P L D 1962 Supreme Court 295 (PLP)

CORNELIUS, C. J.‑

This is a certificated appeal by the Assam Bengal Cement Company Ltd. and concerns a claim of income‑tax in respect of a sum of Rs. 1,60,000 accrued to the appellant Company in the four years commencing 1948 and ending 1952. Relief against income‑tax in respect of this sum was claimed by the appellant‑Company under section 10, subsection (2), clause (xv) of the Income‑tax Act, on the basis that this sum had been spent by the Company as "income expenditure" or "revenue expendi ture". The Income‑tax authorities on the contrary held that the amounts spent, which totalled Rs. 40,000 per year and were provided for in two clauses of the lease‑deed obtained by the Company in 1938 from the Government of Assam, constituted capital expenditure". The claim for the allowance having been rejected by the Income‑tax Appellate Tribunal, that Tribunal in 1959 upon motion by the Company referred the following question to the High Court of East Pakistan for decision, viz :‑- "Whether in the circumstances of the case the two sums of Rs. 5,000 and Rs. 35,000 paid under clauses 4 and 5 of the deed dated 14th November 1938, were rightly disallowed as being expenditure of capital nature?" A Division Bench of the High Court answered the question in the affirmative. They did so after consideration of a decision upon precisely the same question in relation to the same Company given by the Supreme Court of India in the case published as Messrs Aslam‑Bengal Cement Co. Ltd. v. Commissioner of Income‑tax, West Bengal (A I R 1955 S C 89 Vol, 42 C N 21). That decision was given with reference to the Income‑tax claim for the accounting years 1944‑45 and 1945‑

46. Mr. Guha appearing for the appellant‑Company has argued that the view of the matter taken by the Supreme Court of India requires to be reconsidered. The question involved is one of mixed fact and law. All the relevant facts are contained within the compass of the lease deed of 1938. The relevant law, namely the principles upon which "capital expenditure" within the meaning of section 10(2)(xv) of the Income‑tax Act, is to be distinguished from "income expenditure" has been discussed with fullness, and with ample citation of authority in the judgment of the Supreme Court of India, to which we hereby acknowledge our indebtedness for for assistance in this regard. We adopt for the purpose of this judgment, as a fair and comprehensive statement of the relevant principles, those enumerated in the judgment delivered by a Full Bench of the Lahore High Court in the case, Benarsidas Jagannath v. Commissioner of Income‑tax (A I R 1947 Lah. 162), viz :‑ (1) Outlay is capital expenditure when it is made for the start ing of a business, or for extension of a business, or for sub stantial replacement of the equipment ; the money should be used not for the purpose of carrying on the concern, but to acquire the concern ; (2) a common incident of capital expenditure is that it is made once and for all, and that this is done in order to bring into existence as asset or an advantage for the enduring benefit of the trade ; and (3) another test may be whether the money spent was drawn from the fixed capital or was part of the circulating capital of the Company. In the present case, the third Incident is not of importance. The sums in question were to be paid annually namely, Rs. 5,000 under clause (4) and Rs. 35,000 under clause (5). These were sums which could readily be met out of what might be described as the "current account" of the Company. Again, it is clear that these were not "once and for all" payments, but that does not conclude the matter since by agreement the money consideration for an enduring benefit may be payable by instalments. Thus, it may well be that part of the mechanical equipment of an industrial concern may be procur able only on a rental basis, and in such a case, it will be impossible to deny that a capital asset has been procured against a recurring payment. The essential question will thus be whether by means of these two recurring payments, the Company procured an asset or an advantage for the enduring benefit of the trade it was engaged in, namely, the manufacture and sale of cement. A correct appreciation of the facts is necessary for the true resolution of this question, and that requires that an attempt should be made to construe the lease‑deed as a whole. No such attempt has been made either by the Income‑tax authorities or by the High Court, and for this the reason may be that they were content to rely upon the decision of the highest Tribunal in India, namely, the Supreme Court of India in this regard. We have procured from Mr. Guha a copy of the lease‑deed and it has been added to the record of this case. It is a lengthy document, and having studied all its terms I shall endeavour to construe it with a view to appreciating differentially with respect to clause (4) and clause (5) whether each of them provides only for the acquisition of an asset or an advantage for the enduring benefit of the trade of the Assam‑Bengal Cement Company. The main raw material required for the manufacture of cement appears to be limestone, and the lease provides for the procurement of the limestone by the Company, for conversion into cement at its factory in Sylhet, from three separate areas. Firstly, by the lease a specific demise was awarded of "all the limestone situated in the lands measuring 594.40 acres known as Komorrah Quarries situated In British Sobhar Sirdarship in Khasi and Jaintia Hills Districts." The Company was given the right to quarry limestone in this area through its own agency and to convert the limestone thus procured into lime or cement. It is desireable to mention here that the lease indicates with clearness an intention on the part of the Government as lessor to ensure that the Company should adhere as far as possible to its business of manufacturing cement and should not be side‑tracked into other profitable such as that of selling quarried limestone or even lime that had been manufactured from limestone. By clause (23) it was provided that the Company should not sell any building or road making materials or clay or any bricks or tiles made out of such materials, although it might extract or manufacture such materials for its own use. By clause (31), the Company was prohibited from selling lime, which