Income Tax Appellate Tribunal - Nagpur
Income-Tax Appellate Tribunal, Bombay vs Haji Sabumiyan Haji Sirajuddin. on 8 December, 1944
Equivalent citations: [1946]14ITR447(NAG)
JUDGMENT
(Judgment of the Court was delivered by Sen, J.) This is a reference under Section 66 (1) of the Indian Income-tax Act, 1922, by the Appellate Tribunal, Bombay, at the instance of the assessee, Haji Sabumiyan Haji Sirajuddin of Dongargrah.
The reference arises out of assessment for two years 1939-40 and 1940-41. The assessee in each of the years claimed a deduction on account of instalments of lease money paid to the owners of several forests for the right to take harra nut and lac from the forest trees.
The assessee had included in the paper book the two agreements dated 6th April, 1938, and 6th April, 1939, executed by the Commissioner, Chhattisgarh Division, Raipur, representing the Court of Wards in favour of Haji Sarfuddin Yakinuddin. Both the documents purport to be "leases". The first is for a period of three years commencing from the 1st October, 1937, and ending with the 30th September, 1940. The consideration for the lease is Rs. 31,000 which was payable in 12 quarterly instalments of Rs. 2,583-5-4 each, the first instalment falling due on the 15th December, 1937. The lease was of harra produce from the entire forest area within the limits of Panabaras-cum-Aundhi Zamindari estate, tahsil Balod, district Drug. The estate consists of 205 villages which have been specified in the agreement. The lessee agreed to deposit 1/6th of the consideration money, namely, Rs. 5,166-10-8 as security which amount, if not forfeited, was to be set off against the last instalments of the lease money. Under clause 2 the lessor agreed to permit the lessee to pluck, sell, sub-let, remove from the said forest, the harra produce and the lessee undertook not to remove or sell any other kind of produce. The clause recits that the lessor has given possession of the trees within the entire area of the said estate for the purpose of plucking the harra fruits. Under clause 8 the lessee undertook to remove all harra to his own custody outside the said forest area within six months of the expiry of the period of the lease. The lessor was to allow the lessee, free of charge, grass and leaves for thatching, and wood for preparing temporary huts. Other clauses of the agreement are not material for the purpose of this reference and need not be stated.
The second agreement is for five years commencing from the 1st May, 1938, and ending with the 30th April, 1943. The consideration of the lease is Rs. 2,100 which was payable in 10 half-yearly equal instalments of Rs. 210 each, the first instalment falling due on the 15th March, 1938. The lease was for the propagation of lac on palas and other kinds of trees from the entire forest area within the limits of Panabaras-cum-Aundhi Zamindari estate. The clauses of this agreement are almost identical with the previous agreement, the only difference being that in place of harra, lac has been mentioned and there are a few more clauses in this agreement which are not material for this reference.
The assessee claimed a deduction of the instalments which he had paid to the lessor in accordance with the terms of the two agreements. This claim was negatived by the Income-tax Officer on 8th February, 1941, on the ground that it is an item of capital expenditure and is not a permissible item of deduction under section 10(2)(xii) of the Indian Income-tax Act, 1922.
The Appellate Assistant Commissioner of Income-tax, Nagpur, upheld the order on the 14th July, 1941, except for a slight variation with which we are not concerned. The Appellate Tribunal, Bombay Branch, affirmed on the 25th May, 1942, the order of the Appellate Assistant Commissioner of Income-tax, Nagpur.
The assessee applied to the Appellate Tribunal and suggested five questions for submission to the High Court for opinion.
At the hearing of the case the assessee abandoned four questions and only one question was left outstanding. The Appellate Tribunal has referred the following question for our decision :-
"Whether, in the circumstances of these cases, the payments made by the assessee by way of annual instalments to the owners of the forests for the exclusive right to collect harra nut and lac from the forest trees during the contract periods was a revenue expenditure that could be allowed as a deduction under Section 10(2)(xii) of the Indian Income-tax (Amendment) Act, 1939 ?"
The solution of the question depends on the interpretation of Section 10(2)(xii) of the Indian Income-tax Act, 1922, as amended by the Indian Income-tax (Amendment) Act (VII of 1939).
Section 6 of the Act specifies the heads of income chargeable to income-tax. Profits and gains of business have been specified as one of the heads of income chargeable to income-tax. Under Section 3 tax for a year is chargeable in respect of the total income of the previous year. Section 10 is in these terms :-
"(1) The tax shall be payable by an assessee under the head profits and gains of business...... in respect of the profits or gains of any business........ carried on by him.
(2) Such profits or gains shall be computed after making the following allowances, namely :-
(xii) any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business........"
The expenditure claimed by the assessee was laid out or expended wholly and exclusively for the purpose of such business. This has not been disputed by the Income-tax authorities.
The clause (xii) prohibits a deduction which is in the nature of a capital expenditure. The question for decision in this reference is whether the expenditure incurred by the assessee was in the nature of a capital expenditure.
This section may be compared with the provisions of the English Income-tax Act, 1918, which are given in Schedule D, rules 1 and 3 applicable to Cases I and II which deal with tax payable in respect of any trade etc., not contained in any other Schedule. Under rule 1 the tax is chargeable without any other deduction than is by the Act allowed. Rule 3 is in these terms :-
"In computing the amount of the profits or gains to be charged, no sum shall be deducted in respect of -
(a) any disbursements or expenses, not being money wholly and exclusively laid out or expended for the purpose of the trade......
