Revenue expenditure for raw material access was deductible where saltpetre arrangements did not create a capital asset.

An outlay incurred to obtain crude saltpetre deposits for an existing manufacturing business was treated as revenue expenditure, because it was connected with securing raw material for production and did not create a capital asset or enduring advantage. The commercial substance of the arrangement, rather than the label of a lease or its duration, was decisive. Applying the earlier Full Bench principle on similar saltpetre transactions, the expenditure was held to form part of the cost of production and was allowable as a deduction under Section 10(2)(xii) of the Income-tax Act, 1922.

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Issues: Whether the money spent in acquiring the so-called leases over lands containing crude saltpetre deposits was capital expenditure or revenue expenditure deductible in computing the assessee's business income.

Analysis: The expenditure was held to be connected with the carrying on of an existing manufacturing business and not with the acquisition of the business itself. The transaction, on its true construction, was treated as one for obtaining raw material for manufacture and not as creating a capital asset or enduring advantage. The duration of the arrangements did not alter their essential character, because the decisive consideration was the commercial nature of the outlay and the true substance of the documents rather than their label. The earlier Full Bench principle governing similar saltpetre transactions was applied, and the Court accepted that the amounts formed part of the cost of production.

Conclusion: The expenditure was revenue expenditure and was allowable as a deduction under Section 10(2)(xii) of the Income-tax Act, 1922.

Final Conclusion: The reference was answered in favour of the assessee, and the Tribunal's view allowing the deduction was affirmed.

Ratio Decidendi: An outlay incurred to obtain raw material for an existing manufacturing business is revenue expenditure, even if the arrangement is described as a lease, where the substance of the transaction does not create a capital asset.

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