Appeal No 162 of 1952
Appeal from the Judgment and Order dated the 7th day of June 1951 of the High Court of Judicature at Calcutta in Income tax Reference No 60 of 1950 arising out of the Order dated the 22nd day of November 1949 of the Income tax Appellate Tribunal in ITA Nos 1026 and 1027 of 1948 49 N C Chatterjee for the appellant
Porus A Mehta for the respondent
November 11
The Judgment of the Court was delivered by BHAGWATI J
This appeal from the judgment And order of the High Court of Judicature at Calcutta with leave under section 66 A 2 of the Indian Income tax Act raises an interesting question as to the line of demarcation between capital expenditure and revenue expenditure
On the 14th November 1938 the appellant company acquired from the Government of Assam a lease of certain limestone quarries known as the Komorrah quarries situated in the Khasi and Jaintia Hills District for the purpose of carrying on the manufacture of cement
The lease was for 20 years commencing on the 1st November 1938 and ending on the 31st October 1958 with a clause for renewal for a further term of 20 years
The rent reserved was a half yearly rent certain of Rs 3000 for the first two years and thereafter a half yearly rent certain of Rs 6000 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 clause 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 976 therein without a condition that no limestone should be used for the manufacture of cement in consideration of a sum of Rs 5000 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 35000 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 40000 in accordance with these two covenants and claimed to deduct the sums in the computation of its business profits under the provisions of section 102 xv of the Income tax Act in the assessments for the assessment years 1945 46 and 1946 47
The Income tax Officer the Appellate Assistant Commissioner and the Appellate Tribunal rejected the contention of the company and the following question as ultimately reframed was at the instance of the company referred by the Tribunal to the High Court for its decision   Whether in the circumstances of the case the two sums of Rs 5000 and Rs 35000 paid under clauses 4 and 5 of the deed of the 14th November 1938 were rightly disallowed as being expenditure of a capital nature and so not allowable under section 102 xv of the Indian Income tax Act 
The High Court answered the question in the affirmative and hence this appeal
Clauses 4 and 5 of the deed of lease may be here set out  4
The lessee shall pay to the lessor Rs 5000 Rupees five thousand only annually during the period of the lease on November 15th starting from November 15th 1938 as a protection fee
In consideration of that protection fee the lessor undertakes not to allow any person or company any lease permit or prospecting licence for limestone in the group of quarries as described in Schedule 2 and delineated in the plan thereto annexed and therein coloured blue called the Durgasil area without a condition in such 977 lease permit or prospecting licence that no limestone shall be used for the manufacture of cement
5Besides the above protection fee the lessee shall pay to the lessor annually the sum of Rs 35000 Rupees thirty five thousand only for five years starting from the 15th day of November 1940 as a further protection fee so long as the total amount of limestone quarried by the lessee in a year does not exceed 2200000 maunds per year whether quarried in the area of this lease or elsewhere or obtained by purchase from other quarries in the Khasi and Jaintia Hills by the lessees
If however in any year the total amount of limestone converted into cement at the lessee s SylhetFactory exceed 2200000 maunds the lessee will be entitled to an abatement at the rate of Rs 20 for every 1000 maunds quarried in excess of 2200000 maunds and the lessee shall pay the sum of Rs 35000 less the abatement calculated on the basis hereinbefore mentioned
Limestone which is not converted into cement at the lessee s factory in Sylhet district will not 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 month  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 35000 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
978 The line of demarcation between capital expenditure and revenue expenditure is very thin and learned Judges in England have from time to time pointed out the difficulties besetting that task
Lord Macnaghten a Dovey vs Cory1 administered the following warning I do not think it desirable for any tribunal to do that which Parliament has abstained from doing that is to formulate precise rules for the guidance or embarrassment of business men in the conduct of business affairs
There never has been and I think there never will be much difficulty in dealing with any particular case on its own facts and circumstances and speaking for myself I rather doubt the wisdom of attempting to do more Rowlatt J also expressed himself much to the same effect in Countess Warwick Steamship Co Ltd vs Ogg1  It is very difficult as I have observed in previous cases of this kind following the highest possible authority to lay down any general rule which is both sufficiently accurate and sufficiently exhaustive to cover all or even a great number of possible cases and I shall not attempt to lay down any such rule
 Certain broad tests have however been attempted to be laid down and the earliest was the one indicated in the following observations of Bowen LJ in the course of the argument in City of London Contract Corporation vs Styles 3   You do not use it for the purpose of  your concern which means for the purpose of carrying on your concern but you use it to acquire the concern
 The expenditure in the acquisition of the concern would be capital expenditure the expenditure in carrying on the concern would be revenue expenditure