(f) any capital withdrawn from, or any sum employed or intended to be employed as capital in such trade......."
In the Indian Income-tax Act allowance is given in one clause in positive terms while in the English Act prohibition of deduction is given in two clauses. Clause (f) of the English Act may be taken to be an amplification of the expression "capital expenditure" mentioned in Section 10(2)(xii) of the Indian Income-tax Act. The two expression are not in identical terms though they mean substantially the same thing.
The English Income-Tax Act does not contain any express allowance or enumeration of deductions. Under the Act in determining whether a particular item may or may not be deduction is expressly prohibited by the Act and then if it is not so prohibited to consider whether it is of such a nature that it is proper to be charged against the incomings in a computation of the balance of profits and gains for the year. The Indian Income-tax Act contains an express allowance or enumeration of deductions. In determining whether a particular item may or not be deducted from the profits, it is necessary to inquire whether the deduction is expressly allowed.
The Indian Income-tax Act of 1922 is both in its general framework and its particular provisions different from the English Income tax Acts, so that decisions upon English Acts are in general of no assistance in construing the Indian Act. But on some fundamental concepts reference may be to some extent usefully made to English decisions, in particular as to the meaning of the word "income" : see Raja Bahadur Kamakshya Narain Singh v. Commissioner of Income-tax. Similarly reference may usefully be made to English cases as to the meaning of the expression "capital expenditure."
The expression "capital expenditure" has been defined either in the English or the Indian Income-tax Act. No precise, full and accurate definition of the phrase is to be found in the cases. It is not possible to lay down any hard and fast rule or to enumerate any rigid or scientific principle which can be applied to determine whether a particular payment is in the nature of capital expenditure.
Various tests have been formulated in several cases in determining whether an expenditure is a capital expenditure or a revenue expenditure.
In Vallambrosa Rubber Co., Ltd. v. Farmer, Lord Dunedin as President suggested one test : that a capital expenditure is a thing that is going to recur every year. This is however not decisive in every case. Instances may be cited where payment, though made "once and for all" has been held to be a revenue and not a capital expenditure" Smith v. Incorporated Council of Law Reporting for England and Wales, Hancock v. General Reversionary and Investment Co. v. Dale, and In re Imperial Chemical Industries (India) Ltd.
Lord Cave in British Insulated and Helsby Cables v. Atherton, amplified the rule in the Vallambrosa case, and suggested another test :-
"When an expenditure 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, 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."
This test was applied in Income-tax Appellate Tribunal, New Delhi v. Central India Spinning, Weaving and Manufacturing Co., Ltd., The Empress Mills, Nagpur.
The difficulty in determining whether a payment is in the nature of capital expenditure is illustrated in this case. Five noble and learned law Lords took part in the case; they differed in their opinions. Viscount Cave, L. C. Lord Atkinson and Lord Buckmaster held that is was in the nature of capital expenditure while Lord Carson and Lord Blanesburgh reached a contrary decision. Lord Haldane in John Smith and Son v. Moore, applied the test of circulating as contrasted with fixed capital, i.e., whether the payment in the particular case was from fixed or circulating capital. This test was applied by Lord Hanworth in Golden Horse Shoe (New), Ltd. v. Thurgood, It is however difficult to draw a line between fixed capital and circulating capital and Lord Macmillan in Van Den Berghs case observed that he had not found it very helpful.
Decided cases, however, are of great assistance in coming to a conclusion whether a payment in a particular case is in the nature of capital expenditure.
In Alianza Company v. Bell, the appellants, an English company, were the owners of land in Chile containing deposits of a substance called cliche, from which they extracted by a process of manufacture nitrates and iodine for the market. The decision was that in computing their prof its for income-tax the appellants were not entitled to deduct any yearly sum to meet the exhaustion of the caliche. The law has been clearly and lucidly stated by Channell, J., at page 673 in these terms :-
"In the ordinary case, the cost of the material worked up in a manufactory is not a capital expenditure; it 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 payment of a lump sum down secures a supply of the raw material for a period extending over several years............ The question............ is what is the nature of the adventure or concern which this particular company is carrying on. 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 worked into a marketable commodity, then the money paid for the prime cost of the stuff so dealt with is just as much capital as the money sunk in machinery or buildings.......... This company must be treated as a company formed for the purpose of working and developing the bed of caliche. If it carried on a general business of purchasing and developing similar properties it is possible the matter might be otherwise; but here it is formed merely to work this particular bed, and consequently the money sunk in purchasing this bed is a capital and not a current expenditure. Then if it is a capital expenditure, no allowance can be made in respect of it in estimating the profits........ ... Any prudent person who carries on a business or gets an income from something, in which the capital is necessarily wasting, either by lapse of time, as in the case of a leasehold, or by reason of the using up of the material with which he starts as part of his capital, will provide for such a case by a sinking fund - by putting aside each year so much in order to meet the exhaustion of the capital. But, although it is a prudent course to adopt, any deduction in respect of it is not permitted by the Income-tax Acts."
The statement of the law was affirmed by the Court of Appeal in Alianza Co. v. Bell quoted the observation of Bowen, L. J., in City of London Contract Corporation v. Styles.
"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."
This principle was applied and the deduction claimed by Alianza Company was disallowed.
