TaxTMI 
TaxTMI 
1946 (10) TMI 9
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....orally and the payments of the "consideration" money were made under receipts which are not on the record. The terms of the various leases vary from six months to eighteen months. The lessee (the assessee) stipulated to pay to the lessor a consolidated sum in consideration whereof the lessee was given the right to dig earth up to 3 feet (3½ feet in one case) for a fixed period. 3. The firm was assessed on a total income of Rs. 10,295 for the assessment year 1941-42, the relevant accounting period being 1st of October, 1939, to 30th September, 1940. The assessee claimed that a total sum of Rs. 2,299 (being the aggregate of Rs. 1,042, Rs. 973 and Rs. 284 relating respectively to the three kilns mentioned above) representing the payments made by the assessee to the lessors under the terms of the various leases, was in fact the value or the price of earth used up in the manufacture of bricks during the year of account, and as such should be deducted as business expenditure under Section 10(2)(xii) of the Act. In computing the assessable income, the Income-tax Officer, however, disallowed the claim. On appeal the learned Appellate Assistant Commissioner confirmed the order of ....
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.... within the meaning of Section 10(2)(xii) of the Income-tax Act. The department contended that the expenditure was of a capital nature. The Bench came to the conclusion that the lessee (assessee) was not a mere purchaser of raw material but a person who had acquired certain rights in the land and the amount invested by him must, therefore, be treated as capital expenditure. The Bench held that the assessee had not purchased so many maunds of earth for so many rupees but had acquired certain rights in the lease-hold premises―the right of taking earth from land for the purpose of moulding bricks. In such cases the land must be regarded merely as one of the means provided by the manufacturer for causing earth to be brought to the manufactory. On these findings we think a question of law arises and we formulate it as follows:― "Whether, in the circumstances of the case, the assessee is entitled to a deduction of the three sums, Rs. 1,042, Rs. 973 and Rs. 284 aggregating Rs. 2,299, as revenue expenditure under Section 10(2)(xii) of the Income- tax Act?" 8. The questions framed by the a....
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....he land and canal revenue shall rest on the lessors. The lessors will deliver up possession of the land to the lessees whenever they would demand it for digging earth. In the event of our contravening any of the conditions referred to above, or if any of our relations interferes in the possession of the land of the lessees on the ground that he is the owner of it, or creates any obstruction in the digging of earth, or raises any objection on any other ground, then under such conditions, whatever loss or expense will be incurred by the lessees, the lessors will be responsible to pay it and also refund the lease money already received by them; rather the lessees will have power and right to recover it by whatever means they like. The said akrarnama has, therefore, been executed so that it may serve as an authority. EXHIBIT T.G. English translation of deed, dated 17th January, 1940. We are Bua Singh and Bawa Singh, sons of Budh Singh, caste Jat, residents of village Sultanwind, Tehsil Amritsar. Whereas the canal land measuring 12 kanals, khasra No. 4797, in the vicinity of the well, known as Piroowala, situated in the area of village Sultanwind within the municipal limits ....
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....IT T.H. English translation of deed, dated 19th March, 1940. I am Bhag Singh, s/o Hakam Singh, caste Jat, resident of village Sultanwind, Tehsil and Dist. Amritsar. Whereas the land measuring 5/3 kanals, khasra No. 1409, khata No. 3838, situate in the area of village Sultanwind, Tehsil and Dist. Amritsar, is my milkiat property and I am in possession thereof. Since the land is fit for digging earth and difficulty is caused in its irrigation, it is, therefore, leased out on the following conditions to L. Jagannath, son of L. Atma Ram, caste Agarwal, resident of Katra Karm Singh, Amritsar, on payment of a consolidated sum of Rs. 257-8-0 as consideration for digging earth up to 3 ft. deep, so that the land may improve in its value from the point of view of cultivation:― (i) The lease money referred to above will be paid on the grant of a receipt. (ii) The possession of the said land has been given to the lessee from to-day. The said lessee will dig earth for one year from to-day up to the extent mentioned above and will then deliver back the land to the lessor after clearing and levelling it. (iii) The responsibility for the payment of the land revenue will rest o....
