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PETITIONER: THE COMMISSIONER OF INCOME-TAX, MADRAS

       Vs.

RESPONDENT: K. T. M. T. M. ABDUL KAYOOM

DATE OF JUDGMENT: 23/11/1961

BENCH: DAS, S.K. BENCH: DAS, S.K. KAPUR, J.L. HIDAYATULLAH, M.

CITATION:  1962 AIR  680            1962 SCR  Supl. (1) 518  CITATOR INFO :  D          1966 SC1564  (7,9,11)  D          1968 SC 745  (6)  RF         1972 SC1634  (10)  RF         1973 SC  15  (5)  R          1991 SC 227  (7,10,11)

ACT:      Income  Tax-Capital   Expenditure-Dealer   in conch shells-Lease  money paid  for      gathering shells from  sea-Nature of  expenditure-Income-tax Act, 1922(11 of 1922), s.10 (2)(xy).

HEADNOTE:      The assessee  firm carried on the business in purchase and  sale of  conch shells. It obtained a lease for 3 years for gathering specified types of shells from  the sea  along the coastline abutting on the  South Arcot  District. It sought to deduct the amount  paid as  lease money  from its profits from business  on the  ground  that  this  was  an expenditure not of a capital nature but wholly and exclusively laid  out for the purpose of business. under s. 10(2)(xy) of the Income Tax Act. ^      Held, (per  kapur and Hidayatullah, JJ., Das, J. dissenting)  that the  expenditure was  capital expenditure and  could not  be deducted  from  the profits. The  business of  the assessee was buying and selling  shells but  when it took the lease it went in  for a new speculative business of fishing for shells. The amount paid for reserving the vast coastline for  future fishing  was not  price paid for obtaining  the stock in trade i.e. shells with which assessee  did his  business. The  amount was paid to  obtain an  enduring asset in the shape of an exclusive right to fish and the payment was not related to the shells.      Mohanlal Hargovind v. Commissioner of Income- tax, C. P. & Berar, (1949) 17 I. T. R. 473(P. C.), distinguished      Pringle  Industries   Ltd.,  Secunderabad  v.

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Commissioner of Income-tax, Hyderabad, [1960] 3 S. C. R. 681, applied.      Per Das,  J.-The expenditure  was not capital expenditure and  was deductible  from the profits. It was  not an  expenditure for the acquisition of property or  of rights  of a  permanent character, the possession of which was necessary for carrying on of  the assessee’s  trade  By  this  lease  the assessee acquired  its stocks-in-trade rather than a source  or  enduring  asset  for  producing  the stock-in-trade.      Mohanlal Hargovind v. Commissioner of Income- tax, C.  P. & Berar (1949) 17 I. T. R. 473(P. C.), applied.      Pringle  Industries   Ltd.,  Secunderabad  v. Commissioner of  Income-tax, Hyderabad,  [1960]  3 S.C.R. 681, distinguished.

JUDGMENT:      CIVIL APPELLATE JURISDICTION: Review Petition No. 16 of 1960. 519      Petition for  Review of this court’s Judgment and order  dated April  26, 1960,  in Civil Appeal No. 64 of 1956.      A. V.  Viswanatha Sastri,  R. Ganapathy  Iyer and Gopalkrishnan, for the petitioners.      K. N. Rajagopala Sastri, and P. D. Menon, for respondent.      1961. November 23. Das, J., delivered his own Judgment. The  Judgment of Kapur and Hidayatullah, JJ. was delivered by Hidayatullah, J.      S. K.  DAS, J.-I  had taken  a view different from that  of my learned brethren when this appeal was heard  along  with  Pringle  Industries  Ltd., Secunderabad v.  The Commissioner  of  Income-tax, Hyderabad (1),  and that  view was  expressed in a very short judgment dated April 26, 1960.      Now, we  have had  the advantage of hearing a very full argument with regard to the facts of the appeal, and  I for  myself have  had  the  further advantage and  privilege of  reading the  judgment which my  learned  brother  Hidayatullah,  J.,  is proposing to  deliver in  this appeal. I have very carefully  considered   the  question  again  with reference to  the facts relating thereto and, much to my  regret, have  come to the conclusion that I must adhere  to  the  opinion  which  I  expressed earlier. My  view is  that the  facts of this case are indistinguishable  from the facts on which the decision  of   the  Privy   Council  in   Mohanlal Hargovind v.  Commissioner of Income-tax, C.P. and Berar(2) was  rendered, and on the principles laid down by  this court  in Assam  Bengal cement  Co., Ltd.  v.  The  Commissioner  of  Income-tax,  West Bengal (3),  it must  be held that the expenditure of Rs.  6111/-in this  case was on revenue account and  the  respondent  firm  was  entitled  to  the allowance which it claimed. 520      The short  facts are  these.  The  respondent firm carried  on a  business in  the purchase  and sale of  conch shells  (called chanks). It used to

