BHAGWATI, J. ----This appeal from the judgment and order
of the High Court of judicature at Calcutta with leave under section 66-A(2) of
the Indian Income-tax Act raises an interesting question as to the line of
demarcation between capital expenditure and revenue expenditure.
On the 14th November, 1938, the appellant company acquired
from the Government of Assam a lease of certain limestone quarries, known as the
Komorrah quarries situated in the Khasi and Jaintia Hills District for the
purpose of carrying on the manufacture of cement. The lease was for 20 years
commencing on the 1st November, 1938, and ending on the 31st October, 1958, with
a clause for renewal for a further term of 20 years. The rent reserved was a
half-yearly rent certain of Rs. 3,000 for the first two years and thereafter a
half-yearly rent certain of Rs. 6,000 with the provision for payment of further
royalties in certain events. In addition to these rents and royalties two
further sums were payable under the special covenants contained in clauses 4 and
5 of the lease as " protection fees ". Under clause 4 the protection
was in respect of another group of quarries called the Durgasil area, the lessor
undertaking not to grant any lease, permit or prospecting licence regarding the
limestone to any other party therein without a condition that no limestone
should be used for the manufacture of cement inconsideration of a sum of Rs.
5,000 payable annually during the whole period of the lease. Under clause 5 a
further protection was given in respect of the whole of the Khasi and Jaintia
Hills District, a similar undertaking being given by the lessor in consideration
of a sum of Rs. 35,000 payable annually but only for 5 years from the 15th
November, 1940.
In the accounting years 1944-45 and 1945-46 the company
paid its lessor sums of Rs. 40,000 in accordance with these two covenants and
computation of its business profits claimed to deduct the sums in the under the
provisions of section 10(2)(xv) of the Income-tax Act in the assessments for the
assessment years 1945-46 and 1946-47. The Income-tax Officer, the Appellate
Assistant Commissioner and the Appellate Triburial rejected the contention of
the company and the following question, as ultimately reframed, was at the
instance of the company referred by the Tribunal to the High Court for its
decision : -
"Whether, in the circumstances of the case, the two
sums of Rs. 5,000 and Rs. 35, 000 paid under clauses 4 and 5 of the deed of the
14th November, 1938, were rightly disallowed as being expenditure of a capital
nature and so not allowable under section 10(2)(xv) of the Indian Income-tax
Act."
The High Court answered the question in the affirmative
and hence this appeal.
Clauses 4 and 5 of the deed of lease may be here set out
:---
" 4. The lessee shall pay to the lessor Rs.5,000
(Rupees five thousand) only annually during the period of the lease on November
15th starting from November 15th, 1938, as a protection fee. In consideration of
that protection fee the lessor undertakes not to allow any person or company any
lease permit or prospecting licence for limestone in the group of quarries as
described in Schedule 2 and delineated in the plan thereto annexed and therein
coloured blue called the Durgasil area without a condition in such lease permit
or prospecting licence that no limestone shall be used for the manufacture of
cement.
5. Besides the above protection fee the lessee shall pay
to the lessor annually the sum of Rs. 35,000 (Rupees thirty-five thousand) only
for five years starting from the 15th day of November, 1940 as a further
protection fee so long as the total amount of limestone quarried by the lessee
in a year does not exceed 22,00,000 maunds per year whether quarried in the area
of this lease or elsewhere or obtained by purchase from other quarries In the
Khasi and Jaintia Hills by the lessees. If, however, in any year the total
amount of limestone converted into cement at the lessee.'s Sylhet factory
exceeds 22,00,000 maunds the lessee will be entitled to an abatement at the rate
of Rs. 20 for every 1,000 maunds quarried in excess of 22,00,000 maunds and the
lessee shall pay the sum of Rs. 35,000 less the abatement calculated on the
basis hereinbefore mentioned. Limestone which is not converted into cement at
the lessee's factory in Sylhet district will not entitle the lessee to any
abatement in the protection fee. The lessor in consideration of the said payment
undertakes not to allow any person or company any lease permit or prospecting
licence for limestone in the whole of Khasi and Jaintia Hills district without a
condition in such lease permit or prospecting licence that no limestone
extracted shall be used directly or indirectly for the manufacture of cement.
The lessor will be empowered to terminate this agreement for the payment of a
protection fee at any time after it has run for 5 years by giving six months'
notice in writing by registered letter addressed to 11, Clive Street, Calcutta,
but the lessee will not be entitled to terminate this agreement during the
currency of the lease except with the consent of the lessor."
