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PETITIONER:

ASSAM BENGAL CEMENT CO. LTD.

Vs.

RESPONDENT:

THE COMMISSIONER OF INCOME-TAX,WEST BENGAL

DATE OF JUDGMENT:

11/11/1954

BENCH:

BHAGWATI, NATWARLAL H.

BENCH:

BHAGWATI, NATWARLAL H.

MAHAJAN, MEHAR CHAND (CJ)

DAS, SUDHI RANJAN

AIYYAR, T.L. VENKATARAMA

CITATION:

1955 AIR 89 1955 SCR (1) 876

ACT:

Indian Income-tax Act (XI of 1922), s. 10(2)(xv)-Capital

expenditure-Revenue expenditure-Meaning of and distinction

between the two.

HEADNOTE:

Section 10(2)(xv) of the Indian Income-tax Act, 1922, uses

the term 'capital expenditure' for which no allowance is

given to the assessee. The term 'capital expenditure' is

used as contrasted with the term 'revenue expenditure in

respect of which the assessee is entitled to allowance under

section 10(2) (xv) of the Act.

As pointed out by the Full Bench of the Lahore High Court in

Benarsidas Jagannath, In re [(1946) 15 I.T.R. 185] it is not

easy to define the term 'capital expenditure' in the

abstract or to lay down any general and satisfactory test to

discriminate between a capital and a revenue expenditure.

Though it is not easy to reconcile all the decided cases on

the subject, as each case had been decided on its peculiar

facts, some broad principles could be

973

deduced from what the learned judges have laid down from

time to time:

(1)Outlay is deemed to be capital when it is made for the

initiation of a business, for extension of a business, or

for a substantial replacement of equipment: vide Lord Sands

in Commissioners of Inland Revenue v. Granite City Steamship

Company ( [1927] 13 T. C. 1) and City of London Contract

Corporation v. Styles ( [1887] 2 T. C. 239).

(2)Expenditure may be treated as properly attributable to

capital when it is made not only once and for all, but with

a view to bringing into existence an asset or an advantage

for the enduring benefit of a trade: vide Viscount Cave,

L.C., in Atherton v. British Insulated and Helsby Cables

Ltd. ([1926] 10 T.C. 155). If what is got rid of by a lump

sum payment is an annual business expense chargeable against

revenue, the lump sum payment should equally be regarded as

a business expense, but if the lump sum payment brings in a

capital asset, then that puts the business on another

footing altogether. Thus, if labour saving machinery was

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acquired, the cost of such acquisition cannot be deducted

out of the profits by claiming that it relieves the annual

labour bill, the business has acquired a now asset, that is,

machinery.

The expressions 'enduring benefit' or 'of a permanent

character' were introduced to make it clear that the asset

or the right acquired must have enough durability to justify

its being treated as a capital asset.

(3)Whether for the purpose of the expenditure, any capital

was withdrawn, or, in other words, whether the object of

incurring the expenditure was to employ what was taken in as

capital of the business. Again, it is to be seen whether

the expenditure incurred was part of the fixed capital of

the business or part of its circulating capital. Fixed

capital is what the owner turns to profit by keeping it in

his own possession. Circulating or floating capital is what

he makes profit of by parting with it or letting it change

masters. Circulating capital is capital which is turned

over and in the process of being turned over yields profit

or loss. Fixed capital, on the other hand, is not involved

directly in that process and remains unaffected by it.

One has 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 deductible allowance under

section 10(2)(xv) of the Indian Income-tax Act, 1922. The

question has all along been considered to be a question of

fact to be determined by the Income_ tax Authorities on an

application of the broad principles laid down above and the

Courts of law would not ordinarily interfere with such

findings of

124

974

fact if they have been arrived at on a proper application of

those principles.

