1954 Supreme(SC) 160

SUPREME COURT OF INDIA
11th November, 1954
M.C. MAHAJAN C.J.I., S.R. DAS, BHAGWATI AND VENKATARAMA AYYAR JJ.
Messrs. Assam Bengal Cement Co. Ltd. Appellant
Versus
Commr. of Income-tax, West Bengal, Respondent.
Civil Appeal No. 162 of 1952.
Advocates appeared
Mr. N. C. Chatterjee, Sr. Advocate, for Applant; Mr. Porus A. Mehta, Advocate, for Respondent.

Headnote:Section 10 (2) (xv)-Line of demarcation between capital expenditure and revenue expenditure-Lease from Government of limestone quarries.

       In 1938 the Appellant company acquired from the Government of Assam a lease of certain limestone quarries for the purpose of carrying on the manufacture of cement. The lease was for 20 years commencing on the 1st November 1938, with a clause for renewal for a further term of 20 years. In addition to the rents and royalties reserved, two futher sums were payable under the special covenants contained in the lease as "protection fees." Under clause 4 the protection was in respect of another group of quarries, 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 of the 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 1950. In the accounting years 1944.45 and 1945-46 the company paid its lessor sum 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 20(2) (xv) of the Income-tax Act in the assessments for the assessment years 1945-46 and 1946-47. The Income-tax authorities rejected the contention and on reference the High Court also agreed with the Income-tax authorities.

       Held1: (1) 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 ensure 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 in Atherton v. British Insulated and Helsby Cables Ltd.2

       It was not a lump sum payment but spread over the whole period of lease and it could be urged that it was a recurring payment. The fact however that it was a recurring payment was immaterial, because we had 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 carryon 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 Act.

       (2) 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

       1. Affirming the view of the High Court.

       2. 10 Tax Cases 155 in which it was laid down "In Vallambrasa Rubber Company v. Farmer, 1910 S.C. 519 : 5 T.C. 529, Lord Dunedin, as Lord President of the Court of Session expressed the opinion that in a rough way it was 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 for all but with a view to bringing into existence an asset or an advantage 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." no doubt spread over a period of 5 years, but the advantage which the company got as a result of the payment was to endure 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 Hill Districts 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 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 nonetheless 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.1-Section 10 (2) (xv)-Line of demarcation between capital expenditure and revenue expenditure-Lease from Government of limestone quarries.