Law:

Section:

Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] - Business expenditure - Allowability of - Assessment years 1945-46 and 1946-47 - Assessee-company acquired from State Government a lease of certain limestone quarries for purpose of carrying on manufacture of cement for a period of 20 years - In addition to rent and royalties assessee agreed to pay certain amount annually to lessor as 'production fees' and undertaking not to grant any lease, permit or prospecting licence regarding limestone to any other party - Whether payments made by assessee to lessor was for acquisition of an asset or advantage of enduring nature and, thus, was not allowable as business expenditure - Held, yes FACTS The assessee-company acquired from the State Government a lease of certain limestone quarries for the purpose of carrying on the manufacture of cement. The lease was for 20 years commencing on 1-11-1938, with a clause for renewal for a further term of 20 years. In addition to payment of rent and royalties two further sums were payable under the special convenants contained in clauses 4 and 5 of the lease as 'protection fees'. Under those clauses the protection was in respect of another group of quarries the lessor under-taking not to grant any lease, permit or prospecting licence regarding the limestone to any other party. In the accounting years 1944-45 and 1945-46 the company paid its lessor 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). The ITO, the AAC and the Tribunal rejected the contention of the assessee. On reference the High Court answered the question in favour of the revenue. On appeal to the Supreme Court: HELD If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the…

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