said contract. Completion of the specific obligations required the appellant to incur expenditure on furniture, fittings, electrical wiring and other items which were wholly and solely necessitated for the purpose of earning income. That certain items of expenditure were incurred for capital goods could not disentitle the appellant from deduction of such expenses from the profits of the business. In the above analysis of facts of the case, I feel that there was considerable force in the contention of the representative of the appellant. The appellant would be entitled to a relief of Rs. 1,30,130 under this head.'

17. The Tribunal agreed with the reasonings of the AAC in substance and, inter alia, observed as follows:

'5. We have carefully considered the rival submissions of the parties as well as perused the aforesaid contract, and we do not find any merit in the submissions made on behalf of the Deptt. From the aforesaid clauses of the agreement, it is clear to us that they have to be read along with the entire contract as a whole. Under the contract, the assessee had undertaken the expansion of the coke oven plant as well as construction of houses/bungalows including furniture, sanitary and electrical installations in Rourkela Township. In order to get this contract, both H.S.L. as well as the assessee had stipulated various obligations and rights of each of the parties. H.S.L. was under an obligation to make available suitable unfurnished quarters to the assessee for its staff, while, the assessee was under an obligation to furnish them according to its requirement and on the completion of the contract it was required to hand over the furniture and fittings as well as electrical installations to H.S.L. without claiming any payment thereof. The rights and duties of the parties emanate from the said contract and the assessee was obliged to furnish the unfurnished bungalows which were made available to it by H.S.L. In this view of the matter, and looking to the contract as a whole, we are of the view that the AAC was justified in accepting the assessee's claim for deduction of the aforesaid amounts in each of the years under appeal. We, accordingly, uphold the orders of the AAC on this point.'

18. Out of this aforesaid order of the Tribunal, the following question has been referred to this court for our determination :

'Whether, on the facts and in the circumstances of the case and on a correct interpretation of the agreement dated February 25, 1964, between M/s. Hindusthan Steel Ltd. and Dr. C. Otto & Co. Gmbh, the assessee's claim for deduction of Rs. 1,30,130, Rs. 1,38,501 and Rs. 54,578 in respectof assessment years 1964-65, 1965-66 and 1966-67, respectively, was rightly accepted by the Tribunal ?'

19. As we have mentioned before we are concerned with the allowability of the claim for deduction for three sums for three different years as revenue expenditure. The principles for determining whether a particular expenditure is revenue expenditure or capital expenditure are well-settled. Sometimes, the application of such principles to a particular case presents difficulties and as is usual in a case of this type, a plethora of authorities had been cited before us. Before, however, we deal with those authorities we must not forget that it is risky to venture to match the colour of one case with that of another. The Supreme Court, dealing with a similar problem in the case of CIT v. Travancore Sugars & Chemicals Ltd. : [1973]88ITR1(SC) , observed as follows :

'In considering the nature of the expenditure incurred in the discharge of an obligation under a contract or a statute or a decree or some similar binding covenant, one must avoid being caught in the maze of judicial decisions rendered on different facts and which always present distinguishing features for a comparison with the facts and circumstances of the case in hand. Nor would it be conducive for clarity or for reaching a logical result if we were to concentrate on the facts of the decided cases with a view to match the colour of that case with that of the case which requires determination. The surer way of arriving at a just conclusion would be to first ascertain by reference to the document under which the obligation for incurring the expenditure is created and thereafter to apply the principle embalmed in the decisions of those facts. Judicial statements on the facts of a particular case can never assist courts in the construction of an agreement or a statute which was not considered in those judgments or to ascertain what the intention of the Legislature was. What we must look at is the contract or the statute or the decree, in relation to its terms, the obligation imposed and the purpose for which the transaction was entered into.'

20. The principles so far as applicable in adjudicating these problems in India are well settled and have been reiterated by the Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT : [1955]27ITR34(SC) . There, discussing the various English as well as Indian authorities, the Supreme Court referred to the observations of the Full Bench of the Lahore High Court in the case of In ye : Benarsidas Jagannath , where Mr. Justice Mahajan, speaking for the Full Bench of the Lahore High Court, had laid down the principles applicable in determining a question of this nature. The Supreme Court observed, adopting the said principles at p. 45 of the report, that where expenditure was made for initial outlay or for extension of a business or a substantial replacement of the equipment,there was no doubt that it was a capital expenditure. A capital asset of the business was either acquired or extended or substantially replaced and that outlay whatever be its source whether it was drawn from the capital or the income of the concern was certainly in the nature of capital expenditure. The question, however, arose where expenditure was incurred while the business was going on and was not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure, Supreme Court observed, could be looked at either from the point of view of what was acquired or from the point of view of what was the source from which the expenditure was incurred. If the expenditure was made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it was properly attributable to capital and was of the nature of capital expenditure. If, on the other hand, it was not made 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 was a revenue expenditure. If any such asset or advantage for the enduring benefit of the business was thus acquired or brought into existence it would be, according to the Supreme Court, 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 was a capital expenditure or a revenue expenditure. The source or the manner of the payment would be of no consequence. Then the Supreme Court referred to the observations made in different English authorities which, for the purpose of adjudicating the present dispute, it is not necessary for us to refer in detail.

