1953 (4) TMI 28 - HC - Income Tax

High Court rules chank shell fishing payment as revenue expenditure under Section 10

K.T.M.T.M. Abdul Kayoom and Hussain Sahib Versus Commissioner of Income-Tax, Madras

K.T.M.T.M. Abdul Kayoom and Hussain Sahib Versus Commissioner of Income-Tax, Madras - [1953] 24 ITR 116 Issues Involved:1. Whether the payment of Rs. 6,111 made by the assessee under the agreement with the Director of Industries and Commerce, Madras, was a revenue expenditure or capital expenditure.2. Applicability of the principles laid down in the Judicial Committee's decision in Mohanlal Hargovind v. Commissioner of Income-tax, C.P. & Berar [1949] 17 I.T.R. 473.3. Distinction between capital expenditure and revenue expenditure in the context of business operations.4. Whether the right to collect chanks from the sea constitutes an interest in immovable property.Issue-wise Detailed Analysis:1. Revenue Expenditure vs. Capital Expenditure:The primary issue was whether the payment of Rs. 6,111 made by the assessee for the exclusive right to fish for chank shells was a revenue expenditure or capital expenditure. The Income-tax Officer treated it as capital expenditure and disallowed the deduction. This decision was upheld by the Assistant Commissioner and the Tribunal, which felt bound by the earlier Full Bench decision in Abdul Kayum Sahib Hussain v. Commissioner of Income-tax [1939] 7 I.T.R. 652. The Tribunal referred the question to the High Court for clarification.2. Applicability of Judicial Committee's Decision:The assessee's counsel argued that the decision in Mohanlal Hargovind v. Commissioner of Income-tax, C.P. & Berar [1949] 17 I.T.R. 473 overruled the Full Bench decision in Abdul Kayum Sahib Hussain's case. The Judicial Committee in Mohanlal's case held that payments for acquiring tendu leaves under short-term contracts were revenue expenditures, as the contracts conferred no interest in land or trees but merely the right to pick and carry away the leaves.3. Distinction Between Capital and Revenue Expenditure:The Court discussed various principles and tests to distinguish between capital and revenue expenditure. The key test, as formulated by Viscount Cave in Atherton's case [1926] A.C. 205, is whether the expenditure brings into existence an asset or advantage for the enduring benefit of the trade. It was emphasized that expenditure on circulating capital (stock-in-trade) is revenue expenditure, while expenditure on fixed capital (assets used in the business) is capital expenditure.4. Interest in Immovable Property:The Court examined whether the right to collect chanks constituted an interest in immovable property, similar to a right of fishery. It concluded that the right to collect chanks did not confer an interest in immovable property and thus did not fall within the exception contemplated by the Judicial Committee in Mohanlal's case.Conclusion:The High Court concluded that the payment of Rs. 6,111 was revenue expenditure. The Court reasoned that the right to collect chanks was akin to purchasing goods (chanks) and not acquiring a source from which the goods emanated. The expenditure was for acquiring stock-in-trade and not a capital asset. Therefore, the payment was deductible under Section 10 of the Indian Income-tax Act. The reference was answered in favor of the assessee, and the petitioner was entitled to costs of Rs. 250.