Revenue expenditure on tendu leaf supply contracts deductible as raw material cost, not capital outlay.

Expenditure incurred under short-term contracts to obtain tendu leaves for bidi manufacture was revenue in nature because the contracts conveyed only a right to collect and remove raw material, without any interest in land, trees or plants. The outlay was directed to acquiring stock-in-trade for the business rather than an enduring asset or capital structure, so it was deductible in computing business profits. Distinguishing cases involving mines, quarries and standing timber, the Privy Council held that the business sense of capital expenditure did not extend to the cost of procuring consumable material in this way.

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Issues: Whether the expenditure incurred in obtaining tendu leaves under short-term contracts for use as raw material in the bidi business was capital expenditure or revenue expenditure deductible in computing business profits.

Analysis: The contracts did not transfer any interest in land, trees, or plants. They merely conferred the right to collect and remove leaves, which were the raw material of the business. The expenditure was incurred wholly and exclusively for the purpose of the business and was directed to the acquisition of stock-in-trade, not to the acquisition of an enduring asset or capital structure. The Court distinguished cases involving mines, quarries, standing timber, or other interests in land, and held that the business sense of capital expenditure did not extend to the cost of obtaining a supply of consumable material under such arrangements.

Conclusion: The expenditure was revenue expenditure and was deductible under the statutory allowance provision; the answer was in favour of the assessee.

Ratio Decidendi: Expenditure incurred to acquire consumable raw material for a business under short-term supply contracts, without acquiring any interest in land or an enduring asset, is revenue expenditure and not capital expenditure.

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