21. In this case, there is no dispute that the expenditure was incurred for carrying on the business. The only question that calls for determination is whether it brought into existence an asset or an advantage which is considered to be of enduring nature.

22. On behalf of the Revenue it was stressed that the expression 'enduring or abiding benefit' is not a static expression. An asset or an advantage may endure for the duration of the business of an assessee or for the duration of the contract. There is no dispute, as we have noticed that the expenditure was incurred in the course of the discharge of the obligations under the contract. The only question is whether by incurring the expenditure in discharge of the obligations under the contract, the assessee acquired any asset or advantage of an enduring nature, enduring in the sense in which the expression has to be understood. The expression 'enduring' is not perpetual. It is also, not strictly transient but a via media, which, having regard to the reality of the transaction, has to be found out in deciding whether the advantage or the benefit is of an enduringor lasting nature. Learned advocate for the Revenue drew our attention to the different clauses which we have set out before and sought to urge that the benefit would certainly endure for the duration of the contract. The officers of the contractor would have the use and the benefit for the business and carry on business there during the period the contract lasted. He also emphasised on the fact that the contract was not for a duration of one year at least. Some benefit--benefit in the nature of having an advantage of enduring character, was there for the assessee. On the other hand, on behalf of the assessee, it was emphasised by learned advocate that in order to be a capital expenditure the asset or the advantage acquired must endure beyond one transaction, namely, the transaction in respect of which the expenditure was incurred and for this purpose, he emphasised that it was important to bear in mind what was the business of the assessee. The business of the assessee was not certainly the execution of this particular contract. The business of the assessee was the working of the contract. In carrying on that business, the assessee had entered into or had an obligation to furnish these bungalows with the furniture and materials mentioned hereinbefore and this benefit would not enure to the assessee beyond the performance or apart from the performance of the contract in question for which this expenditure was incurred. This, in our opinion, is a significant factor which has to be borne in mind. Learned advocate for the Revenue emphasised that by this expenditure, tangible assets had been acquired. Learned advocate for the Revenue would have been right in saying that certain tangible assets were acquired in the shape of furniture or curtains or things of that nature. But the question is, have these been acquired by the assessee Was it the primary object of acquisition of this asset by the assessee Learned advocate for the Revenue also emphasised that the duration of the life of the asset was relevant to a certain extent. Again, we are inclined to accept the contention of the learned advocate for the Revenue. But this, by itself, would not be a solution of the problem that is before us. It was, then, emphasised that these were not a part of the circulating capital. It belonged to the capital structure of profit-making apparatus. This is the real controversy, in our opinion, in this case. That depends upon the nature and the purpose for which this expenditure was incurred and the assets acquired by the assessee. Was the expenditure incurred for acquiring in-discharging an obligation under the contract, and by the discharge of which alone the assessee was entitled to earn the revenue income, which is taxable If it was the latter, then it was primarily incurred for carrying on the business.

23. In a decision in the case of CIT v. Belgachi Tea Co. Ltd. : [1975]99ITR99(Cal) , the assessee, a tea grower, had claimed under 'repairs account' a sum of Rs. 19,748 as cost of repairs to the fencing of a tea gardens.

24. The ITO was of the view that the new fencing was fixed with new pillars and, therefore, a major portion of the expenditure was capital expenditure and he had disallowed on estimate a sum of Rs. 12,000. On second appeal, the Appellate Tribunal had allowed the claim. We held that in that case, the assessee's business was to carry on the business of tea growing and the business could not ba carried on unless there was a proper fencing. We further noticed that incurring the expenditure was in connection with the carrying on of the business by the assessee. We noted that if the predominant and main purpose of incurring the expenditure was the carrying on of the business, the incidental advantage of the expenditure, in that the property was more secured and thereby the assessce gained an advantage, which was of some endurance, could not affect its revenue character. Learned advocate for the assessee stressed that no advantage beyond the advantage of earning money by the performance of its obligation under the contract was earned by the assessee by incurring the expenditure in question. Therefore, it could not be said that any enduring advantage was earned by the assessee.

25. Our attention was drawn to several decisions and we shall brielly deal with such decisions. Reliance was placed on behalf of the Revenue on the case of Lothian Chemical Co. Ltd. v. Rogers [1926] 1 1 TC 508, where the Lord President Clyde at p. 521 of the report observed as follows :

'The question, and the only question it seems to me that arises in the present case, is this. Was the expenditure of the original 4,000 an expenditure which was part of the working expenses of the business carried on by this company, that is to say, expenditure laid out in the process of manufacture and of sale by which the company expected to make profit from year to year Or, on the other hand, was this expenditure which was necessary to acquire the disposal of property, buildings or plant, the use of which was necessary for conducting the processes of the manufacture and sale of the company, so long as those processes were carried on My Lords, if those two alternative questions fairly state the question here, there can be no doubt whatever upon which side the expenditure in question falls. It was not part of the working expenses of the company, and it cannot be so represented. It was expenditure which was made for the purpose of acquiring the disposal of property or plant which was to be used in the business of the company, namely, the manufacture of some chemical products and, in this case, of one chemical product in particular, and which was to be so used, not for the purpose of making profit in any particular year, but for the purpose of such manufacture so long as that manufacture might be carried on.

