I pay an annual fee to keep competitors out of my area. It recurs every year, so is it revenue expenditure?
No, not on these facts, and recurrence does not decide it. The Supreme Court held that annual protection fees of Rs 5,000 and Rs 35,000 paid to the lessor of limestone quarries, in return for undertakings not to let anyone else use limestone in the area for cement, were capital expenditure. What the company acquired was the right to carry on its business free of competition in the area - an advantage of enduring benefit for the business as a whole, not a working expense. The aim and object of the expenditure determines its character; the source and the manner of payment are of no consequence.
Decided by the Supreme Court (Supreme Court of India - Mehar Chand Mahajan CJ, Sudhi Ranjan Das, Natwarlal H. Bhagwati and T.L. Venkatarama Aiyyar JJ; judgment of the Court delivered by Bhagwati J) on 1954-11-11, reported as 1955 AIR 89; 1955 SCR (1) 876; AIR 1955 Supreme Court 89. It bears on section 10(2)(xv) of the Indian Income-tax Act, 1922, section 37(1) of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the Indian statement of the capital-revenue divide and it is where the tests are ranked. The Court adopted the Lahore Full Bench synthesis in Benarsidas Jagannath and then did what the English cases had not: it put the tests in order. Ask first whether the expenditure brought into existence an asset or advantage for the enduring benefit of the business, or whether it was for running the business with a view to producing profits. Only if that test is of no avail do you go to fixed against circulating capital. It also kills two arguments practitioners still run. Recurring or instalment payments are not thereby revenue - what is looked at is the character of the payment, determined by the nature of the asset acquired. And a short-lived advantage can still be capital: enduring means enduring in the way fixed capital endures, not for ever.
Binding on every court and authority in India.
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On 14 November 1938 the appellant company took from the Government of Assam a lease of the Komorrah limestone quarries in the Khasi and Jaintia Hills District for its cement manufacture. The lease ran 20 years from 1 November 1938 with a clause for renewal for a further 20. Rent was a half-yearly certain sum of Rs 3,000 for two years and Rs 6,000 thereafter, with royalties in certain events. Two further sums were payable as protection fees. Under clause 4 the company paid Rs 5,000 a year for the whole period of the lease, in return for the lessor's undertaking not to grant any lease, permit or prospecting licence for limestone in an adjoining group of quarries, the Durgasil area, without a condition that no limestone be used for making cement. Under clause 5 it paid Rs 35,000 a year for five years from 15 November 1940 for a like undertaking covering the whole of the Khasi and Jaintia Hills District, subject to an abatement if the company converted more than 22,00,000 maunds of limestone into cement in a year, and terminable by the lessor on six months' notice after five years. In the accounting years 1944-45 and 1945-46 the company paid Rs 40,000 and claimed it under section 10(2)(xv). The Income Tax Officer, the Appellate Assistant Commissioner, the Tribunal and the Calcutta High Court all held it capital.
The appeal was dismissed with costs. Both sums were capital expenditure and not allowable under section 10(2)(xv). On clause 4, the benefit was to enure for the whole period of the lease; that it was a recurring and not a lump sum payment was immaterial, because the character of a payment is determined by the nature of the asset acquired. What the company acquired was the right to carry on its business unfettered by competition from outsiders within the area - a capital asset, a protection for the business as a whole, which went to appreciate the whole of the capital asset and make it more profit yielding rather than forming part of working expenses. On clause 5, though the payments were spread over five years, the advantage enured for the whole period of the lease unless terminated, and gave protection against all competitors in the entire district, appreciating the capital asset considerably. The five-year spread made no difference to the nature of the acquisition. Neither sum was any part of the working or operational expenses of the company.
The Court began by acknowledging the difficulty - the warnings of Lord Macnaghten in Dovey v Cory and Rowlatt J in Countess Warwick against general rules - and then traced the tests. Bowen LJ in City of London Contract Corporation: you do not use it for the purpose of carrying on your concern, you use it to acquire the concern. Lord Dunedin in Vallambrosa: once and for all against recurring, a rough criterion only. Viscount Cave in Atherton: expenditure made not only once and for all but with a view to bringing into existence an asset or advantage for the enduring benefit of a trade is attributable to capital. Viscount Haldane in John Smith & Son: fixed against circulating capital, on Adam Smith's description. The Privy Council in Tata Hydro-Electric: the distinction between acquiring an income-earning asset and the process of earning income. The Court then adopted the synthesis of the Lahore Full Bench in Benarsidas Jagannath and, crucially, ordered the tests. Where the expenditure is initial outlay, extension, or substantial replacement of equipment, it is capital without more. Where it is incurred while the business is going on, ask whether it acquired or brought into existence an asset or advantage for the enduring benefit of the business, in which case it is capital, or whether it was for running the business with a view to producing profits, in which case it is revenue; and if such an advantage is acquired it is immaterial whether the source was capital or income and whether payment was once and for all or periodical. Only where that test is of no avail does one turn to fixed against circulating capital. Enduring, the Court added on Romer LJ's authority, means enduring in the way fixed capital endures, not for ever.