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acquire the  stock of  conch shells (1)by purchase from the  Fisheries purchase  from  the  Fisheries Department of  the Government of Madras and (3) by fishing for  and    gathering such shells from the sea. It  disposed of  the  stock  so  acquired  at Calcutta, the different between the cost price and selling price  less expenses being its profit made in business.  On November  9 1945 it took on lease from the  Director  of  Industries  and  Commerce, Madras,  the   exclusive     right.  liberty   and authority to fish for, take and carry away "chank" shells  in the sea off the coast line of the South Arcot District  including the  French  Kuppama  of Pondicherry. The boundary of the area within which the   right could  be exercised  was  given  in  a schedule to  the lease. The lease was for a period of three  years from  July 1, 1944 to June 30 1947 on a  consideration of an yearly rent of s. 6111/- to be  paid in  advance. Clause  3  of  the  lease contained the  material terms  there of and may be set out in full.           "3. The  lesser hereby  convenants  with      the lesson as follows:-                (i) To  pay the rent on the day and           in manner aforesaid.                (ii) To  deliver to  the  Assistant           Director of  Pearl and  Chank Fisheries,           Tuticorn all  Velampuri shells  that may           be obtained  by the  lessee upon payment           of their  value  as  determined  by  the           Assistant Director.                (iii) To  collect chanks  caught in           nets and  by means of diving as well. In           the process of such collection of shells           not to fish chank shells less than 2/1/4           inches in  diameter  and  if  any  chank           shells less than 2/1/4 inches in 521           diameter  be  brought  inadvertently  to           shore, to  return at  once alive  to the           sea all such undersized shells.                (iv) Not at  any time  hereafter to           transfer  or   underlet  or   part  with           possession of  this grant  or the rights           and privileges  hereby  granted  or  any           part thereof without the written consent           of the lessor.                (v)  At   the    end   or    sooner           determination of the term hereby created           peaceably and  quietly to  yield to  the           lesson the  rights and privileges hereby           granted, and                (vi) To  report  to  the  Assistant           Director of  Pearl and  Chank  Fisheries           (South), Tuticorn  the actual  number of           shells kept unsold in different stations           after the expiry of the lease period.      For  the   assessment   year   1946-47,   the respondent firm  submitted a  return of its income to  the   Income-tax  Officer,  Karaikudi  Circle, showing its  income from  sale of chanks purchased from divers  at  Rs.  7194/-  by  sale  of  chanks purchased from  Government Department  at Rs.  23, 588/- and Rs. 2819/- by sale of chanks gathered by themselves (through  divers) after  deducting  Rs.

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6111/- being the rent paid to Government under the contract referred  to above.  It sought  to deduct Rs. 6111/-  from its  profits from business on the ground that  this was  an  expenditure  not  of  a capital nature but wholly and exclusively laid out for the  purpose of business under s. 10(2)(xv) of the Income-tax  Act. This  claim was disallowed by the  Income-tax  Officer  and  on  appeal  by  the Appellate  Assistant   Commissioner.  On   further appeal to  the Appellate  Tribunal the  respondent firm contended that the 522 decision  of   the  Privy   Council  in   Mohanlal Hargovind v.  Commissioner of Income-tax(1)applied to this case inasmuch as the payment was to secure the stockin-trade  for its business. The Appellate Tribunal was of the opinion that the Privy Council decision covered  the case,  but felt itself bound by the  decision of  the Full  Bench of the Madras High Court  in K.  T. M. T. M. Abdul Kayum Hussain Sahib v.  Commissioner of  Income-tax, Madras (2). The Tribunal acceded to the demand for a reference to the  High Court,  and accordingly  referred the following question  to  the  High  Court  for  its decision.           "Whether on  the facts and circumstances      of the  case the  payment of  the sum  of Rs.      6111/- made  by the  assessee under the terms      of  the   agreement  entered  into  with  the      Director of  Industries and  Commerce, Madras      on 9th  November, 1945  was not  an  item  of      revenue expenditure incurred in the course of      carrying on the business of the assessee and,      therefore, allowable  under the provisions of      section 10 of the Indian Income-tax Act?"      The reference  first came  before a  Division Bench and  was then  referred to  a Full Bench. By its judgment  dated April  2, 1953  the Full Bench answered the  question in favour of the respondent firm. On  a certificate  of fitness granted by the High Court the Commissioner of Income-tax, Madras, brought the present appeal to this Court.      In Assam  Bengal  Cement  Co.,  Ltd.  v.  The Commissioner  of   Income-tax  (3),   this   Court referred to  the decision in Benarsidas Jagannath. In  re.(4)   and  accepted   the  following  broad principles  for   the  purpose  of  discriminating between a capital and a revenue expenditure. 523      (1) The  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  [See  Commissioners  of Inland Revenue  v. Granite  City Steamship Company Ltd.(1)].  Such  expenditure  is  regarded  as  on capital account, for it is incurred not in earning profits  but   in   setting   the   profit-earning machinery in  motion. In my opinion this test does not apply  in the  present case  where no  profit- earning machinery was set in motion.      (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.  [See  Atherton  v.

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British Insulated  and Helsby Cables Ltd. (2)]. In elucidation of  this principle  it has  been  laid down in  several decisions  that by  "enduring" is meant "enduring  in the  way  that  fixed  capital endures" and  it does  not connote  a benefit that endures in  the sense  that for  a good  number of years  it  relieves  the  assessee  of  a  revenue payment. In Robert Addie & Sons Collieries Ltd. v. Commissioners of  Inland Revenue  (3)  Lord  Clyde formulated the same test in these words:           "What is  ’money wholly  and exclusively      laid out  for the purposes of the trade’ in a      question which  must be  determined upon  the      principles of ordinary commercial trading. It      is necessary  accordingly to  attend  to  the      true nature  of the  expenditure, and  to ask      one’s self  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?-or, on  the  other  hand,  is  it  a      capital outlay?-is  it expenditure  necessary      for the  acquisition of property or of rights      of a permanent character, 524      the possession  of which  is a  condition  of      carryin on its trade at all?" This test  was adverted to by the Privy Council in Tata Hydro-Electric  Agencies Ltd. v. Commissioner of Income  tax(1).In my opinion the application of this test  makes it  at once clear that the sum of Rs. 6111/-  which the  respondent firm  spent  was expenditure laid  out as  part of  the process  of profit-earning; it  was not a capital outlay, that is, expenditure  necessary for  the acquisition of property or  of rights  of a  permanent character, the  possession   of  which  was  a  condition  of carrying on  its  trade.  Under  the  contract  in question the  respondent firm  did not acquire any right to  immovable property. It acquired no right in the  bed of  the sea  or in  the sea.  The only right conferred  on the  respondent firm  was  the right to  fish for,  gather and  carry away  conch shells (in motion under the surface of the sea) of a specified type and size. The respondent firm was under an  obligation to  return to  the sea  conch shells less  than 2  1/2 inches  in diameter.  The business  of  the  respondent  firm  consisted  in buying and  selling conch shells. No manufacturing process was  involved in it. Therefore, the stock- in-trade of  the respondent firm was conch shells. It secured  this stock-in-trade  in many different ways, by  purchase from  divers, by  purchase from Government  and   private  parties,  and  also  by gathering  conch  shells  under  the  contract  in question. In  my opinion,  the contract into which the  respondent   firm  entered   was  merely  for securing its  stock-in-trade. It  is  indeed  true that in considering whether an item of expenditure is of  a capital  or a  revenue nature,  one  must consider the  nature of  the concern, the ordinary course  of   business  usually   adopted  in  that concern, and  the object with which the expense is incurred. The  true nature of the transaction must be collected from the entire 525