The decision was upheld by the House of Lords in Alianza Co., Ltd. v. Bell. Lord Robertson at page 19 stated : "There is no doubt whatever that the scheme of the enterprise of this company was to invest their capital in the acquisition of this property and then to proceed to work it as a mining concern." The decision of Channell, J., was approved by the Court of Appeal in Golden Horse Shoe (New), Ltd. v. Thurgood.
A reference may be made to the decision of the Privy Council in Kauri Timber Co., Ltd. v. Commissioner of Taxes. The facts of the case were these. A company carried on in New Zealand the business of cutting, milling and selling timber, and for the purpose of that business it has acquired upon its incorporation and from time to time subsequently, rights over freehold and leasehold bush lands bearing natural timber, in some cases by purchasing the lands and in other cases by purchasing the timber thereon with the right to remove the timber within a stated period. The question was whether under the Land and Income Assessment Act, 1908, the company was entitled to make a deduction from the gross proceeds of its business in respect of the value of the standing timber which it had cut in determining the profits for assessment for income purposes. The leases were for a period of 99 years and there was no obligation upon the company immediately to cut down and remove the timber. Lord Shaw at page 776 observed :-
"It appears to the Board that the present case involves no refinement of distinction; for the transaction under which these timber rights were acquired was not one under which a mere possession of goods by a contract of sale was given to the appellant company, but was one under which they obtained an interest in, and possession of, land. 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. All rights of possession necessary for working the business of cutting or even for preserving uninjured the standing and growing stock of timber were ceded under the leases. All this, together with the business facilities for removal and sale, was granted to the company, which became thereby invested with the possession of, and an interest in, the land."
At page 777 :- "There can be no question that the cost of acquisition of this possession, of and interest, in land, and of the timber rights thereon, was just as plainly a capital on cost as if the land, with the timber upon it, had been bought outright. And just as plainly it was not a proper accounting debit item as against revenue."
At page 778 a note by the learned editor in the first volume of Saunders Reports, page 277c, is quoted :-
"The principle of these decisions appears to be this : that wherever at the time of the contract it is contemplated that the purchaser should derive a benefit from the further growth of the thing sold, from further vegetation and from the nutriment afforded by the land, the contract is to be considered as for the interest in land; but where the process of vegetation is cover, or the parties agree that the thing sold shall be immediately with drawn from the land, the land is to be considered as a mere warehouse of the thing sold and the contract is for goods."
The decision was that the company was not entitled in its assessment for income-tax to make any deduction from the gross proceeds of its business in respect of the value of the standing timber which it had cut.
The principles deducible from these two cases are of general application and are not dependent on the special provisions of any statute.
A reference may be made to Stratford v. Mole and Lea : Old Silkstone Collieries, Ltd. v. Marsh. In the first case the agreement was to run for three years with an option of renewal and respondents purchased all the stand and gravel upon a certain parcel of land, paying therefore a fixed sum per ton of all sand and gravel removed. In the second case the appellant company purchased all the coal which it could actually sever from the soil or freehold and thereby convert into chattels personal from specified seams not a minning lease or licence nor the grant of a profit a prendre but a contract of the sale and prendre which was a "right, privilege or benefit in over or derived from land" and that the payments under the agreements were not admissible deductions for income-tax purposes.
In Commissioner of Income-tax, Madras v. Manavedan Tirumalpad, the assessee had purchased a forest with trees growing thereon and that as the trees were cut down and carried away the capital was thereby decreased and he claimed exemption from the assessment of the profits derived from the sale of timber. The decision was that the amounts received by the owner of unassessed forest lands by the sale of timber trees thereon are income liable as such to income-tax.
In Commissioner of Income-tax v. Chengalvaroya Mudaliar, the assessee had the exclusive privilege for the excavation of lime shells for the period of three years for Rs. 27,750 payable in twelve quarterly instalments. The assessee claimed a deduction of Rs. 11,775 on two grounds, (i) that the sum was in part payment of Rs. 27,750 and was paid as rent and (ii) that Rs. 27,750 was really the purchase price of the shells lying upon and under the land which under the agreement was to be excavated.
As regards the first contention Beasley, C.J., at page 5 stated that the amount paid could not be regarded in any sense as rent and observed :-
"The fact that it is payable by instalments does not make it so. The total amount payable is first mentioned and the payment of that total amount is merely spread over a certain time."
Dealing with the second point at page 5 the learned Chief Justice observed :-
"In my view, the payment in question was not made in order to carry on an already existing business and to earn a profit out of it....... Any expenditure made thereafter would of course be deductible. But this was an initial expenditure without which the assessee could not even have begun winning the shells."
Both the contentions were negatived. The decision was that the assessee was not entitled to deduct the sum in computing the profits.
In Commissioner of Income-tax v. P.T. Chengalvaroya Chettiar, the assessee got exclusive right to excavate shells lying under Government property for three years for a payment of Rs. 30,450 payable by certain instalments and described in the instrument as regards Rs. 10,150 (being one-third of the amount stated) as "the annual lease amount." The decision in Commissioner of Income-tax v. Chengalvaroya Mudaliar was applied and it was held that the sum was a capital expenditure and was not a permissible item of deduction.