appears to be either a by‑product or an inter mediate product of the process of manufacturing cement. Clause (32) prohibited the Company from engaging in the sale of limestone except to a single company, namely, the Sylhet Lime Co., Ltd. and this only within limits, and under the control of the Deputy Commissioner of the district. This clause expressly operates to save the "interest of the other local limestone quarry holders." The interest of the Government that the Company should engage to the maximum and in the most efficient manner in its true business of converting limestone into cement appears also with clarity from clauses (9) and (10) of the Agreement which require that by the end of the year 1940, the Company should complete a factory capable of an average output of 250 tons of cement per day, and that it should be in full operation within a period of not more than one year thereafter. Clause (11) contains a further provision which will be mentioned in connection with clause (5) presently. The Government by clauses (12) and (13) provided for itself power to ensure by actual inspection that the Company should "carry on operations In a proper and skillful manner unless prevented by unavoidable cause", and this obligation of the Company was supported by sanctions laid down in clauses (38) and (45), which include a power of the Government to cancel the lease. The Company was, however, not confined to the area of the Komorrah Quarries for procurement of limestone for its use. For the Komorrah Quarries it was required to pay a rent of Rs. 3,000 per half year for the first two years and Rs. 6,000 per half year for every subsequent year. This was described as rent, and it was also a measure of the limestone which the Company was empowered in consideration of this payment to extract. That limit was 3 lakh maunds of limestone in the first two years and 16 lakh maunds of limestone in every subsequent year, and for every 100 maunds in excess of these quantities extracted by the Com pany, it was required to pay a royalty of Rs.

2. In addition, there was a provision that if at any time the net profits after deduct ing the income‑tax exceeded 15 per cent. of the capital, the rate of royalty should be subject to revision. Two extensions of the area of procurement, or if one might use that expression, two "catchment areas", were provided by clauses (4) and (5) and as these clauses appear to me to be entirely different in scope and purpose, I shall deal with them individually. By clause (4), an area known as the Durgasil area, the measure ment of which is not stated in the lease‑deed, which also contained quarries of limestone, was placed under a "protection clause" operating in such wise that no limestone could, while the lease deed was in force, be extracted from this area for conversion into cement. The Government bound itself not to grant a franchise to any person in relation to limestone in the Durgasil area "with out a condition . . . . . that no limestone shall be used for the manu facture of cement." In clause (5), which bears points of similarity to clause (4), there is mention of purchase of limestone by the Company from other extractors in the whole area of the Khasi and Jaintia districts. Althongh, purchase is not mentioned in clause (5), it is, in my opinion, reasonable to suppose that it was not the intention of the Government to prohibit also the sale to the Company of limestone quarried in the Durgasil area, for conversion into cement. The payment required under clause (4) was Rs. 5,000 per year, and the clause did not provide for its termination otherwise than with the lease itself. In this respect clause (4) differs from clause (5) and may be said to run with the lease. Taking this clause by itself, and reading it with the remainder of the lease, I understand its scope and extent to be that the Company was not only protected against competition in the field of manufacture of cement, from other quarry‑holders in the Durgasil area, but was also assured of further supplies of limestone from this area not only by purchase from such other quarry‑holders, but also by extraction through its own agency, for the clause provided that the Government could allow the Company to work any unused quarry in this area under the usual terms and conditions. Clause (5) is also described as providing for a payment of Rs. 35,000 per annum "as a further protection fee", but its wording clearly indicates that its content is far more complex and its purposes more diverse, than those of clause (4). This clause reads asunder :‑ "Besides the above protection fee the lessee shall pay to the lessor annually the sum of Rs. 35,000 (Rupees thirty five thousand only) for five years starting from the 15th day of November 1940 as a further protection fee so long as the total amount of limestone quarried by the lessee in a year does not exceed 22,00,000 maunds per year whether quarried in the area of this lease or elsewhere or obtained by purchase from other quarries in the Khasi and Jaintia Hills by the lessees If however in any year the total amount of limestone converted into cement at the lessee's Sylhet Factory exceeds 2,00,000 maunds the lessee will be entitled to an abatement at the rate of Rs. 20 for every 1,000 maunds quarried in excess of 22,00,000 maunds and the lessee shall pay the sum of Rs. 35,000 less the abatement calculated on the basis hereinbefore mentioned. Limestone which is not converted into cement at the lessee's factory in Sylhet District will not entitle the lessee to any abatement in the protection fee. The lessor in consideration of the said payment undertakes not to allow any person or company any lease permit or prospecting license for limestone 9n the whole of Khasi and Jaintia Hills District without a condition in such lease permit or prospecting license that no limestone extracted shall be used directly or indirectly for the manufacture of cement. The lessor will be empowered to terminate this agreement for the payment of a protection fee at any time after it has run for 5 years by giving six months' notice in writing by registered letter addressed to 11 Clive Street Calcutta but the lessee will not be entitled to terminate this agreement during the currency of the lease except with the consent of the lessor:" It will be convenient here to state what has been mentioned already, namely, that