The assessee acquired from the Government of Assam a lease

for 20 years (with a clause for renewal) in respect of

certain limestone quarries situated in Khasi and Jaintia

Hills. In addition to the rents and royalties for lease the

assessee as the lessee had to pay two further sums as

protection fees' under the covenants contained in clauses 4

and 5 of the lease. Under clause 4 the portection was in

respect of another group of quarries called the Durgasil

area, and the lessor undertook not to grant for this area

any lease, permit or prospecting licence regarding limestone

to any other party except with a condition that no limestone

should be used for the manufacture of cement. This

protection was given in consideration of a sum of Rs. 5,000

annually payable by the assessee during the whole period of

the lease. Under clause 5 a further protection was given by

the lessor to the lessee in respect of the whole of the

Khasi and Jaintia Hills District for which lessee was to pay

annually Rs. 35,000 to the lessor for 5 years. According to

these covenants the assessee in his capacity as the lessee

paid the lessor a sum of Rs. 40,000 for the accounting years

1944-45 and 1945-46.

Held, that the sum of Rs. 40,000 was a capital expenditure

inasmuch as it was incurred for the acquisition of an asset

or advantage of an enduring nature for the whole of the

business and Was no part of the working or operational

expenses for carrying on the business of the assesses.

Accordingly the payment of Rs. 40,000 was not an allowable

deduction under section 10(2)(xv) of the Indian Income-tax

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Act, 1922.

Countess Warwick Steamship Co. Ltd. v. Ogg [1924] 2 K.B.

292), City of London Contract Corporation v. Styles [18871 2

T.C. 239), Vallambrosa Rubber Co., Ltd. v. Farmer ( [1910] 5

T.C. 529), Ounsworth (Surveyor of Taxes) v. Vickers Limited

( [19151 6 T.C. 671), Atherton v. British Insulated and

Helsby Cables, Ltd. ([1925] 10 T.C. 1.55), Usher's case (

[1915] 6 T.C. 399), John Smith & Son v. Moore (H. M.

Inspector of Taxes), ( [19211 12 T.C. 256), Anglo-Persian

Oil Co. v. Dale ( [1932] 1 K.B. 124), Golden Horse Shoe

(New) Ltd. v. Thurgood (H. M. Inspector of Taxes), (

[1933]18 T.C. 280). Van Den Berghs, Limited v. Clark (H.

M. Inspector of Taxes) (I 19341 19 T.C. 390), Tata Hydro-

Electric Agencies, Limited, Bombay v. Commissioner of

Income-tax, Bombay Presidency and Aden ([19371 L.R. 64 I.A.

215), Sun Newspapers Ltd. and the Associated Newspapers Ltd.

v. The Federal Commissioner of Taxation ([1938] 61 C.L.R.

337), Munshi Gulab Singh and Sons. v. Commissioner of

Income-tax ([1945] 1-4 I.T.R. 66), Commissioner of Income-

tax, Bombay v. Century Spinning Weaving and Manufacturing

Co. Ltd. ([1946] 15 I.T.R. 105), Jagat Bus Service

Saharanpur v. Commissioner Of Income-tax, U.P. & Ajmer

Merwara ([1949] 17 I.T.R. 13), Commissioner of Income-tax,

Bombay v. Finlay Mills Ltd., ([1952] S.C.R. 11),

Commissioner of Income-tax v. Piggot Chapman. & Co.

975

( [1949] 17 I.T.R. 317) and Henriksen (Inspector of Taxes)

v. Grafton Hotel Ltd. ( [1942] 2 K.B. 184), referred to.

Benarsidas Jagannath, In re, ( [1946] 15 I.T.R. 185),

approved.

JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 162 of 1952.

Appeal from the Judgment and Order dated the 7th day of

June, 1951, of the High Court of Judicature at Calcutta in

Income-tax Reference No. 60 of 1950 arising out of the Order

dated the 22nd day of November, 1949, of the Income-tax

Appellate Tribunal in I.T.A. Nos. 1026 and 1027 of 1948-49

N. C. Chatterjee for the appellant.

Porus A. Mehta for the respondent.