In Abdul Kayum Sahib Hussain v. Commissioner of Income-tax, Madras, the assessee acquired the exclusive right, for a certain period, to collect chanks from chank beds belonging to a person and agreed to pay a certain amount in instalment in consideration for the grant of the right. The decision was that the amount paid in instalments was a capital expenditure and was therefore not an admissible deduction.
In Shankar Shambhaji Gangla v. Commissioner of Income-tax, Bombay, the assessee acquired the right to quarry a hill and sell stones therefrom for the period of 10 years from 1928-1938 and set apart Rs. 4,150 every year for sinking fund which with compound interest in 10 years would make up Rs. 50,000. He claimed a deduction of Rs. 4,150 in computing his profits for assessment for 1934-35 for income-tax purposes. The decision was that he was not entitled to deduct that sum. The judgment is of two lines but the decision can be supported on principle.
In Commissioner of Income-tax v. Tika Ram and Sons, Ltd., the assessee was a proprietor of a part of the property and a lessee of the rest. The earth used to be dug up and utilized for the purpose of bricks. He claimed a deduction of Rs. 2,500 under Section 10(2)(ix) of the Indian Income-tax Act, 1922, before its amendment. This was disallowed. At page 909 it was stated :-
"If the company had been purchasing merely raw materials for the purpose of manufacturing bricks, it would certainly have been entitled to a deduction of the price of such materials from the total income realised by the sale of the bricks during the year. But the position here is not that of a company which is merely carrying on the business of manufacture by purchasing raw materials and covering such materials into marketable commodities."
At page 910 :- "The position seems to be more analogous to that of a company which is working a quarry or mine rather than to an ordinary manufacturer who purchases raw materials for the purpose of his manufacturing business."
The decision in the Alianza Company case was applied and it was held that the assessee was not a purchaser of raw material but a person who has acquired certain rights in the land and the amount invested by him was a capital expenditure.
The learned counsel for the assessee relied on Hakim Ram Prasad, In re. The decision is not helpful as there were no facts upon which the judges could come to any conclusion upon the matter.
The learned counsel also relied on the decision in Golden Horse Shoe (New), Ltd. v. Thurgood. The company acquired a right to take away and re-treat very large dumps of residual deposits resulting from the working of a gold mine and called "tailings". These tailings were known to contain a certain amount of gold by a new process of treatment some of this gold was recovered and sold. The question was whether the company entitled to deduct from profits or gains the cost of tailings from which the profit was derived. Lord Hanworth, M.R., at page 560 observed :-
"It seems then that the company bought these dumps which were no longer in a natural but in an artificial condition which were in such a state that they would not have passed under a lease of beds opened, or unopened, or minerals...... for the purpose of treating them as their stock in trade lying stored and ready to their hand, at a fair price of Pounds 1,22,750 and their intention was to use them up and make what they could of them by and after treatment. They had not to win them for the soil, they had been gotten already."
At page 562 :- "The present facts seem to point to a manufacturing business applied to raw material already won and gotten." Romer, L.J., stated that the question had to be decided whether the dumps were to be regarded as fixed capital or as circulating capital, and recognised that it is not always easy to determine whether a particular asset belongs to the one category or the other. The determining factor, according to him, is the nature of the trade in which the asset is employed. At page 564, dealing with the case of mine : "the purchase of the mind is not a purchase of coal but purchase of land with the right of extracting coal from it. The land is regarded merely as one of the means provided by the manufacturer for causing coal to be brought to his gas works, and therefore as much part of his fixed capital as would be any railway trucks or lorries provided by him for the same purpose."
After quoting the observations of Lord Summer in John Smith and son v. Moore, at page 38 : "The business carried on was not that of buying and selling contracts, but of buying and selling coals, and the contracts, which enabled the seller of the coals to acquire the coals, were no more the subject of his trading as a stock in trade for sale than a lease of a brickfield would be the subject of a sale of bricks."
At page 565 Romer L.J., put the following question, "Are the dumps the raw material of the appellants business or do they merely provide the means of obtaining that raw material ?" and answered that they were the raw material itself, and concluded the judgment by stating that it was circulating capital. The decision in the case was that the amount expended in acquiring the tailings was in the nature of an expenditure on the raw material of the companys trade and that as such for the purpose of assessing the companys profits or gains the cost of the tailings treated during the period of assessment was a proper deduction from the proceeds realized by the sale of the fold extracted.
This case as well as Miscellaneous Civil Cases Nos. 56 of 1943, 96 of 1942, 97 of 1942 and 57 of 1943 were argued on the same day as the point involved in all these cases is common.
The learned counsel for the assesses strenuously contended that their cases were not governed by the principles deductible from Alianza Company v. Bell affirmed in [1905] 1 K.B. 184 and [1906] A.C. 18, and [1906] A.C. 18, Kauri Timber Company, limited v. commissioner of Taxes and submitted that the principle enunciated in Golden Horse Shoe (New), Ltd. v. Thurgood was applicable.
The argument was that the assessees merely purchased the raw material under the several agreements and that in computing the amount of profits or gains for assessment for income-tax purposes, the price of the materiel purchased should be deducted.
The assessee Haji Sabumiyan Haji Sirajuddin acquired the right to the forest produce of harra nut and lac from the forest area within the limits or Panabaras-cum-Aundhi Zamindari estate consisting of 205 villages.
The assessee Sheodas Daga obtained the right to the forest produce consisting of harra, mahua etc., for a few years under the agreements dated the 21st August, 1928, and the 24th September, 1936.
