Royalty on production held revenue expenditure where payment was directly linked to business operations, not capital acquisition.

Royalty payable on sugar manufactured was held to be revenue expenditure because it was directly linked to production and the carrying on of the business, not to the acquisition of a capital asset or an enduring advantage. The decisive test was the character of the payment and its relation to business operations; on the facts, the royalty attached to the raw output of the undertaking rather than to monopoly rights or capital structure. It was therefore allowable as a deduction in computing taxable profits under the Income-tax Act, 1922.

---

---

Issues: Whether the royalty paid on sugar manufactured was a capital expenditure or a revenue expenditure deductible under section 10(1) or section 10(2)(xv) of the Income-tax Act, 1922.

Analysis: The royalty under the grant was directly related to the sugar manufactured and was payable on production. It was not a payment made to acquire a capital asset or an enduring advantage in the capital field. The Court distinguished the grant from cases where payments secured an asset or benefit of lasting character, and held that the decisive test is the character of the payment and its relation to the business operations. On the facts, the royalty was connected with carrying on the business and with the raw output of the undertaking rather than with the acquisition of monopoly rights.

Conclusion: The royalty paid on sugar was revenue expenditure and was allowable as a deduction under section 10(2)(xv) of the Income-tax Act, 1922.

Ratio Decidendi: A payment that is directly referable to production and is made for running the business, rather than for acquiring an asset or enduring capital advantage, is revenue expenditure deductible in computing taxable profits.

---