It is not clear as to what was meant by the last provision
contained in clause 5, the lessee in the event of his having paid the sum of Rs.
35,000 for the 5 years having nothing else to do but enjoy the benefit of the
covenant on the part of the lessor during the subsequent period of the lease.
This provision is however immaterial for our purposes.
The line of demarcation between capital expenditure and
revenue expenditure is very thin and learned Judges in England have from time to
time pointed out the difficulties besetting that task. Lord Macnaghten in Dovey
v. Cory' administered the following warning :---
"I do not think it desirable for any tribunal to do
that which Parliament has abstained from doing---that is, to formulate precise
rules for the guidance or embarrassment of business men in the conduct of
business affairs. There never has been, and I think there never will be, much
difficulty in dealing with any particular case on its own facts and
circumstances ; and, speaking for myself, I rather doubt the wisdom of
attempting to do more."
Rowlatt, J., also expressed himself much to the same
effect in Countess Warwick Steampship Co. Ltd. v. Ogg :---
" It is very difficult, as I have observed in
previous cases of this kind, following the highest possible authority, to lay
down any general rule which is both sufficiently accurate and sufficiently
exhaustive to cover all or even a great number of possible cases, and I shall
not attempt to lay down any such rule ".
Certain broad tests have however been attempted to be laid
down and the earliest was the one indicated in the following observations of
Bowen, L.J., in the course of the argument in City of London Contract
Corporation v. Styles :
"You do not use it ' for the purpose of ' your
concern, which means, for the purpose of carrying on your concern, but you use
it to acquire the concern."
The expenditure in the acquisition of the concern would be
capital expenditure ; the expenditure in carrying on the concern would be
revenue expenditure.
Lord Dunedin in Vallambrosa Rubber Co. Ltd. v. Farmer
suggested another criterion at page 536 :----
" Now, I don't say that this consideration is
absolutely final or determinative, but in a rough way I think it is not a bad
criterion of what is capital expenditure as against what is income expenditure
to say that capital expenditure is a thing that is going to be spent once and
for all, and income expenditure is a thing that is going to recur every
year."
This test was adopted by Rowlatt, J., in Ounsworth
(Surveyor of Taxes) v. Vickers Limited and after quoting the above passage from
the speech of Lord Dunedin he observed that the real test was between
expenditure which was made to meet a continuous demand for expenditure as
opposed to an expenditure which was made once for all. He however suggested in
the course of his judgment another view-point and that was whether the
particular expenditure could be put against any particular work or whether it
was to be regarded as an enduring expenditure to serve the business as a whole,
thus laying the foundation for the test prescribed by Viscount Cave, L.C., in
Atherton's case.
Atherton v. British Insulated and Helsby Cables Ltd. laid
down what has almost universally been accepted as the test for determining what
is capital expenditure as distinguished from revenue expenditure.
Viscount Cave, L.C., there observed, at page 192 :---
" But there remains the question, which I have found
more difficult, whether apart from the express prohibitions, the sum in question
is (in the words used by Lord Sumner in Usher's case) a proper debit item to be
charged against incomings of the trade when computing the profits of it ; or, in
other words, whether it is in substance a revenue or a capital expenditure. This
appears to me to be a question of fact which is proper to be decided by the
Commissioners upon the evidence brought before them in each case ; but where, as
in the present case, there is no express finding by the Commissioners upon the
point, it must be determined by the Courts upon the materials which are
available and with due regard to the principles which have been laid down in the
authorities. Now, in Vallambyosa Rubber Company v. Farmer, Lord Dunedin, as Lord
President of the Court of Session, expressed the opinion that ' in a rough way '
it was ' not a bad criterion of what is capital expenditure as against what is
income expenditure to say that capital expenditure is a thing that is going to
be spent once and for all and income expenditure is a thing which is going to
recur every year "; and no doubt this is often a material consideration.