Lord Dunedin in Vallambrosa Rubber Co Ltd vs Farmer  4 suggested another criterion at page 536  Now I don t say that this consideration is absolutely final or determinative but in a rough way I think it is not a bad criterion of what is capital 1  488
2 1924 2 KB 292 298
31887  243
41910  536
979 expenditure as against what is income expenditure to say that capital expenditure is a thing that is a going to be spent once and for all and income expenditure is a thing that is going to recur every year
 This test was adopted by Rowlatt J in Ounsworth Surveyor of Taxes vs Vickers Ltd 1 and after quoting the above passage from the speech of Lord Dunedin he observed that the real test was between expenditure which was made to meet a continuous demand for ex
penditure as opposed to an expenditure 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 LC in Atherton s case 2
Atherton vs British Insulated and Helsby Cables Ltd 2 laid down what has almost universally been accepted as the test for determining what is capital expenditure as distinguished from revenue expenditure
Viscount Cave LC 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 case3  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 there is no express finding by the Commissioners upon the point it must be determined by the Courts upon the materials which are available and with due regard to the principles which have been laid down in the authorities
Now in Vallambrosa Rubber Company vs Farmer 4
Lord Dunedin as Lord President of the Court of Session expressed the opinion that in a rough way it was 11915 21925 319I4 419IO 536 980 not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all and income expenditure is a thing which is going to recur every year  and no doubt this is often a material consideration
But the criterion suggested is not and was obviously not intended by Lord Dunedin to be a decisive one in every case for it is easy to imagine many cases in which a payment though made once and for all would be properly chargeable against the receipts for the year 
But when an expenditure is made not only once and for all
but with a view to bringing into existence an asset or an advan tage for the enduring benefit of a trade I think that there is very good reason in the absence of special circumstances leading to an opposite conclusion for treating such an expenditure as properly attributable not to revenue but to capital Viscount Haldane however in John Smith  Son vs Moore H M Inspector of Taxes 1 suggested another test and that was the test of fixed or circulating capital though even there he observed that it was not necessary to draw an exact line of demarcation between the fixed and circulating capital
The line of demarcation between fixed and circulating capital could not be defined more precisely than in the description of Adam Smith of fixed capital as what the owner turns to profit by keeping it in his own possession and circulating capital as what he makes profit of by parting with it and letting it change masters
This test was adopted by Lord Hanworth MR in Anglo Persian Oil Co vs Dale 2 where he observed  I am inclined to think that the question whether the money paid is provided from the fixed or the circulating capital comes as near to accuracy as can be suggested
Lord Cave s test that where money is spent for an enduring benefit it is capital seems to leave open doubts as to what is meant by enduring     1  282
2 138
981 It seems rather that the cases of Hancock 1 and of Mitchell vs B W Noble Ltd 2 and of Mallet vs Staveley Coal  Iron Co 3 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 onthe expenditure ought to be debited to the circulating capital rather than to the fixed capital which is em
ployed in and sunk in the permanent even if wasting assets of the business
 This preference of his was reiterated by Lord Hanworth MR in Golden Horse Shoe New Ltd vs 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 Atherton vs British Insulated and Helsby Cables Ltd 5 Lord Cave says that a payment once and for all  a test which had been suggested by Lord Dunedin in Vallambrosa Rubber Company  vs Farmer1 was not true in all cases and he found authority for that statement in Smith vs Incorporated Council of Law Reporting for England and Wales 7 and the Anglo Persian case8  already referred to is another
The test of circulating as contrasted with fixed capital is as good a test in most cases to my mind as can be found  but that involves the question of fact was the outlay in the particular case from fixed or circulating capital  Romer LJ at page 300 pointed out the difficulties in applying this test also
Unfortunately however it is not always easy to determine whether a particular asset belongs to the one category or the other
It depends in no way upon what may be the nature of the asset in fact or in law
Land may in certain circumstances be circulating 2 2 1927 1 KB 719
3 1928 2 KB 405
4  298 125 5  192
6 7 8 982 capital
A chattel or a chose in action may be fixed capital
The determining factor must be the nature of the trade in which the asset is employed
The land upon which a manufacturer carries on his business is part of his fixed capital
The land with which a dealer in real estate carries on his business is part of his circulating capital
The machinery with which a manufacturer makes the articles that he sells is part of his fixed capital
The machinery that a dealer in machinery buys and sells is part of his circulating capital as is the coal that a coal merchant buys and sells in the course of his trade
So too is the coal that a manufacturer of gas buys and from which he extracts his gas  In Van Den Berghs Limited vs Clark H M Inspector of Taxes1 Lord Macmillan however veered round to Viscount Cave s test and expressed his disapproval of the test of fixed and circulating capital