reference to this clause is to be found in clause (11). That clause reads as follows:‑- "That the lessee undertakes to have and keep his factory in full operation within a period of not more than one year after its completion. The lessee also undertakes not to suffer the factory to cease operation for a period of or periods aggregating 12 (twelve) months within any two calendar years unless caused to do so by cyclones, floods, storms, earthquakes or other occurrences beyond the lessee's control during the period that the protection described in Clause 5 is in force. On the lessee defaulting in either of the foregoing respects the lessor shall have the power of terminating the agreement described in Clause 5 notwithstanding that the agreement may not have run for as much as five years on the said default occurring." Nothing 1n my opinion can serve as a stronger indication than the second provision in clause (I1), regarding one of the major purposes of clause (5), viz., to oblige the Company, in consideration of the advantage it was to enjoy under clause (5) to keep its factory in as full operation as possible subject only to factors beyond the lessee's control. Clause (5) undoubtedly conferred an advantage upon the Company. That advantage was similar to the advantage conferred by clause (4) in respect of the Durgasil area, but it extended to a much wider area, namely, the whole area of the Khasi and Jaintia Hills district. The Government undertook, as in clause (4), not to grant a franchise in respect of limestone to any other person in respect of the whole of the district "without a condition that no limestone extracted shall be used directly or indirectly for the manufacture of cement." In other words, the Company was protected against any competition in the field of manufacture of cement out of limestone procured by quarrying in the whole of the district. But to secure this monopoly was not the only purpose of or provision in clause (5) as it evidently was of clause (4) in respect of the Durgasil area. As has been seen, clause (11) places this monopoly under a sanction if the factory was not put in full operation within a year after its completion, or the precise limit set on its periods of idleness by clause (11), were exceeded. A further condition regarding the termination of clause (5), contained within that clause was that after it had run for a period of five years, the Government could terminate it unilaterally by giving notice to the lessee, but the lessee was not entitled to terminate it, and in this respect, qua the Company's power, clause (5) ran with the lease in the same way as clause (4). It is significant in my opinion that the continuance of this clause was linked up with the full operation of the Factory. The significance lies in this, that it furnishes a key to the proper under standing of the complicated formula regarding the charge of Rs. 35,000 which was described, with some excess of simplicity, as a "protection fee". The formula was as follows. So long as in any year, the total amount of limestone "quarried by the lessee" which expression was to include all limestone "whether quarried in the area of this lease or elsewhere or obtained by purchase from other quarries in the Khasi and Jaintla Hills by the lessees" did not exceed 22 lakh maunds per year, "the protection fee" was to be Rs. 35,000 per year. But there was a provision for reduction of this charge, which became effective upon the production exceed ing the limit of 22 lakh maunds, under this formula, namely, that for every 1,000 maunds converted into cement at the lessee's Sylhet Factory, in excess of 22 lakh maunds, there should be an abate ment of Rs.

20. A simple calculation will show that if the lessee converted at its factory in any year the total quantity of 39 lakh maunds of limestone Into cement, the liability to pay "protec tion fee" under this clause would totally disappear. The charge was one designed to vary in inverse proportion to the volume of production after it had exceeded a certain figure, and immediately, it becomes clear that clause (5) had a direct connection with the intensity and volume of the operation at the Company's factory. It was no t merely that for a payment of Rs. 35,000 per year, the Company could sleep over its monopoly of conversion of lime stone quarried in the whole district into cement. It was to be kept up to the mark by Government's power of inspection of its operations to ensure that it was working to the full of its capacity, and with all possible efficiency, as a condition of its retaining the monopoly. As for the charge, supposing that It had been related directly to the volume of production at the factory, so that as the pro duction rose, the charge would also increase in proportion, no one could doubt for an instant that the charge was one related to the actual working of the Company. I consider that there need not be any greater doubt on the point merely because the charge is related to the volume of operations so that the higher the pro duction, the less the charge until the charge would finally vanish when the consumption of limestone at the factory in any given year reached the high total of 39 lakh maunds of iimestone. It is probable, though in the nature of the case, this could not appear from the lease alone, that the rate of royalty for extraction from the Komarrah quarry was fixed sufficiently high to make it profitable for the Company to make up its requisite of limestone by purchase from the two additional "catchment areas". It is unnecessary to canvass at length the reasons which led to the introduction into the agreement of lease of this somewhat unusual condition. It is obviously the duty of a Government to exploit the natural resources of its territory to the maximum advantage, and in this case the exploitation of limestone found in the Khasi and Jaintia Hills District, for the single purpose of con version into cement, was being made over on a monopolistic basis to the Company. Under conditions of open competition, there might have been no necessity for the Government to arm itself with power to ensure that the exploitation was to the maximum possible extent, and to the best advantage by the adoption of efficient methods of working. But where competition was pre vented, and the advantage was to go to the monopolist under a franchise awarded by the