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document with  reference to all the relevant facts and circumstances.  Having regard to the nature of the respondent  firm’s  business  and  the  course adopted by it for carrying it on, it appears to me to be  rather far-fetched  to  hold  that  by  the contract in  question the respondent firm acquired property or  right of  a permanent  character, the possession of which was a condition of carrying on its trade. To me it seems that the better view, in a business  sense, is  that  the  respondent  firm merely acquired  by  means  of  the  contract  its stock-in-trade, rather  than a  source or enduring asset for producing the stock-in-trade.      It was  argued before us, as it was argued in the High  Court, that  what was  acquired  in  the present case was the means of obtaining the stock- in-trade for  the business  rather than the stock- in-trade  itself.  I  am  unable  to  accept  this argument as  correct. The contract entered into by the respondent firm was wholly and exclusively for the purpose  of obtaining conch shells, which were its stock-in-trade.  As I have stated earlier, the contract granted  no interest in the sea, sea bed, or sea  water etc. It was simply a contract giving the grantee the right to pick and carry away conch shells of  a specified  type  and  size  which  of course implied  the right  to appropriate  them as its own property. In my opinion, in a case of this nature no  distinction can  be drawn in a business sense between  the right  of picking  and carrying away conch  shells and  the actual buying of them. It is  not unusual  for businessmen  to secure, by means of  a contract, a supply of raw materials or of  goods   which   form   their   stock-in-trade, extending over  several years for the payment of a lump sum  down. Even  if  the  conch  shells  were stored in  a godown  and the  respondent firm  was given a  right to  go and fetch them and so reduce them into  its ownership,  it could  scarcely have been 526 suggested  that   the  price   paid  was   capital expenditure. I  may explain what I have in mind by giving a  simple illustration.  Take the case of a fisher may  who sells  fish. Fish is his stock-in- trade. He  man buy the fish he requires from other persons; or  he may  obtain the  supply of fish he requires by  catching the fish of a specified size and type  in particular  water over a short period under a contract entered into by him and take them away. I  do not think that in a business sense any distinction can  be made  between the two means of obtaining the  stock-in-trade. Both  really amount to  securing   the  stock-in-trade   rather   than acquiring an  enduring asset  or a permanent right for producing  the stock-in-trade.  And a business man, like the fisher man in the illustration given above, would  indeed be  surprised to  learn  that buying  of   fish  for  his  business  is  revenue expenditure whereas  catching fish  in  particular water under a contract entered into by him for the purpose of obtaining his stock-in-trade on payment of a lump sum down, is capital expenditure.      (3) The  test whether  for the purpose of the expenditure, any  capital was  withdrawn,  or,  in

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other words,  whether the  object of incurring the expenditure was  to employ  what was  taken in  as capital of  the business  does not  arise  in  the present case and need not be considered.      No different  principles were laid down by my learned brethren  in  their  decision  in  Pringle Industries Ltd.  v. Commissioner  of Income-tax(1) and so  far  as  that  case  is  concerned,  their decision must  hold the  field. The difficulty and difference of opinion that arise now relate to the application of  those principles  to the  facts of the present case.      One is  reminded in  this case  of what  Lord Macmillan said  in  Tata  Hydro-Electric  Agencies Ltd. v. Commissioner of Income-tax(2) at page 209: 527           "Their  Lordships   recognise  and   the      decided cases  show how  difficult it  is  to      discriminate between expenditure which is and      expenditure which is not, incurred solely for      the purpose of earning profits or gains." Lord  Greene   (Master  of  the  Rolls)  expressed himself  more   strongly  and   adverting  to  the distinction between capital and income, said:           "There have  been many  cases where this      matter of capital or income has been debated.      There have  been many  cases which  fall upon      the borderline:  indeed, in  many cases it is      almost true  to say  that the  spin of a coin      would   decide    the   matter    almost   as      satisfactorily  as   an   attempt   to   find      reasons." [Vide Commissioners  of Inland  Revenue v. British Salmson Aero Engines Ltd.(1)]. Perhaps, the  case before  us is not as bad as the cases which  the Master  of the  Rolls had in mind when  he  made  the  above  observations.  It  is, however, a  truism that  each case  must turn upon its own  facts.  Nevertheless  the  decisions  are useful as  illustrations of  some relevant general principles. The  nearest illustration  that we can get is  the  decision  of  the  Privy  Council  in Mohanlal  Hargovind  v.  Commissioner  of  Income- tax(2). That  decision was  binding on  the Indian Courts at  the time  when it  was given  and as  I think  that   it  is   still  good   law  and   is indistinguishable from  the present  case, I offer no apology  for referring  to it  in great detail. The facts  of that  case were these. The assessees there carried  on a  business at several places as manufacturers   and    vendors   of   country-made cigarettes known  as bidis.  These cigarettes were composed of  tobacoo rolled  in leaves  of a  tree known as  tendu leaves, which were obtained by the assessees by entering into a number of 528 short term contracts with the Government and other owners  of   forests.  Under   the  contracts,  in consideration  of   a  certain   sum  payable   by instalments,  the   assessees  were   granted  the exclusive right  to pick  and carry away the tendu leaves  from   the  forest   area  described.  The assesees  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