I quite understand that the company did not expect that these manufacturing processes would be brought to so sharp and rapid an end as theyactually were ; and it may be, for anything I know, that the company took too rosy a view of the prospects of the permanence of this particular branch of its trade ; but all that is utterly irrelevant to the question. If they made a miscalculation, I am afraid, like other miscalculations in trade, the misfortunes which ensue fall upon their own shoulders ; and it cannot be said that the Government had not been willing to meet them half-way.'

26. The context in which these observations came to be made was entirely different. The assessee-company during the first world war was manufacturing explosives for the Minister of Munitions, but owing to the dange-rous situation of the works this was discontinued and in October, 1917, an arrangement was entered into with the Minister of Munitions and ultimately embodied in a written agreement dated April 22, 1918, under which the assessee-company agreed to transferring the works forthwith into a plant suitable for the manufacture of calcium nitrate to be sold to the Minister on stated terms. The Minister undertook to recoup to the company the whole cost of conversion up to a maximum sum of 15,000, which was the company's estimate of the cost in the conditions then prevailing. The agreement was to continue in force until determined by the Minister by one month's notice, which might be given immediately on the termination of the hostilities, but the agreement was not otherwise to expire before December 31, 1918. The converted works, except any existing plant and buildings incorporated therein and the land, were to be the property of the Minister, with an option to the company, within three months of the determination of the agreement, to purchase the works at a valuation and if such option was not exercised, an option to the Minister within 12 months to remove the buildings, plant and machinery so far as his property, or to purchase the company's interest in the land and buildings, etc., not already his property. The work of conversion was commenced in November, 1917, and completed in the autumn of i9I8. Following the armistice, the contract was determined according to its terms only after one week's output had been manufactured. None of the options in the agreement was exercised at its termination, and eventually in 1922, the works and plant belonging to the Minister, which were of little value to the company, were taken over by the company for 400. Owing to the rise of the cost of materials during the progress of the work, the cost of conversion exceeded the 15,000 paid by the Minister of Munitions by 4,044, of which a sum of 1,879 after deducting costs was recovered from the Minister in 1925 in settlement of an action which had been commenced against him and the net deficiency of 2,165 was claimed by the company as a deduction in arriving at its profits for the purposes of the income-tax and the excess profits duty. It was held that the loss in question was a loss of capital and that it was not admissible as a deduction from the company'sprofits for income-tax and excess profits duty purposes. Though the decision had to deal with the obligations under the contract, the context in which the observations of Lord President Clyde had been made was entirely different from the narration already made before.

27. Our attention was next drawn to the decision in the case of Hyam v. IRC [1929] 14 TC 479. There the assessee had carried on business in Edinburgh and in Dublin. They had two shops in Dublin in neighbouring streets. Business in the one was discontinued for about a year when the premises were being rebuilt. When the new premises were available, the other shop was given up, the lease having expired. In both the cases, the greater part of the fittings was scrapped and sold. The assessee claimed a deduction from the profits of the business in respect of the cost of the fittings of the new premises, claiming either allowance of the cost of the new fittings less the price realised for the old fittings sold or alternatively an allowance for obsolescence computed in the usual manner (Rule 7, Cases I and II, Schedule D). Both the claims were rejected by the General Commissioners on appeal. It was held that the assessee was not entitled to deduct the cost of the new fittings less the price realised for the old. There at p. 486 of the report again Lord President Clyde made the following interesting observations :

'The propriety, and the practice, of charging the cost of supplying 'implements, utensils, or articles employed for the purposes of the trade' to revenue must vary according to the character of the trade, and--partly perhaps--according to the financial circumstances of the trader. Trading implements, utensils, and similar articles--taking these descriptions in their ordinary connotation--have to be supplied, repaired and altered from time to time, in order to enable the trade to be carried on and profits to be earned ; and in many businesses, expenditure on these things is a usual incident of their conduct and properly recurs in every year, or at least in most ordinary years, as a debt against revenue account. Take the case of a hotel or restaurant business--much table-furniture, linen, crockery, pots and pans have to be provided, and the supply of such things is a usual incident of the trade. Accordingly, I think that, in a business of the kind supposed, the costs of such supply are a proper charge against revenue in the books, and a proper deduction from gross profits in terms of sub-head (d) of rule 3 for purposes of Income-tax. But, since such relatively permanent things as shop-fittings must be taken to form a species of the genus 'implements, utensils, or articles employed for the purposes of the trade', it is plain that there are some kinds of ' implements, utensils or articles ' the supply of which is not a usual incident (one year with another) of the conduct of the business, and in respect of which there is no sum which can be said to be ' usually expended '. Shop-fittings are intended to last, and often dolast, as long as the shop, with very little repair or alteration : in the present case, the fittings which were discarded and sold were from 25 to 37 years old. The reconstruction and remodelling of a shop or hotel--whether the result of a compulsory change of site, or brought about by the necessity of bringing business premises into line with the more luxurious conditions demanded by the public of today--are not usual incidents of the conduct of the business, and the expenditure required to effect them is not a usual expenditure appearing in the accounts of the business. In the accounts of the appellant firm, the sum expended on the fittings of the reconstructed premises did not belong to the class of sums 'usually' expended on 'implements, utensils, or articles employed for the purposes of the trade'--even including fittings therein--but to the class of exceptional and extraordinary expenditure. It is not enough to convert such extraordinary expenditure into usual expenditure, simply to spread it over three years, in order to get an average. The measure provided by the method of average only applies to 'the sum usually expended', Here no sum was 'usually expended' and there is no room for reverting to the average method.'