He reviewed the various authorities and stated   My Lords if the numerous decisions are examined and classified they will be found to exhibit a satisfactory measure of consistency with Lord Cave s principle of discrimination
 As regards the test of fixed and circulating capital he observed at page 432   I have not overlooked the criterion afforded by the economists  differentiation between fixed and circulating capital which Lord Haldane invoked in John Smith  Son vs Moore1 and on which the Court of Appeal relied in the present case but I confess that I have not found it very helpful  The Privy Council in Tata Hydro Electric Agencies Limited Bombay vs Commissioner of Income tax Bombay Presidency and Aden1 pronounced at page 226 What is money wholly and exclusively laid out for 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 1  2  3 1937 LR 64 IA 215
983 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 ie 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 LJ in The City of London Contract Corporation Ltd vs Style81
Dixon J expressed a similar opinion in Sun Newspapers Limited and the Associated Newspapers Limited vs The Federal Commissioner of Taxation1 at page 360  But in spite of the entirely different forms material and immaterial in which it may be expressed such sources of income contain or consist in what has been called a profit yielding subject the phrase of Lord Blackburn in United Collieries Ltd vs Inland Revenue Commissioners3
As general conceptions it may not be difficult to distinguish between the profit yielding subject and the process of operating it
In the same way expenditure and outlay upon establishing replacing and enlarging the profit yielding subject may in a general way appear to be of a nature entirely different from the continual flow of working expenses which are or ought to be supplied continually out of the returns of revenue
The latter can be considered estimated and determined only in relation to a period or interval of time the former as at a point of time
For the one concerns the instrument for earning profits 1 2 1038  3  220
984 and the other the continuous process of its use or employment for that purpose
These are the three criteria adopted for distinguishing capital expenditure from revenue expenditure though it must be said that preponderance of opinion is to be found in support of Viscount Cave s test as laid down in Atherton s case1
Viscount Cave s test has also been adopted almost universally in India vide Munshi Gulab Singh  Sons V Commissioner of Income tax2 Commissioner of Income tax Bombay vs Century Spinning Weaving  Manufacturing Co Ltd1 Jagat Bus Service Saharanpur vs Commissioner of Income tax U P  Ajmer Merwara4 and Commissioner of Income tax Bombay vs Finlay Mills Ltd5
In Commissioner of Income tax Bombay vs Century Spinning Weaving  Manufacturing Co Ltd3 Chagla J observed at page 116  The legal touchstone which is almost invariably applied is the familiar dictum of Viscount Cave in Atherton s case1 
Romer LJ felt that this definition had placed the matter beyond all controversy see remarks in Anglo Persian Oil Co s case6
But Lord Macmillan in Van Den Bergh s case1 felt that Romer LJ had been unduly optimistic and the learned Law Lord was of the opinion that the question whether a particular expenditure fell on one side of the line or other was a task of much refinement
But on the whole I think that the definition of Viscount Cave is a good working definition  and if one were to supplement it with the definition suggested by Mr Justice Lawrence in Southern vs Borax Consolidated Ltd1 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
1 1925 to TC 1555 1952 SCR 11
2 194514 ITR 666 3  4 1942 10 ITR Suppl
1 6 985 In Benarsidas Jagannath In re1 a Full Bench of the Lahore High Court attempted to reconcile all these decisions and deduced the following broad test 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 replacement of equipment vide Lord Sands in Commissioners of Inland Revenue vs Granite City Steamship Company1
In City of London Contract Corporation vs Styles1 at page 243 Bowen LJ observed as to the capital expenditure as follows   You do not use it for the purpose of  your concern which means for the purpose of carrying on your concern but you use it to acquire the concern
Expenditure may be treated as properly attributable to capital when it is made not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade vide Viscount Cave LC in Atherton vs British Insulated and Helsby Cables Ltd1
If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue the lump sum payment should equally be regarded as a business expense but if the lump sum payment brings in a capital asset then that puts the business on another footing altogether
Thus if labour saving machinery was acquired the cost of such acquisition cannot be 1 3 2  14
4 986 deducted out of the profits by claiming that it relieves the annual labour bill the business has acquired anew asset that is machinery
The expressions enduring benefit  or of a permanent character  were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset
3Whether for the purpose of the expenditure any capital was withdrawn or in other words whether the object of incurring the expenditure was to employ what was taken in as capital of the business
Again it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital
Fixed capital is what the owner turns to profit by keeping it in his own possession
Circulating 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
This synthesis attempted by the Full Bench of the Lahore High Court truly enunciates the principles which emerge from the authorities
In cases where the expenditure is made for the initial outlay or for extension of a business or 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 987 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 enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically
