Case: Commissioner of Income Tax Vs.  K.T.M.T.M. Abdul Kayoom &amp; Another

capital as the money sunk in machinery or buildings. The first part of the observation is applicable to Mohanlal Hargovinds case 1949-17 ITR 473 : (AIR 1949 PC 311 ) and the latter part, to Pingle Industries case 1960-3 SCR 681 : (AIR 1960 SC 1034 .) What is said of a manufacturing concern is equally applicable to a non-manufacturing business. It is the quality of the payment taken with what is obtained, that is decisive of the character of the payment. 26. We may now pass on to the facts of the case before us. The respondent carried on the business of selling chanks. It obtained its supplies from divers, from whom it purchased the chanks, and having got them, perhaps cheap, it resold them at a profit. This is one mode in which it carried on its business : In this business it was directly buying its stock-in-trade for resale. The other method was to acquire exclusive right to fish for chanks by employing divers and nets. The business then changed to something different. The sale was now of the product of another business in which divers and equipment were first employed to get the shells. It thus took leases of extensive coastline with all the right to fish for chanks for some years. The shells were not the subject of the bargain at all, as were the tendu leaves ; but the bargain was about the right to fish. There can be no doubt that what it paid the divers when it bought chanks from them with the view of reselling them, was expenditure laid out wholly and exclusively for the purpose of- its business, which was not of a capital nature. That business was buying goods and reselling them at a profit. But a different kind of business was involved when it went in for fishing for chanks. To be able to fish for chanks in reserved waters it had to obtain the right first. It, therefore, took lease of that right. To Mohanlal Hargovind, the leaves were raw materials, and that firm preferred to buy a number of crops over years rather than buy them as it went along. Hence the remark that the leaves were bought, as if they were in a shop. 27. Under the lease which the respondent obtained, it had a right to take only chanks of particular dimensions and shape; but it had to fish for them and obtain them first. The rest of the chanks were not its property. The smaller chanks had to be returned alive to the sea, and Velampuri chanks had to be compulsorily sold to the State. Of course, the smaller chanks put back into the sea would grow, and if fished later, be its property to take ; but till they grow, it had no claim. The chanks were on the bed of the sea. Their exact existence was not known, till the divers found them, or they got netted. Chanks which were there one day might have been washed back into the deep sea, and might never be washed back into a place where they would be within reach. Similarly, other chanks not there one day might come within reach on another day. All these matters make the case entirely different from the case of a purchase from the divers. In obtaining the lease, the respondent obtained a speculative right to fish for chanks which it hoped to obtain and which might be in large quantities, or small, according to its luck. The respondent changed the nature of its business to fishing for chanks instead of buying them. To be able to fish, it had to arrange for an area to fish, and that arrangement had to be of some duration to be effective. 28. This is not a case of so much clay or so much salt-petre or a dump of tailings or leaves on the trees in a forest. The two modes in which the respondent did the business furnish adequate distinguishing characteristics. Here is an agreement to reserve a source, where the respondent hoped to find shells which, when found, became its stock-in-trade but which in situ, were no more the firms than a shell in the deepest part of the ocean beyond the reach of its divers and nets. The expenses of fishing shells were its current expenses as also the expenses incurred over the purchase of shells from the divers. But to say that the payment of lease money for reserving an exclusive right to fish for chanks was on a par with payments of the other character is to err. It was possible to say of the former, as it was possible to say of the tendu leaves in Mohanlal Hargovinds case 1949-17 ITR 473: (AIR 1949 PC 311 ) that the chanks were bought because the money paid was the price of the chanks. But it would be a straining of the imagination to say that the amount paid for reserving the coastline for future fishing was the price of chanks, with which the respondent did its business. That amount was paid to obtain an enduring asset in the shape of an exclusive right to fish, and the payment was not related to the chanks, which it might or might not have brought to the surface in this speculative business. The rights were not transferable, but if they were and the firm had sold them, the gain, if any, would have been on the capital side and not a realising of the chanks as stock-in-trade, because none had been bought by the firm, and none would have been sold by it. 29. In our opinion, the decision of the High Court, with all due respect, was, therefore, erroneous, and the earlier decision of the Full Bench of the same High Court was right in the circumstances of the case. 30. In the result, the appeal is allowed but there will be no order about costs. ORDER

