ASSAM BENGAL CEMENT CO. LTD. versus THE COMMISSIONER OF INCOME-TAX,WEST BENGAL

1954 MaMsh Prasad v. Tlle$fatf!of Ult., I+a¢ah J•gtµ1nadhadas ].

'l72 SUPREME COURT REPORTS

Code. On the material we are not satisfied that there is any reason to reverse the findings of the courts belmf that the sanction is valid.

All the contentions raised before us are untenable. This appeal must accordingly fail. It has been repre-sented to us that the appellant who has been refused bail by this court when leave to appeal was granted but has been granted bail subsequently has already served nearly six months of imprisonment in the intervening period, that he is young man and has lost his job. In the circumstances we consider that it is not neces-sary to send him back to jail. The result, therefore, is that the appeal is dismissed subject to the modification of sentence of imprisonment. We reduce the sentence of imprisonment to the period already undergone. The sentence of fine stands.

Appeal dismissed

ASSAM BENGAL CEMENT CO. LTD.

THE COMMISSIONER OF INCOME-TAX, WEST BENGAL

[MEHAR CHAND MAHAJAN C.J., s. R. DAS, BHAGWATI and VENKATARAMA AYYAR JJ.J

Indian Income-tax Act (XI of I922), s, 10(2)(xv)-Capital expenditure-Revenue expenditure-Meaning of and distinction between the two.

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 fagannath, In re [(1946) 15 l.T.R. 185], it is not easy to define the term 'capital expenditure' in the abstract or to lay down any g~neral and satisfactory test to discriminate between capital ancf_ revenue expenditure. Though it is not easy to re-concile al\ the decided i;:ases on the subject, as each case had been decided on its peculiar fac;ts, so1ne broad principles could be

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 business, for extension of business, or for sub-stantial replacement of equipment: vide Lord Sands in Commis-sioners of Inland Revenue v. Granite City Steamship Company ([ 1927] 13 T. C. I) 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 view to bringing into exi~tence an asset or an advantage for the endur-ing benefit of 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 lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as business expense, but if the lump sum payment brings in 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 deducted out of the profits by claiming that it relieves the annual labour bill, the b_usiness has acquired new asset, that is, machi-nery. The expressions 'enduring benefit' or 'of 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 capital asset. ( 3) Whether for the purpose of the expenditure, any capi-tal was withdrawn, or, in other words, whether the object of incur-ring 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 capitai is what the owner turns to profit by keeping it in his own possession. Circulating or floating capi-tal 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 fair appreciation of the whole situation the expenditure incurred in particular case is of the nature of capital expenditure er revenue expenditure in which latter event only it would be deductable allowance under section 10(2)(xv) of the Indian Income-tax Act, 1922. The question has all along been considered to be 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 wou:ld not ordinarily interfere with such findin,gs of

Assam Bengal Cement Co. Lld. v.

Commissioner of lncomr.-tax,

. West Bengal BhagwatiJ.

Assam Beng'al · -Cement Co. Ltd. v.

Commissioner· of Income-tax,_ We.st Bengal. BhagwatiJ.

fact if they have been arrived at on proper application of those principles.

The assessee acquired from the Government of Assam lease for 20 ye::irs (with clause for renewal) in respect of certain lime-stone 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 con-tained in clauses 4 and 5 of the lease. Under clause 4 the portec-tion was in respect of another group of quarries called the Durgasii 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 condition that no lin1cstone should be used for the manufacture of cement. This protection was given in con:. sideration of sum of Rs. 5,000 annually payable by the assissee during the whole period of the lease. Under clause S 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 sum of Rs. 40,000 for the accounting years 1944-45 and 1945-46.

Held, that the sum of Rs. 40,000 was capital expenditure inasmuch as it was incurred for the acquisi.tion 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 assessee. Accordingly the payment of Rs. 40,000 was not an allowable deduction under section 10(2)(xv) of the Indian lncome-tax Act, 1922.