Government, it was the duty of the Government to apply a scheme to ensure full and advantageous user of the publicly‑owned raw material in question, namely, limestone by the monopolist. I consider that the Government of the day discharged this duty in two ways, viz, firstly, by empower ing itself to ensure by inspection that there was full and efficient exploitation and to apply sanctions if necessary, and secondly, by laying a charge upon the Company which it could avoid in part or in whole by intensifying and increasing the volume of its opera tion to that which the Government considered was its maximum capacity, whereupon the charge would vanish. In the light of this analysis and estimation of the content and purpose of the two relevant clauses, I now proceed to consider whether the expenditure involved under each of them can justly be described as "capital expenditure". I consider that clause (4) which provided an asset or advantage namely, a monopoly in respect of the Durgasil area to run with the lease, that lease itself being an instrument by which the Company assured to itself adequate supplies of basic raw material for its process, can be truly regarded as "capital expenditure". With respect, I accept the conclusion of the Supreme Court of India reached in respect of this clause that it provided protection for the business of the Company as a whole, and did not form a part of the working of the business. The fact that payment was not made "once for all", but in annual installments, is incidental, and does not affect the substance of the matter. But as to clause (5), I am clearly of the opinion that it provi ded for a payment, namely, Rs. 35,000 per year, which was, by the very terms of the lease, related directly to the operations of the Company, and therefore, this payment was to be made as a part of the working expenses of the Company and not exclusively for gaining protection in respect of the area of the Khasi and Jantia Hills District. One reason for considering that this clause is connected with the operations of the Company is that the money payment is related directly by an agreed formula with the volume of the operations of the Company so that when that volume reached a certain high figure, the payment would no longer be, necessary. Another ground for reaching the same conclusion is that the clause could be terminated by the Government if the factory was not brought into full operation within a specified time. A third reason is the imposition of a strict limit upon the extent to which the factory could be kept idle, so long as the "protection described in clause (5) is in force". In my opinion payments which are related to the actual operations of a business in this manner cannot truly fall within the meaning of the expression "capital expenditure". I can see no escape from the conclusion that such payments are rightly to be regarded as expenditure out of revenue or income, and consequently my conclusion is that the amount of Rs. 35,000 or any lesser sum per year, which the Company is required to pay under clause (5) of the agreement constitutes a revenue expenditure and is thus a permissible allowance under section 10 (2) (xv) of the Income‑tax Act. For these reasons, I would allow this appeal in part and would return the following answer to the question referred by the Income‑tax Appellate Tribunal, viz., that the payment of Rs. 5,000 per annum under clause (4) has been rightly disallowed as being expenditure of a capital nature, but that as to the payment of Rs. 35,000 or any lesser sum per annum under clause (5), that is revenue expenditure and is a permissible allowance under section 10 (2) (xv) of the Income‑tax Act. In all the circumstances I would leave the parties to bear their own costs. S. A. RAHMAN, J.‑

This appeal comes to us on a certificate granted by the Dacca High Court. The question raised is whether the appellant is entitled under section 10 (2) (xv) of the Income‑tax Act to deduct a total sum of Its. 40,000 per year, paid by the Company to the Government, by way of protection fee under a lease relating to certain limestone quarries. The Income‑tax Officer, the Appellate Assistant Commissioner and the Income‑tax Appellate Tribunal negatived the claim of the appellant. A reference was then made by the Tribunal, at the instance of the appellant, to the Dacca High Court under section 66(1) of the Income‑tax Act. The question referred for decision was in the following terms :‑ "Whether in the circumstances of the case the two sums of Rs. 5,000 and Rs. 35,000 paid under clauses 4 and 5 of the deed dated 14th November, 1938, were rightly disallowed as being expenditure of capital nature ? The question was answered in the affirmative. The facts, forming the background of this reference, are these. The appellant‑Company on the 14th of November 1938, acquired a lease of limestone quarries, known as Komorrah Quarries, situate In the Khasi and Jaintia Hills District, mainly for the purpose of carrying on the manufacture of cement. The lease was to commence from the 1st of November 1938 and was to enure for twenty years, but there was a clause enabling renewal to take place for another twenty years' term. For the first two years of the lease, half‑yearly rent amounting to Rs. 3,000 and thereafter, a half‑yearly rent of Rs. 6,000 was payable under the lease, be sides certain royalties. In addition to these rents and royalties. two further sums were payable under the special covenants contained in clauses 4 and 5 of the lease, described as "protection fees". These clauses are reproduced below:‑- "

4. The lessee shall pay to the lessor Rs. 5,000 (Rupees five thousand) only annually during the period of the lease on November 15 starting from November 15, 1938, as a pro tection fee. In consideration of this protection fee the lessor undertakes not to allow any person or company any lease per mit or prospecting licence for limestone in the group of quarries as described in Schedule 2 and delineated in the plan thereto annexed and therein coloured blue called the Durgasil area, without a condition in such lease permit or prospecting licence that no limestone shall be used for the manufacture of cement. In the event of any quarry in the Durgasil area not being worked, the lessor may allow the lessee to work such quarries under the terms and conditions of working in force for this area.