1954. November, 11. The Judgment of the Court was

delivered by,

BHAGWATI J.-This appeal from the judgment And order of the

High Court of Judicature at Calcutta with leave under

section 66-A (2) of the Indian Income-tax Act raises an

interesting question as to the line of demarcation between

capital expenditure and revenue expenditure.

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 clause& 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

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grant any lease, permit or prospecting licence regarding the

limestone to any other party

976

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 decision :-

" Whether, in 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-tax Act ".

The High Court answered the question in the affirmative and

hence this appeal.

Clauses 4 and 5 of the deed of lease may be here set out :-

4. The lessee shall pay to the lessor Rs. 5,000 (Rupees

five thousand) only annually during the period of the lease

on November 15th starting from November 15th, 1938, as a

protection fee. In consideration of that protection fee the

lessor undertakes not to allow any person or company any

lease permit or prospecting licence for limestone in the

group of quarries as described in Schedule 2- and delineated

in the plan thereto annexed and therein coloured blue called

the Durgasil area without a condition in such

977

lease permit or prospecting licence that no limestone ,shall

be used for the manufacture of cement.

5.Besides the above protection fee the lessee shall pay to

the lessor annually the sum of Rs. 35,000 (Rupees thirty

five thousand) only for five years starting from the 15th

day of November, 1940, as a further protection fee so long

as the total amount of limestone quarried by the lessee in a

year does not exceed 22,00,000 maunds per year whether

quarried in the area of this lease or elsewhere or obtained

by purchase from other quarries in the Khasi and Jaintia

Hills by the lessees. If, however, in any year the total

amount of limestone converted into cement at the lessee's

Sylhet,Factory exceed 22,00,000 maunds the lessee will be

entitled to an abatement at the rate of Rs. 20 for every

1,000 maunds quarried in excess of 22,00,000 maunds and the

lessee shall pay the sum of Rs. 35,000 less the abatement

calculated on the basis hereinbefore mentioned. Limestone

which is not converted into cement at the lessee's factory

in Sylhet district will not entitle the lessee to any

abatement in the protection fee. The lessor in

consideration of the said payment undertakes not to allow

any person or company any lease permit or prospecting

licence for limestone in the whole of Khasi and Jaintia

Hills district without a condition in such lease permit or

prospecting licence that no limestone extracted shall be

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used directly or indirectly for the manufacture of cement.

The lessor will be empowered to terminate this agreement for

the payment of a protection fee at any time after it has run

for 5 years by giving six month,%' notice in writing by

registered letter addressed to 11, Clive Street, Calcutta

but the lessee will not be entitled to terminate this

agreement during the currency of the lease except with the

consent of the lessor.

It is not clear as to what was meant by the last provision

contained in clause 5, the lessee in the event of his having

paid the sum of Rs. 35,000 for the 5 years having nothing

else to do but enjoy the benefit of the covenant on the part

of the lessor during the subsequent period of the lease.

This provision is however immaterial for our purposes.

978

The line of demarcation between capital expenditure and

revenue expenditure is very thin and learned Judges in

England have from time to time pointed out the difficulties

besetting that task. Lord Macnaghten a Dovey v. Cory(1),

administered the following warning:-

I do not think it desirable for any tribunal to do that

which Parliament has abstained from doing-that is, to

formulate precise rules for the guidance or embarrassment of

business men in the conduct of business affairs. There

never has been, and I think there never will be, much

difficulty in dealing with any particular case on its own

facts and circumstances; and, speaking for myself, I rather

doubt the wisdom of attempting to do more."

Rowlatt J. also expressed himself much to the same effect in

Countess Warwick Steamship Co. Ltd. v. Ogg(1):

"

It is very difficult, as I have observed in previous cases

of this kind, following the highest possible authority, to

lay down any general rule which is both sufficiently

accurate and sufficiently exhaustive to cover all or even a

great number of possible cases, and I shall not attempt to

lay down any such rule."