Countess Wai·wick Steamship Co. Ltd. v. Ogg ([1924] 2 K.B. 292), City of London Contract Corporation v. Styles ( [ 1887] 2 T.C. 239), Vallambrosa Rubber Co .. Ltd. v. Farmer ([1910] 5 T.C. 529), Ounsworth (Surveyor of Taxes) v. Vickers Limited ([1915] 6 T.C. 671), Atherton v. British Insulated and Helsby Cables, Ltd. ([1925] 10 T.C. 155), Usher's case ([1915] 6 T.C. 399), John Smith & Son v.: Moore (H. M. Inspector of Taxes), ([1921] 12 T.C. 256), Anglo-Per-sian 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) ([1934] 19 'f.C. 390), Tata Hydro~Electri"c Agencies, Limited, Bombay v. Commissioner of Income-tax, Bombay Presidency and Aden ( [ 1937] L.R. 64 LA. 215), Sun ·Newspapers Ltd. and the Associated Neivs-, papers Ltd. v. The Federal Commissioner of Taxation ([1938] 61 C.L.R. 337), Munshi Guiab Singh and Sons v. Commissioner of Income-tax ([1945] 14 l.T.R. 66), Con1missio11er of Income-tax, Bombay v. Century Spinning Hleaving and Manufacturing Co. Ltd. ([1946] 15 l.T.R. 105), /agat Bus Service Saharanpur v. Commis-, sioner of Income-tax, U.P. & Ajmer Merwara ([1949] .17 l.T.R. 13), Commissioner of Income-tax, Bombay v. Finlay Mills Ltd., ([1952 J .S.C.R. 11), Commissioner of Income-tax v. Piggot Chapman & Co •.

([1949] 17 I.T.R. 317) and Henriksen (Inspector of Taxes) v. Grafton Hotel L.td. ((1942] 2 K.B. 184), referred to.

Benarsidas /agannath, In re, ([1946] 15 I.T.R. 185), approved. CIVIL APPELLATE JuRISDICTION: Civil Appeal No. 162 of 1952.

Civil Appeal No.

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 LT.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 Qrder 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 com-pany acquired from the Government of Assam 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 clause for renewal for further term of 20 years. The rent reserved was half-yearly rent certain <>f Rs. 3,000 for the first two years and thereafter 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 dauses 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 prospect-ing licence regarding the limestone to any other _party

Assam Bengal Cement Co. Ltd. v .

. Commissioner. of Income.tax, West Bengal. Bhagwati].

Assam lJf:ngal Cement Co. Lid. v. Commissiqnqr of Income-tax, 'Wt'st Bengal. Bhagwati].

[ 1955);

therein without condition that no limestone should be used for the manufacture of cement in consideration, of sum of Rs. 5,000 payable annually during the whole period of the lease. Under clause 5 further protection was given in respect of the whole of the Khasi and J aintia Hills District, similar undertaking being given by the lessor in consideration of 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 accord-· ance 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 affir--mative 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 protection fee. In considera-tion 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 condition in such1

lease permit or prospecting licence that no limestone shall be used for the ma;mfacture of cement. 5. Besides the above protectiori fee the lessee sh<tll pay to the lessor annually the sum of Rs. 35,000 (Rupees thirty five thousand) only for five years start· ing from the 15th day of November, 1940, as further protection fee so long as the total amount of limestone quarried by the lessee in · 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. Jf, 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 ma,1,mds 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 c.ement at the lessee's factory in Sylhet district will not entitle the lessee to any abatement in the protec-tion fee. The lessor in consideration of the said payment undertakes not to allow any person or com-pany any lease permit or prospecting licence for lime-stone in the whole of Khasi and Jaintia Hills district withou1t condition in such lease permit or. prospecting licence that no limestone extracted shall be used directly or indirectly for the manufacture of cement. The lessor will be empowered to terminate this agree-ment for the payment of protection fee at any time after it has run for 5 years by giving six months' 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 StJbSe· quent period of the lease. This provision is however immaterial for our purposes.

1954 Assam Bengai Cement Co. Ltd. v. f;ommissioner of lncome~tax, West Bengal. · Bhagwati ].

Assam Bengal <Jement Co. Ltd. v. Commissioner ef lncome·tax, .West Bengal. Bhagwati].

The line of demarcation between capi.tal expenditure and revenue expenditure is very thin and le;uned Judges in England have from time to time pointed out the difficulties besetting that task. Lord Macnaghten in Dovey v. Cory('), 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 embarrass-ment of business men in the conduct of business affairs. There never has been, and I think there never will be, mnch difficulty in dealing with any parti-cular 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(2): "It is very difficult, as I have observed in previous cases of this kind, following the highest possible autho-rity, to lay down any general rule which is both suffi-ciently accurate and sufficiently exhaustive to cover all or even great number of possible cases, and I shall not attempt to lay down any such rule."

