Profit-linked mining payment treated as deductible revenue expenditure where it formed part of business consideration and no estoppel applied.

A payment quantified as 10 per cent of net profits was treated as expenditure, not a distribution of business profits, because it formed part of the consideration for the right to work the mineral deposits and was merely measured by profits. It was held to be revenue expenditure, since it was incurred to obtain mineral sand used as trading stock in the ordinary course of business and was laid out wholly for business purposes. No estoppel prevented the assessee from claiming deduction, as the description of the liability did not alter its true legal character for income-tax purposes.

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Issues: (i) Whether the payment of 10 per cent of the company's net profits to Government was an expenditure or a share of business profits, (ii) whether that payment was capital expenditure or revenue expenditure and allowable as an outlay wholly for the purposes of business, and (iii) whether the assessee was estopped from claiming deduction of the amount.

Issue (i): Whether the payment of 10 per cent of the company's net profits to Government was an expenditure or a share of business profits.

Analysis: The payment was made under the commercial arrangement governing the mining operations and formed part of the consideration for the right to work the mineral deposits. The reference to net profits was only the mode adopted for quantifying the liability. Its character had to be judged by the true nature of the arrangement and not by the label attached to it. On that construction, the payment was not a division of profits after they had arisen, but an outgoing incurred in the course of carrying on the business.

Conclusion: The payment was an expenditure and not a share in the profits of the business.

Issue (ii): Whether that payment was capital expenditure or revenue expenditure and allowable as an outlay wholly for the purposes of business.

Analysis: The expenditure was incurred to obtain the sand which was mined, purified and sold in the ordinary course of the business. The mineral sand formed stock-in-trade or circulating capital and not a fixed capital asset. A payment made to secure the raw material for trading operations was therefore on revenue account, and it satisfied the statutory requirement of being laid out wholly for the purposes of the business.

Conclusion: The payment was revenue expenditure and an allowable deduction.

Issue (iii): Whether the assessee was estopped from claiming deduction of the amount.

Analysis: No material was shown to create any estoppel against the assessee. The mere manner in which the liability had been described did not preclude the assessee from asserting its true legal character for income-tax purposes.

Conclusion: The assessee was not estopped from claiming the allowance.

Final Conclusion: The reference was answered in favour of the assessee, with the disputed 10 per cent payment treated as a deductible business outgo rather than a non-allowable distribution of profits.

Ratio Decidendi: A payment measured by profits may still be deductible expenditure if, on the true construction of the commercial arrangement, it is part of the consideration for carrying on the business and is incurred on revenue account in obtaining trading stock or other circulating capital.

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