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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. On  these essential facts, the Privy Council held  that the contracts were entered into by the  assessees wholly  and exclusively  for the purpose of  supplying themselves  with one  of the raw materials of their business, that they granted no interest  in land,  or in  the trees or plants, that under  them  it  was  the  tendu  leaves  and nothing but  the tendu  leaves that were acquired, that the  right to  pick the leaves or to go on to the land  for the  purpose was merely ancillary to the real  purpose of  the  contracts  and  if  not expressed would be implied by law in the sale of a growing crop,  and that  therefore the expenditure incurred in  acquiring the  raw material  was in a business sense  an expenditure  on revenue account and not  on capital,  just as much as if the tendu leaves had  been bought  in a  shop. I can find no distinction  which   would  make   any  difference between the  facts of  that case  and the facts of the present  case. Let  me compare  the  essential facts of  these two cases and see whether there is any difference.      (1)  Two  of  the  contracts  were  taken  as typical of  the rest  by the  Privy  Council.  One contract was for the period from September 5, 1939 to June  30, 1941 and the other was for the period from October 1, 1938 to June 30, 1941. Thus one of the contracts  was for a period of about two years and the other contract for a period of about three years. 529 In the  case under our consideration the period of the contract  is three  years. Indeed, there is no vital difference  between the  periods in  the two cases.      (2) In  the case  before us the contract area is described  in a  schedule. In the two contracts which  were   under  consideration  by  the  Privy Council the  contract area was also indicated in a schedule. The  boundaries of  the forests in which tendu leaves  could be  plucked were  delimited by the schedule.  Same is  the case with the contract before us. The contract area in which conch shells of a  specified type  and size  can be  picked and gathered  is   described  in   a  schedule.   Such description does  not mean  that the assessee gets any right  other than  the right  to gather  conch shells. In  the Privy  Council case  the assessees were granted  no interest  in land or in the trees or plants; it was the tendu leaves and nothing but the tendu  leaves that  were acquired. In the case before us  no interest was given in the sea bed or in the  sea  water  or  in  any  of  the  products thereof. Conch shells of a specified type and size and nothing but such conch shells were acquired by the contract. I do not think that the reference to the coast  line off the South Arcot District makes any difference  between the  present case  and the case on  which the  decision in Mohanlal Hargovind v. Commissioner of Income-tax (1) was rendered. If in the  matter of  plucking of  tendu  leaves  the expenditure under  the contract was, in a business

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sense, expenditure  on revenue  account, I fail to see why  a similar expenditure for gathering conch shells in motion under the surface of the sea near the coast line should not, in a business sense, be considered as expenditure on revenue account. This aspect  of   the  case  was  emphasised  by  their Lordships in the following paragraph: 530           "It  appears  to  their  Lordships  that      there has been some misapprehension as to the      true nature of these agreements and they wish      to state at once what in their opinion is and      what is  not the  effect of  them.  They  are      merely examples  of  many  similar  contracts      entered into  by the  appellants  wholly  and      exclusively  for   the   purpose   of   their      business,  that   purpose  being   to  supply      themselves with  one of  the raw materials of      that  business.   The  contracts   grant   no      interest in land and no interest in the trees      or plants  themselves. They  are  simply  and      solely contracts  giving to  the grantees the      right to pick and carry away leaves, which of      course, implies  the right  to a  appropriate      them as their own property." In the case under our consideration the only right granted to  the respondent  firm was  to take  and carry away  conch shells  of a  specified type and size,  which  of  course,  implies  the  right  to appropriate them  as  the  respondent  firm’s  own property. The  right to  go into  the sea and cast nets etc. was merely ancillary to the real purpose of the contract.      Nor do I think that the circumstance that the contracts  conferred  an  exclusive  privilege  or right is a matter of any significance. In Mohanlal Hargovind v.  Commissioner of  Income-tax (1)  the contracts  were   exclusive  and  their  Lordships stated:           "It is  true that  the rights  under the      contracts are exclusive but in such a case as      this that  is a matter which appears to their      Lordships to be of no significance. These observations are as apt in their application to the  present case  as they  were  in  the  case before their Lordships of the Privy Council.      (3) The  Privy  Council  draw  a  distinction between cases  relating to the purchase or leasing of 531 mines, quarries,  deposits of  brick  earth,  land with standing timber etc. On one side and the case under its  consideration on the other. It referred to the  decision in  Alianza Co.  v.  Bell(1)  and said:           "....the  present  case  resembles  much      more   closely   the   case   described   and      distinguished by  Channell, J. at page 673 of      the report in Alianza Co. v. Bell of the cost      of material  worked up in a manufactory. That      side  the   learned  Judge,   is  a   current      expenditure and  does not  become ‘a  capital      expenditure merely  because the  material  is      provided  by   something   like   a   forward      contract,  under   which  a  person  for  the

