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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.