"...there have been since many cases where this matter of capital or income has been debated. There have been many cases which fall upon the borderline : indeed, in many cases it is almost true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons." (Vide Commissioners of Inland Revenue v. British Salmson Aero Engines Ltd.
Perhaps, the case before us is not as bad as the cases which the Master of the Rolls had in mind when he made the above observations. It is, however, a truism that each case must turn upon its own facts. Nevertheless the decisions are useful as illustrations of some relevant general principles. The nearest illustration that we can get is the decision of the Privy Council in Mohanlal Hargovind v. Commissioner of Income-tax. That decision was binding on the Indian courts at the time when it was given and as I think that it is still good law and is indistinguishable from the present case, I offer no apology for referring to it in great detail. The facts of that case were these. The assessees there carried on a business at several places as manufacturers and vendors of country-made cigarettes known as bidis. These cigarettes were composed of tobacco rolled in leaves of a tree known as tendu leaves, which were obtained by the assessees by entering into a number of short term contracts with the Government and other owners of forests. Under the contracts, in consideration of a certain sum payable by instalments, the assessees were granted the exclusive right to pick and carry away the tendu leaves from the forest area described. The assessees were allowed to coppice small tendu plants a few months in advance to obtain good leaves and to pollard tendu trees a few months in advance to obtain better and bigger leaves. The picking of the leaves however had to start at once or practically at once and to proceed continuously. On these essential facts, the Privy Council held that contracts were entered into by the assessees wholly and exclusively for the purpose of supplying themselves with one of the raw materials of their business, that they granted no interest in land, or in the trees or plants, that under them it was the tendu leaves and nothing but the tendu leaves that were acquired, that the right to pick the leaves or to go on to the land for the purpose was merely ancillary to the real purpose of the contracts and if not, expressed would be implied by law in the sale of a growing crop, and that therefore the expenditure incurred in acquiring the raw material was in a business sense an expenditure on revenue account and not on capital, just as much as if e in business. On November 9, 1945, it took on lease from the Director of Industries and Commerce, Madras, the exclusive right, liberty and authority to fish for, take and carry away all " chank " shells in the sea off the coast line of the' South Arcot District including the French Kuppams of Pondicherry. The boundary of the area within which the right could be exercised was given in a schedule to the lease. The lease was for a period of three years from July 1, 1944, to June 30, 1947, on a consideration of an yearly rent of Rs. 6,111 to be paid in advance. Clause 3 of the lease contained the material terms thereof and may be set out in full.
" 3. The lessee hereby covenants with the lessor as follows :
(i) To pay the rent on the day and in the manner aforesaid.
(ii) To deliver to the Assistant Director of Pearl and Chank Fisheries, Tuticorn, all Valampiri shells that may be obtained by the lessee upon payment of their value as determined by the Assistant Director.
(iii) To collect chanks caught in nets and by means of diving as well. In the process of such collection of shells not to fish chanks shells less than 2 1/4 inches in diameter and if any chank shells less than 2 1/4 inches in diameter be brought inadvertently to shore, to return at once alive to the sea all such undersized shells.
(iv) Not at any time hereafter to transfer or underlet or part with possession of this grant or the rights and privileges hereby granted or any part thereof without the written consent of the lessor.
(v) At the end or sooner determination of the term hereby created peaceably and quietly to yield to the lessor the rights and privileges hereby granted, and
(vi) To report to the Assistant Director of Pearl and Chank Fisheries (South), Tuticorin the actual number of shells kept unsold in different stations after the expiry of the lease period.
For the assessment year 1946-47, the respondent firm submitted a return of its income to the Income-tax Officer, Karaikudi Circle, showing its income from sale of chanks purchased from divers at Rs. 7,194, by sale of chanks purchased from Government Department at Rs. 23,588 and Rs. 2,819 by sale of chanks gathered by themselves (through divers) after deducting Rs. 6,111 being the rent paid to Government under the contract referred to above. It sought to deduct Rs. 6,111 from its profits from business on the ground that this was an expenditure not of a capital nature but wholly and exclusively laid out for the purpose of business under section 10(2)(xv) of the Income-tax Act. This claim was disallowed by the Income-tax Officer and on appeal by the Appellate Assistant Commissioner. On further appeal to the Appellate Tribunal the respondent firm contended that the decision of the Privy Council in Mohanlal Hargovind v. Commissioner of Income-tax applied to this case inasmuch as the payment was to secure the stock-in-trade for its business. The Appellate Tribunal was of the opinion that the Privy Council decision covered the case, but felt itself bound by the decision of the Full Bench of the Madras High Court in Abdul Kayum Sahib Hussain Sahib v. Commissioner of Income-tax. The Tribunal acceded to the demand for a reference to the High Court, and accordingly referred the following question to the High Court for its decision :
" Whether on the facts and circumstances of the case the payment of the sum of Rs. 6,111 made by the assessee under the terms of the agreement entered into with the Director of Industries and Commerce, Madras, on 9th November, 1945, was not an item of revenue expenditure incurred in the course of carrying on the business of the assessee and, therefore, allowable under the provisions of section 10 of the Indian Income-tax Act ? "
The reference first came before a Division Bench and was then referred to a Full Bench. By its judgment dated April 2, 1953, the Full Bench answered the question in favour of the respondent firm. On a certificate of fitness granted by the High Court, the Commissioner of Income-tax, Madras, brought the present appeal to this court.
In Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax this court referred to the decision in Benarsidas Jagannath, In re and accepted the following broad principles for the purpose of discriminating between a capital and a revenue expenditure.
(1) The outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment. (See Commissioners of Inland Revenue v. Granite City Steamship Company Ltd.). Such expenditure is regarded as on capital account, for it is incurred not in earning profits but in setting the profit-earning machinery in motion. In my opinion this test does not apply in the present case where no profit-earning machinery was set in motion.
(2) Expenditure may be treated as properly attributable to capital when it 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 (See Atherton v. British Insulated and Helsby Cables Ltd.). In elucidation of 'this principle it has been laid down in several decisions that by, " enduring " is meant " enduring in the way that fixed capital endures " and it does not connote a benefit that endures in the sense that for a good number of years it relieves the assessee of a revenue payment. In Robert Addie and Sons Collieries Ltd. v. Commissioners of Inland Revenue Lord Clyde formulated the same test in these words :
" What is ' money wholly and exclusively laid out for the purposes of the trade ' is a question which must be determined upon the principles of ordinary commercial trading. It is necessary accordingly to attend to the true nature of the expenditure, and to ask one's self the question, is it a part of the company's working expenses ?--is it expenditure laid out as part of the process of profit-earning ?--or, on the other hand, is it a capital outlay ?--is it expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all ? "
This test was adverted to by the Privy Council in Tata Hydro Electric Agencies Ltd. v. Commissioner of Income-tax. In my opinion the application of this test makes it at once clear that the sum of Rs. 6,111 which the respondent firm spent was expenditure laid out as part of the process of profit-earning ; it was not a capital outlay, that is, expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which was a condition of carrying on its trade. Under the contract in question the respondent firm did not acquire any right to immovable property. It acquired no right in the bed of the sea or in the sea. The only right conferred on the respondent firm was the right to fish for, gather and carry away conch shells (in motion under the surface of the sea) of a specified type and size. The respondent firm was under an obligation to return to the sea conch shells less than 2 1/4 inches in diameter. The business of the respondent firm consisted in buying and selling conch shells. No manufacturing process was involved in it. Therefore, the stock-in-trade of the respondent firm was conch shells. It secured this stock-in-trade in many different ways, by purchase from divers, by purchase from Government and private parties, and also by gathering conch shells under the contract in question. In my opinion, the contract into which the respondent firm entered was merely for securing its stock-in-trade. It is indeed true that in considering whether an item of expenditure is of a capital or a revenue nature, one must consider the nature of the concern, the ordinary course of business usually adopted in that concern, and the object with which the expense is incurred. The true nature of the transaction must be collected from the entire document with reference to all the relevant facts and circumstances. Having regard to the nature of the respondent firm's business and the course adopted by it for carrying it on, it appears to me to be rather far-fetched to hold that by the contract in question the respondent firm acquired property or right of a permanent character, the possession of which was a condition of carrying on its trade. To me it seems that the better view, in a business sense, is that the respondent firm merely acquired by means of the contract its stock-in-trade, rather than a source or enduring asset for producing the stock-in-trade.
It was argued before us, as it was argued in the High Court, that what was acquired in the present case was the means of obtaining the stock-in-trade for the business rather than the stock-in-trade itself. I am unable to accept this argument as correct. The contract entered into by the respondent firm was wholly and exclusively for the purpose of obtaining conch shells, which were its stock-in-trade. As I have stated earlier, the contract granted no interest in the sea, sea bed, or sea water etc. It was simply a contract giving the grantee the right to pick and carry away conch shells of a specified type and size which of course implied the right to appropriate them as its own property. In my opinion, in a case of this nature no distinction can be drawn in a business sense between the right of picking and carrying away conch shells and the actual buying of them. It is not unusual for business men to secure, by means of a contract, a supply of raw materials or of goods which form their stock-in-trade, extending over several years for the payment of a lump sum down. Even if the conch shells were stored in a godown and the respondent firm was given a right to go and fetch them and so reduce them into its ownership, it could scarcely have been suggested that the price paid was capital expenditure. I may explain what I have in mind by giving a simple illustration. Take the case of a fisherman who sells fish. Fish is his stock-in-trade. He may buy the fish he requires from other persons ; or he may obtain the supply of fish he requires by catching the fish of a specified size and type in particular waters over a short period under a contract entered into by him and take them away. I do not think that in a business sense any distinction can be made between the two means of obtaining the stock-in-trade. Both really amount to securing the stock-in-trade rather than acquiring an enduring asset or a permanent right for producing the stock-in-trade. And a business man, like the fisherman in the illustration given above, would indeed be surprised to learn that buying of fish for his business is revenue expenditure whereas catching fish in particular waters under a contract entered into by him for the purpose of obtaining his stock-in-trade on payment of a lump sum down, is capital expenditure.
(3) The test whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business does not arise in the present case and need not be considered.
No different principles were laid down by my learned brethren in their decision in Pingle Industries Ltd. v. Commissioner of Income-tax and so far as that case is concerned, their decision must hold the field. The difficulty and difference of opinion that arise now relate to the application of those principles to the facts of the present case.
One is reminded in this case of what Lord Macmillan said in Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax at page 209 :
"Their Lordships recognise and the decided cases show how difficult it is to discriminate between expenditure which is and expenditure which is not, incurred solely for the purpose of earning profits or gains."
Lord Greene (Master of the Rolls) expressed himself more strongly and