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    payment of  a lump  sum down secures a supply      of the  raw material  for a  period extending      over several years’." In  Kauri  Timber  Co.  Ltd.  v.  Commissioner  of Taxes(2)  the   company’s  business  consisted  in cutting and  disposing of  timber. It  acquired in some cases timber bearing lands, in other cases it purchased the standing timber. The leases were for 99 years.  So far  as the cases where the land was acquired were  concerned there  could have been no doubt that  the expenditure  made in  acquiring it was  capital  expenditure.  In  the  case  of  the purchase of  the standing timber what was acquired was an interest in land. The purchasers bought the trees which they could allow to remain standing as long as  they liked.  It was  pointed out  that so long as  the timber  at the  option of the company remained upon  the soil, it derived its sustenance and nutriment  from  it.  The  additional  growths became ipso  jure the  property of the company. In these  circumstances   it  was   held   that   the expenditure was  capital expenditure.  In the case before  us   some  reliance   was  placed  by  the appellant on  the term that shells less than 2 1/4 inches in  diameter brought inadvertently to shore had to be returned at once alive to the sea. 532 The argument was that such shells might later grow in size by receiving sustenance and nutriment from sea water  and could  be  later  gathered  by  the respondent firm  when they  reached the  size of 2 1/4 inches  in diameter  or  more.  This,  it  was argued,  brought   the  present  case  nearer  the decision in  Kauri Timber case (1). I am unable to agree. It  is to  be remembered  that live  shells move under  the surface of the sea and they do not remain at  the same  place, as  trees do.  A shell less than  2 1/4 inches in diameter returned alive to the  sea may  move away  from the contract area and may  never be gathered by the respondent firm. In  these   circumstances  the  appellant  is  not entitled to  call to  his aid the test of "further vegetation" or "sustenance and nutriment" referred to in the Kauri Timber case (1).      From whatever  point of  view we  may look at the case,  it seems  to me  that the  facts of the present case  are indistinguishable  from those of the case  in Mohanlal Hargovind v. Commissioner of Income-tax(2) In Mohanlal Hargovind’s case (2) the right was  to pluck  tendu leaves; in our case the right was to gather conch shells of specified type and size.  This distinction,  it is obvious, makes no difference.  In the High Court it was contended on  behalf   of  the   appellant   that   Mohanlal Hargovind’s case (2) related to the acquisition of raw materials  whereas the present case relates to the acquisition  of "chanks" by a dealer who sells them without  subjecting them to any manufacturing process, and  this distinction,  it was contended, made the decision in Mohanlal Hargovind’s case (2) inapplicable to  the present  case. The High Court rejected  this   contention  and   in  my  opinion rightly. I  agree with  the  High  Court  that  on principle and  in a  business sense,  there is  no distinction between  acquiring raw materials for a

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manufacturing business and acquiring or purchasing goods  by  a  dealer  for  the  purpose  of  sale, particularly when  there is  no  question  of  any excavation 533 etc., in  order to  win the  goods and  make  such goods parts  of the  stock-in-trade, a point which weighed with  the Court of Appeal in Stow Bardolph Cravel Co.  Ltd. v.  Poole (1) and with my learned brethren in Pingle Industries Ltd. V. Commissioner of Income-tax  (2). No  such point  is present  in this case.  I have  been unable  to find any other distinction between the two cases which would make a difference  in the application of the principles for discriminating between capital expenditure and revenue expenditure.      To adopt  again the language of Lord Green, I see  no   ground  in   principle  or   reason  for differentiating the  present case from the case in Mohanlal Hargovind  v. Commissioner  of Income-tax (3).      On behalf  of the  respondent firm  a further question  was   agitated,   namely,   whether   an allowance for  the cost  of  gathering  the  conch shells by  nets etc.,  should not  be given,  even though the  rent paid  under the  contract was not allowable, under  s. 10 (2) (xv) of the Income-tax Act and a reference was made in this connection to the decision  in Hood  Barrs v.  Commissioners  of Inland Revenue  (4). I  do not  think that  we are concerned with  that matter in the present appeal. The only question which arises for decision is the one referred  to the  High Court. I have held that the High  Court correctly  answered  the  question which related  to the  payment of  the sum  of Rs. 6111/- only.  The question  having been  correctly answered by  the High  Court, the appeal fails and must be dismissed with cost.      HIDAYATULLAH, J.-This  appeal was  heard with Pingle  Industries,   Ltd.,  Secunderabad  v.  The Commissioner of  Income-tax (5), in which judgment was  delivered   by  us   on  April  26  1960.  In accordance with  the decision in Pingle Industries case (1), 534 this appeal  was allowed. Later, a review petition of (No.  16 of  1960) was filed on the ground that this appeal  was not  governed by  the decision in Pingle Industries case (1), and that as it was not fully  argued,   it  should   be  reheard.  It  is unnecessary  to   go  into  the  reasons  why  the rehearing was  granted, except  to say  that there was   perhaps   a   misunderstanding   about   the concessions made  by counsel.  We were, therefore, satisfied that  we should grant the rehearing, and have since heard full arguments in this appeal.      K. T. M. T. M. Abdul Kayoom and Hussain Sahib (respondent) is  a registered firm, and carries on business  in   conch  shells   locally  known   as "chanks", which  are found  on the  bed of the sea all along  the coast-line  abutting on  the  South Arcot District.  The respondent took on lease from the Director  of Industries  and Commerce,  Madras "the exclusive  right, liberty  and  authority  to take and  carry away all chanks founnd in the sea"