The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence.
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Handle my notice → Ask a CA on WhatsAppNo, not on these facts, and recurrence does not decide it. The Supreme Court held that annual protection fees of Rs 5,000 and Rs 35,000 paid to the lessor of limestone quarries, in return for undertakings not to let anyone else use limestone in the area for cement, were capital expenditure. What the company acquired was the right to carry on its business free of competition in the area - an advantage of enduring benefit for the business as a whole, not a working expense. The aim and object of the expenditure determines its character; the source and the manner of payment are of no consequence. This was decided by the Supreme Court (Supreme Court of India - Mehar Chand Mahajan CJ, Sudhi Ranjan Das, Natwarlal H. Bhagwati and T.L. Venkatarama Aiyyar JJ; judgment of the Court delivered by Bhagwati J) and bears on section 10(2)(xv) of the Indian Income-tax Act, 1922, section 37(1) of the Income Tax Act 1961. It is reported as 1955 AIR 89; 1955 SCR (1) 876; AIR 1955 Supreme Court 89. This is the Indian statement of the capital-revenue divide and it is where the tests are ranked. The Court adopted the Lahore Full Bench synthesis in Benarsidas Jagannath and then did what the English cases had not: it put the tests in order. Ask first whether the expenditure brought into existence an asset or advantage for the enduring benefit of the business, or whether it was for running the business with a view to producing profits. Only if that test is of no avail do you go to fixed against circulating capital. It also kills two arguments practitioners still run. Recurring or instalment payments are not thereby revenue - what is looked at is the character of the payment, determined by the nature of the asset acquired. And a short-lived advantage can still be capital: enduring means enduring in the way fixed capital endures, not for ever. If it applies to you, the first step is this: Identify what was actually acquired for the money before you argue about how it was paid. The nature of the asset or advantage decides the head; lump sum against instalments does not.
On 14 November 1938 the appellant company took from the Government of Assam a lease of the Komorrah limestone quarries in the Khasi and Jaintia Hills District for its cement manufacture. The lease ran 20 years from 1 November 1938 with a clause for renewal for a further 20. Rent was a half-yearly certain sum of Rs 3,000 for two years and Rs 6,000 thereafter, with royalties in certain events. Two further sums were payable as protection fees. Under clause 4 the company paid Rs 5,000 a year for the whole period of the lease, in return for the lessor's undertaking not to grant any lease, permit or prospecting licence for limestone in an adjoining group of quarries, the Durgasil area, without a condition that no limestone be used for making cement. Under clause 5 it paid Rs 35,000 a year for five years from 15 November 1940 for a like undertaking covering the whole of the Khasi and Jaintia Hills District, subject to an abatement if the company converted more than 22,00,000 maunds of limestone into cement in a year, and terminable by the lessor on six months' notice after five years. In the accounting years 1944-45 and 1945-46 the company paid Rs 40,000 and claimed it under section 10(2)(xv). The Income Tax Officer, the Appellate Assistant Commissioner, the Tribunal and the Calcutta High Court all held it capital. The matter was decided on 1954-11-11 by the Supreme Court (Supreme Court of India - Mehar Chand Mahajan CJ, Sudhi Ranjan Das, Natwarlal H. Bhagwati and T.L. Venkatarama Aiyyar JJ; judgment of the Court delivered by Bhagwati J). On those facts the Supreme Court held as follows. The appeal was dismissed with costs. Both sums were capital expenditure and not allowable under section 10(2)(xv). On clause 4, the benefit was to enure for the whole period of the lease; that it was a recurring and not a lump sum payment was immaterial, because the character of a payment is determined by the nature of the asset acquired. What the company acquired was the right to carry on its business unfettered by competition from outsiders within the area - a capital asset, a protection for the business as a whole, which went to appreciate the whole of the capital asset and make it more profit yielding rather than forming part of working expenses. On clause 5, though the payments were spread over five years, the advantage enured for the whole period of the lease unless terminated, and gave protection against all competitors in the entire district, appreciating the capital asset considerably. The five-year spread made no difference to the nature of the acquisition. Neither sum was any part of the working or operational expenses of the company.