The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure
The source or the manner of the payment would then be of no consequence
It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital
If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure
These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated
It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations
One has therefore got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductible allowance under section 102 xv of the Income tax Act
The question has all along been considered to be a question of fact to be determined by the Income tax authorities on an application of the broad principles laid down above and the courts of law would not ordinarily interfere with such findings of fact if they have 988 been arrived at on a proper application of those principles
The expression once and for all used by Lord Dunedin has created some difficulty and it has been contended that where the payment is not in a lump sum but in instalments it cannot satisfy the test
Whether a payment be in a lump sum or by instalments what has got to be looked to is the character of the payment
A lump sum payment can as well be made for liquidating certain recurring claims which are clearly of a revenue nature 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 vs Piggot Chapman  Co1
The character of the payment can be deter mined 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 MR in Henriksen Inspector of Taxes vs Grafton Hotel Ltd2 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 vs Commissioner of Income tax Bombay Presidency and Aden3 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 pay a sum annually to a third party irrespective of whether the business yields any profits or not it would be difficult to say that the annual payments were made solely for the purpose of earning the profits of the business
1 1949 171TR 3I7
3 193 7 L R 64 1 A 215
2 989 The expression once and for all is used to denote an expenditure which is made once and for all for procuring an enduring benefit to the business as distinguished from a recurring expenditure in the nature of operational expenses
The expression enduring benefit also has been judicially interpreted
Romer LJ in Anglo Persian Oil Company Limited vs Dale1 agreed with Rowlatt J that by enduring benefit is meant enduring in the way that fixed capital endures An expenditure on acquiring floating capital is not made with a view to acquiring an enduring asset
It is made with a view to acquiring an asset that may be turned over in the course of trade at a comparatively early date
Latham C J observed in Sun Newspapers Ltd  Associated Newspapers Ltd vs Federal Commissioner of Taxation2 When the words permanent  or enduring  are used in this connection it is not meant that the advantage which will be obtained will last for ever
The distinction which is drawn is that between more or less recurrent expenses involved in running a business and an expenditure for the benefit of the business as a whole eg enlargement of the goodwill of a company permanent improvement in the material or immaterial assets of the concern
To the same effect are the observations of Lord Greene M R in Henriksen HM Inspector of Taxes vs Grafton Hotel Ltd 3  above referred to
These are the principles which have to be applied in order to determine whether in the present case the expenditure incurred by the company was capital expenditure or revenue expenditure
Under clause 4 of the deed the lessors undertook not to grant any lease permit or prospecting license regarding limestone to any other party in respect of the group of quarries called the Durgasil area without a condition therein that no limestone shall be used for the manufacture of 1 1932 1 KB 124 146
2   355
126 3 990 cement
The consideration of Rs 5000 per annum was to be paid by the company to the lessor during the whole period of the lease and this advantage or benefit was to enure for the whole period of the lease
It was an enduring benefit for the 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 bad 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 expenses 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 102xv of the Income tax Act
The further protection fee which was paid by the company to the lessor under clause 5 of the deed was also of a similar nature
It was no doubt spread over a period of 5 years but the advantage which the company got as a result of the payment was to enure for its benefit for the whole of the period of the lease unless determined in the manner provided in the last part of the clause
It provided protection to the company against all competitors in the whole of the Khasi and Jaintia Hills District and the capital asset which the company acquired under the lease was thereby appreciated to a considerable extent
The sum of Rs 35000 agreed to be paid by the company to the lessor for the period of 5 years was not a revenue expenditure which was made by the company for working the capital asset which it had acquired
It was no 991 part of the working or operational expenses of the company
It was an expenditure made for the purpose of acquiring an appreciated capital asset which would no doubt by reason of the undertaking given by the lessor make the capital asset more profit yielding
The period of 5 years over which the payments were spread did not make any difference to the nature of the acquisition
It was none the less an acquisition of an advantage of an enduring nature which enured for the benefit of the whole of the business for the full period of the lease unless terminated by the lessor by notice as prescribed in the last part of the clause
This again was the acquisition of an asset or advantage of an enduring nature for the whole of the business and was of the nature of capital expenditure and thus was not an allowable deduction under section 102xv of the Act
