Case: H. Dear and Company Private Limited Vs. Commissioner of Income Tax, Calcutta

the company did not purchase standing timber, but it was given " a right to extract sleepers ". According to the High Court, the company had " to enter the forests, to wait for certain trees to be marked, and then to cut such trees according to its requirements for the supply of sleepers to the railways and others, as and when it liked, within the specified period of three years, " and that what was acquired under the agreement was not stock-in-trade, but the right to acquire it and, upon the principle laid down by the House of Lords in Hood-Barrs v. Inland Revenue, Commissioners, the company acquired a capital asset of an enduring nature. In the alternative, the High Court observed, the additional amounts agreed to be paid in respect of the period under the original agreements which had expired were in consideration of the Estate granting extension of the agreement which came to an end in the month of June, 1950. Had the agreement not been extended, observed the High Court, the " business of the company would have been greatly affected and there could be no doubt that by the payment the company acquired a benefit of an enduring nature ", and since by the payment of the amounts the company got the benefit of a contract whereby it could continue its business activities for a sufficiently long period to come, it was a benefit of an enduring nature and, therefore, the payments were of a capital natureUnder section 10(2) of the Act in the computation of the profits of a business carried on by an assessee certain allowances are permitted to be deducted and one such allowance is " expenditure not being an allowance of the nature described in clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business, profession or vocation. " The expenditure in question was, it is common ground, laid out wholly and exclusively for the purpose of the business, and it was not an allowance of the nature described in clauses (i) to (xiv) of sub-section (2) of section 10. It was still not admissible as an allowance, if it was in the nature of capital expenditure4. In our view the High Court was not right in assuming that the royalty agreed to be paid under the terms of the agreement dated June 13, 1952, and the additional payments annually made were of the same character. The High Court was also not right in holding that the royalty paid under the agreement was of the nature of capital expenditure. Under the terms of the agreement dated June 13, 1952, the company had made an arrangement for obtaining what was its stock-in-trade, and money spent for acquiring stock-in-trade of the business is revenue expenditure. The Income-tax Officer did not disallow the royalty stipulated to be paid under the terms of the agreement dated June 13, 1952 : he only disallowed the additional amounts which related to what was called " back royalty " for the period July 1, 1948, to June 30, 1950. The question referred by the Tribunal also related to the amount of Rs. 83, 157 which was paid as an additional amount over and above the royalty agreed to be paid5. But we are of the view that the answer recorded on the alternative ground which appealed to the High Court must be sustained. The additional payments were worked out on the basis of total royalty paid during the period of two years under the earlier agreements, i.e., from June 1, 1948, to June 30, 1950, and were offered to be paid in consideration of the Estate agreeing to grant renewal of those agreementsUnder the original agreements of the year 1944, certain payments were stipulated to be made for acquiring the " sleepers and scantlings " and payments were made accordingly by the company. Before the period of the agreements came to an end, the company offered to pay for the last two years royalty at an enhanced rate. The offer was conditional : it was binding only if renewal of the agreement was granted as proposed. The offer apparently fell through, when the Collector of Koraput sanctioned renewal only for one year. Before the expiry of the year for which renewal was granted, the company made a fresh offer to pay an additional amount of Rs. 78, 000 annually. That again was a conditional offer. Finally, by letter dated June 10, 1952, the company agreed to make additional payments at the rate of Rs. 83, 000 annually provided " a lease " was "signed and registered in terms of the draft enclosed" with the companys letter dated June 9, 1951. It is in the light of these persistent efforts made by the company to secure renewal of the agreements for what the High Court called a " sufficiently large period " that the nature of the payment has to be determined. It was only with a view to persuade the State authorities to " grant a new lease for a period of four or five years " that an offer to pay those amounts in addition to the stipulated royalty was made. There was no legal obligation to pay those amounts under the terms of the original agreements, and the company offered " as a special case to pay " those additional amounts " on the understanding that the Government will give approval " for renewal of the agreement. The amounts agreed to be paid did not form part of the price of the companys stock-in-trade, right to collect which was conferred by the agreement dated June 13, 1952. There is no doubt that payment of premium in consideration of the owner of property agreeing to grant a right to take and remove the stock-in-trade of the taxpayer is in the nature of capital expenditure.

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

Explanation:
0[ds]In our view the High Court was not right in assuming that the royalty agreed to be paid under the terms of the agreement dated June 13, 1952, and the additional payments annually made were of the same character. The High Court was also not right in holding that the royalty paid under the agreement was of the nature of capital expenditure. Under the terms of the agreement dated June 13, 1952, the company had made an arrangement for obtaining what was itsand money spent for acquiringof the business is revenue expenditure. TheOfficer did not disallow the royalty stipulated to be paid under the terms of the agreement dated June 13, 1952 : he only disallowed the additional amounts which related to what was called " back royalty " for the period July 1, 1948, to June 30, 1950. The question referred by the Tribunal also related to the amount of Rs. 83, 157 which was paid as an additional amount over and above the royalty agreed to bewe are of the view that the answer recorded on the alternative ground which appealed to the High Court must be sustained. The additional payments were worked out on the basis of total royalty paid during the period of two years under the earlier agreements, i.e., from June 1, 1948, to June 30, 1950, and were offered to be paid in consideration of the Estate agreeing to grant renewal of those agreementsUnder the original agreements of the year 1944, certain payments were stipulated to be made for acquiring the " sleepers and scantlings " and payments were made accordingly by theis in the light of these persistent efforts made by the company to secure renewal of the agreements for what the High Court called a " sufficiently large period " that the nature of the payment has to be determined. It was only with a view to persuade the State authorities to " grant a new lease for a period of four or five years " that an offer to pay those amounts in addition to the stipulated royalty was made. There was no legal obligation to pay those amounts under the terms of the original agreements, and the company offered " as a special case to pay " those additional amounts " on the understanding that the Government will give approval " for renewal of the agreement. The amounts agreed to be paid did not form part of the price of the companysright to collect which was conferred by the agreement dated June 13, 1952. There is no doubt that payment of premium in consideration of the owner of property agreeing to grant a right to take and remove theof the taxpayer is in the nature of capital expenditure.