But the criterion suggested is not, and was obviously not intended by Lord
Dunedin to be, a decisive, one in every case ; for it is easy to imagine many
cases in which a payment, though made ' once and for all ', would be properly
chargeable against the receipts for the year ........ But when an expenditure is
made, not only once and for all but with a view to bringing into existence an
asset or an advantage for the enduring benefit of a trade, I think that there is
very good reason (in the absence of special circumstances leading to an opposite
conclusion) for treating such an expenditure as properly attributable not to
revenue but to capital. "
Viscount Haldane however in John Smith & Son v. Moore
(Inspector of Taxes), suggested another test and that was the test of fixed or
circulating capital, though even there he observed that it was not necessary to
draw an exact line of demarcation between the fixed and circulating capital. The
line of demarcation between fixed and circulating capital could not be defined
more precisely than in the description of Adam Smith of fixed capital as what
the owner turns to profit by keeping it in his own possession, and circulating
capital as what he makes profit of by parting with it and letting it change
masters.
This test was adopted by Lord Hanworth, M.R., in
Anglo-Persian Oil Co. v. Dale, where he observed :---
" I am inclined to think that the question whether
the money paid is provided from the fixed or the circulating capital comes as
near to accuracy as can be suggested.
Lord Cave's test that where money is spent for an enduring
benefit it is capital, seems to leave open doubts as to what is meant by '
enduring ' ............................
It seems rather that the cases of Hancock' and of Mitchell
v. B. W. Noble, Ltd, and of Mallett v. Staveley Coal & Iron Co." give
illustrations that the test of fixed or circulating capital is the true one ;
and where, as in this case, the expenditure is to bring back into the hands of
the company a necessary ingredient of their existing business---important, but
still ancillary and necessary to the business which they carry on---the
expenditure ought to be debited to the circulating capital rather than to the
fixed capital, which is employed---in and sunk in the permanent---even if
wasting--assets of the business."
This preference of his was reiterated by Lord Hanworth,
M.R., in Golden Horse Shoe (New) Ltd. v. Thurgood (H. M. Inspector of Taxes)
:---
" The above cases serve to establish the difficulty
of the question rather than to affirm any principle to be applied in all cases.
Indeed, in the last case cited, Lord Cave says (10 T. C. at p. 192) that a
payment ' once and for all '---a test which had been suggested by Lord Dunedin
in Vallambrosa Rubber Company v. Farmer---was not true in all cases, and he
found authority for that statement in Smith v. Incorporated Council of Law
Reporting for England and Waless and the Anglo-Persian case already referred to
is another. The test of circulating, as contrasted with fixed capital, is as
good a test in most cases, to my mind, as can be found ; but that involves the
question of fact, was the outlay in the particular case from fixed or
circulating capital ?"
Romer, L.J., at page 300 pointed out the difficulties in
applying this tes also.
"Unfortunately, however, it is not always easy to
determine whether a particular asset belongs to the one category or the other.
It depends in no way upon what may be the nature of the asset in fact or in law.
Land may in certain circumstances be circulating capital. A chattel or a chose
in action may be fixed capital. The determining factor must be the nature of the
trade in which the asset is employed. The land upon which a manufacturer carries
on his business is part of his fixed capital. The land with which a dealer in
real estate carries on his business is part of his circulating capital. The
machinery with which a manufacturer makes the articles that he sells is part of
his fixed capital. The machinery that a dealer in machinery buys and sells is
part of his circulating capital, as is the coal that a coal merchant buys and
sells in the course of his trade. So, too, is the coal that a manufacturer of
gas buys and from which he extracts his gas."
In Van Den Berghs, Limited v. Clark (H. M. Inspector of
Taxes), Lord Macmillan however veered round to Viscount Cave's test and
expressed his disapproval of the test of fixed and circulating capital. He
reviewed the various authorities and stated :
"My Lords, if the numerous decisions are examined and
classified, they will be found to exhibit a satisfactory measure of consistency
with Lord Cave's principle of discrimination."
As regards the test of fixed and circulating capital he
observed at page 432:--
I have not overlooked the criterion afforded by the
economists' differentiation between fixed and circulating capital which Lord
Haldane invoked in John Smith & Son v. Moore' and on which the Court of
Appeal relied in the present case, but I confess that I have not found it very
helpful."
The Privy Council in Tata Hydro-Electric Agencies,
Limited, Bombay v. Commissioner of Income-tax, Bombay Presidency and Aden,
pronounced at page 226 :--
"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 oneself 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 ?"