Certain broad tests have however been attempted to be laid

down and the earliest was the one indicated in the following

observations of Bowen L.J. in the course of the argument in

City of London Contract Corporation v. Styles (3) :-

" You do not use it 'for the purpose of' your concern, which

means, for the purpose of carrying on your concern, but you

use it to acquire the concern."

The expenditure in the acquisition of the concern would be

capital expenditure; the expenditure in carrying on the

concern would be revenue expenditure.

Lord Dunedin in Vallambrosa Rubber Co., Ltd. v. Farmer ( 4),

suggested another criterion at page 536 :

Now, I don't say that this consideration is absolutely final

or determinative, but in a rough way I think it is not a bad

criterion of what is capital

(1) [1901] A.C. 477, 488.

(2) [1924] 2 K.B. 292, 298.

(3)(1887) 2 T.C. 239, 243.

(4)(1910) 5 T.C. 529, 536.

979

expenditure as against what is income expenditure to say

that capital expenditure is a thing that is a going to be

spent once and for all, and income expenditure is a thing

that is going to recur every year."

This test was adopted by Rowlatt J. in Ounsworth (Surveyor

of Taxes) v. Vickers Ltd. (1), and after quoting the above

passage from the speech of Lord Dunedin he observed that the

real test was between expenditure which was made to meet a

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continuous demand for ex. penditure as opposed to an

expenditure which was made once for all. He however

suggested in the course of his judgment another view-point

and that was whether the particular expenditure could be put

against any particular work or whether it was to be regarded

as an enduring expenditure to serve the business as a whole,

thus laying the foundation for the test prescribed by

Viscount Cave L.C. in Atherton's case (2).

Atherton v. British Insulated and Helsby Cables Ltd. (2),

laid down what has almost universally been accepted as the

test for determining what is capital expenditure as

distinguished from revenue expenditure. Viscount Cave L.C.

there observed at page 192:-

"But there remains the question, which I have found more

difficult, whether apart from the express prohibitions, the

sum in question is (in the words used by Lord Sumner in

Usher's case(3) ), a proper debit item to be charged against

incomings of the trade when computing the profits of it; or,

in other words, whether it is in substance a revenue or a

capital expenditure. This appears to me to be a question of

fact which is proper to be decided by the Commissioners upon

the evidence brought before them in each case ; but where,

as in the present case, there is no express finding by the

Commissioners upon the point, it must be determined by the

Courts upon the materials which are available and with due

regard to the principles which have been laid down in the

authorities. Now, in Vallambrosa Rubber Company v. Farmer

(4). Lord Dunedin, as Lord President of the Court of

Session, expressed the opinion that "in a rough way" it was

(1)(1915) 6 T.C. 671.

(2)(1925) 10 T.C. 155.

(3)(19I4) 6 T.C. 399.

(4)(19IO) 5 T.C. 529. 536,

980

"not a bad criterion of what is capital expenditure as

against what is income expenditure to say that capital

expenditure is a thing that is going to be spent once and

for all and income expenditure is a thing which is going to

recur every year" ; and no doubt this is often a material

consideration. But the criterion suggested is not, and was

obviously not, intended by Lord Dunedin to be a decisive one

in every case; for it is easy to imagine many cases in which

a payment, though made "once and for all", would be properly

chargeable against the receipts for the year........ But

when an expenditure is made, not only once and for all. but

with a view to bringing into existence an asset or an advan-

tage for the enduring benefit of a trade, I think that there

is very good reason (in the absence of special circumstances

leading to an opposite conclusion) for treating such an

expenditure as properly attributable not to revenue but to

capital."

Viscount Haldane however in John Smith & Son v. -Moore (H.

