Case: Mewar Sugar Mills Ltd., Bhopal Sagar Vs. Commissioner Of Income-Tax, Rajasthan, Jaipur

the Act", The passage extracted above shows a confusion of the principles applicable for determining what is an expenditure of a capital nature and that which is a revenue expenditure. This Court in a recent decision in R. B. Seth Moolchand Suganchand v. C. I. T. Delhi, Civ. Appeal No. 2020 of 19725 D/- 19-9-1972 (SC) to which two of us were a party (Jaganmohan Reddy and Khanna, JJ.) pointed out the difficulty which the judges are confronted with in the application of the principles and criteria for determining the nature of the expenditure incurred in bringing into existence an asset or advantage for the enduring benefit of the trade, in which context several cases of this Court and the English Courts were examined. It is unnecessary to traverse the same ground again except to say that none of the tests laid down in any of the cases is either exhaustive or universal because it is not always easy to determine whether a particular asset belongs to one category or the other nor does it depend in any way on what may be the nature of the asset in fact or in law. None of the tests suggested in decided cases affords a strict rule of guidance. In that case it was observed :-"The principles enunciated for determining the nature of the expenditure have been sought to be applied to different situations arising on the facts of each case, but the difficulty in matching them with the seeming irreconcilability is perhaps explicable only on the ground that the determination in any particular case is dependent on the character of the lease or agreement, the nature of the asset, the purpose for which the expenditure was incurred and such other factors as in the facts and circumstances of that case would indicate". The determining factor, therefore, will depend largely on the nature of the trade in which the asset is employed and the quality of the payment therefore. It appears to us that on the facts of each case it will have to be determined whether a particular expenditure is a capital expenditure or a revenue expenditure. In this case the payment made is directly related to the sugar manufactured by the appellant. The decision in Assam Bengal Cement Co. Ltd. v. C. L T, West Bengal, 27 ITR 34 .(AIR 1955 SC 89 ) which has been relied upon by the High Court and the Tribunal has in our view been misapplied. In that case the question was, whether in computing the profits of the appellant the sum of Rupees 5,000 and Rupees 35,000/- paid to the lessor by the appellant could be deducted under S. 10 (2) (xv) of the Act. This payment was in addition to the rents and royalties which were agreed to be paid by the lessor and was payable for obtaining a right to acquire an asset of an enduring nature which had necessarily to be incurred for initiation of the business or trading activity. Bhagwati, J., speaking for this Court observed at page 45 :-"It 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." In Gotan Lime Syndicate v. Commr. of I. T., 59 ITR 718 = (AIR 1966 SC 1564 ) which was a case dealing with the amount of dead rent payable per acre and the amount of royalty payable for a maund of lump lime and per maund of limestone, it was held that in the absence of material to show that any part of the royalty had to be treated as premium and referable to the acquisition of the mining lease, the royalty payment including the dead rent, had relation only to the lime deposits to be got and had therefore to he treated as a revenue expenditure; and although the appellant did derive an advantage-assuming that that advantage was to last at least for a period of five years-there was only an annual payment of royalty or dead rent which was not a direct payment for securing an enduring advantage but was relatable to the raw material to be obtained. It was further emphasised that the reason why royalty has to be allowed as revenue expenditure is the relation which it has to the raw materials to be excavated or extracted; that the more you take the more royalty you pay and that the minimum payment or the dead rent also has the same characteristic i.e. it is an advance payment in respect of a certain amount of raw material to be excavated. In a similar case dealt with by the Andhra Pradesh High Court in Singareni Collieries Co. Ltd. v. Commr. of I. T., (1967) 66 ITR 553 (Andh Pra) to which one of us (Jaganmohan Reddy, C. J.) was a party dead rent payable under the lease was characterised as having a direct relation to the working of the coal from the mine and so it was a revenue expenditure. In another case Associated Stone Industries (Kotah) Ltd. v. C. 1 T. ( (1971) 82 ITR 896 ) = to which one of us (Hegde, J.) was a party, the royalty was payable at a certain rate or rates on the stone excavated and an additional royalty was leviable at a certain rate on polished stone. On these facts it was held that the nature of the payment was no different from that of the minimum royalty paid and the excess royalty was not paid for getting some additional capital asset or even an enduring benefit but was paid on the basis of commercial expediency not of a capital expenditure.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]The determining factor, therefore, will depend largely on the nature of the trade in which the asset is employed and the quality of the payment therefore. It appears to us that on the facts of each case it will have to be determined whether a particular expenditure is a capital expenditure or a revenue expenditure. In this case the payment made is directly related to the sugar manufactured by the appellant. The decision in Assam Bengal Cement Co. Ltd. v. C. L T, West Bengal, 27 ITR 34   .(AIR 1955 SC 89  ) which has been relied upon by the High Court and the Tribunal has in our view been misapplied. In that case the question was, whether in computing the profits of the appellant the sum of Rupees 5,000 and Rupees 35,000/- paid to the lessor by the appellant could be deducted under S. 10 (2) (xv) of the Act. This payment was in addition to the rents and royalties which were agreed to be paid by the lessor and was payable for obtaining a right to acquire an asset of an enduring nature which had necessarily to be incurred for initiation of the business or trading activity. Bhagwati, J., speaking for this Court observed at page 45 :-"It 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."In Gotan Lime Syndicate v. Commr. of I. T., 59 ITR 718   = (AIR 1966 SC 1564  ) which was a case dealing with the amount of dead rent payable per acre and the amount of royalty payable for a maund of lump lime and per maund of limestone, it was held that in the absence of material to show that any part of the royalty had to be treated as premium and referable to the acquisition of the mining lease, the royalty payment including the dead rent, had relation only to the lime deposits to be got and had therefore to he treated as a revenue expenditure; and although the appellant did derive an advantage-assuming that that advantage was to last at least for a period of five years-there was only an annual payment of royalty or dead rent which was not a direct payment for securing an enduring advantage but was relatable to the raw material to be obtained. It was further emphasised that the reason why royalty has to be allowed as revenue expenditure is the relation which it has to the raw materials to be excavated or extracted; that the more you take the more royalty you pay and that the minimum payment or the dead rent also has the same characteristic i.e. it is an advance payment in respect of a certain amount of raw material to be excavated. In a similar case dealt with by the Andhra Pradesh High Court in Singareni Collieries Co. Ltd. v. Commr. of I. T., (1967) 66 ITR 553 (Andh Pra) to which one of us (Jaganmohan Reddy, C. J.) was a party dead rent payable under the lease was characterised as having a direct relation to the working of the coal from the mine and so it was a revenue expenditure. In another case Associated Stone Industries (Kotah) Ltd. v. C. 1 T. ( (1971) 82 ITR 896  ) = to which one of us (Hegde, J.) was a party, the royalty was payable at a certain rate or rates on the stone excavated and an additional royalty was leviable at a certain rate on polished stone. On these facts it was held that the nature of the payment was no different from that of the minimum royalty paid and the excess royalty was not paid for getting some additional capital asset or even an enduring benefit but was paid on the basis of commercial expediency not of a capital expenditure.