In the case before them they came to the conclusion that
the obligation to make the payments was undertaken by the appellants in
consideration of their acquisition of the right and opportunity to earn profits,
i.e., of the right to conduct the business and not for the purpose of producing
profits in the conduct of the business. The distinction was thus made between
the acquisition of an income-earning asset and the process of the earning of the
income. Expenditure in the acquisition of that asset was capital expenditure and
expenditure in the process of the earning of the profits was revenue
expenditure. This test really is akin to the one laid down by Bowen, L.J., in
City of London Contract Corporation Ltd. v. Styles'.
Dixon, J., expressed a similar opinion in Sun Newspapers
Limited and the Associated Newspapers Limited v. The Federal Commissioner of
Taxation :---
" But in spite of the entirety different forms,
material and immaterial, in which it maybe expressed, such sources of income
contain or consist in what has been called a ' profit-yielding subject ', the
phrase of Lord Blackburn in United Collieries Ltd. v. Inland Revenue
Commissioners. As general conceptions it may not be difficult to distinguish
between the profit yielding subject and the process of operating it. In the same
way expenditure and outlay upon establishing, replacing and enlarging the
profit-yielding subject may in a general way appear to be of a nature entirely
different from the continual flow of working expenses which are or ought to be
supplied continually out of the returns of revenue. The latter can be
considered, estimated and determined only in relation to a period or interval of
time, the former as at a point of time. For the one concerns the instrument for
earning profits and the other the continuous process of its use or employment
for that purpose."
These are the three criteria adopted for distinguishing
capital expenditure from revenue expenditure though it must be said that
preponderance of opinion is to be found in support of Viscount Cave's test as
laid down in Atherton's case'.
Viscount Cave's test has also been adopted almost
universally in India. Vide Munshi Gulab Singh & Sons v. Commissioner of
Income-tax, Commissioner of Income-tax, Bombay v. Century Spinning, Weaving
& Manufacturing Co. Ltd., Jagat Bus Service, Saharanpur v. Commissioner of
Income-tax, U.P. & Ajmer Merwara, and Commissioner of Income-tax, Bombay v.
Finlay Mills Ltd.
In Commissioner of Income-tax, Bombay v. Century Spinning,
Weaving & Manufacturing Co. Ltd., Chagla, J., observed, at page 116 :----
"The legal touchstone which is almost invariably
applied is the familiar dictum of Viscount Cave in Atherton's case .........
Romer, L.J., felt that this definition had placed the matter beyond all
controversy---see his remarks in the Anglo-Persian Oil Co.'s case. But Lord
Macmillan in Van Den Bergh's case felt that Romer, L.J., had been unduly
optimistic and the learned Law Lord was of the opinion that the question whether
a particular expenditure fell on one side of the line or other was a task of
much refinement. But on the whole I think that the definition of Viscount Cave
is a good working definition ; and if one were to supplement it with the
definition suggested by Mr. Justice Lawrence in Southern v. Borax Consolidated
Ltd., whether an expenditure had in any way altered the original character of
the capital asset, we have a legal principle which can be applied to any set of
given facts."
In Benarsidas Jagannath, In re, a Full Bench of the Lahore
High Court attempted to reconcile all these decisions and deduced the following
broad tests for distinguishing capital expenditure from revenue expenditure. The
opinion of the Full Bench was delivered by Mr. justice Mahajan, as he then was,
in the terms following :
"It is not easy to define the term ' capital
expenditure ' in the abstract or to lay down any general and satisfactory test
to discriminate between a capital and a revenue expenditure. Nor is it easy to
reconcile all the decisions that were cited before us for each case has been
decided on its peculiar facts. Some broad principles can, however, be deduced
from what the learned judges have laid down from time to time. They are as
follows :----
1. 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 : vide Lord Sands in Commissioners of Inland Revenue v.
Granite City Steam ship Company. In City of London Contract Corporation v.
Styles, Bowen, L.J., observed as to the capital expenditure as follows :
' You do not use it " for the purpose of " your
concern, which means, for the purpose of carrying on your concern," but you
use it to acquire the concern.'
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 :
vide Viscount Cave, L. C., in Atherton v. British Insulated and Helsby Cables
Ltd. If what is got rid of by a lump sum payment is an annual business expense
chargeable against revenue, the lump sum payment should equally be regarded as a
business expense, but if the Jump sum payment brings in a capital asset, then
that puts the business on another footing altogether. Thus, if labour saving
machinery was acquired, the cost of such acquisition cannot be deducted out of
the profits by claiming that it relieves the annual labour bill, the business
has acquired a new asset, that is, machinery.