Rowlatt J. also expressed himself much to the same effect in Countess Warwick Steamship Co. Ltd. v. Ogg(2):

Certain broad tests have however been attempted to be laid down and the earliest was the one indic;.ted in the following observations of Bowen L.J. in the course of the argument in City of London Contract Corporation v. Styles(') :-

"You do not use it 'for the purpose of' your con-cern, 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 ( '), suggested another criterion at page 536 :-. "Now, I don't say that this consideration is ab-solutely final or determinative, but in rough way . I think it is not bad criterion of what is capital \1) [1901] A.C. 477, 488. (3) (1887) 2 T. C. 239, 243. (2) [1924] 2 K.B. 292. 298. (4) (1910) 5 T.C. 529, 536.

J ... >·

expenditure as against what is income expenditure to say that capital expenditure is thing that is going to be spent once and for all, and income expenditure is 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 quot-ing the above passage from the speech of Lord Dunedin he observed that the real test was between expenditure which was made to ~meet 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 whe-ther 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 whole, thus laying the foundation for the test prescrib-ed by Viscount Cave L.C. in Atherton's case (2). Atherton v. British Insulated and Helsby Cables Ltd. ([1 ]), 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 Summer in Usher's case ([8]), proper debit item to be charged against incomings of the trade when computing the profits of it ; or, in other words, whe-ther it is in substance revenue or capital expendi-ture. This appears to me to be 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 rough way" it was (1) (1915J 6 T.C. 67i. (3) (1914) 6 T,C. 399· (2) (1925) IO T.C. 155. (4) (1910) 5 T.C. 529, 536.

.lg54 ·Assam Bengal Cement Co. Lttf. \". Commissioner oI Income~tax, .West Bengal. Bhagwati].

Assam &ngal CaMnt Co. Ltd. v. Commiulontr of lncumt-tdx, WtJt Btngal. BhagwatiJ.

"not bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is thing that is going to be spent once and for all and income expenditure is thing which is going to recur every year"; and no doubt this is often material consideration. But the criterion suggested is not, and was obviously not, intended by Lord Dunedin to be decisive one in every case ; for it is easy to imagine many cases in which payment, though made "once and for all", would be properly chargeable against the receipts for the year ....... But when an ex-penditure is made, not only once and for all but with view to bringing into existence an asset or an advan-tage for the enduring benefit of 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) ('),suggested another test and that was the test of fixed or circulating capital, though even there he observed that it was not neces-sary 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 prec{sely 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 circu-lating 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 (' ), where he observed:-

"I am inclined to think that the question whether the money paid is provided from the fiJ>ed 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 'l'.C. 266 ;282.

S.C.R. SUPREME COURT REPORTS 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 necessary ingredient of their existing business-important, but still ancillary and necessary to the business which they carry on-the 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) ( [4]):-

"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 payment 'once and for all'-a test which had been suggested by Lord Dunedin in Vallambrosa Rubber Company v. Farmer ( [8]), was not true in all cases, and he found authority for that state-ment 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 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 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

(1) [1919] I K.B. 25. (5) '[1925] IO T.C. 155, 192 . (2) [1927] I K.B. 719. 16) [1910] 5 T.C. 529. (3) [1928] 2. K.B. 405. (7) [1914] 3 K.B. 674. (4.) [1933] 18 T.C. 280, 298. (8) [1932] l K.B. 124·

(2) [1927] I K.B. 719.

1954 Assam Bengal Cement Co. Ltd. v. Commissioner ef lru;ome-tax, West Bengal• Bhagwati].

A,ssa~ Beng~l Cement Co. Ltd. v. Commissioner of , Income-tax, West Bengal. BhagwatiJ.

capital. i:hattel or i:hose in ai:tion may be fixed i:apital. The determining factor must be the natur.e of the trade in which the asset is employed. The land upon which manufacturer carries on his business is part of his fixed capital. The land with which dealer in real estate carries on his business is part of his circulating capital. The machinery with which manufacturer makes the ·articles that he sells is part of his fixed capital. The machinery that dealer in machinery buys and sells is part of his circulating capital, as is the coal that coal merchant buys and sells in the course of his trade. So, too, is the coal that manufacturer of gas buys and from which he extracts his gas."

