Capital expenditure on gravel rights: payments for excavation and removal rights were not deductible as trading expenses.

Payments for an agreement conferring an exclusive right to enter land, excavate gravel, and remove it over an extended period were held to be capital in nature. The agreement did not transfer a legal estate, but it secured the means of obtaining raw material rather than the raw material itself; the gravel remained part of the soil until excavated and was not stock-in-trade in situ. Applying the circulating capital and fixed capital distinction, the rights acquired were capital assets, so the cost was not deductible as revenue expenditure in computing taxable profits.

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Issues: Whether the sums paid for the agreement conferring rights to win and carry away gravel from land were deductible as revenue expenditure laid out wholly and exclusively for the purposes of the trade, or were capital outlay not allowable in computing taxable profits.

Analysis: The agreement did not transfer a legal estate in land, but gave the taxpayers an exclusive right to enter the land, excavate the deposit, and remove the gravel over an extended period. On the facts found, the gravel remained part of the soil until excavated and therefore was not stock-in-trade in situ. The money paid was directed to acquiring the means of obtaining the raw material, not to buying the raw material itself. Applying the distinction drawn in the authorities between circulating capital and fixed capital, the rights obtained were capital assets; the cost of acquiring them was not an expenditure incurred in the ordinary course of trading operations so as to be deductible.

Conclusion: The sums paid under the agreement were capital expenditure and not allowable deductions in computing the taxpayers' income for tax purposes; the appeal succeeded.

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