The expressions ' enduring benefit ' or ' of a permanent
character ' were introduced to make it clear that the asset or the right
acquired must have enough durability to justify its being treated as a capital
asset.
3. 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. Again,
it is to be seen whether the expenditure incurred was part of the fixed capital
of the business or part of its circulating capital. Fixed capital is what the
owner turns to profit by keeping it in his own possession. Circulating or
floating capital is what he makes profit of by parting with it or letting it
change masters. Circulating capital is capital which is turned over and in the
process of being turned over yields profit or loss. Fixed capital, on the other
hand, is not involved directly in that process and remains unaffected by it
".
This synthesis attempted by the Full Bench of the Lahore
High Court truly enunciates the principles which emerge from the authorities. In
cases where the expenditure is made for the initial outlay or for extension of a
business or a substantial replacement of the equipment, there is no doubt that
it is capital expenditure. A capital asset of the business is either acquired or
extended or substantially replaced and that outlay whatever be its source
whether it is drawn from the capital or the income of the concern is certainly
in the nature of capital expenditure. The question however arises for
consideration where expenditure is incurred while the business is going on and
is not incurred either for extension of the business or for the substantial
replacement of its equipment. Such expenditure can be looked at either from the
point of view of what is acquired or from the point of view of what is the
source from which the expenditure is incurred. If the expenditure is made for
acquiring or bringing into existence an asset or advantage for the enduring
benefit of the business it is properly attributable to capital and is of the
nature of capital expenditure. If on the other hand it is made not 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 is a revenue
expenditure. If any such asset or advantage for the enduring benefit of the
business is thus acquired or brought into existence it would be 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 is a capital expenditure or a revenue expenditure. The
source or the manner of the payment would then be of no consequence. It is only
in those cases where this test is of no avail that, one may go to the test of
fixed or circulating capital and consider whether the expenditure incurred was
part of the fixed capital of the business or part of its circulating capital. If
it was part of the fixed capital of the business it would be of the nature of
capital expenditure and if it was part of its circulating capital it would be of
the nature of revenue expenditure. These tests are thus mutually exclusive and
have to be applied to the facts of each particular case in the manner above
indicated. It has been rightly observed that in the great diversity of human
affairs and the complicated nature of business operations it is difficult to lay
down a test which would apply to all situations. One has therefore got to apply
these criteria one after the other from the business point of view and come to
the conclusion whether on a fair appreciation of the whole situation the
expenditure incurred in a particular case is of the nature of capital
expenditure or revenue expenditure in which latter event only it would be a
deductable allowance under section 10(2)(xv) of the Income-tax Act. The question
has all along been considered to be a question of fact to be determined by the
Income-tax authorities on an application of the broad principles laid down above
and the Courts of law would not ordinarily interfere with such findings of fact
if they have been arrived at on a proper application of those principles.
The expression " once and for all " used by Lord
Dunedin has created some difficulty and it has been contended that where the
payment is not in a lump sum but in instalments it cannot satisfy the test.
Whether a payment be in a lump sum or by instalments, what has got to be looked
to is the character of the payment. A lump sum payment can as well be made for
liquidating certain recurring claims which are clearly of a revenue nature, and
on the other hand payment for purchasing a concern which is prima facie an
expenditure of a capital nature may as well be spread over a number of years and
yet retain its character as a capital expenditure. (Per Mukherjea, J., in
Commissioner of Income-tax v. Piggot Chapman & Co.) The character of the
payment can be determined by looking at what is the true nature of the asset
which has been acquired and not by the fact whether it is a payment in a lump
sum or by instalments. As was otherwise put by Lord Greene, M. R., in Henriksen
(Inspector of Taxes) v. Grafton Hotel Ltd.:----
'The thing that is paid for is of a permanent quality
although its permanence, being conditioned by the length of the term, is
shortlived. A payment of this character appears to me to fall into the same
class as the payment of a premium on the grant of a lease, which is admittedly
not deductible."
The case of Tata Hydro-Electric Agencies Ltd., Bombay v.
Commissioner of Income-tax, Bombay Presidency and Aden, affords another
illustration of this principle. It was observed there :-----
" If the purchaser of a business undertakes to the
vendor as one of the terms of the purchase that he will pay a sum annually to a
third party, irrespective of whether the business yields any profits or not, it
would be difficult to say that the annual payments were made solely for the
purpose of earning the profits of the business ".