The Court began by acknowledging the difficulty - the warnings of Lord Macnaghten in Dovey v Cory and Rowlatt J in Countess Warwick against general rules - and then traced the tests. Bowen LJ in City of London Contract Corporation: you do not use it for the purpose of carrying on your concern, you use it to acquire the concern. Lord Dunedin in Vallambrosa: once and for all against recurring, a rough criterion only. Viscount Cave in Atherton: expenditure made not only once and for all but with a view to bringing into existence an asset or advantage for the enduring benefit of a trade is attributable to capital. Viscount Haldane in John Smith & Son: fixed against circulating capital, on Adam Smith's description. The Privy Council in Tata Hydro-Electric: the distinction between acquiring an income-earning asset and the process of earning income. The Court then adopted the synthesis of the Lahore Full Bench in Benarsidas Jagannath and, crucially, ordered the tests. Where the expenditure is initial outlay, extension, or substantial replacement of equipment, it is capital without more. Where it is incurred while the business is going on, ask whether it acquired or brought into existence an asset or advantage for the enduring benefit of the business, in which case it is capital, or whether it was for running the business with a view to producing profits, in which case it is revenue; and if such an advantage is acquired it is immaterial whether the source was capital or income and whether payment was once and for all or periodical. Only where that test is of no avail does one turn to fixed against circulating capital. Enduring, the Court added on Romer LJ's authority, means enduring in the way fixed capital endures, not for ever. In the words reproduced by the source cited on this page: "The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence."
It was decided by the Supreme Court on 1954-11-11 and is reported as 1955 AIR 89; 1955 SCR (1) 876; AIR 1955 Supreme Court 89. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 10(2)(xv) of the Indian Income-tax Act, 1922, section 37(1), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was dismissed with costs. Both sums were capital expenditure and not allowable under section 10(2)(xv). On clause 4, the benefit was to enure for the whole period of the lease; that it was a recurring and not a lump sum payment was immaterial, because the character of a payment is determined by the nature of the asset acquired. What the company acquired was the right to carry on its business unfettered by competition from outsiders within the area - a capital asset, a protection for the business as a whole, which went to appreciate the whole of the capital asset and make it more profit yielding rather than forming part of working expenses. On clause 5, though the payments were spread over five years, the advantage enured for the whole period of the lease unless terminated, and gave protection against all competitors in the entire district, appreciating the capital asset considerably. The five-year spread made no difference to the nature of the acquisition. Neither sum was any part of the working or operational expenses of the company. It arises in Deductions & Disallowances matters, on section 10(2)(xv) of the Indian Income-tax Act, 1922, section 37(1) of the Income Tax Act 1961, and was decided by Supreme Court of India - Mehar Chand Mahajan CJ, Sudhi Ranjan Das, Natwarlal H. Bhagwati and T.L. Venkatarama Aiyyar JJ; judgment of the Court delivered by Bhagwati J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If you are claiming a deduction, show the expenditure was laid out in the process of earning profits rather than in acquiring or improving the profit-yielding thing itself - the Tata Hydro-Electric distinction the Court adopts. Do not lead with fixed against circulating capital. On this judgment that test is a fallback, reached only where the enduring-benefit test gives no answer. Remember the finding is treated as one of fact. Get the correct principles recorded as applied at the Tribunal stage, because the Court said the courts will not ordinarily interfere with such findings once the broad principles have been properly applied.
Still good law. The framework stated here remains the standard Indian statement of the capital-revenue distinction and the harvested page records the judgment as cited in 406 later decisions. I have not read those later decisions. Note that the enduring-benefit test has since been qualified where the advantage is in the revenue field rather than the capital field, and the practitioner should read this case alongside the later Supreme Court authority on that qualification, which I have not checked in this session. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Decided under the Indian Income-tax Act, 1922; the batch line's reference to section 37(1) of the 1961 Act is the corresponding provision, not the one construed. The Court noted that it was not clear what was meant by the last provision of clause 5, allowing the lessor to terminate the protection agreement after five years while the lessee could not, and treated the point as immaterial - so the judgment does not decide how a genuinely terminable advantage of that kind should be characterised. The harvested page carries the reporter's headnote before the judgment; nothing here is taken from it. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed with costs. Both sums were capital expenditure and not allowable under section 10(2)(xv). On clause 4, the benefit was to enure for the whole period of the lease; that it was a recurring and not a lump sum payment was immaterial, because the character of a payment is determined by the nature of the asset acquired. What the company acquired was the right to carry on its business unfettered by competition from outsiders within the area - a capital asset, a protection for the business as a whole, which went to appreciate the whole of the capital asset and make it more profit yielding rather than forming part of working expenses. On clause 5, though the payments were spread over five years, the advantage enured for the whole period of the lease unless terminated, and gave protection against all competitors in the entire district, appreciating the capital asset considerably. The five-year spread made no difference to the nature of the acquisition. Neither sum was any part of the working or operational expenses of the company.
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