Revenue expenditure: payments for short-term leases to obtain raw saltpetre treated as deductible under Section 10(2)(xii).

Whether payments for acquiring lease/licence rights to lands producing crude saltpetre are revenue-deductible under Section 10(2)(xii) was resolved by applying the capital-versus-revenue test focused on purpose and commercial character. The Tribunal's factual findings - that transactions granted only licence to remove recurring saltpetre crops, did not create proprietary or enduring land rights, and amounted to acquiring raw material equivalents - placed the payments within ordinary production costs. Outcome: payments held revenue expenditure deductible under Section 10(2)(xii) in favour of the assessee.

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Issues: Whether, on the facts found by the Tribunal, the moneys spent in acquiring the leases of lands containing deposits of crude saltpetre are revenue expenditure deductible under Section 10(2)(xii) of the Income-tax Act.

Analysis: Apply the established test distinguishing capital from revenue expenditure by reference to the purpose of the outlay and the commercial character of the transaction. Where payments are made in the ordinary course of a manufacturing business to obtain the raw material or its equivalent supply for conversion into finished product, such payments form part of production costs and are revenue in nature. Prior Full Bench authority applied identical principles to saltpetre manufacture where short-term rights to collect recurring deposits were treated as acquisition of raw material rather than acquisition of a business or enduring asset. The Tribunal found, on documental inspection and the factual matrix, that the so-called leases in substance effected recurring transfers of the salt-bearing earth or the biannual saltpetre crop and granted only a licence to enter to remove it; the transactions did not create proprietary or enduring rights in the land nor constitute the acquisition of a wasting asset. These findings bring the payments within ordinary trade expenditure incurred in obtaining raw material and within the scope of Section 10(2)(xii).

Conclusion: The moneys spent on acquiring the lease/licence rights to obtain crude saltpetre are revenue expenditure deductible under Section 10(2)(xii) of the Income-tax Act; conclusion is in favour of the assessee.

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