M. Inspector of Taxes) (1), suggested another test and that

was the test of fixed or circulating capital, though even

there he observed that it was not necessary to draw an exact

line of demarcation between the fixed and circulating

capital. The line of demarcation between fixed and

circulating capital could not be defined more precisely than

in the description of Adam Smith of fixed capital as what

the owner turns to profit by keeping it in his own

possession, and circulating capital as what he makes profit

of by parting with it and letting it change masters.

This test was adopted by Lord Hanworth M.R. in Anglo-Persian

Oil Co. v. Dale (2), where he observed:-

" I am inclined to think that the question whether the money

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paid is provided from the fixed or the circulating capital

comes as near to accuracy as can be suggested.

Lord Cave's test, that where money is spent for an enduring

benefit it is capital, seems to leave open doubts as to what

is meant by "enduring" .................

(1) (1921) 12 T.C. 266, 282.

(2) [1932] 1 K.B. 124,138.

981

It seems rather that the cases of Hancock (1) and of

Mitchell v. B. W. Noble, Ltd. (2) and of Mallet v. Staveley

Coal & Iron Co. (3), give illustrations that the test of

fixed or circulating capital is the true one; and where, as

in this case, the expenditure -is to bring back into the

hands of the company a necessary ingredient of their

existing business-important, but still ancillary and

necessary to the business which they carry-onthe expenditure

ought to be debited to the circulating capital rather than

to the fixed capital, which is em. ployed in and sunk in the

permanent-even if wasting -assets of the business."

This preference of his was reiterated by Lord Hanworth M.R.

in Golden Horse Shoe (New) Ltd. v. Thurgood (H. M.

Inspector of Taxes)

"The above cases serve to establish the difficulty of the

question rather than to affirm any principle to be applied

in all cases. Indeed, in the last case cited, Atherton v.

British Insulated and Helsby Cables Ltd. (5) Lord Cave says

that a payment 'once and for all'-a test which had been

suggested by Lord Dunedin in Vallambrosa Rubber Company' v.

Farmer(1), was not true in all cases, and he found authority

for that statement in Smith v. Incorporated Council of Law

Reporting for England and Wales (7) and the Anglo-Persian

case(8 ) already referred to is another. The test of

circulating, as contrasted with fixed capital, is as good a

test in most cases, to my mind, as can be found ; but that

involves the question of fact, was the outlay in the

particular case from fixed or circulating capital ?"

Romer L.J. at page 300 pointed out the difficulties in

applying this test also.

"Unfortunately, however, it is not always easy to determine

whether a particular asset belongs to the one category or

the other. It depends in no way upon what may be the nature

of the asset in fact or in law. Land may in certain

circumstances be circulating

(2) [1919] 1 K.B. 25.

(2) (1927] 1 K.B. 719.

(3) (1928] 2 K.B. 405.

(4) (1933) 18 T.C. 280, 298.

125

(5) (1925) 10 T.C. 155, 192.

(6) (1910) 5 T.C. 529.

(7) [1914] 3 K.B. 674.

(8) [1932] 1 K.B. 124.

982

capital. A chattel or a chose in action may be fixed

capital. The determining factor must be the nature of the

trade in which the asset is employed. The land upon which a

manufacturer carries on his business is part of his fixed

capital. The land with which a dealer in real estate

carries on his business is part of his circulating capital.

The machinery with which a manufacturer makes the articles

that he sells is part of his fixed capital. The machinery

that a dealer in machinery buys and sells is part of his

circulating capital, as is the coal that a coal merchant

buys and sells in the course of his trade. So, too, is the

coal that a manufacturer of gas buys and from which he

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extracts his gas. "

In Van Den Berghs, Limited v. Clark (H. M. Inspector of

Taxes)(1), Lord Macmillan however veered round to Viscount

Cave's test and expressed his disapproval of the test of

fixed and circulating capital. He reviewed the various

authorities and stated :

" My Lords, if the numerous decisions are examined and

classified, they will be found to exhibit a satisfactory

measure of consistency with Lord Cave's principle of

discrimination. "

As regards the test of fixed and circulating capital he

observed, at page 432 :-

" I have not overlooked the criterion afforded by the

economists' differentiation between fixed and circulating

capital which Lord Haldane invoked in John Smith & Son v.