28. As we have mentioned before, the facts were entirely different. The assessee had the benefit for itself by incurring the expenditure.

29. Our attention was also drawn to certain observations in the case of Henrikson v. Grafton Hotel Ltd., [1942] 24 TC 453. There, the assessee-company was the tenant of a fully licensed hotel, the lease providing that the tenant should pay all charges imposed in respect of the licences by virtue of the Licensing (Consolidation) Act, 1910. On the renewal of the licence in March, 1934 and in March, 1937, sums in respect of monopoly value were imposed, payable in instalments. The company appealed against the assessments under Schedule D for the years 1938-39 and 1939-40, claiming that the instalments of monopoly value should be deducted in computing the assessments. The Commissioners allowed the appeal. It was held by the Court of Appeal that the instalments were capital sums, and that they did not lose their capital nature because the company had undertaken to pay these under its lease, and that they were not admissible deductions for income-tax purposes. Lord Greene M.R. observed at p. 459 of the report as follows :

'It appears to me that there can be no difference in principle between a payment out and out for monopoly value and a payment in respect of a term. Each licence granted for a term must stand by itself, since an application for its renewal falls to be treated as an application for a new licence. This is what I mean when I say that there is a false appearance of periodicity about these payments. Whenever a licence is granted for a term, the payment is made as on a purchase of a monopoly for thatterm. When a licence is granted for a subsequent term, the monopoly value must be paid in respect of that term and so on. The payments are recurrent if the licence is renewed, they are not periodical so as to give them the quality of payments which ought to be debited to revenue account. The thing that is paid for is of a permanent quality although its permanence, being conditioned by the length of the term, is shortlived.'

30. These observations, with great respect, in our opinion, would not be applicable to the present controversy having regard to the nature of the obligations which the assessee had to discharge and for the purpose of which the expenditure in question had to be incurred.

31. Reliance was also placed on the observations in the case of Avon Beach & Cafe Ltd. v. Stewart, [1950] 31 TC 487. There the asscssee-company had carried on a cafe, etc., business at a place on a sea-shore. The company held a lease of a part of the foreshore and owned freehold of an adjacent strip of land on which the cafe stood. The company erected a barrier of wooden piles and brushwood in front of the cafe as a protection against erosion by the sea. On appeal to the General Commissioners against the assessments to income-tax under Schedule D, the company contended that the barrier had been erected solely to maintain its existing assets in their original condition, that its construction did not represent the creation of a new asset and that the cost of its erection was expenditure incurred wholly and exclusively for the purpose of the company's trade and allowable as a deduction in computing its profits.

32. For the Crown it was contended that there had been created an entirely new asset, a sea-wall, which was an improvement of the premises occupied for the purposes of the company's trade and that the cost of its construction was capital expenditure, not allowable as a deduction for I.T. purposes. The Commissioners held that the deduction claimed was not permissible. It was held that the Commissioners' decision was correct. Even if we consider the curtains to be on the same ground, the curtains in Rourekela did not seem to serve the same purpose as a sea-wall protecting the buildings from the waves of the sea. The distinction lies in the fact, the building belonged to the assessee and the protection that was afforded was of a permanent nature but the curtains were provided to decorate the bungalows. In that context, therefore, we have to note the observations of Vaisey J., at page 491 of the report upon which learned advocate for the Revenue, relied. There Vaisey J. observed as follows :

'Now it seems to me to be reasonably plain that we have here the case of a new construction resulting in a new tangible erection or structure. Before this operation was carried out, at a cost of 500, the land where it touched the sea was no doubt just the ordinary ground and earth ormould which, as we know, was continually being eroded ; and what the Appellant Company did was really to build up between the land and the sea--that is, of course, the sea at high tide which I suppose is really the only difficult time--a new sea-wall. It is true that it was not a sea-wall of concrete or brick or anything of that kind but none the less it was a solid structure. It cost 500. It was a barrier of wood piles and brushwood and it was erected right across the front of the lawn, that is to say, as I understand it, it was erected so as to intervene for the first time between land and water in order that the land which was behind it might not be further encroached upon by the water which was in front of it.

In my judgment, if the matter had been a matter entirely for my decision I should have thought that this was essentially a capital expenditure. Mr. Millard Tucker has pointed out the ratio decidendi of these cases and one of the tests undoubtedly is :

Has the expense produced a new tangible asset I think that in this case it has. There is the wall, there are the wood piles and there is the brushwood. It was not merely the replacement of an existing barrier by a new and more up to date one but it was the creation and insertion of a new- barrier ; and I should have thought myself that that was quite obviously capital expenditure. It was not merely some act done to preserve the existing asset of the land, not merely something which added nothing, because it was there before, but it was the creation of a new asset. It is hardly necessary to refer to any authority on the matter but I should have thought that it was reasonably clear that the expenditure was expenditure of a capital sum, out of capital, and for a capital purpose.

