Judgment:
D.P. Mohhpatra, J.
1. These two cases have come before this court on references by the Income-tax Appellate Tribunal, Cuttack Bench, under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act'), at the instance of the assessee. The question referred by the Tribunal for consideration by this court reads as follows :
'Whether, under the facts and circumstances of the case, the Tribunal was justified in holding that the expenses incurred amounting to Rs. 11,250 under the head ' Lease contract paid ' was of a capital nature ?'
2. The Tribunal in its order came to hold that the question whether a particular expenditure can be said to have been incurred on capital or revenue account is a mixed question of fact and law and the finding in the case, being based on interpretation of a document, a question of law arises out of the order. Accordingly, it allowed the applications filed by the assessees and made the references.
3. The facts relevant for the present purpose may be shortly stated thus :
The assessee, a partnership firm, entered into two agreements on December 14, 1971, with Shri Jagannath Temple Managing Committee whereby it was permitted to quarry stones, namely, washed gravels, morum earth, genguti and raw stones from the quarries detailed in the schedules to the agreements, for a total sum of Rs. 16,000, for a period of three years from October 1, 1971, up to September 30, 1974, unless determined earlier. Fifty per cent. of the aforesaid amount was paid on September 3, 1971, and the balance was to be paid in one instalment on pr before September 30, 1972. Under the agreement, the licensee could make use of a crusher machine and undertake blasting operations with the help of dynamite after obtaining necessary permission from the competent authority, for the sole purpose of quarrying and carrying on such other operations necessarily connected with quarrying. The agreement also permitted the licensee to enter into arrangements with third parties in regard to quarrying operations subject to written permission of Shri Jagannath Temple Managing Committee obtained in advance. Under the terms of the agreement, the licensee undertook to deliver vacant possession of the quarry on October 1, 1974, the day when the licence expired. The terms of both the agreements were identical.
4. During the assessment year 1973-74, the assessee claimed to have paid a sum of Rs. 11,250 towards lease money under the aforesaid agreements and claimed deduction of the same under Section 37 of the Act. The assessee contended that the amount having been spent by it to acquire only raw materials for its business and not any tangible asset of a permanent nature, it was in the nature of revenue expenditure and, therefore, deductible under the provisions of the Act, On the other hand, it was the contention of the Revenue that by spending the aforesaid amount, the assessee acquired the right to win, raise and carry away stones of different types from the quarry during the period mentioned in the contracts and, as such, it was a case of acquisition of a right of a permanent nature and not merely acquiring raw materials for the business of the assessee. According to the Revenue, the expenditure was in the nature of capital expenditure and the assessee was not entitled to deduction of the same while computing its income. The Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal accepted the contention of the Revenue and decided the question against the assessee.
5. From the facts narrated in the foregoing paragraphs, the question that arises for determination is whether, on the facts and circumstances of the case, the amount of Rs. 11,250 spent for payment of lease money was in the nature of revenue expenditure or capital expenditure. This question as to whether a particular amount spent by the assessee for its business is in the nature of revenue expenditure or capital expenditure has very often arisen in cases under the Act. A large number of decisions are available on the point and a good number were cited before us at the hearing of these cases. On a perusal of the decisions, what emerges broadly is that the criteria for determining the question of capital or revenue expenditure cannot be decided on a strait-jacket formula. No particular set of criteria can be said to be of universal application. The answer to the question depends on the facts and circumstances of the particular case.
6. Let me at the outset discuss some of the cases cited by learned counsel for the parties. The Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT : [1955]27ITR34(SC) considered a case where the appellant-company acquired from the Government of Assam, for the purpose of carrying on the manufacture of cement, a lease of certain limestone quarries for a period of twenty years for certain half-yearly rents and royalties. In addition to the rents and royalties, the appellant agreed to pay the lessor annually a sum of Rs. 5,000 during the whole period of the lease as a protection fee and in consideration of that payment, the lessor undertook not to grant to any person any lease, permit or prospecting licence for limestone in a group of quarries without a condition that no limestone should be used for the manufacture of cement. The appellant also agreed to pay Rs. 35,000 annually for five years as a further protection fee and the lessor in consideration of that payment gave a similar undertaking in respect of the whole district. The question was whether in computing the profits of the appellant, the sums of Rs. 5,000 and Rs. 35,000 paid to the lessor by the appellant could be deducted under Section 10(2)(xv) of the Indian Income-tax Act, 1922. The Supreme Court held that the payment of Rs. 40,000 was capital expenditure and was, therefore, rightly disallowed as a deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922, The court, after considering several decisions of courts in India and those in England, concluded that the synthesis attempted by the Full Bench of the Lahore High Court in the case of Benarsidas Jagannath, In re , enunciated the principles correctly. The relevant portion of the judgment is extracted below : [1955]27ITR34(SC)
'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 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 revenue expenditure.....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.'