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for a  period of  three years  ending on  June 30, 1947. The  consideration was Rs. 6, 111/- per year payable in  advance. For  the year  of assessment, 1946-47 (the year of account ending June 30, 1945) the  respondent   in  showing   its  profits  from business sought  to  deduct  Rs.  6,111/-  on  the ground that  this was  an  expenditure  not  of  a capital nature but wholly and exclusively laid out for the  purpose of  business under s. 10 (2) (XV) of the  Income-tax Act.  This claim was disallowed by the  Income-tax Officer,  and on appeal, by the Appellate  Assistant   Commissioner.  On   further appeal to  the Appellate  Tribunal, the respondent contended that  the ruling of the Privy Council in Mohanlal Hargovind’s case (2) applied to the case, inasmuch as  the payment  was to secure the stock- in-trade for its business. The Appellate Tribunal, though it  was of  opinion that  the Privy Council case applied,  felt itself  bound by  the  earlier Full Bench decision of the Madras High 535 Court in  K.T.M.T.M. Abdul Kayoom Hussain Sahib v. Commissioner of Income-tax, Madras (1) relating to this respondent,  and dismissed  the  appeal.  The Tribunal, however, acceded to a demand for a case, and referred  the following  question to  the High Court for its decision :           "Whether on  the facts and circumstances      of the  case the  payment of  the sum  of Rs.      6,111- made  by the  assessee under the terms      of  the   agreement  entered  into  with  the      Director of  Industries and Commerce, Madras,      on 9th  November 1945  was  not  an  item  of      revenue expenditure incurred in the course of      carrying on the business of the assessee and,      "therefore, allowable under the provisions of      section 10 of the Indian Income-tax Act".      The reference went before a Divisional Bench, which referred  the case  for decision  of a  Full Bench. The  Full Bench  held  that  the  case  was covered by  the Privy  Council case above referred to, observing:           "In our  opinion, the  facts in the case      before    the    Judicial    Committee    are      indistinguishable  from   the  facts  of  the      present case.  In one case, the leaves had to      be picked  from trees by going upon the land,      while in  the other case the chanks had to be      collected and  gathered by  dividing into the      sea.  It   is  impossible   to  construe  the      documents in  the present  case as conferring      any interest  in that portion of the sea from      which the  exclusive  right  of  winning  the      chanks was conferred upon the assessee." The High  Court also  did not  see any  difference between raw materials acquired for a manufacturing business and  the acquisition  of  chanks  in  the present  case,  and  held  that  the  chanks  were acquired as  the stock-in-trade  of the respondent and the  transaction was tantamount to purchase of goods, 536 The High Court, however, certified the case as fit for appeal, and the Commissioner of Income-tax has filed this appeal.

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    The material  terms of  the agreement  in the case are as follows :           "1. The  lessor hereby  grants unto  the      lessees the  full free  and exclusive  right,      liberty and  authority to  fish or  take  and      carry away  all chank  shells in  the sea off      the coast  line of  the South  Arcot District      including the  French Kuppams  of Pondicherry      more particularly  described in  the schedule      hereto to  hold the  premises to  the lessees      from the  first day of July 1944 for a period      of three  years ending  30th June 1947 paying      therefor  the  yearly  rent  of  Rs.  6,  111      (rupees six  thousand one  hundred and eleven      only) to be paid yearly in advance, the first      payment to  be made  within fifteen days from      the date  of intimation of acceptance and the      second and  third payments  to be  made on or      before  the   15th  June   1945   and   1946,      respectively at  the Government  Treasury  at      Tuticorin or Madras.           x         x            x           3. The  lossee hereby covenants with the      lessor as follows :-           x         x            x           (ii)  To   deliver  to   the   Assistant      Director  of   Pearl  and   Chank  Fisheries,      Tuticorin all  Velampuri shells  that may  be      obtained by the lessees upon payment of their      value  as   determined   by   the   Assistant      Director.           (iii) To  collect Chanks  in nets and by      means of  diving as  well. In  the process of      such collection  of shell  not to  fish chank      shells less  than 2 1/4 inches in diameter if      any chank  shells less  than 2  1/4 inches in      diameter 537      be brought  inadvertently to shore, to return      at once  alive to the sea all such undersized      shells.           (iv)  Not   at  any  time  hereafter  to      transfer or  underlet or part with possession      of this  grant or  the rights  and privileges      hereby granted  or any  part thereof  without      the written consent of the lessor.            x           x             x           (vi) To report to the Assistant Director      of  Pearl   and  Chank   Fisheries   (South),      Tuticorin the  actual number  of shells  kept      unsold in different stations after the expiry      of the lease period."      An analysis  of the  agreement shows that the respondent obtained an exclusive right to fish for "chanks" by  the method  of diving and nets and to appropriate them  except those  below 2  inches in diameter, which  had to  be returned  alive to the sea and  Velampuri shells  which had  to  be  sold compulsorily to  Government.  The  respondent  had also to  report to  its lessors  at the end of the term, the number of shells not sold. The right was exclusive,  but   was   not   capable   of   being transferred or  underlet, and  it was for a fairly long period.  The coast  line  involved  was  also fairly long.

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    There is  no doubt  that the  payment of  Rs. 6,111/- was  an expenditure wholly and exclusively for the purpose of the business of selling shells, just as the payment to the divers and other sundry expenses were.  But an expenditure for the purpose of the business may be of a capital nature, and if it is so, it cannot be claimed as a deduction. The question is  whether this payment was of a capital nature.      What is  attributable to capital and what, to revenue has led to a long string of cases here and 538 in the English Courts. The decisions of this Court reported in  Assam  Bengal  Cement  Co.,  Ltd.  v. Commissioner of  Income-tax and  Pingle Industries case (1)  have considered  all the  leading cases, and have  also  indicated  the  tests,  which  are usually applied in such cases. It is not necessary for us  to cover  the same  ground again. Further, none  of   the  tests   is  either  exhaustive  or universal. Each case depends on its own facts, and a close similarity between one case and another is not enough,  because  even  a  single  significant detail may  alter the  entire aspect.  In deciding such cases,  one should  avoid the  temptation  to decide cases (as said by Cordozo * by matching the colour of  one case against the colour of another. To decide,  therefore, on which side of the line a case falls,  its broad resemblance to another case is not  at all  decisive. What  is decisive is the nature  of   the  business,   the  nature  of  the expenditure, the nature of the light acquired, and their relation  inter se, and this is the only key to resolve  the issue  in the light of the general principles, which are followed in such cases.      A trader  may spend  money to acquire his raw materials, or  his stock-in-trade, and the payment may  often   be  on   revenue  account   but   not necessarily. A  person selling goods by retail may be said to be acquiring his stock-in-trade when he buys such  goods from  a wholesaler.  But the same cannot be  said of  another retailer  who  buys  a monopoly right  over a long period from a producer of those  goods. The amount, he pays to secure the monopoly, through  a part  of the  expenditure  to secure his  stock-in-trade  is  not  of  the  same character as  the  price  he  pays  in  the  first illustration.  By  that  payment,  he  secures  an enduring advantage and an asset which is a capital asset of  his business.  In the  same  way,  if  a manufacturer buys  his raw  materials he  makes  a revenue expenditure, but when he acquires a source from which he would derive his 539 raw materials  for the  enduring  benefit  of  his business, he  spends on  the capital side. Thus, a manufacturer of  wollen goods  buys his  wool buys his raw  materials, but when he buys a sheep farm, he  buys   a  capital  asset.  There  is  then  no difference between  purchase of  a factory and the purchase of  the  sheep  farm,  because  both  are capital asset of enduring nature.      The respondent  in this  case  has  tried  to distinguish Pingle  Industries  case  (1)  and  to bring its  case within  the ruling  of  the  Privy

