Forest rights payments treated as capital expenditure where the agreements acquired the source of profit itself.

Payments made for the exclusive forest rights to collect harra nut and lac were treated as capital expenditure because the agreements conferred a profit a prendre and a right in immovable property, not a mere purchase of raw material for an existing business. Applying the tests of acquisition of an asset and enduring advantage, the court held that the payments acquired the source of profit itself. Authorities on land, timber, and similar forest or mineral rights were applied, while cases treating such payments as raw material cost were distinguished. The amounts were therefore not deductible under Section 10(2)(xii) of the Indian Income-tax Act, 1922.

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Issues: Whether the payments made under the forest agreements for the exclusive right to collect harra nut and lac during the contract periods were revenue expenditure deductible under Section 10(2)(xii) of the Indian Income-tax Act, 1922, or capital expenditure.

Analysis: The right acquired under the agreements was not a mere purchase of raw material for an existing business. It was a right in immovable property amounting to a benefit arising out of land and a profit a prendre. Applying the principles governing capital and revenue expenditure, especially the tests of acquisition of an asset or enduring advantage and the nature of the right obtained, the price paid for obtaining the forest rights was held to be expenditure incurred to acquire the source of profit itself. The cases relied on for treating the payments as raw material cost were distinguished, and the principles applied in authorities dealing with acquisition of land, timber rights, and similar forest or mineral rights were held to govern the matter.

Conclusion: The payments were capital expenditure and were not allowable as a deduction under Section 10(2)(xii) of the Indian Income-tax Act, 1922.

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