1960 (4) TMI 5 - SC - Income Tax

Supreme Court: Lease Payments for Enduring Asset are Capital Expenditure

The Supreme Court held that the lease money paid by the appellant to Nawab Mehdi Jung Bahadur and the Government constituted capital expenditure, as it ... Whether the lease money paid by the assessee company to Nawab Mehdi Jung Bahadur and to Government is capital expenditure or revenue expenditure? Held that:- We are satisfied that in this case the assessee acquired by his long term lease a right to win stones, and the leases conveyed to him a part of land. The stones in situ were not his stock-in-trade in a business sense but a capital asset from which after extraction he converted the stones into his stock-in-trade. The payment, though periodic in fact, was neither rent nor royalty but a lump payment in instalments for acquiring a capital asset of enduring benefit to his trade. In this view of the matter, the High Court was right in treating the outgoings as on capital account. In the result, the appeal fails, and will be dismissed with costs. Issues Involved:1. Whether the lease money paid by the assessee company to Nawab Mehdi Jung Bahadur and to the Government is capital expenditure or revenue expenditure.Issue-wise Detailed Analysis:1. Nature of Lease Money: Capital or Revenue ExpenditureThe appellant, a private limited company, engaged in the business of extracting and selling Shahabad stones, entered into a contract with Nawab Mehdi Jung Bahadur for the right to excavate stones from quarries in six villages for twelve years. The contract stipulated an annual payment of Rs. 28,000, with Rs. 96,000 paid upfront as security and the balance paid in monthly installments. The appellant also had a similar five-year contract with the Government for Rs. 9,000 per year. The primary question was whether these payments were capital or revenue expenditure.The Income-tax Appellate Tribunal initially held that the payments were revenue expenditure, akin to royalties or dead rent, which are allowable as working expenses in the case of mines and quarries. The Tribunal reasoned that the payments were for acquiring raw materials rather than an asset of enduring benefit.The High Court, however, disagreed, holding that the payments were capital expenditure. The High Court's decision was based on the nature of the contract, which provided an exclusive right to extract stones, thereby creating an enduring asset.In the Supreme Court, the majority opinion upheld the High Court's decision, emphasizing that the payments were for acquiring a capital asset of enduring benefit. The Court noted that the contract provided the appellant with an exclusive and long-term right to extract stones, which constituted a capital asset rather than merely purchasing raw materials. The periodic payments were seen as installments for acquiring this asset, not as recurring business expenses.The dissenting opinion argued that the payments were revenue expenditure, focusing on the business aspect of the transaction. It was contended that the contract was essentially for acquiring raw materials, and the payments should be treated as revenue expenditure.The Supreme Court's majority judgment concluded that the payments were capital expenditure, as they were made to acquire a source of raw materials, which is an enduring asset. The Court distinguished this case from others where payments were considered revenue expenditure, noting the long-term and exclusive nature of the contract.Conclusion:The Supreme Court, by a majority, held that the lease money paid by the assessee to Nawab Mehdi Jung Bahadur and the Government was capital expenditure, as it was for acquiring an enduring asset rather than merely purchasing raw materials. The appeal was dismissed with costs.