The assessee Mohanlal Hargovind obtained the right to the tendu leaves from certain forests for a number of years.
The question is, what is the nature of the right which each of the assessees acquired under the several contracts ?
The terms "movable and immovable property" have been defined variously in different Acts for various purposes. Under the General Clauses Act, 1897, they have been defined in these terms :-
"3. (25) Immovable property shall included land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything to the earth.
"3. (34) Movable property shall mean property of every description, except immovable property."
Under the General Clauses Act growing crops will fall under the definition "immovable property."
Under Section 2(13), Civil Procedure Code, "movable property" includes growing crops. Immovable property has not been defined in the Code. The definition of movable property must be limited to the Code, for under Section 3(25) of the general Clauses Act, 1897, standing crops are immovable property. Movable property has been defined in Section 2(9) of the registration Act to include standing timber, growing crops and grass, fruit upon and juice in trees, and property of every other description, except immovable property. Immovable property has been defined in Section 2(6) of the Act to include land, buildings hereditary allowance, rights to ways etc., or any other benefit to arise out of land, and things attached to the earth or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops, nor grass. The combined effect of these two definitions is that growing crops are movable property.
Under Section 3 of the Transfer of Property Act immovable property does not include standing timber, growing crops or grass. Movable property has not been defined in the Act.
The definition of "goods" in the Indian Sale of Goods Act is as follows :-
"2. (7) goods means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be served before sale or under the contract of sale."
This definition may be compared with the definition in Section 62(1) of the English Sale of Goods act, 1893, which is as given below :-
"Goods" include all chattels personal other than things in action and money, and in Scotland all corporeal movables except money. The term includes emblements, industrial growing crops, and things attached to or forming part of the land which are agreed to be served before sale or under the contract of sale."
The definition of "goods" in the Indian Sale of Goods Act is wider than in the English Act. Under the Indian Act stocks and shares are included within the definition of goods. Under the Indian law all growing crops are included in the term while under the English law only "industrial growing crops" are included.
In the English law the question has arisen with respect to the provision of the statute of Frauds (29 Car. 2, C. 3) and the Stamp Act, 1891. Section 4 enacts that no action shall be brought on any of the contracts specified in the section "unless the agreement upon which such action shall be brought or some memorandum or note thereof shall be in wiring and signed by the party to be charged therewith or some other person thereunto by him lawfully authorized." One of the contracts enumerated therein is a contract for sale of lands, tenements, or hereditaments, or any interest in or concerning them. Another clause which is included is an agreement that is not to be performed within the space of one year from the making thereof. The questions have arisen whether sales of growing crops and the like were sales of an interest in lands within the 4th Section or of goods within the 17th. Section 17 applies to contracts for the sale of goods, wares, and merchandise. Under the section the necessity for writing does not exist when the value is under Pounds 10, and it may be disputed with in contracts for larger sums, by proof of part acceptance or part payment by the buyer or by giving something to bind the bargain. A contract for sale under the latter section is exempt from stamp duty under the Stamp Act, under the former a stamp is required.
Under Section 4 of the English Sale of Goods Act, 1893, a contract for the sale of any goods of the value of ten pounds or upwards is not enforceable by action unless the buyer shall accept part of the goods so sold, and actually receive the same, or give something in earnest to bind the contract, or in part payment, or unless some note or memorandum in writing of the contract be made and signed by the party to be charged or his agent in that behalf. There is no such corresponding law in India.
The notes on the case Duppa v. Mayo by the learned editor Sir Edward Vaughan Williams in the first volume of Saunders Reports correctly summarised the English common law on the subject. These were further explained and applied in Marshall v. Green. They have been subsequently modified by the definition contained in the English Sale of Goods Act which is in terms different from the definition given in the Indian Sale of Goods Act. They are thus of doubtful application so far as the Indian Acts are concerned.
The contention of the assessees was that the purchase was of forest produce and not a lease of immovable property. Reference was made to the executive instructions on the preparation of forest contract agreements in the forest Manual contained in Volume II at page 107. They do not however bear out the contention advanced. The relevant observations are reproduced below :-
".... Their distinctive feature lies in the monopoly given to the contractor to extract all the forest produce specified in the contract in the area covered by the contract.
2. In the past such contracts have been called licences or leases. Both terms are inaccurate. A licence is merely a permission given to one person to enter on the land of another person and there to do something. It is not, strictly speaking, a right to enter on the second persons land to take anything. As soon as a licence confers a right to take anything it becomes a licence coupled with a transfer of the property taken, though it may still popularly be called a licence.....
The term lease is equally inappropriate to a forest contract. A lease confers a right to enjoy a piece of immovable property, either in perpetuity or for a certain time. The lessee is entitled to almost unrestricted rights of enjoyment, and can usually all others, even the owner himself.
3. A forest contract is neither a licence nor a lease. It is primarily a sale of forest produce, clearly indicated. The forest contractor is given the fight to extract and remove, usually with a prescribed period, all the forest produce of a specified kind within a defined area of forest. It has an element of monopoly in so far as no one but the forest contractor may take any of the specified forest produce within the area; and to that extent it differs from a forest licence..........