5. Besides the above protection fee the lessee shall pay to the lessor annually the sum of Rs. 35,000 (Rupees thirty‑five thousand) only for five years starting from the 13th November 1940, as a further protection fee so long as the total amount of limestone quarried by the lessee in a year does not exceed 22,00,000 maunds per year whether quarried in the area of this lease or elsewhere or obtained by purchase from other quarries In the Khasi and Jaintia Hills by the lessees. If however in any year, the total amount of limestone converted into cement at the lessee's Sylhet Factory exceeds 22,00,000 maunds, the lessee will be entitled to an abatement at the rate of Rs. 20 for every 1,000 maunds quarried in excess of 22,00,000 maunds and the lessee shall pay the sum of Rs. 35,000 less the abatement calculated on the basis hereinbefore mentioned. Limestone which is not converted into cement at the lessee's Factory in Sylhet District will not entitle the lessee to any abatement in the protection fee, The lessor in consideration of the said payment, undertakes not to allow any person or com pany, any lease permit or prospecting licence for limestone, in the whole of Khasi and Jaintia Hills District, without a con dition In such lease permit or prospecting licence that no lime stone extracted, shall be used directly or indirectly, for the manu facture of cement. The lessor will be empowered to terminate this agreement for the payment of a protection fee, at any time after it has run for 5 years, by giving six months' notice in writing, by registered letter, addressed to 11 Clive Street, Calcutta but the lessee will not be entitled to terminate this agreement during the currency of the lease except with the consent of the lessor." The question in the present case arose in respect of assess ment years 1948‑49, 1949‑50 and 1950‑51 and 1951‑

52. It appears that similar question was agitated in respect of assessment years 1945‑46 and 1946‑47, in India, the matter being finally disposed of in appeal by the Supreme Court of India in a judgment, reported as Assam‑Bengal Cement Co. Ltd. v. The Commissioner of Income‑tax, West Bengal (AIR 1955 SC 89). The decision of the Income‑tax authorities rejecting the prayer of the Company for exemption in respect of the sums payable under clauses 4 and 5 of the lease deed, was upheld by the Supreme Court of India and this decision weighed with the Dacca High Court in answering the question referred, against the assessee. Such a decision, of course, does not operate as res judicata between the parties, when we are considering assessments for subsequent years, and the point could, therefore be re‑canvassed by the appellant‑Company, for the later years. The question that falls for determination is whether the two sums payable under clauses 4 and 5 of the lease‑deed, constituted "capital expenditure" or "revenue expenditure" of the assessee Company. An item of expenditure, though wholly and exclusively laid out for the purpose of the business of the Company, would nevertheless be inadmissible as an allowance under section 10 (2) (xv) of the Income‑tax Act, if it is of a capital nature. The term "capital expenditure" is not defined in the Income Tax Act, and the words that occur in clause (xv) of sub section (2) of section 10 of the Act, "not being in the nature of capital expenditure", appear to be somewhat elastic in their connotation. This expression has to be construed in a business sense, save in so far as there may be rules of construction, applicable to it, vide Messrs Mohanlal Hargovind of Jubbulpur v. Commissioner of Income‑tax, C. P. and Berar (PLD1949 PC147). Ordinarily, there is not much difficulty in determining whether a particular Item falls within the scope of "capital expenditure" or income expenditure, but complication arises in cases on the border line between the two. No precise or comprehensive definition of "capital expenditure" can be formulated. Certain broad principles have, however, been crystallized by judicial precedents which may be helpfull in answering such a question. The mere fact that the expenditure in question is of a periodic nature would seem to be immaterial in this connection. As was observed by Lord Greene M. R. in I. R. v. Williams's Executors ((1943) I T R Suppl. 84, 88), "there is no magic in the distinction between a lump sum and a periodic sum". Even a capital sum may be paid by instalments spread over a number of years. Again, the circumstance that the expenditure has been met out of moneys with drawn out of the capital of the concern or out of its profits, would not provide a sufficient criterion for determining whether the expenditure is of a capital or of a revenue nature, vide observations of Lord Greene M. R. in Associated Port Land Cement Manu facturers Ltd. v. Kerr ((1946) 1 All. E R 68, 70). The principal guiding factors for the determination of such question were adequately summarized after an examination of the case law on the subject by a Full Bench of the Lahore High Court in the case of Benarsi Dass Jagan Nath v. Commissioner of Income Tax (A I R 1947 Lah. 162). It was observed in that case that in order to distinguish between a revenue expenditure, which is deductible in assessing income‑tax and a capital expenditure which is not so deducible, one must carefully consider the nature of tae concern, the ordinary course of business usually adopted by a manufacturer in that concern and the object with which an expense is incurred by him and then decide the category under which it falls. The learned Judges in that case laid down that the outlay made for the it itiation of a business, for extension of a business or fur substantial replacement of equipment, would be deemed to be of a capital nature. Further, an item of 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. The opinion was also expressed that some assistance may be gained from the consideration whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business, though this would not appear to be a conclusive factor. Again, it may be relevant to consider whether the expenditure incurred was part of the fixed capital of the business or of its circulating capital. These tests were approved by the Supreme Court of India in the case cited above, relating to this very Company. The expression "enduring benefit" does not imply that it necessarily lasts for ever. It only means that it should endure in the way that fixed capital endures, as was said by Lord Romer L. J. in Anglo‑Persian Oil Co. v. Dale ((1932) 1 K B 124, 146) what degree of durability or permanence it should possess for qualifying as a capital asset, depends upon the facts of each case. The main consideration