- (1.) This appeal from the judgment and order of the High Court of Judicature at Calcutta with leave under Section 66-A(2) of the Indian Income-tax Act raises an interesting question as to the line of demarcation between capital expenditure and revenue expenditure.
(2.) On the 14th November 1938 the Appellant company acquired from the Government of Assam a lease of certain limestone quarries, known as the Komorrah quarries situated in the Khasi and Jaintia Hills District for the purpose of carrying on the manufacture of cement. The lease was for 20 years commencing on the 1st November 1938 and ending on the 31st October 1958, with a clause for renewal for a further term of 20 years. The rent reserved was a half yearly rent certain of Rs. 3,000 for the first two years and thereafter a half-yearly rent certain of Rs. 6,000 with the provision for payment of further royalties in certain events. In addition to these rents and royalties two further sums were payable under the special covenants contained in Clauses 4 and 5 of the lease as "protection fees". Under Clause 4 the protection was in respect of another group of quarries called the Durgasil area, the lessor undertaking not to grant any lease, permit or prospecting licence regarding the limestone to any other party therein without a condition that no limestone should be used for the manufacture of cement in consideration of a sum of Rs. 5,000 payable annually during the whole period of the lease. Under Clause 5 a further protection was given in respect of the whole of the Khasi and Jaintia Hills District, a similar undertaking being given by the lessor in consideration of a sum of Rs. 35,000 payable annually but only for 5 years from the 15th November 1940.
(3.) In the accounting years 1944-45 and 1945-46 the company paid its lessor sums of Rs. 40,000 in accordance with these two covenants and claimed to deduct the sums in the computation of its business profits under the provisions of Section 10(2)(xv) of the Income-Tax Act in the assessments for the assessment years 1945-46 and 1946-47. The Income-Tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal rejected the contention of the company and the following question, as ultimately reframed, was at the instance of the company refered by the Tribunal to the High Court for its decision: "Whether, in the circumstances of the case, the two sums of Rs. 5,000 and Rs. 35,000 paid under Clauses 4 and 5 of the deed of the 14th November 1938, were rightly disallowed as being expenditure of a capital nature and so not allowable under Section 10(2)(xv) of the Indian IncomeTax Act". The High Court answered the question in the affirmative and hence this appeal.;