Primarily, of course, it is not for me to form any views about this although I have expressed the view which I have formed. The Commissioners, on facts which are not very elaborately stated but which I think are perfectly clear, have found, and apparently were perfectly satisfied, that the expenses claimed were, in their opinion, on their view of the facts and of the law, of a capital nature and, therefore, not allowable as deductions ; and I do not see any ground at all on which I can disturb that finding. I think it is rather hard on the appellant company perhaps, who have been forced to make this expenditure for the protection of their property but this is a matter of law and of the construction of the statute and of the application of principles which are extremely well settled and to which I think it would be almost an impertinence for me to attempt to add anything. I think the contention of the appellants is one which could not have prevailed before the Commissioners but whether that be so or not I do not think it can be established in this court.'

33. Reliance was also placed on certain other English decisions and our attention was drawn to the observations in the case of Pitt v. Castle HillWarehousing Co. Ltd. [1979] 49 TC 638 where at page 645, Mr. Justice Megary had expressed the same doubt about the phrase 'no new capital asset had been created'. Now, this observation of Mr. Justice Megary, in the context of the controversy that arose in that case, in the sense, whether the assets created assets at all or a capital asset or a new asset at all which were really assets in exchange for something, which came up for consideration in that case, need not detain us because of the nature of the expenditure in the instant case and the obligations in discharge of which the expenditure had been incurred. In this context, it is also not very material, as we have mentioned before, to consider whether there be any advantage or there be any benefit or the question if there be any advantage or any benefit apart from the income for the performance of the obligations under contract, was it tangible or intangible Reliance was also placed on certain observations in the case of Odeon Associated Theatres Ltd. v. Jones [1970] 48 TC 257. There, at page 285, Buckley L.J. observed that the cost of acquiring or creating a physical capital asset for use in a trade or business was clearly a capital expenditure. The cost of improving such asset by adding to it or modifying it may well be a capital expenditure. There, his Lordship gave an example of a tradesman, who acquired a dilapidated shop in which to carry on his business and, either before he commenced business or as soon thereafter as he could afford to do so, put a shop into a state of repair and decoration suitably for his business, had incurred a cost not only of acquiring the shop but also of repairing and decorating it in a suitable manner in order to provide himself with a capital asset of a character which he regarded as appropriate to his business. The whole of the expenditure, it was said, was capital expenditure because it constituted the cost of acquiring such a capital asset as an appropriate requirement for the purpose of his business. The whole of this expenditure, according to his Lordship, would be capital expenditure. This analogy, would not, in our opinion, be applicable to the facts of the present case. Here, the expenditure or the cost that was incurred was not for carrying on of any trade or any transaction except in discharging the obligations of a particular nature under the contract on the performance of which alone depended the asses-see's earning of profit which is taxable in the instant case. Our attention was also drawn to the case of Strick v. Regent Oil Co. Ltd. [1965] 43 TC 1, where at page 57 of the report, dealing with the expression 'enduring nature', Wilberforce L.J. observed as lollows :

'This brings me to consideration of the durability of the advantage acquired. As Dixon J. said, when considering the nature of the advantage sought, ' its lasting qualities may play a part'. In English law the term most commonly employed in this part of the argument is 'enduring' ever since Viscount Cave. L.C. in the British Insulated and Helsby Cables Ltd. v.Atherton [1926] AC 205, spoke, without intending to lay down a test of 'the enduring benefit of a trade'. It might be enough to decide this case in favour of the Crown to say that, in relation to an 'asset' of so concrete a character as a lease, or as a lease accompanied by a sub-lease, at any rate when the term of the lease amouts to five years or more, the test of durability is satisfied, but I do not wish to rest on this narrow ground ; indeed, I do not think that it is sound reasoning to do so. I agree entirely with Lord Denning M. R, that if one considers the business reality here, or, in the words of Dixon J. what the expenditure is calculated to effect from a practical and business point of view, the payments were made for rights (reinforced by the lease-sub-lease method) of exclusive supply of petrol to certain filling stations for periods varying from five years to 21 years. It is the durability of this complex right which has to be considered, and we must squarely face the question whether such an advantage is sufficiently enduring in the context of Regent's trade to qualify as a capital asset, or whether it has such transient qualities that it ought properly to be regarded as 'day to day' or 'current', and so, revenue expenditure. It seems to me an undue abstraction to segregate the leasehold or real element in this complex and to apply to it a special rule or test which may exist in relation to such assets in other contexts ; and, relevant, no doubt, though the lease-sub-lease framework is, it requires to be demonstrated that a different durability test is to be applied in cases where that framework exists and in cases where the advantage consists of a simple tie unsupported by it. The commercial reality is substantially the same, for it is not suggested that Regent paid any more in the lease-sub-lease cases than in those cases where there was a simple tie or that Regent had any desire for the lease-sub-lease method ; on the contrary, the evidence is that Regent disliked it and that the retailers forced it on Regent. Surely, therefore, the test should be identical. Is, there, then, any line which can be drawn below which expenditure for a short-term asset has, or can have a revenue character It is noticeable, and I think significant, that, with one possible exception, there is no authority in favour of the view that, though an advantage has been identified, expenditure to gain it should be treated as revenue expenditure because of the short-term character of the asset. That one possible exception is Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1964] AC 948 ; [1965] 58 ITR 241, where the agreement was for the period of a year. Although there were other, possibly more important, considerations which led the Judicial Committee to consider the payment as having a revenue character, the contrast was pointed out between the payment in question, which exhausted itself and was created to exhaust itself within the twelve months period 'withinwhich profits were ascertained' and a 'contractual right to last for years', payment for which may be capital expenditure. Some other cases on short-term assets are of interest. Mac. Taggart v. Strump (B&E;) [1925] 10 TC 17, was a case of premium paid for renewal of a lease for five years--this was held a capital expense--which the trader would probably make good out of his profits when earned. Commissioners of Inland Revemie v. Adam [1928] 14 TC 34, was concerned with a right for eight years to deposit earth and slag on another's land ; the right was held to be a capital asset. Lord President Clyde considering it as equivalent to any other capital asset of a 'relatively permanent character'. John Smith & Son v. Moore [1921] 2 AC 13, is a delusive case ; it appears to involve precisely the critical area which we must consider here--namely, very short-term contracts--but no clear conclusions can be drawn from the decision. The difficulties inherent in it have been so fully analysed by the Judicial Committee in the Nchanga's case : [1965]58ITR24(Bom) and by others of your Lordships that I shall not take up time by a further discussion of them. More comprehensible is Henrikson v. Grafton Hotel Ltd. [1942] 24 TC 453, where it was held in the Court of Appeal that a payment in respect of so-called monopoly value on the renewal for three years of a licence was a capital payment. The subject-matter of the payment there, though of a special character (but what asset is not ?) was in the same area as the ties in the present case, and Lord Greene M.R. said :