Moore(1), and on which the Court of Appeal relied in the

present case, but I confess that I have not found it very

helpful. "

The Privy Council in Tata Hydro-Electric Agencies, Limited,

Bombay v. Commissioner of Income-tax, Bombay Presidency and

Aden(1), pronounced at page 226:-

"What is money wholly and exclusively laid out for the

purposes of the trade' is a question which must be

determined upon the principles of ordinary commercial

trading. It is necessary, accordingly, to attend

(1) (1935) 19 T.C. 390.

(2) (1921) 12 T.C, 266,

(3) (1937) L.R, 64 I.A. 215.

983

to the true nature of the expenditure, and to ask oneself

the question, is it a part of the company's working

expenses; is it expenditure laid out as part of the process

of profit earning ?"

In the case before them they came to the conclusion that the

obligation to make the payments was undertaken By the

appellants in consideration of their acquisition of the

right and opportunity to earn profits, i.e., of the right to

conduct the business and not for the purpose of producing

profits in the conduct of the business. The distinction was

thus made between the acquisition of an income-earning asset

and the process of the earning of the income. Expenditure

in the acquisition of that asset was capital expenditure and

expenditure in the process of the earning of the profits was

revenue expenditure. This test really is akin to the one

laid down by Bowen L.J. in The City of London Contract

Corporation Ltd. v. Style8(1).

Dixon J. expressed a similar opinion in Sun Newspapers

Limited and the Associated Newspapers Limited v. The Federal

Commissioner of Taxation(1), at page 360:-

" But in spite of the entirely different forms, material and

immaterial, in which it may be expressed, such sources of

income contain or consist in what has been called a 'profit-

yielding subject," the phrase of Lord Blackburn in United

Collieries Ltd. v. Inland Revenue Commissioners(3). As

general conceptions it may not be difficult to distinguish

between the profit yielding subject and the process of

operating it. In the same way expenditure and outlay upon

establishing, replacing and enlarging the profit-yielding

subject may in a general way appear to be of a nature

entirely different from the continual flow of working

expenses which are or ought to be supplied continually out

of the returns of revenue. The latter can be considered,

estimated and determined only in relation to a period ,or

interval of time, the former as at a point of time. For the

one concerns the instrument for earning profits

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(1) (1887) 2 T.C. 239.

(2) (1038) 61 C.L.R. 337.

(3) (1930) S.C. 215, 220.

984

and the other the continuous process of its use or

employment for that purpose.

These are the three criteria adopted for distinguishing

capital expenditure from revenue expenditure though it must

be said that preponderance of opinion is to be found in

support of Viscount Cave's test as laid down in Atherton's

case(1).

Viscount Cave's test has also been adopted almost

universally in India: vide Munshi Gulab Singh & Sons V.

Commissioner of Income-tax(2), Commissioner of Income-tax,

Bombay v. Century Spinning, Weaving & Manufacturing Co.

Ltd.(1), Jagat Bus Service, Saharanpur v. Commissioner of

Income-tax, U. P. & Ajmer Merwara(4), and Commissioner of

Income-tax, Bombay v. Finlay Mills Ltd.(5).

In Commissioner of Income-tax, Bombay v. Century Spinning,

Weaving & Manufacturing Co., Ltd.(3), Chagla J. observed, at

page 116:-

" The legal touchstone which is almost invariably applied

is the familiar dictum of Viscount Cave in Atherton's

case(1)............ Romer L.J. felt that this definition had

placed the matter beyond all controversy -see remarks in

Anglo-Persian Oil Co.'s case(6). But Lord Macmillan in Van

Den Bergh's case(1), felt that Romer L.J. had been unduly

optimistic and the learned Law Lord was of the opinion that

the question whether a particular expenditure fell on one

side of the line or other was a task of much refinement.