4. It is clear that a forest contract must be something more than a mere sale of forest produce. A forest contractors right would be of no value if he and his servants and agents were treated as trespassers whenever they entered the forest. A forest contract, therefore, carries with it what is known as an accessory licence enabling the contractor and his servants and agents to enter the forest and to do all lawful acts required for the extraction and removal of the forest produce sold to him."
These executive instructions have not the binding force of law but they correctly represent the law on the point as it is in accord with the decision of the Divisional Bench in Messrs Mulji Sickka and Co. v. Nurmohammad, and Narmadaprasad v. Narayan Singh. The question in Messrs. Mulji Sickka and Co. v. Nurmohammad was about the nature of the right which a person gets under a written agreement to enter upon land, collect and take away tendu leaves for making bidis over a period of years. The decision was that it was not a lease but an exclusive licence coupled with a grant amounting to a profit a prendre and that such an agreement fell within Section 17(1)(b) of the Registration Act and required registration. At page 441 it is stated :-
" These leases are not leases of leaves or crops. That is, the subject-matter is not the sale or transfer or crops. The subject-matter is the transfer of a right. We have therefore to consider not what leaves or crops are, but what the right is.....
The so-called lease here in question is a licence and a grant. As a licence, it is within the meaning of Section 52 of the Easements Act and it does not amount to an interest in property. But to it is added a grant, viz., a grant permitting the grantee over a period of years to sever from the land certain things which are attached to the earth. A tree is attached to the earth and with it all its pars.... are the leaves of a tendu tree excepted because they fall within the expression growing crops ? This does not arise for our present purpose for what was transferred was not a crop but a right to pick leaves.
Here the grant amounted to a profit a prendre. A profit a prendre is a right to take something off the land of another person....... It is an interest in land and, in England must, under the statute of Frauds, be in writing. (See Law of Property Act, 1925, Section 53). If in gross, as here, it can be created for a term or in perpetuity and is a tenement : see Laws of England (Hailsham edition), Volume 11, page 386."
At page 443 :- "The right to collect leaves is still more clearly a right relating to a benefit to arise out of land."
The conclusion is at page 442 :- "We are accordingly of the opinion that these leases amounted to grants of immovable property within the definition contained in the general Clauses act, Section 3(25), and Section 2(6) of the registration Act, as relating to benefits to arise out of land and as not being excluded by Section 3 of the Transfer of Property Act or Section 2 (9) of the registration Act."
The case disapproved of the decision of Pollock, J., in Ahmedkhan Jamatkhan v. Mohammad Khan, and of the Allahabad High Court in Raja Devi v. Muhammad Yaqub, the cases on which the assessees relied in support of their argument.
The question in Narmadaprasad v. Narayan Singh was one relating to registration of a document which related to timber. At page 83 it was observed :-
"But the decision does not turn upon the question whether tendu leaves form movable or immovable property. In determining whether a document has to be registered, one is concerned not with the object which the transaction relates to but with the rights which the instrument creates or declares. If the right in question amounts to a right, title or interest in immovable property, then the instrument....... must be registered. The question here is : does this document create a right, title or interest ........ to or in immovable property ? If it does, then it requires registration under Section 17(a) of the Indian Registration Act..........
But it is not necessary to decide in this case whether a sale of standing timber amounts to a profit or whether it confers an interest in the property sold under the Sale of Goods Act, for whichever way the matter is viewed, the result is the same in this particular case because of the terms of the document under consideration. There is something more than a mere licence to enter in order to cut and remove ascertained timber sold and that something more creates rights and interest in immovable property."
The principle in Kauri Timber Company, Limited v. Commissioner of Taxes, though based on the statement of the law contained in the notes on the case of Duppa v. Mayo by the learned editor Sir Edward Vaughan Williams in the first volume of Saunders Reports p. 277c, deducible from the cases cited therein, is applicable as the view there taken is consistent with the law as stated in the decisions of the Divisional Bench in Messrs. Mulji Sickka and Co. v. Nurmohammad and Narmadaprasad v. Narayan Singh.
The right to collect lac is a right relating to immovable property : see Parmanand v. Birkhu, Sonu v. Bhadaria and Imam Ali v. Rani Priyawati Devi.
The right to collect harra fruit is a right to immovable property as it relates to a benefit to arise out of land within the meaning of Section 3(25) of the General Clauses Act.
The principle deducible from Alianza Company v. Bell and Kauri Timber Company Limited v. Commissioner of Taxes are applicable to the case which have been referred to us for our opinions and not the principle enunciated in golden horse Shoe (New), Ltd. v. Thurgood.
The price paid by the assessee for acquiring the right is a capital expenditure and is not a permissible item of deduction under Section 10(2)(xii) of the Indian Income-tax Act, 1922.
Our answer to the question is that the expenditure is not a revenue expenditure but a capital expenditure and as such it cannot be allowed as a deduction under Section 10(2)(xii) of the Indian Income-tax Act.
The assessee shall bear the costs of this reference and pay the costs of the Commissioner of Income-tax. Counsels fee Rs. 100.
Reference answered accordingly.