7. The House of Lords in the case of Hood Barrs v. IRC [1958] 34 ITR 238 considered a case where a timber merchant, soon after commencing business, entered into two agreements with a company in which he owned 49 per cent. of the capital, undertaking to pay 24,275 pounds and 24,900 pounds, respectively, in respect of a large number of trees growing on the company's land. He acquired the right to 'mark, fell and carry away all the said trees and complete all the operations authorised at such times as he.....shall consider convenient.' no time limit being fixed. The trees had not been selected or identified. The House of Lords by majority held that in computing the timber merchant's income-tax liability, the sums payable should be treated as capital expenditure and not as the price for stock-in-trade and accordingly should not be debited in calculating his trading profits. His only right was to fell and carry away the trees which remained the vendor's property till severance.
8. In the case of Pingle Industries Ltd. v. CIT : [1960]40ITR67(SC) , the Supreme Court considered a case where the assessee-company which carried on the business of selling Shahabad flag stones obtained from a jagirdar under a contract the right to extract stones from quarries situated in six named villages for a period of twelve years on an annual payment of Rs. 28,000. To safeguard payment, a sum of Rs. 96,000 was paid in advance as security of which Rs. 8,000 was to be adjusted annually against Rs. 28,000 and the balance of Rs. 20,000 was payable in monthly instalments of Rs. 1,660-10-8. The assessee had only the right to excavate stones and undertook not to manufacture cement and the jagirdar undertook not to allow any other person to excavate stones in those areas. There was also another similar lease taken from the Government for a period of five years under which the appellant had to pay Rs. 9,000 per year in monthly instalments of Rs. 750 each. The question was whether the amounts paid by the assessee to the jagirdar and the Government each year were revenue expenditure allowable under Section 12(2)(xv) of the Hyderabad Income-tax Act corresponding to Section 10(2)(xv) of the Indian Income-tax Act, 1922. The court, by its majority view, held that the assessee acquired by his long-term lease the right to win stones and the leases conveyed to him a part of land. The stones in situ were not his stock-in-trade in a business sense but a capital asset from which, after extraction, he converted the stones into his stock-in-trade. The payment, though periodic in fact, was neither rent nor royalty but a lump payment in instalments for acquiring a capital asset of enduring benefit to his trade. The amounts were outgoings on capital account and were not allowable deductions. The court, on consideration of various tests laid down in different cases, came to hold that the stones are not lying on the surface but are part of a quarry from which they have to be extracted methodically and skilfully before they can be dressed and sold. These deposits are extensive and the work of the assessee carries him deep under the earth. Such a deposit cannot be described as the stock-in-trade of the assessee but only stones detached and won can be so described.
9. In the case of H. J. Rorke Ltd. v. IRC [1962] 44 ITR 394, the Chancery Division considered the facts that a company which carried on the business of opencast coal mining entered into an agreement with a landowner, whereby certain land was let to the company for one year on payment of a royalty for every ton of coal won from the land, the company covenanting to restore the surface of the land on the completion of the opencast mining operations. The company further agreed to pay to the lessor 250 pounds for the right to enter upon the land demised and a further sum of 250 pounds as compensation for the diminution in value of the land and the destruction of land drains, etc. In 1958, the company made two further agreements with the landowner in substantially the same terms. The payments for the right of entry and for diminution in value of the land provided for in all three agreements were a normal and recurrent incident in the trade of opencast coal mining as carried on by the company and others in the industry. It was held that no distinction could be drawn between the payments for the right of entry and the payments for diminution in value, and that, since the company in making the payments were not buying circulating capital, i.e., coal, but were acquiring rights which enabled them to obtain circulating capital, the whole of the payments were marked as being of a capital nature, and, notwithstanding that the transactions were transient and recurrent, fell to be disregarded in computing the profits or gains of the company for profits tax purposes.