in such cases always is, whether the expenditure concerned, is part of the Company's working expenses, or in other words, expenditure laid out as part of the process of profit‑earning or whether on the other band, it Is a capital outlay, via., expenditure necessary for the acquisition of property or of rights of a more or less permanent character, the possession of which is a condition of carrying on its trade at all 7 This test, which was formulated by Lord Clyed in Robert Addie & Sons' Collieries Ltd. v. I. R. (8 T C 671, 676) was approved by the Privy Council in Tata Hydro‑Electric Agencies Ltd. v. C. I. T. ((1937) I T R 202, 209). The nature of the expenditure visualized by clauses 4 and 5 of the lease‑deed under consideration has to be judged in the light of these broad principles. Payments made in connection with the acquisition of any lease‑holds of mines or minerals are usually regarded as on capital account, vide Kamakshya Marain Singh v. C I T ((1943) I T R 513 (P C)). Clause 4 in this case, clearly confers the benefit of a monopoly on the assessee‑Company, in respect of manufacture of cement from, limestone, in the area concerned‑a substantial and enduring initial advantage from the point of view of the concern. The sum of Rs. 5,000 payable annually. therefore, during the period of the lease, even though a periodic payment, attains to the dignity of capital expenditure. The payment secures to the appellant freedom from competition by other concerns operating 9n the area and satisfies all the well‑recognized criteria of capital expenditure. Under clause 5 too similar monopoly rights are created in favour of the appellant, in consideration of a sum of Rs. 35,000 payable annaully. The clause is not very happily worded, but it appears that for the first five years of the lease, the sum in ques tion was payable subject to a rebate being granted, proportion ately to the Increase in the limestone quarried by the lessee and the payment was to vanish if the production reached a certain optimum figure. After the expiry of those five years, this clause was apparently to continue in force unless terminated by the lessor giving six moths' notice, in writing, by a registered letter, to the lessee. No such option was available to the lessee, unless the lessor consented. It seems that even during the first five years' period, the lessor was empowered, under another term of the lease, to cancel this monopoly‑concession, in certain contingencies. Both clauses 4 and 5, however, appear to me to be integral conditions of the lease itself and a breach of the conditions, thereby laid on the lessee, would entail cancellation of the lease, at the option of the lessor, under clause 38 of the lease‑deed. In my opinion, this is an important factor as it would seem to indicate that the sums payable under these clauses constitute, inter alia, the condition on which the lease‑hold rights can be enjoyed by the appellant. To my mind, it makes no difference to this position that the benefit of clause 5 could be taken away, in certain contin gencies, during the first five years' period or thereafter, by a notice on the part of the lessor. So long as the clause remains operative, it functions as one of the essential conditions of the lease. In that) aspect, therefore, the payments envisaged by the clause would seem to partake of "capital expenditure" and when the fact that it confers a monopoly‑concession on the appellant is considered along with this circumstance, the Inference gets strengthened In favour of its being "capital expenditure" The question then arises whether the provision which makes it possible for the pay ment under clause 5 to be reduced by progressive increase in production and its eventual disappearance when a certain output is reached, alters the nature of this payment. In my humble judgment, it does not have that effect. Rather than being an expenditure incurred to earn profits the payment is mainly designed to secure for the appellant‑Company the advantage of exclusive operation in the sphere of cement manufacture in the areas. Indeed, with greater production and increase in profits, the pay ment would progressively decrease and eventually vanish. Can to be said then that it Is part of the working expenses of the concern,' laid out in the process of earning profits 7 The answer, in my opinion, should be in the negative. I am unable to persuade myself in consequence, that the sum in question represents revenue expenditure in the accepted sense of the term. The expenditure is attributable, on the contrary, to the capital account of the concern. The other clauses In the lease‑deed which are intended to ensure that the Company works efficiently or does not fall below a certain standard of production, do not appear to have a direct bearing on the nature of this payment. I am inclined to the view therefore that the answer to the reference, returned by the High Court was correct. I would, consequently, dismiss the appeal with costs. HAMOODUR RAHMAN, J.‑

This certificated appeal arises out of a reference made by the Income‑tax Appellate Tribunal to the High Court of East Pakistan under section 66 (1) of the Income‑tax Act. The appellant‑Company acquired from the Government of Assam a lease for quarrying limestone from the Komorrah quarries situated in the Khasi and Jaintia Hills for manufacturing cement. The lease was for a period of 20 years commencing from the 1st November 1938, with a clause for renewal for a further term of 20 years. Under the terms of the said lease, apart from the rents and royalties reserved thereunder, the Company also undertook to pay to the Government of Assam under clauses 4 and 5 of the lease certain sums which have been described therein as "protection fees." The said clauses 4 and 5 provided as follows :‑-- "

4. The lessee shall pay to the lessor Rs. 5,000 (Rupees five thousand) only annually during the period of the lease on November 15th starting from November 15th 1938, as a protec tion fee. In consideration of this protection fee the lessor undertake not to allow any person or company any lease permit or prospecting licence for limestone In the group of quarries as described in Schedule 2 and delineated in the plan thereto annexed and therein coloured blue called the Durgasil area without a condition in such lease permit or prospecting licence that no limestone shall be used for the manufacture of cement. In the event of any quarry in the Durgasil area not being worked the lessor may allow the lessee to work such quarries under the terms and conditions of working in force for this area." "

