1944 (12) TMI 5 - HC - Income Tax

Payments for Exclusive Rights to Harra Nut & Lac: Capital vs. Revenue Expenditures

Income-tax Appellate Tribunal Versus Haji Sabumiyan Haji Sirajuddin

Income-tax Appellate Tribunal Versus Haji Sabumiyan Haji Sirajuddin - [1946] 14 ITR 447 (NAG) Issues Involved:1. Nature of the expenditure (capital or revenue) for the payments made by the assessee.2. Interpretation of Section 10(2)(xii) of the Indian Income-tax Act, 1922.3. Applicability of principles from English and Indian case law on capital and revenue expenditure.Issue-wise Detailed Analysis:1. Nature of the Expenditure (Capital or Revenue):The central issue in this case was whether the payments made by the assessee for the exclusive right to collect harra nut and lac from forest trees were capital or revenue expenditures. The assessee argued that these payments were revenue expenditures and should be allowed as deductions under Section 10(2)(xii) of the Indian Income-tax Act, 1922. However, the Income-tax Officer, Appellate Assistant Commissioner, and the Appellate Tribunal determined that these payments constituted capital expenditures and were not permissible deductions.2. Interpretation of Section 10(2)(xii) of the Indian Income-tax Act, 1922:Section 10(2)(xii) allows for the deduction of expenses 'not being in the nature of capital expenditure or personal expenses of the assessee' that are 'laid out or expended wholly and exclusively for the purpose of such business.' The court noted that the expenditure claimed by the assessee was indeed laid out or expended wholly and exclusively for the purpose of the business. The crux of the matter was whether the expenditure was in the nature of capital expenditure, which is prohibited from being deducted.3. Applicability of Principles from English and Indian Case Law:The court examined various tests and principles from both English and Indian case law to determine whether the expenditure was capital or revenue in nature. The court referenced several key cases:- Vallambrosa Rubber Co., Ltd. v. Farmer (1910): Suggested that capital expenditure is spent once and for all, while income expenditure recurs every year. However, this was not decisive in every case.- British Insulated and Helsby Cables v. Atherton (1926): Proposed that expenditure made once and for all with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade should be treated as capital expenditure.- Alianza Company v. Bell (1904): Established that the cost of acquiring raw material for a manufacturing business is not capital expenditure unless the business is akin to working a mine or bed of brick earth.- Kauri Timber Co., Ltd. v. Commissioner of Taxes (1913): Held that acquiring timber rights was a capital expenditure as it involved an interest in land.- Golden Horse Shoe (New), Ltd. v. Thurgood (1934): Distinguished between fixed and circulating capital, determining that the cost of tailings was a revenue expenditure as it was raw material for the business.The court concluded that the principles from Alianza Company v. Bell and Kauri Timber Co., Ltd. were applicable. The right to collect harra nut and lac was considered a right relating to immovable property, and the payments made for acquiring this right were capital expenditures.Conclusion:The court held that the payments made by the assessee were capital expenditures and not revenue expenditures. Therefore, these payments could not be allowed as deductions under Section 10(2)(xii) of the Indian Income-tax Act, 1922. The court's answer to the question referred was that the expenditure was not a revenue expenditure but a capital expenditure, and as such, it could not be allowed as a deduction.