10. In another case reported in the same volume at page 689, K. T. M. T. M. Abdul Kayoom v. CIT : [1962]44ITR689(SC) wherein the assessee-firm which carried on business in purchase and sale of conch (chank) shells took on lease from the Government 'the exclusive rights, liberty and authority to fish for and take and carry away all chank shells' in the sea off the coastline of a certain area specified in the lease, for a period of three years from July 1, 1944, to June 30, 1947, on a consideration of a yearly rent of Rs. 6,111. The assessee claimed that, in computing its annual income from the sale of chanks, it was entitled to deduct the yearly rent of Rs. 6,111 paid to the Government as business expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922, but the Department held that it was capital expenditure. The Supreme Court, on consideration, held that the amount of Rs. 6,111 paid by the assessee was an amount paid to obtain an enduring asset in the shape of an exclusive right to fish ; the payment was not related to the chanks, which it might or might not bring to the surface; it was not an amount spent in acquiring its stock-in-trade but for acquiring an asset from which it may collect its stock-in-trade. It was, therefore, an expenditure of a capital nature, and though it was incurred for the purposes of the assessee's business, it was not allowable under Section 10(2)(xv).
11. The Supreme Court in the case of CIT v. Jalan Trading Co. (P.) Ltd. : [1985]155ITR536(SC) considered the question in the light of the facts that the manufacturing company gave its sole selling agency to a firm by an agreement for two years with a right of renewal. The assessee was a private company newly incorporated. Under a deed of assignment, the benefits of the agreement were assigned to the assessee and under the assignment, the assessee carried on the business as the selling agents of the manufacturing company. On the basis of the option for renewal exercised by the assessee, an agreement was entered into between the manufacturing company and the assessee in respect of the sole selling agency and with a renewal clause. As per the terms of the agreement, the assessee-company paid 75 per cent. of its net profits in the relevant assessment year to the manufacturing company and claimed it as a business deduction. The court held that the assessee-company had acquired an asset of an enduring nature in lieu of the payment in dispute and that the expenditure related to acquisition of a capital asset and was not admissible as a deduction under Section 10(2)(xv). The court approved the synthesis made by Mahajan J. (as he then was) in the Full Bench of the Lahore High Court in Benarsidas Jagannath, In re .
12. Now, some of the decisions cited at the Bar taking the other view may be noticed.
13. In the case of Mohanlal Hargovind of Jubbulpore v. CIT [1949] 17 ITR 473, the assessees carried on business at several places as manufacturers and vendors of bidis. The bidis were composed of tobacco rolled in leaves of a tree known as tendu leaves, which were obtained by the assessees by entering into a number of short-term contracts with the Government and other owners of forests. Under the contracts, in consideration of a certain sum payable in instalments, the assessees were granted the exclusive right to pick and carry away the tendu leaves from the forest area described. The assessees were allowed to coppice small tendu plants a few months in advance to obtain good leaves and to pollard tendu trees a few months in advance to obtain better and bigger leaves. The picking of the leaves, however, had to start at once or practically at once and to proceed continuously. It is clear from the aforementioned facts that the tendu leaves were one of the raw materials for manufacture of bidis, the business in which the assessees were engaged. The contracts permitted the assessees to pick tendu leaves from the forest in question in the same shape and form in which they were used in the manufacturing process. Therefore, it was clear that what the assessees got under the contract was a right to acquire stock-in-trade or raw materials and not the right to acquire something which was not raw material but from which by further process of manufacture or otherwise raw material for its business could be acquired. The case is thus distinguishable on the facts from the present case,
14. The Bombay High Court in the case of CIT v. Cinceita Private Ltd. : [1982]137ITR652(Bom) considered the following facts : the assessee took on lease for an initial period of 20 years a building on a monthly rental of Rs. 3,500, with an option for renewal of the lease at a higher rent, to be used as the business premises of the assessee. For the relevant assessment year, the assessee claimed as deduction an expenditure of Rs. 10,700 towards registration fees, stamp duty and solicitors' fees in connection with the drawing up of the lease deed. The Income-tax Officer disallowed the entire expenditure on the ground that it had been incurred by the assessee for acquiring a benefit of an enduring nature and hence was capital expenditure. The Appellate Assistant Commissioner upheld the order of the Income-tax Officer. On further appeal, the Tribunal held that what the assessee had secured for itself was the use of the leasehold property and it was not for securing that right that it had incurred the expenditure, that the expenditure was incurred to meet certain expenses which the assessee had necessarily to incur in order to conform to the legal requirements for executing a valid lease deed, that the expenditure was laid out to facilitate the carrying on of the business of the assessee and, therefore, was permissible as revenue expenditure. On a reference, the High Court held that though the period of the lease was for 20 years with an option for renewal at a higher rent, yet the expenditure claimed by the assessee was the only expenditure required for drawing up a proper and effective lease deed, namely, the expenditure in respect of the stamp duty, registration charges and professional fees paid to the solicitors, who prepared and got registered the lease deed. There was no element of premium in the amount claimed as expenditure for acquiring the leasehold premises. Moreover, the expenditure would have been the same even if the lease was for a shorter duration provided the period of the lease was more than one year. Merely because the period of the lease was for a longer duration, it could not be regarded as decisive of the circumstance as to whether the asset or advantage secured was of an enduring nature. Therefore, the sum of Rs. 10,700 was allowable as revenue expenditure.