5. Besides the above protection fee the lessee shall pay to the lessor annually the sum of Rs. 35,000 (Rupees thirty five thousand) only for five years starting from the 15th day of November 1940 as a further protection fee so long as the total amount of limestone quarried by trio lessee in a year does not exceed 22,00,000 maunds per year whether quarried in the area of this lease or elsewhere or obtained by purchase from other quarries in the Khasi and Jainda Hills by the lessees. If, however, in any year the total amount of limestone converted into cement at the lessee's Sylhet Factory exceeds 22,00,000 maunds the lessee will be entitled to an abate ment at the rate of Rs. 20 for every 1,000 maunds quarried In excess of 22,00,000 maunds and the lessee shah pay the sum of Rs. 35,000 less the abatement calculated on the basis herein before mentioned. Limestone which is not converted into cement at the lessee's Factory in Sylhet District will not entitle the lessee to any abatement in the protection fee. The lessor in consideration of the said payment undertakes not to allow any person or company any lease permit or prospecting licence for limestone in the whole of Khasi and Jaintia Hills District without a condition in such lease permit or prospecting licence that no limestone extracted shall be used directly or indirectly for the manufacture of cement. The lessor will be empowered to terminate this agreement for the payment of protection fee at any time after it has run for 5 years by giving six months' notice in writing by registered letter addressed to 11 Clive Street, Calcutta, but the lessee will not be entitled to terminate this agreement during the currency of the lease except with the consent of the lessor." The appellant‑Company has throughout, it appears, been claiming that the sums paid by them as such protection fees were sums expended for the purposes of its business in its revenue account as distinguished from the capital account and, therefore, it was entitled to have the same deducted from the computation of its business profits under the provisions of section 10 (2) (xv) of the Income‑tax Act. In respect of the assessment years 1945‑46 and 46‑47 a similar question was referred by the Income‑tax Appellate Tribunal to the Calcutta High Court, but the same was answered in the affirmative against the contention of the Appellant Company. This decision was upheld even by the Indian Supreme Court in the case of Assam‑Bengal Cement Company Limited v. The Commissioner of Income‑tax, West Bengal (AIR1955SC89). The present reference was in respect of the assessment years 1948‑49, 49‑50, 50‑51 and 51‑52 and the question referred was as follows :‑-- "Whether in the circumstances of the case the two sums of Rs. 5,000 and Rs. 35,000 paid under clauses 4 and 5 of the deed, dated the 14th November 1938, were rightly disallowed as being expenditure of capital nature ?" The High Court of East Pakistan also accepted the reasoning of the Supreme Court of India in the above mentioned case and answered the question similarly. Mr. Guha now appearing for the appellant Company seeks to contend that the reasoning of the Supreme Court of India should not have been accepted, firstly, because the Supreme Court of India was dealing with payments which fell within the first five years mentioned in clause 5 of the lease and, secondly, because, the Supreme court of India had treated the payments under clause 4 or 5 on the same footing, although there was a radical difference between the two. Whilst under clause 4 the payment was to continue annually throughout for the period of the lease and was in the nature of a payment for obtaining a monopoly of extracting limestone from the Durgasil area for the purpose of manufacturing cement, the payment under clause 5 was, however, of a somewhat complex nature. Under this clause the payment was to be made for the first five years starting from the 15th of November 1940 and although the appellant‑Company was given the exclusive right of quarrying limestone in the entire Khasi and Jaintia Hills for the purpose of manufacturing cement; yet even during these five years the payment was, by no means, certain, for, if the total amount of limes to a quarried by the appellant Company in any year exceeded 22,00,000 maunds, then the lessee, i.e., the appellant‑Company, was to be entitled to an abatement at the rate of Its. 20 for every thousand maunds quarried in excess of 22,00,000 maunds. Thus it was quite possible that under this clause nothing might be payable if the appellant‑Company was successful in quarrying 39,50,000 maunds of limestone for the pur poses of manufacturing cement. Furthermore, it is not without significance that under this clause this right was terminable at the lessor's option, after it had run for five years, upon six months' notice, but no such right of termination was given to the lessee. In these circumstances, Mr. Guha argues that the latter payment could neither be regarded as one by which the appellant‑Company obtained any enduring benefit nor was this payment merely intended to be a "protection fee" for buying off competition. According to him it was more in the nature of an incentive to the appellant‑Company to exploit the quarries in the Khasi and Jaintla Hills extensively and produce larger quantities of cement which would inevitably result in larger profits to the lessee as also earn larger royalties for the lessor. It is, therefore, argued that when looked at from the correct business point of view this was in every sense of the terms a revenue expenditure and not a capital expenditure and the deduction claimed should have been allowed. Mr. Guha has, of course, also argued that even the payments under clause 4, which he conceded were payments for buying off competition, should be regarded as being of the nature of revenue expenditure. So far as the principles governing the determination of the question as to what is capital expenditure and what is revenue expenditure are concerned, there does not appear to be much dispute, for, even Mr. Guha accepts that the decision of the Full Bench of the Lahore High Court in the case of Benarsi Dass Jagannath of Amritsar v. Commissioner of Income‑tax (A I R 1947 Lah. 162), "truly enunciates the principles which emerge from the authorities." The difficulty, however, arises in the application of the said principles to the facts of a given case. Even in this case my Lord the Chief Justice and my learned brother S. A. Rahman, J.; advance copies of whose judgments I have had the advantage of reading; appear to be agreed as to the said principles but have unfortunately differed in their application so far as the payments under clause 5 are concerned. There is no dispute as to the payments under