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

The respondent firm carried on a business in the purchase and sale of conch shells (called chanks). It used to acquire the stock of conch shells by (1) purchase from divers, (2) by purchase from the Fisheries Department of the Government of Madras, and (3) by fishing for and gathering such shells from the sea. It disposed of the stock so acquired at Calcutta, the difference between the cost price and selling price less expenses being its profit made in business. On November 9, 1945, it took on lease from the Director of Industries and Commerce, Madras, the exclusive right, liberty and authority to fish for, take and carry away all chank shells in the sea off the coast line of the South Arcot District including the French Kuppams of Pondicherry. The boundary of the area within which the right could be exercised was given in a schedule to the lease. The lease was for a period of three years from July 1, 1944, to June 30, 1947, on a consideration of an yearly rent of Rs. 6,111/- to be paid in advance. Clause 3 of the lease contained the material terms thereof and may be set out in full.          3. The lessee hereby covenants with the lessor as follows :-          (i) To pay the rent on the day and in the manner aforesaid.          (ii) To deliver to the Assistant Director of Pearl and Chank Fisheries, Tuticorin all Velampuri shells that may be obtained by the lessee upon payment of their value as determined by the Assistant Director.          (iii) To collect chanks caught in nets and by means of diving as well. In the process of such collection of shells not to fish chank shells less than 2 1/4 inches in diameter and if any chank shells less than 2 1/4 inches in diameter be brought inadvertently to shore, to return at once alive to the sea all such undersized shells.          (iv) Not at any time hereafter to transfer or underlet or part with possession of this grant or the rights and privileges hereby granted or any part thereof without the written consent of the lessor.          (v) At the end or sooner determination of the term hereby created peaceably and quietly to yield to the lessor the rights and privileges hereby granted, and          (vi) To report to the Assistant Director of Pearl and Chank Fisheries (South), Tuticorn the actual number of shells kept unsold in different stations after the expiry of the lease period.          4. For the assessment year 1946-47, the respondent firm submitted a return of its income to the Income-tax Officer, Karaikudi Circle, showing its income from sale of chanks purchased from divers at Rs. 7,194/-, by sale of chanks purchased from Government Department at Rs. 23,588/- and Rs. 2,819/- by sale of chanks gathered by themselves (through divers) after deducting Rs. 6,111/- being the rent paid to Government under the contract referred to above. It sought to deduct Rs. 6,111/- from its profits from business on the ground that this was an expenditure not of a capital nature but wholly and exclusively, laid out for the purpose of business under S. 10(2) (xv) of the Income-tax Act. This claim was disallowed by the Income-tax Officer and on appeal by the Appellate Assistant Commissioner. On further appeal to the Appellate Tribunal the respondent firm contended that the decision of the Privy Council in 1949-17 ITR 473 : (AIR 1949 PC 311  ) applied to this case inasmuch as the payment was to secure the stock-in-trade for its business. The Appellate Tribunal was of the opinion that the Privy Council decision covered the case, but felt itself bound by the decision of the Full Bench of the Madras High Court in Abdul Kayum Hussain Sahib v. Commissioner of Income-tax, Madras,1939-7 ITR 652   (Mad) (FB). The Tribunal acceded to the demand for a reference to the High Court and accordingly referred the following question to the High Court for its decision.          Whether on the facts and circumstances of the case the payment of the sum of Rs. 6,111/- made by the assessee under the terms of the agreement entered into with the Director of Industries and Commerce, Madras on 9th November, 1945 was not an item of revenue expenditure incurred in the course of carrying on the business of the assessee and, therefore, allowable under the provisions of S. 10 of the Indian Income-tax Act ?          5. The reference first came before a Division Bench and was then referred to a Full Bench. By its judgment dated April 2, 1953 the Full Bench answered the question in favour of the respondent firm. On a certificate of fitness granted by the High Court the Commissioner of Income-tax, Madras, brought the present appeal to this Court.

Court's reasoning:
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.