'The thing that is paid for is of a permanent quality although its permanence, being conditioned by the length of the term, is short lived' ; and he regarded the fact that the licence had to be renewed every three years as irrelevant--there was 'a false appearance of periodicity' about them. Lastly, there are certain cases concerned with open cast mining : Knight v. Calder Grove Estates [1954] 35 TC 447 ; Stow Bardolph Gravel Co. Ltd. v. Poole [1954] 35 TC 459 ; H. J. Rorke Ltd, v. Commissioners of Inland Revenue [1960] 39 TC 194. In two of them the question of transience was raised, and in each it was decided that, once the conclusion was reached, on other considerations (the validity of which need not be here considered) that the asset acquired was fixed and not circulating capital, the fact that the asset was of a transient character is irrelevant. These authorities do little more than provide illustrations of the character of various types of assets in various trades. The principle seems to emerge that if, on a consideration of the nature of the asset in the context of the trade in question, it is seen to be appropriate to classify it as fixed rather than as circulating capital, the brevity of its life is an irrelevant circumstance. But it would still be correct, in my opinion, where the nature of the asset, taken together with other relevant factors, leaves the matter in doubt, to have regard, amongst other things, to its transient character.No rule can be laid down as to a minimum period of endurance for a capital asset or a maximum permissible period for an item of stock of circulating capital, though obviously the more closely the period of endurance is related to an accounting period the easier it is to argue for a revenue character, but no doubt there is a penumbra the width of which may vary according to the nature of the trade.'

34. While we respectfully agree with the principles enunciated by Wilber-force L.J. in the aforesaid decision, it appears to us that in the context of the controversy before us it is not relevant for us to determine whether the advantage was of a transient quality. The correct principle, as was indicated by his Lordship, emerges on a consideration of the nature of the assets in the context of the trade in question and it is in that context the question has to be decided. Our attention was also drawn to the decision in the case of Manby v. Furlong (50 TC 491), where the expenditure incurred by a Barrister in commencing his practice were considered to be his business or trade expenditure and allowed as deduction. The context and the facts of that case were entirely different from the instant case.

35. Learned advocate for the Revenue also drew our a-ttention to the observations of the Privy Council in the case of Tata Hydro-electric Agencies Ltd. v. CIT [1937] 5 ITR 202, where McMillan L.J. recognised that the decided cases would show how it was difficult to discriminate the expenditure which was and which was not incurred solely for the purpose of earning the profits or gains. It was observed by his Lordship that the conclusions were to be reached that in the particular case whether the expenditure were incurred for the purpose of earning profit. The facts of that case again were entirely different from the instant case. There, the purchaser of a business undertook to the vendor, as one of the terms of the purchase, that he would pay a certain sum annually to a third party irrespective whether the business yielded any profit or not and in that context it was held that it was difficult to say that the annual payments were made solely for the purpose of business and it would make no difference that the annual sum should be paid out of the particular receipt of the business irrespective of the earning of any profit from the business as a whole. Learned advocate for the Revenue also drew our attention to the decision of the Bombay High Court in the case of CIT v. Menora Hosiery Works Put. Ltd. : [1977]109ITR714(Bom) . He also drew our attention to the observations of Tulzapurkar J., at pages 723-724 of the report. There, the asses-see had the benefit of user of a particular floor for the purpose of carrying on his business apart from the particular construction work that the assessee was doing. Reliance was also placed on the decision of the Gujarat High Court in the case of H. Mohamed & Co, v. CIT : [1977]107ITR637(Guj) ,where Mr. Justice Divan, as the learned Chief Justice then was, hadobserved at pages 644-645 as follows :