In Van Den Berghs, Limited v. Clark (H. M. Inspec-tor of Taxes) ('), 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 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 :-"! have not overlooked the criterion afforded by the economists' differentiation between fixed and circu-lating capital which Lord Haldane invoked in fohn Smith & Son v. Moore('), and on which the Court of Appeal relied in the present case, but I confess that 1 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('), pronounced at page 226 :-"What is 'money wholly and exclusively laid out for the purposes of the trade' is question which must be determined upon the. principles of ordinary comJ mercial trading. It is ·necessary, accordingly, to attend (1) (1935) 19 T.C. 390. (3) (1937) L. R. 64 I.A. 215. (2) (•921) 12 T.C. 266.

S.C.R. SUPREME COURT REPORTS

to the true nature of the expenditure, and to ask oneself the question, 1s 1t 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 under-taken by the appellants in consideration of their acqu.isition 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 busi-ness. The distinction was thus made between the ac-quisition of an incq_me-earning asset and the process ~f the earning of the income. Expenditure in the acquisi-tion of that asset was capital expenditure and expendi-ture 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. Styles(1).

Dixon J. expressed similar opinion in Sun News-papers Limited and the Associated Newspapers Limited v. The Federal Commissioner of Taxation( [2]), at page 360 :-

:-• "But

"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 '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 ~ j . 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 general way appear to be of 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 period or interval of time, the former as at point of time. For the one concerns the instrument for earning profits

(1} (.1887; 2 T.C. 239. (3) (1930) S.C. 215, 220. (2) (1938) 6I C.L.R. 337. 7-89 S.C. India/59

Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, West Bengal. Bhagwati].

1954 .Assam Bengal Cement Co. Ltd. v. Commissioner of Jncomt-tax, West Bengal. Bhagwati].

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(').

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.([3]), Jagat Bus Service, Saharan-pur v. Commission'r of Income-tax, U. P. & Ajmer Merwara(•), and Commissioner of Income-tax, Bombay v. Finlay Mills Ltd. (').

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(') .............. Romer L. J. felt that this definition had placed the matter beyond all controversy -see remarks in Anglo-Persian Oil Co.'s case([0]). But Lord Macmillan in Van Den Bergh's case('), felt that Romer L. J. had been unduly optimistic and the learned Law Lord was of the opinion that the question whether particular expenditure fell on one side of the line or other was task of much refinement. But on the whole I think that the definition of Viscount Cave is good working definition ; and if one were to supple-ment it with the definition suggested by Mr. Justice Lawrence in Southern v. Borax Consolidated Ltd.(•), whether an expenditure had in any way altered the original character of the capital asset, we have legal principle which can be applied to any set of given facts."

(5) [1952] S.C.R. II.

(1) (1925) rn T.C. 155·

(6) [1932] 1 K.B. 124.

(2) [1945] 14 I.T.R. 66.

(3) [1946] 15 I.T.R. rn5.

(7) (1935) 19 T.C. 390.

(8) [1942] 10 l.T.R. Suppl. 1, 6.

(4) [1949] 18 !.T.R. 13.

In Benarsidas Jagannath, In re([1 ]), Full Bench of the Lahore High Court attempted to reconcile all these decisions and deduce.cl 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, m the terms following :

"It is not easy to define the term 'capital expendi-ture' in the abstract or to lay down any general and satisfactory test to discriminate between capital and 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 princi-ples 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 business, for extension of business, or for substantial replacement of equipment : vide Lord Sands in Commissioners of Inland Revenue v. Granite City Steamship Company( [2]). In City of London Contract Corporation v. Styles( [3]), 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 use it to acquire the concern." 2. Expenditure may be treated as properiy attributable to capital when it is made not only once and for all, but with view to bringing into existence an asset or an advantage for the enduring benefit of trade : vide Viscount Cave L. C. in Atherton v. British Insulated and Helsby Cables Ltd.([4]). If what is got rid of by lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as business expense, but if the lump sum payment brings in 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.

(4) (1925) 10 T.C. 155.

(2) (1927) 13 T.C. 1, 14.

1954 Assam Bengal Cerrll!nt Co. IJd. v. Commis•ioner of Income-tax, We5tBengal. BhagwatiJ.

Assam Bengal Cement Co. Ltd. v.

Commissioner of · Income-tax, West Bengal. BhagwatiJ.

deducted out of the profits by claiming that it relieves the annual labour bill, the business has acquired new asset, that is, machinery.