But on the whole I think that the definition of Viscount

Cave is a good working definition ; and if one were to

supplement it with the definition suggested by Mr. Justice

Lawrence in Southern v. Borax Consolidated Ltd.(1), whether

an expenditure had in any way altered the original character

of the capital asset, we have a legal principle which can be

applied to any set of given facts.

(1) (1925) to T.C. 155.(5) (1952] S.C.R. 11.

(2) [1945]14 I.T.R. 66.(6) [1932] 1 K.B. 124.

(3) [1946] 15 I.T.R. 105.(7) (1935) 19 T.C. 390.

(4) [1949] 18 I.T.R. 13(8) [1942] 10 I.T.R. Suppl. 1, 6.

985

In Benarsidas Jagannath, In re(1), a Full Bench of the

Lahore High Court attempted to reconcile all these decisions

and deduced the following broad test for distinguishing

capital expenditure from revenue expenditure. The opinion

of the Full Bench was delivered by Mr. Justice Mahajan as he

then was, in the terms following:

" It is not easy to define the term 'capital expenditure' in

the abstract or to lay down any general and satisfactory

test to discriminate between a capital and a revenue

expenditure. Nor is it easy to reconcile all the decisions

that were cited before us for each case has been decided on

its peculiar facts. Some broad principles can, however, be

deduced from what the learned Judges have laid down from

time to time. They are as follows :-

1. Outlay is deemed to be capital when it is made for the

initiation of a business, for extension of a business, or

for a substantial replacement of equipment: vide Lord Sands

in Commissioners of Inland Revenue v. Granite City Steamship

Company(1). In City of London Contract Corporation v.

Styles(1), at page 243, Bowen L.J. observed as to the

capital expenditure as follows :

" You do not use it 'for the purpose of' your concern, which

means, for the purpose of carrying on your concern, but you

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use it to acquire the concern. "

2. Expenditure may be treated as properly attributable to

capital when it is made not only once and for all, but with

a view to bringing into existence an asset or an advantage

for the enduring benefit of a trade: vide Viscount Cave L.C.

in Atherton v. British Insulated and Helsby Cables Ltd.(1).

If what is got rid of by a lump sum payment is an annual

business expense chargeable against revenue, the lump sum

payment should equally be regarded as a business expense,

but if the lump sum payment brings in a capital asset, then

that puts the business on another footing altogether. Thus,

if labour saving machinery was acquired, the cost of such

acquisition cannot be

(1) [1946] 15 I.T.R. 185. (3) (1887) 2 T.C. 239.

(2) (1927) 13 T.C. 1, 14. (4) (1925) 10 T.C. 155.

986

deducted out of the profits by claiming that it relieves the

annual labour bill, the business has acquired anew asset,

that is, machinery.

The expressions 'enduring benefit' or 'of a permanent

character' were introduced to make it clear that the asset

or the right acquired must have enough durability to justify

its being treated as a capital asset.

3.Whether for the purpose of the expenditure, any capital

was withdrawn, or, in other words, whether the object of

incurring the expenditure was to employ what was taken in as

capital of the business. Again, it is to be seen whether

the expenditure incurred was part of the fixed capital of

the business or part of its circulating capital. Fixed

capital is what the owner turns to profit by keeping it in

his own possession. Circulating or floating capital is what

he makes profit of by parting with it or letting it change

masters. Circulating capital is capital which is turned

over and in the process of being turned over yields profit

or loss. Fixed capital, on the other hand, is not involved

directly in that process and remains unaffected by it".