APPENDIX The judgment of the High Court in Miscellaneous Civil Case No. 56 of 1943, dated the 8th December, 1944, was as follows :-
MESSRS. SHEODAS DAGA, HARRA FIRM OF KHARIAR v. COMMISSIONER OF INCOME-TAX, U.P. & C.P. This is a reference under Section 66(1) of the Income-tax Act, 1922, at the instance of the assessee, Messrs. Sheodas Daga, Harra Firm of Khariar. The relevant facts which have led to the present reference are briefly these :-
The assessee claimed a deduction of Rs. 11,000 as a revenue expenditure in computing the profits and gains of the business for the assessment year 1940-41. The payment was made by the assessee under two contracts dated 21st August, 1928, and 24th September, 1936. Under the first contract Lal Artatran Deo Zamindar of Khariar Zamindari granted a lease in favour of Seth Balkrishan Ramkishan Nathani of Raipur for five years from 1st October, 1934, to 30th September, 1939, for Rs. 50,000 payable in 5 instalments of Rs. 10,000 each. Under the lease the lessee was allowed to pluck, buy or remove the forest produce consisting of harra, mohwa, toli, wax, honey, gum, chironji, baichendi etc. The other lease was executed by Ganeshsingh Gulalsingh Zamindar of Narra in favour of Sheodas Daga for a period of 10 years commencing from 1st January, 1930, to 1st January, 1940, for Rs. 10,000 payable in instalments. The assessee collected the produce and in the harra account the debits included Rs. 10,000 and Rs. 1,000 being the lease money paid for the contracts of Khariar and Narra Zamindaris.
The Income-tax Officer, Raipur, by the order dated 8th February, 1941, disallowed the item as a capital expenditure and not a permissible item of deduction. the Appellate Assistant Commissioner of Income-tax, Jubbulpore, by the order dated 15th July, 1941, affirmed the order of the Income-tax officer. The Appellate tribunal (Bombay Bench) by the judgment dated 8th June, 1942, found on a consideration of the deeds (i) that the assessee got the right to collect the foliage of the trees and other produce, in addition to a right of access etc., and that such a right cannot be regarded as a lease of forest produce and the payment for acquiring such a right cannot be called rent and (ii) that the money paid for the jungles did not amount to the price of raw material or stock in trade as the assessee had acquired an interest in the land itself, and affirmed the order passed by the Appellate Assistant Commissioner in appeal.
The assessee filed an application under section 66 of the Indian Income-tax Act, 1922, before the Appellate Tribunal, Bombay Bench, on 19th August, 1942, for a statement of the case and reference to the High Court. He suggested three questions which arose for decision in the case. The appellate Tribunal has given reasons for not referring those questions to us for our opinion and has formulated the question in these terms :-
"Whether, on a true construction of the two forest contracts, the applicant is entitled to a deduction of Rs. 11,000 (Rs. 10,000 plus Rs. 1,000) from his business income, either under Section 10(2)(i) or 10(2)(xii) of the Indian Income-tax (Amendment) Act, 1922 ?"
No objection has been taken by the assessee before us to the question as framed by the Appellate Tribunal.
The two deeds which embody the contracts are not before us and it is not possible for us to give our opinion, regarding the nature of interest created by these documents. We, however presume that these contracts must be of the type which we have considered in Miscellaneous Civil Case No. 55 of 1943.
For the reasons given in our judgment in Miscellaneous Civil Case No. 55 of 1943, we hold that the applicant is not entitled to a deduction of Rs. 11,000 from his business income under Section 10(2)(xii) of the Indian Income-tax Act, 1922.
Section 10(2)(i) of the Act is in these terms :-
"Such profits or gains shall be computed after making the following allowances, namely :-
(i) any rent paid for the premises in which such business,..... is carried on, provided that when any substantial part of the premises is used as a dwelling-house by the assessee, the allowance under this clause shall be such sum as the Income-tax officer may determine having regard to the proportional annual value of the part so used."
The business is not carried on in such premises and no question of allowance under Section 10(2)(i) can possibly arise. The clause has no application to this case.
We have already held that his does to amount to a lease of immovable property and the payments under the contracts are not rents. The consideration of each contract is first settled and the amount is payable in certain instalments. The amount so payable is not rent.
Our answer to the question formulated is that the applicant is not entitled to a deduction of Rs. 11,000 from his business income either under Section 10(2)(i) or 10(2)(ii) of the Indian Income-tax Act, 1922.
The assessee shall bear the costs of this reference and pay the costs of the Commissioner of Income-tax. Counsels fee Rs. 100.
Reference answered accordingly.
The judgment of the High court in Miscellaneous Civil Case No. 96 of 1942, dated the 8th December, 1944, was as follows :-
MESSRS. SHEODAS DAGA & CO., RAIPUR v. COMMISSIONER OF INCOME-TAX, LUCKNOW.
This is an application under Section 66(3) of the Income-tax Act, 1922, by the assessee Messrs. Sheodas Daga and Company requiring the commissioner of Income-tax to state the case and refer it to the High Court.
The assessee claimed a deduction of Rs. 11,000 as a revenue expenditure in computing the profits and gains of the business for the assessment year 1939-40.
The payment was made by the assessee under two contracts dated 21st August, 1928, and 24th September, 1936. Under the first contract Lal Artatran Deo Zamindar of Khariar Zamindari granted a lease in favour of Seth Balkishan Ramkishan Nathani of Raipur for five years from 1st October, 1934, to 30th September, 1939, for Rs. 50,000 payable in 5 instalments of Rs. 10,000 each. Under the lease the lessee was allowed to pluck, buy, or remove the forest produce consisting of harra, mohwa, toli wax, honey, gum, chironji baichendi etc. The other lease was executed by Ganeshsingh Gulalsingh Zamindar of Narra in favour of Sheodas Daga for a period of 10 years commencing from 1st January, 1930, to 1st January, 1940, for Rs. 10,000 payable in instalments. The assessee collected the produce and in the harra account the debits included Rs. 10,000 and Rs. 1,000 being the lease money paid for the contracts of Khariar and Narra Zamindaris.