15. From the facts stated above, it is apparent that the amount in dispute was spent for drawing up a proper and effective lease deed, the amount was not spent directly for acquisition of any benefit/advantage of a permanent nature. It was an amount spent for facilitating business transactions of the assessee. As such, the case was of a nature different from that under consideration here.
16. In the case of CIT v. M. B. Umbrella Industries : [1984]145ITR292(MP) the assessee-firm which derived income from the business of manufacture of umbrellas, paid a sum of Rs. 25,001 towards 'tank' trade mark commission to another firm (old firm) which was manufacturing umbrellas with that trade mark. Under an agreement between the assessee-firm and the old firm, the assessee was allowed the use of the trade mark for a period of five years on payment of compensation of Rs. 25,001 per year. The Madhya Pradesh High Court held that the sum of Rs. 25,001 paid for exploitation of the trade mark was deductible as revenue expenditure. The court accepted the finding of the Commissioner (Appeals) that there was no sale of the trade mark by the old firm to the assessee-firm, that the assessee-firm only acquired a licence to use the same formula as laid down in the agreement for a limited period of time by payment of a licence fee, that the payment of commission was in the nature of royalty on the trade mark used by the assessee and was not a price paid for the acquisition of a capital asset which continued to belong to the old firm and that, therefore, the sum of Rs. 25,001 was deductible as revenue expenditure. This case too is distinguishable on the facts from the facts of the present case.
17. The Karnataka High Court in the case of CIT v. Rex Talkies : [1984]148ITR560(KAR) considering the question of capital and revenue expenditure observed that if an outgoing or expenditure is so related to the carrying on or the conduct of the business, then it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset of an enduring nature. In that case, the assessee, a tenant of a cinema theatre and running shows in it, claimed deduction of expenditure incurred on repair to the ceiling, repair and polishing of the furniture, fittings, etc., of the theatre. The court held that from the nature of expenditure that the assessee had to incur towards effecting repairs to the ceiling and repairs and polishing of the furniture, etc., it was clear that the assessee, who was running cinema shows in the theatre as a tenant, had to preserve and maintain the theatre in a fit condition and make it more attractive and comfortable. What was spent by the assessee was only to run his business more efficiently or more profitably leaving the fixed assets untouched. Therefore, the amount spent on repairs and renovation was allowable as revenue expenditure.
18. A bare reading of the aforesaid facts is sufficient to clarify the position that the expenditure in question was not made for acquiring any benefit of a permanent or enduring nature. It was merely for proper maintenance of the cinema hall used by the assessee as a tenant. The expenditure was made for proper and efficient management of the business of the assessee. As such it was clearly in the nature of revenue expenditure and not capital expenditure.
19. Coming to the facts of the present case, as noticed earlier, in the agreements entered into between the assessee and Shri Jagannath Temple Managing Committee, the former was given the right to win, raise and remove stones from quarries specified in the agreements. The lessee was further permitted to engage third parties for the purpose of the operation and undertake blasting for the said purpose. The arrangements were operative for a period of three years. From the orders of the Income-tax Officer or the Appellate Assistant Commissioner or the Tribunal, the exact nature of business carried on by the assessee is not clear. But it is clear that the arrangement under the agreements could not be construed to mean that it enabled the assessee to acquire stock-in-trade or raw materials as in the case of purchasing the same from a shop. As observed in some of the cases discussed earlier, it may be said that the assessee acquired the right to carry on quarrying operations and pick up and remove stones from which it could obtain stock-in-trade or raw materials. Therefore, the expenditure incurred for obtaining the right under the contract was in the nature of capital expenditure since it bestowed on the assessee benefit of a permanent nature. Though the criteria like duration for which the arrangement under the contract was to prevail, whether the amount was spent once for all or it was of a recurring nature are relevant considerations, none of them by itself is conclusive of the matter.
20. After giving my anxious consideration to the facts and circumstances of the case, the terms of the agreements entered into between the assessee and Shri Jagannath Temple Managing Committee and the principles enunciated in the decisions discussed in the foregoing paragraphs, I am of the view that the departmental authorities and the Tribunal committed no error in holding that the expenditure in question was not revenue expenditure but capital expenditure and hence not admissible for deduction acclaimed by the assessee.
21. The question referred is, therefore, answered in the affirmative.
K.P. Mohapatra, J.
22. I agree.