The expressions 'enduring benefit' or 'of per-manent character' were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as 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 he 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 hy keeping it in his own possession. Circulating or floating capital is what he makes profit of hy 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 direct-ly 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 exten-sion of business or substantial replacement of the equipment, there is no doubt that it is capital expendi-ture. capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever he 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 expendi-ture is made for acquiring or bringing into existence in 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 busi-ness or working it with view to produce the profits it is revenue expenditure. If any such asset or advant-age for the enduring benefit of the business is thus acquired or brought into existence it would be im-material 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 whe-ther it is capital expenditure or 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 liave 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 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 fair appreciation of the whole situation the expendi-ture incurred in particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be deductable allowance under section 10(2) (xv) of the Income-tax Act. The question has all along been considered to be 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

Assam Bengal Ctment Co. Ltd. v. Commissioner of Income-tax, West Bengal Bhagwati].

1954 Assam Bengal Cement Co. lid. v. Commissioner of lncume-tax, Wist Bengal. Bhagwati].

been arrived at on 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 lump sum but in instalments it cannot satisfy the test. Whether payment be ·in lump sum or by instal-ments, what has got to be looked to is the character of the payment. lump sum payment can as well be made for liquidating certain recurring claims which are clearly of revenue nature, and on the other hand payment for purchasing a- concern which is prima facie an expenditure of capital nature may as well be spread over number of years and yet retain its character as capital expenditure. (Per Mukherjea J. in Commissioner of Income-tax v. Piggot Chapman & Co.(')). 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 whe-ther it is payment in lump sum or by instalments. As was otherwise put by Lord Greene M.R. in Henrik-. sen (Inspector of Taxes) v. Grafton Hotel Ltd.(') :

"The thing that is paid for is of permanent quality although its permanence, being conditioned by the length of the term, is shortlived. payment of this character appears to me to fall into the same class as the payment of premium on the grant of lease, · which is admittedly not deductible".

The case of Tata Hydro-Electric Agencies. Ltd:, Bombay v. Commissioner of Income-tax, Bombay Pre-sidency and Aden ( •) affords anothel' illustration of this principle. It was observed there :-

"If the purchaser of business undertakes to the vendor as one of the terms of the purchase that he will • pay sum annually to 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 purpose of earning the profits of the business".

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

(1) [1949] 17 I.T.R. 317, 329.

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

The expression "once and for all" is used to denote an expenditure which is made once and for all for pro-curing an enduring benefit to the · business as dis-tinguished from recurring expenditure in the nature of operational expenses.

The expression "enduring benefit" also has been judicialiy 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 view to acquiring an enduring asset. It is made with view to acquiring an asset that may be turned over in the course of trade at 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 advant-age which will be obtained will last for ever. The dis-tinction which is drawn is that between more or less recurrent expenses involved in running business and an expenditure for the benefit of the business as whole" ....... . e.g ...... . -"enlargement of the goodwill of company."-"permanent improvement i11 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.( [8]) 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 condition therein that no limestone shall be used for the manufacture of (1) [1932] I K.B. 124, 146. . . (3) (1942) T.C. 24 453· (2) (1938) 61 C.L.R. 337, 355·

Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, West Bengal. Bhagwati].

. Assam Bengal Cement Co. Ltd. v. Commissioner of lncome·tax, West Bengal. Bhagwati].

S.C.R. SUPREME COURT REPORTS

_part of the working or operational expenses of the com-pany. 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 acquisi-tion. It was none the less an acquisition of an advant-age 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 na~ure 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 Co_urt 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 .

MUIR MILLS CO., LTD.

SUTI MILLS MAZDOOR UNION, KANPUR.

[MEHR CHAND MAHAJAN C.J., S. R. DAs,

BHAGWATI and VENKATARAMA AYYAR JJ.]

Bonus -Meaning of-Necessary conditions for the demand . thereof-Industrial claim-Principles for the grant of it-Social Justice-Meaning of-Industrial Tribunals-Whether Tribunal.< within the meaning of Art. 136 of the Constitution.

The term bonus is applied to cash payment made in addition to wages. It generally represents the cash incentive given condi-tionally on certain standards of attendance and efficiency being attained.

1954 Assam Bengal Cement Co., Ltd. v. Commissioner of Income-tax, West Bengal. Bhagwati],

1 954 November 19.