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. The

question however arises for consideration where expenditure

is incurred while the business is going on and is not

incurred either for extension of the business or for the

substantial replacement of its equipment. 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

987

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. 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

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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. If it 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

deductible allowance under section 10(2) (xv) of the Income-

tax Act. The question has all along been considered to be a

question of fact to be determined by the Income-tax

authorities on an application of the broad principles laid

down above and the courts of law would not ordinarily

interfere with such findings of fact if they have

988

been arrived at on a proper application of those principles.

The expression "once and for all" used by Lord Dunedin has

created some difficulty and it has been contended that where

the payment is not in a lump sum but in instalments it

cannot satisfy the test. Whether a payment be in a lump sum

or by instalments, what has got to be looked to is the

character of the payment. A lump sum payment can as well be

made for liquidating certain recurring claims which are

clearly of a revenue nature, and on the other hand payment

for purchasing a concern which is prima facie an expenditure

of a capital nature may as well be spread over a number of

years and yet retain its character as a capital expenditure.

(Per Mukherjea J. in Commissioner of Income-tax v. Piggot

Chapman & Co.(1). The character of the payment can be deter-

mined by looking at what is the true nature of the asset

which has been acquired and not by the fact whether it is a

payment in a lump sum or by instalments. As was otherwise

put by Lord Greene M.R. in Henriksen (Inspector of Taxes) v.

Grafton Hotel Ltd.(2):

"The thing that is paid for is of a permanent quality

although its permanence, being conditioned by the length of

the term, is shortlived. A payment of this character

appears to me to fall into the same class as the payment of

a premium on the grant of a lease, which is admittedly not

deductible".

The case of Tata Hydro-Electric Agencies Ltd., Bombay v.

Commissioner of Income-tax, Bombay Presidency and Aden(3)

affords another illustration of this principle. It was

observed there:-

"If the purchaser of a business undertakes to the vendor as

one of the terms of the purchase that he will pay a sum

annually to a third party, irrespective of whether the

business yields any profits or not, it would be difficult to

say that the annual payments were made solely for the

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purpose of earning the profits of the business".

(1) [1949] 171.T.R. 3I7. 329.

(3) (193 7) L. R. 64 1, A 215.

(2) [1942] 2 K.B. 184.

989

The expression "once and for all" is used to denote an

expenditure which is made once and for all for procuring an

enduring benefit to the business as distinguished from a

recurring expenditure in the nature of operational expenses.

The expression "enduring benefit" also has been judicially

interpreted. Romer L.J. in Anglo-Persian Oil Company,

Limited v. Dale(1) agreed with Rowlatt J. that by enduring

benefit is meant enduring in the way that fixed capital

endures:

"An expenditure on acquiring floating capital is not made

with a view to acquiring an enduring asset. It is made with

a view to acquiring an asset that may be turned over in the

course of trade at a comparatively early date".

Latham C. J. observed in Sun Newspapers Ltd. & Associated

Newspapers Ltd. v. Federal Commissioner of Taxation(2):

"When the words 'permanent' or 'enduring' are used in this

connection it is not meant that the advantage which -will be

obtained will last for ever. The distinction which is drawn

is that between more or less recurrent expenses involved in

running a business and an expenditure for the benefit of the

business as a whole e.g -"enlargement of the goodwill of a

company permanent improvement in the material or immaterial

assets of the concern".

To the same effect are the observations of Lord Greene M. R.

in Henriksen (H.M. Inspector of Taxes) v. Grafton Hotel Ltd.

(3 ) above referred to.

These are the principles which have to be applied in order

to determine whether in 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

license 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

(1) (1932] 1 K.B. 124, 146.

(2) (1938) 61 C.L.R. 337, 355.

126

(3) (1942) 24 T.C. 453.

990

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 enure 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 a

recurring payment. The fact however that it was a recurring

payment was immaterial, because one bad 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 acquired. 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 expenses of the

business but went to appreciate the whole of the capital

asset and make it more profit yielding. The expenditure

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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

991

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 no 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

enured 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.

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 Act.

The appeal therefore fails and must be dismissed with costs.

Appeal dismissed.