1984 (12) TMI 7 - HC - Income Tax

Annual rent for excavation lease held as capital expenditure not deductible in computing business profit.

The High Court held that the annual rent paid by the assessee for a lease agreement allowing excavation activities constituted capital expenditure for ... Estate Duty, Property Passing On Death Issues Involved:1. Whether the sum of Rs. 10,752 paid by the assessee as annual rent is allowable as a deduction in computing the business profit.2. Whether the expenditure incurred by the assessee is of a capital nature or revenue nature.Summary:Issue 1: Deductibility of Annual Rent as Business ExpenditureThe assessee, a company, entered into a lease agreement for 25.6 acres of land for excavation purposes, paying an annual rent of Rs. 10,752. The Income-tax Officer disallowed the deduction of this rent as business expenditure, considering it capital expenditure for acquiring an asset or advantage of enduring benefit. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal upheld this view, referencing the Supreme Court decision in Pingle Industries Ltd. v. CIT [1960] 40 ITR 67. The Tribunal referred the question to the High Court for opinion under section 256(2) of the Income-tax Act, 1961.Issue 2: Nature of Expenditure - Capital or RevenueThe High Court examined the lease agreement, which allowed the assessee to use the land for excavation and related activities. The court noted that the lease was for the purpose of winning manganese ore, and the rent paid was for the right to excavate the land, not for securing stock-in-trade. The court found that the lease conferred an enduring benefit, making the expenditure capital in nature. The court referenced the Supreme Court's decisions in Pingle Industries' case and R. B. Seth Moolchand Suganchand v. CIT [1972] 86 ITR 647, which held that rent paid for acquiring rights to excavate and obtain raw materials was capital expenditure.The court also considered the decisions in Golan Lime Syndicate v. CIT [1966] 59 ITR 718 and M.L.A. Jabbar v. CIT [1968] 68 ITR 493, where the Supreme Court allowed royalty payments as revenue expenditure due to their direct relationship with the quantity obtained. However, the court found these cases inapplicable to the present case.The court further referenced Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, emphasizing that the nature of the advantage in a commercial sense determines whether the expenditure is capital or revenue. The court concluded that the expenditure incurred by the assessee was for acquiring an asset or advantage of enduring character, thus capital in nature.Conclusion:The High Court held that the Tribunal was correct in concluding that the lease amount paid by the assessee is not allowable as business expenditure. The question was answered in the affirmative, in favor of the Revenue and against the assessee. The court also rejected the assessee's oral request for leave to appeal to the Supreme Court.