Case: Assam Bengal Cement Co. Ltd Vs. The Commissioner Of Income-Tax,West Bengal

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. 3, 000 for the first two years 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 in consideration 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 claimed to deduct the sums in the computation of its business profits under the provisions of section 10(2)(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 decisionin the circumstances of the case, the two sums of Rs. 5, 000 and Rs. 35, 000 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 10(2)(xv) of the Indian Income-taxHigh Court answered the question in the affirmative and hence this appeal.

Reasoning: 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. Thequestion however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business of for the substantial replacement of itsequipment. 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 of 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. It is 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 deductable allowance under section 10(2)(xv) of the Income-tax Act.These are the principles which have to be applied in order to determine whetherin 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 licence 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 cement. The consideration of Rs. 5, 000 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 endure 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 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 acquire. 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 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. 35, 000 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 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 not 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 endured 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 10(2)(xv) of the Act.18. 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. 40, 000 paid by the company to the lessors during the accounting years 1944-45 and 1945-46 were not allowable deductions under section 10(2)(xv) of the