'In view of the generally understood meaning of the words 'stock-in-trade' in the commercial world, it is obvious that this phrase 'stock-in-trade' means 'all those goods or commodities in which the particular individual deals in the sense of buying and selling in the course of his business activity and it cannot be said to include a commodity which is acquired for the purpose of being let to hire'. To give two illustrations of comparable activities, if a person keeps with him a number of motorcars which are let to hire to the intending customers with drivers or without drivers in what are known as 'hire a car' companies, there is no buying and selling but the motor-cars 'are hired out to intending customers. In such a case, it is very difficult to say that the motor-cars in question are the stock-in-trade of that particular individual. The income which he would derive from letting out the motor-cars would be from the exploitation of his capital assets, viz., the motor-cars, and not from turnover of his stock-in-trade in the course of his business activities. A similar case in point, in our opinion, is also the case of a person who carries on the business of a circulating library. In the case of such a library, the books are bought and hired out to different persons on some fee or charge. It is possible that in the course of the business some books are worn out and have to be replaced but it is very difficult to envisage these books which are kept by the circularing library as the stock-in-trade of the library. No books are traded in. They are merely hired out and, in our opinion, these two illustrations of the circulating library and the car hiring business clearly go to show the essential characteristics of stock-in-trade, viz., that it must be a commodity in which there is a dealing, i.e., which is bought and sold as distinguished from a commodity with which the business is carried on, viz., from the exploitation of which the income isderived. The distinction is between selling outright in the course of the business activity as distinguished from deriving income from exploitation of one's assets. It is, therefore, clear that the contention on behalf of the assessee that the furniture constituted his stock-in-trade must be rejected.' But, in the instant case, if we apply the test, that is to say, whether the assessee was dealing in the furniture or curtains or the fixtures which had to be fitted in the bungalows, then it could not be applied. But certainly it was true that the assessee had to provide for those, tha.t is to say, furniture, fixtures and the curtains, etc., were to be fitted to the bungalow in the discharge of its obligations under the contract. Therefore, the test that his Lordship had indicated, in our opinion, would be destructive of the Revenue's contention in the instant case. Our attention was also drawn to the observations of the Privy Council in the case of CommissionerTaxes v. Nchanga Consolidated Copper Mines Ltd. [1964] AC 948 ; [1965] 58 ITR241, which reads as follows :

'Again, courts have stressed the importance of observing a demarcation between the cost of creating, acquiring or enlarging the permanent (which does not mean perpetual) structure of which the income is to be the produce or fruit and the cost of earning that income itself or performing the income-earning operations. Probably this is as illuminating a line of distinction as the law by itself is likely to achieve, but the reality of the distinction, it must be admitted, does not become the easier to maintain as tax systems in different countries allow more and more kinds of capital expenditure to be charged against profits by way of allowances for depreciation and by so doing recognise that at any rate the exhaustion of fixed capital is an operating cost. Even so, the functions of business are capable of great complexity and the line of demarcation is sometimes difficult indeed to draw and leads to distinctions of some subtlety between profit and that is made 'out of' assets and profits that is made 'upon' assets or 'with' assets. It does not settle the question, for instance, to say merely that an expenditure has been made to acquire a 'source of income.' as the appellant says here, unless one is clear that some forms of circulating capital itself, e.g., labour, raw material, stock-in-trade, are not themselves to be regarded as such a source.

With these considerations in mind their Lordships must address themselves to Nchanga's challenged expenditure. It bought one right only, the right to have Bancroft out of production for 12 months. While, no doubt, money paid to acquire a business or to shut a business down for good or to acquire some contractual right to last for years may well be capital expenditure, it seems a contradiction in terms to speak of what Nchanga thus acquired, which exhausted itself and was created to exhaust itself within the 12 months' period within which profits are ascertained, as constituting an enduring benefit or as an accretion to the capital or income-earning structure of the business. If the expenditure is to be treated as capital expenditure at all, it cannot be for any reason such as that.

It is hot the fact, as their Lordships understand the evidence, that the expenditure bought for Nchanga a right to produce any part of whatever its annual production for March, 1958/March, 1959, may have been. As has been remarked, it needed no such right. What happened was that, having settled as between Rhokana, Bancroft and itself what the production policies and programmes were to be for the group, it implemented its own production programme accordingly. It is not in evidence, how the mine's working was adapted to the small increase of the planned total that was involved. There is nothing to suggest that there was required anystructural enlargement of the mine. In any event, it was not for that that the 1,384,569 was paid.

In considering allocations of expenditure between the capital and income accounts, it is almost unavoidable to argue from analogy. An instance is taken which seems to fall beyond dispute on one or other side of the line and it is argued that the case under review is in substance more akin to that than to any comparable instance which falls beyond argument on the opposite side. Applying this method, their Lordships think that Nchanga's expenditure has no true analogy with expenditure for the purposes of acquiring a business or the benefit of a long term or 'enduring' contract. On the other hand, it does bear a fair comparison with a monetary levy on the production of a given year. What Nchanga did was to charge its 1958/1959 production with the payment of this money in order to settle its share of the group's production programme in the way that suited it best. The payment was wholly related to and an incident of its output of the year, and it is of ho moment for this purpose that the factors of the calculation that produced the sum were certain financial requirements of Bancroft itself. Nor does it matter whether the sum is treated as a charge on the gross proceeds of the copper sales of the year, as it was in Nchanga's accounts, or as an extra charge on the additional production, as the Chief Justice described it in the Federal Supreme Court. Some of the year's production, he said, was produced ' at very high cost' The point in either case is the same. Nchanga's arrangement with Rhokana and Bancroft, out of which the expenditure arose, made it a cost incidental to the production and sale of the output of the mine. As such its true analogy is with an operating cost.'