We are therefore of the opinion that the conclusion reached by the Income tax authorities as well as the High Court in regard to the nature of the payments was correct and the sums of Rs 40000 paid by the company to the lessors during the accounting years 1944 45 and 1945 46 were not allowable deductions under section 102xv of the Act
The appeal therefore fails and must be dismissed with costs
Appeal dismissed


Summary:
Section 102xv of the Indian Income tax Act 1922 uses the term capital expenditure  for which no allowance is given to the assessee
The term capital expenditure  is used as contrasted with the term revenue expenditure in respect of which the assessee is entitled to allowance under section 102 xv of the Act
As pointed out by the Full Bench of the Lahore High Court in Benarsidas Jagannath In re 1946 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
Though it is not easy to reconcile all the decided cases on the subject as each case had been decided on its peculiar facts some broad principles could be 973 deduced from what the learned judges have laid down from time to time 1Outlay is deemed to be capital when it is made for the initiation of a business for extension of a business or for a substantial replacement of equipment vide Lord Sands in Commissioners of Inland Revenue vs Granite City Steamship Company  and City of London Contract Corporation vs Styles  2Expenditure may be treated as properly attributable to capital when it is made not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade vide Viscount Cave LC in Atherton vs British Insulated and Helsby Cables Ltd 1926 If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue the lump sum payment should equally be regarded as a business expense but if the lump sum payment brings in a capital asset then that puts the business on another footing altogether
Thus if labour saving machinery was acquired the cost of such acquisition cannot be deducted out of the profits by claiming that it relieves the annual labour bill the business has acquired a now asset that is machinery
The expressions enduring benefit  or of a permanent character  were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset
3Whether for the purpose of the expenditure any capital was withdrawn or in other words whether the object of incurring the expenditure was to employ what was taken in as capital of the business
Again it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital
Fixed capital is what the owner turns to profit by keeping it in his own possession
Circulating 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
One has got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductible allowance under section 102xv of the Indian Income tax Act 1922
The question has all along been considered to be a question of fact to be determined by the Income_ tax Authorities on an application of the broad principles laid down above and the Courts of law would not ordinarily interfere with such findings of 124 974 fact if they have been arrived at on a proper application of those principles
The assessee acquired from the Government of Assam a lease for 20 years with a clause for renewal in respect of certain limestone quarries situated in Khasi and Jaintia Hills
In addition to the rents and royalties for lease the assessee as the lessee had to pay two further sums as protection fees  under the covenants contained in clauses 4 and 5 of the lease
Under clause 4 the portection was in respect of another group of quarries called the Durgasil area and the lessor undertook not to grant for this area any lease permit or prospecting licence regarding limestone to any other party except with a condition that no limestone should be used for the manufacture of cement
This protection was given in consideration of a sum of Rs 5000 annually payable by the assessee during the whole period of the lease
Under clause 5 a further protection was given by the lessor to the lessee in respect of the whole of the Khasi and Jaintia Hills District for which lessee was to pay annually Rs 35000 to the lessor for 5 years
According to these covenants the assessee in his capacity as the lessee paid the lessor a sum of Rs 40000 for the accounting years 1944 45 and 1945 46
Held that the sum of Rs 40000 was a capital expenditure inasmuch as it was incurred for the acquisition of an asset or advantage of an enduring nature for the whole of the business and Was no part of the working or operational expenses for carrying on the business of the assesses
Accordingly the payment of Rs 40000 was not an allowable deduction under section 102xv of the Indian Income tax Act 1922
Countess Warwick Steamship Co Ltd vs Ogg 1924 2 KB 292 City of London Contract Corporation vs Styles 18871  Vallambrosa Rubber Co Ltd vs Farmer   Ounsworth Surveyor of Taxes vs Vickers Limited  19151  Atherton vs British Insulated and Helsby Cables Ltd 1925  Usher s case   John Smith  Son vs Moore H M Inspector of Taxes  19211  Anglo Persian Oil Co vs Dale   Golden Horse Shoe New Ltd vs Thurgood H M Inspector of Taxes  193318 TC 280
Van Den Berghs Limited vs Clark H M Inspector of Taxes I 19341   Tata Hydro Electric Agencies Limited Bombay vs Commissioner of Income tax Bombay Presidency and Aden 19371 LR 64 IA 215 Sun Newspapers Ltd and the Associated Newspapers Ltd vs The Federal Commissioner of Taxation 1938 61 CLR 337 Munshi Gulab Singh and Sons
vs Commissioner of Income tax 1945  Commissioner of Income tax Bombay vs Century Spinning Weaving and Manufacturing Co Ltd 1946  Jagat Bus Service Saharanpur vs Commissioner Of Income tax UP  Ajmer Merwara 1949  Commissioner of Income tax Bombay vs Finlay Mills Ltd 1952 SCR 11 Commissioner of Income tax vs Piggot Chapman  Co 975  and Henriksen Inspector of Taxes vs Grafton Hotel Ltd   referred to
Benarsidas Jagannath In re   approved