The expression " once and for all " is used to
denote an expenditure which is made once and for all for procuring an enduring
benefit to the business as distinguished from a recurring expenditure in the
nature of operational expenses.
The expression " enduring benefit " also has
been judicially interpreted. Romer, L. J., in Anglo-Persian Oil Company, Limited
v. Dale, agreed with Rowlatt, J., that by enduring benefit is meant enduring in
the way that fixed capital endures.
"An expenditure on acquiring floating capital is not
made with a view to acquiring an enduring asset. It is made with a view to
acquiring an asset that may be turned over in the course of trade at a
comparatively early date."
Latham, C. J., observed in Sun Newspapers Ltd. &
Associated New Papers Ltd. v. Federal Commissioner of Taxation :
" When the words ' permanent ' or ' enduring ' are
used in this connection it is not meant that the advantage which will be
obtained will last for ever. The distinction which is drawn is that between more
or less recurrent expenses involved in running a business and an expenditure,
for the benefit of the business as a whole "........... e.g .........
--" enlargement of the goodwill of a company "---" permanent
improvement in the material or immaterial assets of the concern."
To the same effect are the observations of Lord Greene, M.
R., in Henriksen (H. M. Inspector of Taxes) v. Grafton Hotel Ltd. above referred
to.
These are the principles which have to be applied in order
to determine whether in the present case the expenditure incurred by the company
was capital expenditure or revenue expenditure. Under clause 4 of the deed the
lessors undertook not to grant any lease, permit or prospecting licence
regarding limestone to any other party in respect of the group of quarries
called the Durgasil area without a condition therein that no limestone shall be
used for the manufacture of cement. The consideration of Rs. 5,000 per annum was
to be paid by the company to the lessor during the whole period of the lease and
this advantage or benefit was to enure for the whole period of the lease. It was
an enduring benefit for the benefit of the whole of the business of the company
and came well within the test laid down by Viscount Cave. It was not a lump sum
payment but was spread over the whole period of the lease and it could be urged
that it was a recurring payment. The fact however that it was a recurring
payment was immaterial, because one had got to look to the nature of the payment
which in its turn was determined by the nature of the asset which the company
had acquired. The asset which the company had acquired in consideration of this
recurring payment was in the nature of a capital asset, the right to carry on
its business unfettered by any competition from outsiders within the area. It
was a protection acquired by the company for its business as a whole. It was not
a part of the working of the business but went to appreciate the whole of the
capital asset and make it more profit yielding. The expenditure made by the
company in acquiring this advantage which was certainly an enduring advantage
was thus of the nature of capital expenditure and was not an allowable deduction
under section 10(2)(xv) of the Income-tax Act.
The further protection fee which was paid by the company
to the lessor under clause 5 of the deed was also of a similar nature. It was no
doubt spread over a period of 5 years, but the advantage which the company got
as a result of the payment was to enure for its benefit for the whole of the
period of the lease unless determined in the manner provided in the last part of
the clause. It provided protection to the company against all competitors in the
whole of the Khasi and Jaintia Hills District and the capital asset which the
company acquired under the lease was thereby appreciated to a considerable
exent. The sum of Rs. 35,000 agreed to be paid by the company to the lessor for
the period of 5 years was not a revenue expenditure which was made by the
company for working the capital asset which it had acquired. It was no part of
the working or operational expenses of the company. It was an expenditure made
for the purpose of acquiring an appreciated capital asset which would no doubt
by reason of the undertaking given by the lessor make the capital asset more
profit yielding. The period of 5 years over which the payments were spread did
not make any difference to the nature of the acquisition. It was none the less
an acquisition of an advantage of an enduring nature which enured for the
benefit of the whole of the business for the full period of the lease unless
terminated by the lessor by notice as prescribed in the last part of the clause.
This again was the acquisition of an asset or advantage of an enduring nature
for the whole of the business and was of the nature of capital expenditure and
thus was not an allowable deduction under section 10(2)(xv) of the Act.
We are therefore of the opinion that the conclusion
reached by the Income-tax authorities as well as the High Court in regard to the
nature of the payments was correct and the sums of Rs. 40,000 paid by the
company to the lessors during the accounting years 1944-45 and 1945-46 were not
allowable deductions under section 10(2)(xv) of the Act.
The appeal therefore fails and must be dismissed with
costs.
Appeal dismissed.
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