36. Therefore, according to the Privy Council, where the functions of business are capable of great complexity and the line of demarcation was sometimes difficult indeed to draw and lead to distinctions of some subtlety between profit that was made 'out of' assets and profit that was made 'upon assets' or 'with assets'. Learned advocate for the assessee drew our attention to the observations of the Supreme Court in the case of Bombay Steam Navigation Co. P. Ltd. v. CIT : [1965]56ITR52(SC) , the Supreme Court observed as follows :

'The question then, is whether the expenditure is of a capital nature. It is not easy ordinarily to evolve a test for ascertaining whether in a given case, expenditure is capital or revenue, for the determination of the question must depend upon the facts and circumstances of each case. The court has to consider the nature and ordinary course of business and the objects for which the expenditure is incurred. The assessee-company urged that the payment of interest was revenue expenditure for the purposes of the business of the assessee-company, because in the event of failure to payinterest accruing due, the Scindias would enforce the lien, and the business of the assessee-company would come to an end and that in any event the expenditure was necessary on grounds of business expediency and incurred in order directly or indirectly to facilitate the carrying on of business. If the principal or the interest accruing due was not paid, the Scindias had undoubtedly a right to enforce their lien against the assets of the assessee-company's business, but that cannot be regarded as a ground for holding that the expenditure fell within Section 10(2)(xv). Even in respect of a liability wholly unrelated to the business it would be open to a creditor to sequester the assets of the assessee's business and such sequestration may result in stoppage of the operation of the business. Expenditure for satisfying liability unrelated to the business, even if incurred for avoiding danger apprehended or real to the conduct of the business, cannot be said to be revenue expenditure. Nor can it be said that because a liability has some relation to the business which is carried on, expenditure incurred for satisfaction of such liability is always to be regarded as falling within Section 10(2)(xv).

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. In a recent case, State oj Madras v. G.J. Coelho : [1964]53ITR186(SC) , this court had to consider the permissibility of a deduction under Section 5(e) of the Madras Plantations Agricultural Income-tax, Act, 1955. Section 5(e) it may be observed, is in terms similar to Section 10(2)(xv) of the Income-tax Act. Section 5 permits deductions of various items of expenditure in the computation of agricultural income. Clause (e) provides for the deduction of any expenditure incurred in the previous year (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of plantation. The assessee in that case had purchased an estate consisting of tea, coffee and rubber plantations in the Nilgiris mountains for Rs. 3,10,000. He borrowed Rs. 2,90,000 on interest and claimed to deduct the interest paid out of the income of the plantations in the assessment year 1955-56. The claim was made under Clauses (e) and (k) of Section 5. The claim under Clause (k) was not admissible because interest was not payable on the amounts borrowed and actually spent on the plantationsin the previous year, and the sole question which fell to be determined was whether it was a permissible allowance under Section 5(e). It was held that the payment of interest was not in the nature of capital expenditure in the year of account. The court held that payment of interest even in respect of capital borrowed for acquiring assets to carry on business must be regarded as revenue expenditure in commercial practice and should not be termed as capital expenditure. Dealing with the application of Section 5(e) it was observed :

'The assessee had bought the plantation for working it as a plantation, i.e., for growing tea, coffee and rubber. The payment of interest on the amount borrowed for the purchase of the plantation when the whole transaction of purchase and the working of the plantation is viewed as an integrated whole, is so closely related to the plantation that the expenditure can be said to be laid out or expended wholly and exclusively for the purpose of the plantation. In this connection, it is pertinent to note that what the Act purports to tax is agricultural income and not agricultural receipts. From the agricultural receipts must be deducted all expenses which in ordinary commercial accounting must be debited against the receipts..... In principle, we do not see any distinction betweeninterest paid on capital borrowed for the acquisition of a plantation and interest paid on capital borrowed for the purpose of existing plantations : both are for the purposes of the plantation.' The test laid down by this court, therefore, was that expenditure made under a transaction which is so closely related to the business that it could be viewed as an integral part of the conduct of the business, may be regarded as revenue expenditure laid out wholly and exclusively for the purposes of the business.'

37. Our attention was also drawn to the decision of the Supreme Court in the case of CIT v. Kirkend Coal Co, : [1970]77ITR530(SC) , where the Supreme Court reiterated its previous observations. Our attention was drawn to the decision of the Madras High Court in the case of CIT v. T.V. Sundaram Iyengar P. Ltd. : [1974]95ITR428(Mad) , upon which reliance was placed by the assessee. This decision, in our opinion, does not throw much light on the controversy involved in the instant case.

38. Having regard to the nature of the expenditure incurred and having regard to the nature of the obligations required to be discharged under the contract, in our opinion, the Tribunal was right in coming to the conclusion as it did. We would, therefore, answer the question in the affirmative and in favour of the assessee.

39. The parties will pay and bear their own costs.

Sudhindra Mohan Guha, J.

40. I agree.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //