TaxTMI 
TaxTMI 
1954 (11) TMI 2
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....ars and thereafter a half-yearly rent certain of Rs. 6,000 with the provision for payment of further royalties in certain events. In addition to these rents and royalties two further sums were payable under the special covenants contained in clauses 4 and 5 of the lease as " protection fees ". Under clause 4 the protection was in respect of another group of quarries called the Durgasil area, the lessor undertaking not to grant any lease, permit or prospecting licence regarding the limestone to any other party therein without a condition that no limestone should be used for the manufacture of cement inconsideration of a sum of Rs. 5,000 payable annually during the whole period of the lease. Under clause 5 a further protection was given in respect of the whole of the Khasi and Jaintia Hills District, a similar undertaking being given by the lessor in consideration of a sum of Rs. 35,000 payable annually but only for 5 years from the 15th November, 1940. In the accounting years 1944-45 and 1945-46 the company paid its lessor sums of Rs. 40,000 in accordance with these two covenants and computation of its business profits claimed to deduct the sums in the under the provisions of sect....
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....entitle the lessee to any abatement in the protection fee. The lessor in consideration of the said payment undertakes not to allow any person or company any lease permit or prospecting licence for limestone in the whole of Khasi and Jaintia Hills district without a condition in such lease permit or prospecting licence that no limestone extracted shall be used directly or indirectly for the manufacture of cement. The lessor will be empowered to terminate this agreement for the payment of a protection fee at any time after it has run for 5 years by giving six months' notice in writing by registered letter addressed to 11, Clive Street, Calcutta, but the lessee will not be entitled to terminate this agreement during the currency of the lease except with the consent of the lessor." It is not clear as to what was meant by the last provision contained in clause 5, the lessee in the event of his having paid the sum of Rs. 35,000 for the 5 years having nothing else to do but enjoy the benefit of the covenant on the part of the lessor during the subsequent period of the lease. This provision is however immaterial for our purposes. The line of demarcation between capital expenditure and ....
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....re which was made once for all. He however suggested in the course of his judgment another view-point and that was whether the particular expenditure could be put against any particular work or whether it was to be regarded as an enduring expenditure to serve the business as a whole, thus laying the foundation for the test prescribed by Viscount Cave, L.C., in Atherton's case. Atherton v. British Insulated and Helsby Cables Ltd. laid down what has almost universally been accepted as the test for determining what is capital expenditure as distinguished from revenue expenditure. Viscount Cave, L.C., there observed, at page 192 :--- " But there remains the question, which I have found more difficult, whether apart from the express prohibitions, the sum in question is (in the words used by Lord Sumner in Usher's case) a proper debit item to be charged against incomings of the trade when computing the profits of it ; or, in other words, whether it is in substance a revenue or a capital expenditure. This appears to me to be a question of fact which is proper to be decided by the Commissioners upon the evidence brought before them in each case ; but where, as in the present case, th....
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..... It seems rather that the cases of Hancock' and of Mitchell v. B. W. Noble, Ltd, and of Mallett v. Staveley Coal & Iron Co." give illustrations that the test of fixed or circulating capital is the true one ; and where, as in this case, the expenditure is to bring back into the hands of the company a necessary ingredient of their existing business---important, but still ancillary and necessary to the business which they carry on---the expenditure ought to be debited to the circulating capital rather than to the fixed capital, which is employed---in and sunk in the permanent---even if wasting--assets of the business." This preference of his was reiterated by Lord Hanworth, M.R., in Golden Horse Shoe (New) Ltd. v. Thurgood (H. M. Inspector of Taxes) :--- " The above cases serve to establish the difficulty of the question rather than to affirm any principle to be applied in all cases. Indeed, in the last case cited, Lord Cave says (10 T. C. at p. 192) that a payment ' once and for all '---a test which had been suggested by Lord Dunedin in Vallambrosa Rubber Company v. Farmer---was not true in all cases, and he found authority for that statement in Smith v. Incorporated Council o....
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....or the purposes of the trade ' is a question which must be determined upon the principles of ordinary commercial trading. It is necessary, accordingly, to attend to the true nature of the expenditure, and to ask oneself the question, Is it a part of the company's working expenses; is it expenditure laid out as part of the process of profit earning ?" In the case before them they came to the conclusion that the obligation to make the payments was undertaken by the appellants in consideration of their acquisition of the right and opportunity to earn profits, i.e., of the right to conduct the business and not for the purpose of producing profits in the conduct of the business. The distinction was thus made between the acquisition of an income-earning asset and the process of the earning of the income. Expenditure in the acquisition of that asset was capital expenditure and expenditure in the process of the earning of the profits was revenue expenditure. This test really is akin to the one laid down by Bowen, L.J., in City of London Contract Corporation Ltd. v. Styles'. Dixon, J., expressed a similar opinion in Sun Newspapers Limited and the Associated Newspapers Limited v. The Fed....
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....ere to supplement it with the definition suggested by Mr. Justice Lawrence in Southern v. Borax Consolidated Ltd., whether an expenditure had in any way altered the original character of the capital asset, we have a legal principle which can be applied to any set of given facts." In Benarsidas Jagannath, In re, a Full Bench of the Lahore High Court attempted to reconcile all these decisions and deduced the following broad tests for distinguishing capital expenditure from revenue expenditure. The opinion of the Full Bench was delivered by Mr. justice Mahajan, as he then was, in the terms following : "It is not easy to define the term ' capital expenditure ' in the abstract or to lay down any general and satisfactory test to discriminate between a capital and a revenue expenditure. Nor is it easy to reconcile all the decisions that were cited before us for each case has been decided on its peculiar facts. Some broad principles can, however, be deduced from what the learned judges have laid down from time to time. They are as follows :---- 1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replace....
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....r a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the en....
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....ture, and on the other hand payment for purchasing a concern which is prima facie an expenditure of a capital nature may as well be spread over a number of years and yet retain its character as a capital expenditure. (Per Mukherjea, J., in Commissioner of Income-tax v. Piggot Chapman & Co.) The character of the payment can be determined by looking at what is the true nature of the asset which has been acquired and not by the fact whether it is a payment in a lump sum or by instalments. As was otherwise put by Lord Greene, M. R., in Henriksen (Inspector of Taxes) v. Grafton Hotel Ltd.:---- 'The thing that is paid for is of a permanent quality although its permanence, being conditioned by the length of the term, is shortlived. A payment of this character appears to me to fall into the same class as the payment of a premium on the grant of a lease, which is admittedly not deductible." The case of Tata Hydro-Electric Agencies Ltd., Bombay v. Commissioner of Income-tax, Bombay Presidency and Aden, affords another illustration of this principle. It was observed there :----- " If the purchaser of a business undertakes to the vendor as one of the terms of the purchase that he will pa....
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....benefit of the whole of the business of the company and came well within the test laid down by Viscount Cave. It was not a lump sum payment but was spread over the whole period of the lease and it could be urged that it was a recurring payment. The fact however that it was a recurring payment was immaterial, because one had got to look to the nature of the payment which in its turn was determined by the nature of the asset which the company had acquired. The asset which the company had acquired in consideration of this recurring payment was in the nature of a capital asset, the right to carry on its business unfettered by any competition from outsiders within the area. It was a protection acquired by the company for its business as a whole. It was not a part of the working of the business but went to appreciate the whole of the capital asset and make it more profit yielding. The expenditure made by the company in acquiring this advantage which was certainly an enduring advantage was thus of the nature of capital expenditure and was not an allowable deduction under section 10(2)(xv) of the Income-tax Act. The further protection fee which was paid by the company to the lessor under....