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....the land revenue. 6. That at the place pointed out by me, the contractor will dig out well at his cost, by which land will be irrigated and from this well, by using bullocks belonging to me, supply water to the contractor for making bricks and for cultivation and charge Rs. 35 per month for this. 7. That during the stipulated period, the contractor can cultivate other lands taken by him on lease from this well. 8. That it is my duty to get these lands irrigated through distributories. 9. That the contractor shall have the right to use the land for traffic purposes by donkeys, mules etc. 10. That in case the area is found less or greater than the specified one, then accordingly the sum will be refunded or recovered. 11. That the repairs and renewals of the well will be borne by the contractor. I will get his name mutated in the revenue office and in case I fail to do so or refuse to do so, I shall pay Rs. 500 towards damages to the contractor and will still have to get his name entered. I solemnly assure the contractor that the aforesaid land is solely owned by me and not in partnership or co-ownership with others, and no one else has any concern in it. The propert....
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....and in addition to this, the contractor shall be entitled to take out earth up till the stipulated period. The contractor shall have the right to bring water from the other well in the distributories from which she is entitled to water the above-mentioned land. And after the expiry of the period, whatever quantity of earth is left over, the contractor is entitled to take out such quantity on payment of land revenue. Hence I do hereby execute this meyadi rehan deed in favour of the aforesaid L. Gyan Chand, contractor, on 16 Har, 1994, corresponding to 29th June 1937. Entry at the deed writer's register No. 45. C. L. Aggarwal, P. L. Sud and M. F. Rahman, for the assessee S. M. Sikri and Jindra Lal, for the Commissioner ORDER DIN MOHAMMAD and MEHR CHAND MAHAJAN, JJ.--The question involved in this reference is whether payments made by an assessee for acquiring earth for the manufacture of bricks can be legally deducted for the purpose of determining his assessable income. A Full Bench of the Allahabad High Court (reported as 5 I.T.R. 544, Commissioner of Income-tax v. Tika Ram & Sons Ltd.) is clearly against the assessee, but with all respect we consider that the matter....
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....) of the Income-tax Act?" Learned counsel for the assessee relies on a Full Bench decision of this Court in In re Messrs. Parma Nand Haveli Ram [1945] 13 I.T.R. 157; A.I.R. 1945 Lah. 137, in which I wrote the judgment with which Sale and Marten, JJ., agreed. That was a case where the assessee who was a refiner of saltpetre claimed a deduction for the amount expended by him in acquiring short term leases of salt-bearing sites from which he scraped kallar which he converted into crude saltpetre which was taken to the assessee's refinery and analysed into sodium chloride and potassium nitrate. We held the expenditure to be a running business expense even though the amount was expended by the assessee in not purchasing his raw material from the market but in acquiring it by a process of collection and evaporation on the land which he had acquired from the owners on short term leases. It is admitted by the learned counsel for the Crown that if in this case the assessee had purchased loose earth, which is stated to be a marketable commodity, the amount spent would be a proper business expense, but it is contended that if what is acquired is not raw material but the right to dig ra....
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.... of land for the purpose of extracting the earth for the manufacture of bricks was an expenditure of a capital nature. A further appeal to the Income-tax Appellate Tribunal was dismissed. The Tribunal, however, on an application made by the assessee under Section 66(1) of the Income-tax Act, formulated the following question for the opinion of this Court:― "Whether, in the circumstances of the case, the assessee is entitled to a deduction of the three sums, Rs. 1,042, Rs. 973 and Rs. 284, aggregating Rs. 2,299, as revenue expenditure under Section 10(2)(xii) of the Income- tax Act?" The matter originally came up before me and my learned brother Mr. Justice Din Mohammad. In view of a Full Bench decision of the Allahabad High Court in Commissioner of Income-tax v. Tika Ram and Sons, Limited**, the case was referred by us to a Full Bench, as, in our opinion, the question required further consideration. The matter then came up before a Full Bench of three Judges; but, as during the arguments, a question was raised as to the correctness of the Full Bench decision of this Court in the case of In re Messrs. Par....
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....limits not only to the extent of the length and breadth of the land but even the extent of its depth to which earth was to be excavated. These agreements did not convey the property in favour of the assessee. In effect and substance, they are for the purchase of earth with a privilege to enter upon the land for the purpose of digging and removing the earth. The arrangements evidenced by these transactions are transitory in character and the whole intention and purpose of these so-called leases was to procure raw material for the manufacture of bricks. Once the earth was dug and removed, the right created by these agreements in the assessee had automatically to come to an end. The arrangements evidenced by these documents can neither be given the status of leases nor of permanent grants. All that may be reasonably suggested is that they confer on the assessee temporary rights of easement, even if they are found to vest some very limited and insignificant interest in the land out of which earth had to be dug. But no advantage of a permanent nature or of an enduring character can be held to have been gained by them. In short, the transactions evidenced by these leases were for the sal....
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.... may be presumed in a transaction of such a transitory nature that there was no intention of investing the money as capital of the concern. Had the transaction been of such a nature as would have conferred an advantage of an enduring nature on the trade and the payment was made once and for all to avoid recurring expenditure it may have been possible to infer that the expenditure incurred was of a capital nature but when the expenditure incurred neither swells the capital nor improves it, but it only increases or decreases the profit or loss it must be held to be a part of the profit and loss account of the business. The distinction between capital and revenue expenditure is in many cases an easy one. There are, however, a number of cases where it may be difficult to distinguish. The cost of acquisition of plant, machinery or premises for carrying on a business would clearly be in the nature of a capital expenditure; on the other hand, the pay of the establishment and the rents of the premises taken on lease for the business would be items of revenue expenditure. But it may be difficult to draw a line in cases which stand on the margin. It is not easy to define the term "capital....
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....culating or floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it. Mr. Sikri, learned counsel for the Commissioner of Income-tax, in reply to a question by me was forced to admit that the expenditure in the present case did not satisfy any of the above tests. Judged in the light of the above rules, the expenditure in question was in my opinion of a revenue nature. Though it was incurred once and for all, yet it did not bring in an asset of an enduring advantage to the trade. Learned counsel for the Commissioner of Income-tax urged that the transactions evidenced by the agreements in question were not in the nature of purchases of raw material but were in the nature of the acquisition of some interest in land which interest in land was not the raw material for the concern of the assessee and hence the sums spent on these acquisitions could not be debited in the revenue account. To support this argument, he placed reliance on c....
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.... capital. The reason for this distinction is not, at first sight, very easy to discover. It must, as it seems to me, be found in this: that, in the former case, the purchase of the mine is not a purchase of coal but a purchase of land with the right of extracting coal from it. The land is regarded merely as one of the means provided by the manufacturer for causing coal to be brought to his gas works, and, therefore, as much part of his fixed capital as would be any railway trucks or lorries provided by him for the same purpose. The land is regarded as a capital asset of the same nature as the coal contracts that were held to be fixed capital in Smith v. Moore. In that case, Lord Sumner said: 'The business carried on was not that of buying and selling contracts, but of buying and selling coals, and the contracts, which enabled the seller of the coals to acquire the coals were no more the subject of his trading as a stock-in-trade for sale than a lease of a brickfield would be the subject of a sale of bricks.'" In my view, the above observations do not support the contention of the learned counsel for the Commissioner of Income-tax. The purchase of a coal mine and land bri....
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....duction as it was in the nature of capital expenditure. Lord Haldane expressed his opinion in these words:― "My Lords, in the case before us the appellant, of course, made profit with circulating capital, by buying coal under the contracts he had acquired from his father's estate at the stipulated price of fourteen shillings and reselling it for more, but he was able to do this simply because he had acquired, among other assets of his business, including the goodwill, the contracts in question." The sum paid for unexecuted contracts was, therefore, held to be capital expenditure on the ground that these were obtained by the son at the time of the acquisition of the business as a part of his capital. Lord Haldane's opinion, therefore, is of no use to Mr. Sikri. Lord Finlay gave the opinion "that the coal represented by the contracts was circulating capital. It was bought for use in the business and was so used....................................... The contracts gave the means of getting coal, and there is no difference for this purpose between having coal....
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....manufacturer acquires earth by an agreement which in substance amounts to purchase of earth but assumes the shape of a lease or amounts to an acquisition of a right of easement or a profits a prendre in the land itself, particularly when the arrangement is of such a nature as cannot be found to possess the dignity of being an asset. The arrangements made under the agreements in question will exhaust themselves in 6 months to 3 years and the quantity of earth dug out would be consumed in the manufacture of bricks. The assessee would have no interest whatsoever left in the land as soon as earth is dug out and removed. I would like to observe that in deciding a border line case like this it is relevant to consider how a tradesman in this business treats such an expense in his accounts. The expenditure thus incurred forms part of the profit and loss statement and as a matter of fact in the previous years the Income-tax Department was itself treating such an expenditure as a legitimate deduction as business expense. The mode adopted to procure earth is the usual and the normal mode employed for procuring raw material by brick kiln concerns in this country. Reliance was placed by l....