Short-term lease payments for raw material rights treated as revenue expenditure, not capital outlay, in manufacturing business.

Short-term lease payments made to obtain rights to collect salt-bearing earth and extract crude saltpetre in an existing manufacturing business were treated as revenue expenditure, not capital expenditure. Because the leases were recurrent, lasted only about one to two years, and were used merely to secure raw material for production, the outlay was regarded as part of circulating capital and a working expense of the trade. The payments did not acquire a fixed asset or an enduring benefit, and they formed part of the cost of production rather than the price of acquiring business assets. They were therefore deductible in computing business profits.

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Issues: Whether the amount paid under short-term leases for the right to collect salt-bearing earth and extract crude saltpetre was capital expenditure or revenue expenditure deductible in computing business profits.

Analysis: The business was a manufacturing business carried on through repeated short-term leases, each lasting about one to two years, and the land acquired under the leases was used only to obtain raw material for the manufacture of crude saltpetre, which was then converted into the finished products. The payments were made out of circulating capital in the course of an existing business, not to acquire the business itself or any asset of enduring benefit. The leases did not create a fixed capital asset, and the expenditure formed part of the cost of production of the finished goods rather than the acquisition price of raw material already won and ready for sale. The nature of the transactions, their recurrent character, and the short duration of the rights acquired showed that the outlay was a working expense of the trade.

Conclusion: The lease payments were not capital expenditure and were deductible as revenue expenditure under Section 10(2)(ix) of the Income Tax Act, 1922.

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