clause 4, and I am in respectful agreement with them that a payment for buying off potential competitors is a payment which brings into existence an advantage for the enduring benefit of the trade or business and is capital expenditure, for, in effect it is a payment which improves the value of the good‑will of the business of the payer. "It is not always easy", as observed by Romer L. J. in the case of Golden Horse Shoe Ltd. v. Thulgool ((1934) 1 K B 548), "to determine whe ther a particular asset belongs to the one category or the other" nor is it easy to reconcile all the decisions having a bearing on this question. But as far as can be gathered from these decisions capital expenditure must be some expenditure made either for the initiation or extension of business or for substantial replace ment of equipment or for bringing into existence some asset or advantage for the enduring benefit of the trade or business carried on. The source or fund from which the payment is made nor the manner of the payment is necessarily a conclusive test, for, one may well acquire a capital asset out of the revenue fund or make payment for such an asset in easy installments. Again the asset acquired may be a capital asset for one kind of business but merely a stock‑in‑trade for another. It is not possible, in the circumstances, to lay down any "infallible criterion of universal application." This much, however, is clearly deducible from these decisions that no part of an expenditure which is incurred for the purposes of earning profits or gains or for meeting the working expenses of the business in the ordinary commercial sense can be treated as capital expenditure. I would, therefore, venture to adopt, as a safe working principle, the test laid down by the Judicial Committee in the case of Tata Hydro‑Electric Agencies Limited, Bombay v. Commissioner of Income‑tax Bombay, Presidency and Aden ((1937) A C 685 at 696), namely, that it "is 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 oneself the question, is it a part of the Company's working expenses; is it expenditure laid out as part of the process of profit earning ?" The essence of the matter, therefore, seems to me to be that we must look more at the substance rather than the form of the transaction and first ascertain keeping in mind the nature of the business which is being carried on as to what is the true purpose of the payment. Applying this test to the payments under consideration I am inclined to hold that although both the payments in the two clauses of the lease under consideration have been generally described therein as "protection fees" yet, it seems to me, that the payment under clause 5 is not a protection fee simpllciter. If the payment under clause 5 was intended to be merely a protection fee, then it is difficult to appreciate why the protection was to be only for five years certain, and even during this period rebates were to be allowed from the same in the event of the consumption of limestone in the production of cement exceeding a fixed minimum. The business of the appellant‑Company was to manufacture cement, and the limestone utilized by it was its raw material which it had to procure from Government's quarries. Government, no doubt, gave it the exclusive right to quarry such limestone within certain specified areas but the payment under clause 5 was clearly something mere than a mere protection fee, although it may legitimately be urged that a part of it was certainly paid to free the appellant‑Company from competition. In so far, however, as the quantum of the fee payable was made dependent upon the quantity of limestone, in excess of the fixed minimum, being utilised in the process of the production of cement; the marketable commodity produced by the Company; the payment also partook of the nature of a levy on the profits made by the sale of such finished commodity in the event of the sales not exceeding the stipulated minimum. Therefore, strictly speak ing, the payment was of a composite nature being partly payment for buying off competition and partly payment in the nature of an additional royalty and to that extent at least it influenced directly the working of the Company Itself and was expenditure laid out as part of its process of profit earning. The later part would, E according to the principles indicated above, in my humble opinion, be more appropriately revenue expenditure having a direct relationship with the working expenses of the Company. By the payment under clause 5, furthermore, the appellant‑Company did not, in my opinion, acquire any asset of an enduring nature, for, this right was terminable at any time after the expiry of the first five years at the will of the lessor upon six months' notice. The lessee had no say In the matter. The payments made even during the first five years were again purely of a fluctuating nature which could only have been paid out of its circulating capital and cannot be regarded as an expenditure For preserving a capital asset for which a sinking fund could possibly have been opened. The question may, however, be raised that if this is a payment of a composite nature, then what portion of it is revenue expenditure and what capital expenditure. This question is, from the very nature of the payment itself, not capable of being answered in a definite manner, for, as already pointed out, if the amount of limestone quarried exceeds 39,50,000 maunds, then there will be no necessity to make any payment at all and the entire amount will be an expenditure towards the cost of production. In this view of the matter it is not possible, in my opinion, to allocate separately any sums from out of this payment to either of the heads capital or revenue and, as such, I would resolve this in favour of the assessee and give it F the benefit by treating the entire payment made after the expira tion of the first five years as revenue expenditure allowable as a deduction under section 10(2)(xv) of the Income‑tax Act. I would, therefore, respectfully agree with the order proposed to be made by my Lord the Chief Justice, In terms of the view of the majority, we allow this appeal in part and return the following answer to the question referred by the Income‑tax Appellate Tribunal, viz., that the pay ment of Rs. 5,000 per annum under clause (4) of the Deed, dated 14th November 1938, has been rightly disallowed as being expenditure of a capital nature, but that as to the payment of Rs. 35,000 or any lesser sure per annum under clause (5), that is revenue expenditure and is a permissible allowance under section (10)2(xv) of the Income‑tax Act. We leave the parties to bear their own costs. A. H. Appeal allowed in part.