Capitalisation of lease payments: payments for enduring forest rights are capital, not deductible as revenue expenditure.

Whether payments under three forest leases qualified as deductions under section 10(2)(xv) was resolved by treating the payments as capital outlay where leases conferred enduring proprietary rights. The court applied the principle that rights to allow standing produce to continue growth, to graze, erect works, establish factories and sublet indicate acquisition of an interest in land rather than purchase of consumable goods; where the lessee's removal right is not coextensive with the lease and benefits from future growth accrue to the lessee, the payment is capital and not deductible as revenue expenditure.

---

---

Issues: Whether the amounts paid under the terms of the three forest leases constituted expenses admissible as deductions under section 10(2)(xv) of the Income-tax Act, 1961.

Analysis: The leases granted rights to cut and appropriate a wide range of forest produce, to graze cattle, to establish related works and to sublet, with no obligation of immediate removal of produce. The absence of an obligation for immediate severance, combined with the right to allow standing produce to derive sustenance from the soil and to acquire ancillary rights (grazing, erection of shelters, establishing factories, subletting), indicates acquisition of enduring rights rather than mere purchase of consumable raw material. Precedents distinguishing contracts for sale of goods from acquisitions of interests in land emphasise whether benefits from future growth accrue to the lessee and whether the right of removal is coextensive with the lease term. Where the lessee acquires rights that enable continued growth and accretion of the produce as part of the property, the payment is properly characterised as capital outlay for an asset of enduring nature rather than revenue expenditure for stock-in-trade.

Conclusion: The amounts paid under the leases are not deductible under section 10(2)(xv) as revenue expenditure; they are capital in nature. The question is answered in the negative, against the assessee.

---