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

Explanation:
1[ds]Under the contract in question the respondent firm did not acquire any right to immovable property. It acquired no right in the bed of the sea or in the sea. The only right conferred on the respondent firm was the right to fish for, gather and carry away conch shells ((in motion under the surface of the sea) of a specified type and size. The respondent firm was under an obligation to return to the sea conch shells less than 2 1/4 inches in diameter. The business of the respondent firm consisted in buying and selling conch shells. No manufacturing process was involved in it. Therefore, the stock-in-trade of the respondent firm was conch shells. It secured this stock-in-trade in many different ways, by purchase from divers, by purchase from Government and private parties, and also by gathering conch shells under the contract in question. In my opinion, the contract into which the respondent firm entered was merely for securing its stock-in-trade. It is indeed true that in consideringwhether an item of expenditure is of a capital or a revenue nature, one must consider the nature of the concern, the ordinary course of business usually adopted in that concern, and the object with which the expense is incurred.The true nature of the transaction must be collected from the entire document with reference to all relevant facts and circumstances. Having regard to the nature of the respondent firms business and the course adopted by it for carrying it on, it appears to me to be rather far-fetched to hold that by the contract in question the respondent firm acquired property or right of a permanent character, the possession of which was a condition of carrying on its trade. To me it seems that the better view, in a business sense, is that the respondent firm merely acquired by means of the contract its stock-in-trade, rather than a source or enduring asset for producing the stock-in-tradeIt was argued before us, as it was argued in the High Court, that what was acquired in the present case was the means of obtaining the stock-in-trade for the business rather than the stock-in-trade itself. I am unable to accept this argument as correct. The contract entered into by the respondent firm was wholly and exclusively for the purpose of obtaining conch shells, which were its stock-in-trade. As I have stated earlier, the contract granted no interest in the sea, sea bed, or sea water etc. It was simply a contract giving the grantee the rights to pick and carry away conch shells of a specified type and size which of course implied the right to appropriate them as its own property. In my opinion, in a case of this nature no distinction can be drawn in a business sense between the right of picking and carrying away conch shells and the actual buying of them. It is not unusual for business men to secure, by means of a contract, a supply of raw materials or of goods which form their stock-in-trade, extending over several years for the payment of a lump sum down. Even if the conch shells were stored in a godown and the respondent firm was given a right to go and fetch them and so reduce them into its ownership, it could scarcely have been suggested that the price paid was capital expenditure. I may explain what I have in mind by giving a simple illustration. Take the case of a fisherman who sells fish. Fish is his stock-in-trade. He may buy the fish he requires from other persons; or he may obtain the supply of fish he requires by catching the fish of a specified size and type in particular waters over a short period under a contract entered into by him and take them away. I do not think that in a business sense any distinction can be made between the two means of obtaining the stock-in-trade- Both really amount to securing the stock-in-trade rather than acquiring an enduring asset or a permanent right for producing the stock-in-trade. And a business man, like the fisherman in the illustration given above, would indeed be surprised to learn that buying of fish for his business is revenue expenditure whereas catching fish in particular waters under a contract entered into by him for the purpose of obtaining his stock-in-trade on payment of a lump sum down, is capital expenditure11. On behalf of the respondent firm a further question was agitated, namely, whether an allowance for the cost of gathering the conch shells by nets etc. should not be given, even though the rent paid under the contract was not allowable, under S. 10(2) (xv) of the Income-tax Act and a reference was made in this connection to the decision inHood Barrs v. Commissioners of Inland Revenue, (1957) 37 Tax CasI do not think that we are concerned with that matter in the present appeal. The only question which arises for decision is the one referred to the High Court. I have held that the High Court correctly answered the question which related to the payment of the sum of Rs. 6,111/- only. The question having been correctly answered by the High Court, the appeal fails and must be dismissed with costs.