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Council in Mohanlal Hargovind’s case (2). When the former case  was argued,  the attempt was to bring it also  within the rule of the Privy Council, but now, the  differences between  the two  cases  are recognised and  Pingle Industries case (1) is said to be  entirely different. In deciding the present appeal, it  is hardly  necessary to  do more  than analyses once again the facts and circumstances of these two  cases to  show why those two cases were differently decided,  and the  present  case  will then be  easily disposed of, not on its similarity to another  but on  its own  facts. We shall begin with the Privy Council.      Mohanlal Hargovind  and Co.,  was a  firm  of bidi manufacturers,  which needs  tendu leaves  in which tobacco  is wrapped  to  make  bidis.  Tendu leaves were thus the raw material of the business. Tendu leaves  can be  bought from dealers who sell tendu leaves  in a  large way.  Now, what  did the firm do  ? It  took leaves of forests with a right to pick the leaves. This right carried with it the right to coppice small tendu plants and to pollard the tendu  trees. There  was, however, no right in the trees or the land and the right to go over the land was  merely ancillary.  Looked  at  from  the point of  view of business, there was no more than a purchase  of the  leaves, and  the  leaves  were needed  as  raw  materials  of  the  business.  In deciding  the   case,   the   Judicial   Committee discounted the right to 540 coppice small  tendu plants  and  to  pollard  the tendu trees  as  a  very  insignificant  right  of cultivation necessary  to improve  the quality  of the leaves,  but which right ranked no higher than the right  to spray  a fruit  tree. The  right  of entry upon  the land was also considered ancillary to the  main purpose  of the  contract, which  was acquisition  of  tendu  leaves  and  tendu  leaves alone, and it was observed that even if this right of going  on the  land and plucking the leaves was not expressed  in the contract, it would have been implied by law. Their Lordships then observed that the  High  Court  diverted  its  view  from  these points, and  attached too much importance to cases decided upon  quite  different  facts.  They  then observed that  "cases relating  to the purchase or leasing of  mines,  quarries,  deposits  of  brick earth, land  with standing  timber...." were of no assistance, and concluded:           "If the  tendu leaves had been stored in      a merchant’s  godown and  the appellants  had      bought the  right to go and fetch them and so      reduce  them   into  their   possession   and      ownership  it   could  scarcely   have   been      suggested that the purchase price was capital      expenditure. Their Lordships see no ground in      principle or  reason for  differentiating the      present case from that supposed." (p. 478)      That case  thus involved  no right in land or trees; the licence to be on the land was merely an accessory right;  the  right  of  cultivation  was insignificant.  The   term  was   short,  and  the collection of  leaves was  seasonal.  Leaves  once collected, the operation pro tempore was over till

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the fresh crop came. There was thus no acquisition of an  enduring asset  in the way capital endures; it was  more a  purchase of  crops of two or three successive  years  shewered  on  an  agreement  to ensure the supply of raw materials, 541      Contrast  this   with  the  facts  of  Pingle Industries case  (1). The business of the assessee there, was selling stone slabe called flag stones. These stones  were first won from the quarries and then dressed  and shaped  and then sold. Now, what did the  assessee do  ? It  took leases  of  stone quarries in  a large number of villages for twelve years. Primarily,  this was  done to obtain stones for its business. It could have been a contract by which it would have been entitled to so many cubic feet of  stones to  be extracted  in a  particular period. It  took long-term leases of vast areas in several  villages   to  ensure   supplies  for   a considerable time.  The leases were not limited by quantity, nor  did they  refer to  any  stones  in particular. It  could take  all or  it could  take none; but  it could  not have carried away all the stones, if  the supply  outran  its  efforts.  The stones were  embedded in  earth, layer upon layer, and had  to be  systematically extracted. Till the stones at  the top  were  removed,  it  could  not remove those  at the  bottom, and there were still more layers further below. In there circumstances, no specific  quantity having  been bought  or sold either expressly  or impliedly,  the stones  being immovable property  or  a  part  thereof  and  the contract  being   long-teem  contracts,   Mohahlal Rargovind’s case (2) was held inapplicable, and it was held  that the  assessee in  Pingle Industries case (1)  had acquired  an enduring  asset and the expenditure was on capital account.      These cases  between them show adequately the dividing  line,   which  exists   between  capital expenditure and  revenue expenditure. To determine on  which   side  of   the  line   the  particular expenditure falls,  one may  often put himself the question posed  by Lord  Clyde in Robert Addie and Sons  Collieries   Ltd.  v.  Commissioners  Inland Revenue (3) 542      "It  it   part  of   the  Company’s   working expenses, is  it expenditure  laid out  as part of the process  of profit earning ? -or, on the other hand, is  it capital  outlay,  is  it  expenditure necessary for  the acquisition  of property  or of rights of a permanent character, the possession of which is  a condition  of carrying on its trade at all?" The same  question was again posed by the Judicial Committee in Tata Hydro-Electric Agencies, Ltd. v. Commissioner of Income-tax (1). The answer to this question in  each of  the  two  case  of  Mohanlal Hargovind  (2)   and  Pingle   Industries  (3)  is entirely different.  The difference can be noticed easily, if  we were to read here what Channell, J. said in Alianza Co. Ltd. v. Bell (4):           "In the  ordinary case,  the cost of the      material worked  up in a manufactory is not a      capital  expenditure,   it   is   a   current