The Income-tax Officer, Raipur, by the order sated 13th March, 1940, disallowed the item as a capital expenditure and not a permissible item of deduction. The Appellate Assistant Commissioner of Income-tax, Jubbulpore, by the order dated 3rd September, 1940, affirmed the order of the Income-tax Officer. In the course of argument it was urged before the Appellate Assistant Commissioner that the income derived from the forest produce under the two deeds was an agricultural income and was exempt from assessment. This contention was negatived by the Appellate Assistant Commissioner. The Commissioner of Income-tax, Central and United Provinces, by the order dated 27th December, 1941, declined to interfere with the assessment under Section 33 of the Income-tax Act and refused to refer the case to the High Court under Section 66(2) of the Act as the points involved, according to him, were fully covered by authority and must inevitably be decided against the assessee. The application was accordingly dismissed. Against this order the assessee filed an application to the High Court on 27th June, 1942, calling upon the Commissioner of Income-tax to state the case and refer it to the High Court. On 27th July, 1942, the divisional Bench issued notice to the other side. the parties have been heard on the application. The points raised in this application were :-
(i) Whether the expenditure of Rs. 11,000 incurred by the assessee towards payments to the Khariar and Narra Zamindaris under the deeds dated 21st August, 1928, and 24th September, 1936, was a revenue expenditure and a permissible item of expenditure deduction under Section 10(2)(xii) of the Income-tax Act, 1922 ?
(ii) Whether the income derived by the assessee from the forest produce was an agricultural income and exempt from assessment ?
The Appellate Assistant Commissioner of Income-tax and the Commissioner of Income-tax have discussed the question involved in point No. 2 and have given reasons for holding that the income derived by the assessee from the forest produce under the terms of the deeds is not an agricultural income and not exempt from assessment. The second point was not raised by the assessee before the Income-tax Officer and has not been pressed in argument before us and must be deemed to have been abandoned. We refrain from giving our opinion on the second point as it was never argued before us.
The question raised in Point No. 1 is the only question which calls for decision and is the same as the one involved in Miscellaneous Civil Case No. 56 of 1943. For the reasons given in our judgment in Miscellaneous Civil Case No. 56 of 1943 our answer to the question is, no. The application fails and is dismissed with costs. Counsels fee Rs. 75.
Application dismissed. -
The judgment of the High court dated the 8th December, 1944, in Miscellaneous Civil Case No. 97 of 1942 was as follows :-
MESSRS. SHEODAS DAGA & CO., RAIPUR v. COMMISSIONER OF INCOME-TAX, LUCKNOW.
This is an application under Section 66(3) of the Income-tax Act, 1922, by the assessee Messrs. Sheodas Daga and Co. (Harra firm), Rajim, requiring the Commissioner of Income-tax to state the case and refer it to the High Court. The assessee claimed a deduction of Rs. 4,600 paid by him to the Zamindars of Binda-Nawagarh and Fingeshwar in determining the profits or gains of his business for the assessment year 1939-40. The assessee paid Rs. 3,500 to the Zamindar of Binda-Nawagarh and Rs. 1,100 to the Zamindar of Fingeshwar. The two Zamindars had given him an exclusive right to collect harra, wax etc., from the specified forest area and the Zamindaris. He claimed this amount as a business expenditure. The claim was disallowed by the Income-tax Officer, Raipur, on 13th March, 1940, on the ground that it was a capital expenditure and not a permissible item of deduction. The commissioner of Income-tax by the order dated 27th December, 1941, declined to interfere with the assessment under Section 33 of the Act and refused to refer the case to the High Court under section 66(2) of the act, as, according to him, the point involved was fully covered by authority and must inevitably be decided against the assessee.
Before the Commissioner of Income-tax for the first time the question was raised that the income derived by the assessee from the forest produce under the terms of contract was an agricultural income and exempt from assessment. The Commissioner stated that the point could not be referred to the High Court under Section 66(2) of the Act as it was not raised either before the Income-tax Officer or before the Appellate assistant Commissioner in appeal.
The assessee filed an application on 27th June, 1942, under Section 66(3) of the Income-tax Act. calling upon the Commissioner of Income-tax to state the case and refer it to the High Court. On 27th July, 1942, the divisional Bench issued notice to the other side.
In the application the contention that the income derived by the assessee was an agricultural income and was exempt from assessment for income-tax purposes had been raised. This was, however, not raised before the Income-tax Officer or the appellate Assistant Commissioner of Income-tax and cannot be decided in this case. The point was not pressed before us in the course of argument and must be deemed to have been abandoned by the assessee.
The only point that survives for consideration in this case is, whether the expenditure of Rs. 4,600 incurred by the assessee to the Zamindars under the lease was a revenue expenditure and a permissible item of deduction ?
For the reasons given in our judgment in Miscellaneous Civil Case No. 56 of 1943 our answer to the question is, no.
The application fails and is dismissed with costs. Counsels fee Rs. 75.
Application dismissed.