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    expenditure and  does not  become  a  capital      expenditure merely  because the  material  is      provided  by   something   like   a   forward      contract,  under   which  a  person  for  the      payment of a lump sum secures a supply of the      raw material  for  a  period  extending  over      several   years.....If   it   is   merely   a      manufacturing business, then the procuring of      the raw  material  would  not  be  a  capital      expenditure. But if it is like the working of      a particular  mine, or bed of brick earth and      converting  the   stuff  into   a  marketable      commodity, then, the money paid for the prime      cost of  the stuff  so dealt  with is just as      much capital  the money  sunk in machinery or      buildings." The first part of the observation is applicable to Mohanlal Hargovind’s case (2) and the latter part, to Pingle  Industries case  (3). What is said of a manufacturing concern  is equally  applicable to a non-manufacturing business.  It is  the quality of the payment  taken with  what is obtained, that is decisive of the character of the payment. 543      We may  now pass  on to the facts of the case before us.  The respondent carried on the business of selling  chanks. It  obtained its supplies from divers, from  whom it  purchased the  chanks,  and having got  them, perhaps cheap, it resold them at a profit.  This is one mode in which it carried on its business.  In this  business, it  was directly buying its  stock-in-trade for  resale. The  other method was  to acquire exclusive right to fish for chanks by  employing divers and nets. The business then changed  to something different. The sale was now of  the product  of another business, in which divers and  equipment were  first employed  to get the shells.  It  thus  took  leases  of  extensive coastline with  all the  right to  fish for chanks for some years. The shells were not the subject of the bargain  at all, as were the tendu leaves; but the bargain  was about  the right  to fisht. There can be  no doubt that what it paid the divers when it bought  chanks  from  them  with  the  view  of reselling them was expenditure laid out wholly and exclusively for the purpose of its business, which was not  of a  capital nature.  That business  was buying goods and reselling them at a profit. But a different kind  of business  was involved  when it went in for fishing for chanks. To be able to fish for chanks in reserved waters it had to obtain the right first.  It, therefore  took  lease  of  that right. To  Mohanlal Hargovind, the leaves were raw materials, and that firm preferred to buy a number of crops  over years  rather than  buy them  as it went along.  Hence the remark that the leaves were bought, as if they were in a shop.      Under  the   lease   which   the   respondent obtained, it  had a  right to  take only chanks of particular dimensions  and shape,  but it  had  to fish for  them and  obtain them first. The rest of the chanks  were not  its  property.  The  smaller chanks had  to be  returned alive  to the sea, and Velampuri chanks  had to  be compulsorily  sold to the state.  Of Course, the smaller chanks put back

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into the sea 544 would grow,  and if  fished later, be its property to take, but till they grow, it had not claim. The chanks were  on the  bed of  the sea.  Their exact existence was  not known,  till the  divers  found them, or  they got netted. Chanks which were there one day  might have been washed back into the deep sea, and  might never  be washed back into a place where they would be within reach. Similarly, other chanks not  there one  day might come within reach on another  day. All  these matters  make the case entirely different  from the  case of  a  purchase from the  divers.  In  obtaining  the  lease,  the respondent obtained  a speculative  right to  fish for chanks  which it  hoped to  obtain  and  which might be  in large  quantities or small, according to its  luck. The respondent changed the nature of its business  to fishing  for  chanks  instead  of buying them. To be able to fish, it had to arrange for an  area to  fish, and that arrangement had to be of some duration to be effective.      This is not a case of so much clay or so much salt petre  or a dump of tailings or leaves on the trees in  a forest.  The two  modes in  which  the respondent  did   the  business  furnish  adequate distinguishing   characteristics.   Here   is   an agreement  to   reserve  a   source,   where   the respondent hoped to find shells which, when found, became its  stock-in-trade but which, insitu, were no more  the firm’s  than a  shell in  the deepest part of  the ocean  beyond the reach of its divers and nets.  The expenses of fishing shells were its current expenses  as also  the  expenses  incurred over the  purchase of  shells from the divers. But to  say  that  the  payment  of  lease  money  for reserving an  exclusive right  to fish  for chanks was on  a par with payments of the other character is to  err. It  was possible to say of the former, as it  was possible  to say of the tendu leaves in Mohanlal Hargovind’s  case (1),  that  the  chanks were bought  because the  money paid was the price of the  chanks. But it would be a straining of the imagination to say that the amount paid 545 for reserving the coastline for future fishing was the price of chanks, with which the respondent did its business.  That amount  was paid  to obtain an enduring asset  in the shape of an exclusive right to fish,  and the  payment was  not related to the chanks, which  it might  or might not have brought to the  surface in  this speculative business. The rights were  not trasferable, but if they were and the firm  had sold  them, the  gain, if any, would have been  on the capital side and not a realising of the  chanks as stock in-trade, because none had been bought  by the firm, and none would have been sold by it.      In our  opinion, the  decision  of  the  High Court,  with  all  due  respect,  was,  therefore, erroneous, and  the earlier  decision of  the Full Bench of  the same  High Court  was right  in  the circumstances of the case.      In the  result, the  appeal is  allowed;  but there will be no order about cost.

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    BY COURT.  In accordance  with  the  majority judgment of  the Court, the appeal is allowed, but there will be no order about costs.