Law:

Section:

Section 37(1) of Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] - Business expenditure - Allowability of - Appellant/assessee was carrying on business of sale of Shahabad stones - It entered into contract to excavate stones from quarries for certain number of years - As per contract, assessee had to pay certain sum annually which was paid by assessee in monthly instalments - Whether, on facts, payment, though periodic in nature, was neither rent nor royalty but a lump sum payment in instalments for acquiring a capital asset of enduring benefit to his trade - Held, yes - Whether, therefore, payment in question was capital expenditure in respect of which deduction could not be allowed under section 10(2)(xv) of 1922 Act - Held, yes FACTS The appellant/assessee was carrying on the business, inter alia, of sale of Shahabad stones which had to be extracted from quarries, dressed and then sold. For the purpose of its business, the appellant took on contract the right to excavate stones from certain quarries in six villages for a period of twelve years. The contract provided that the jagirdar should be paid annually certain sum as consideration for extracting the stones till the end of the contract period, as per a plan prepared, within the six villages specified therein. There was also another lease or contract taken from Government for a period of five years for which the appellant was required to pay Rs. 9,000 per year in monthly instalments of Rs. 750. The amount paid by assessee, as lease or contract money to extract the stones under the two contracts, was claimed as allowance under section 10(2)(xv) of 1922 Act. The Income-tax Officer held that the expenditure in question was capital expenditure, in respect of which the appellant was not entitled to claim any allowance. On appeal, the Tribunal allowed the assessee's claim. On reference, the High Court restored the ITO's order. On appeal to the Supreme Court : HELD The agreement between assessee and jagirdar showed that it was for 12 years. The assessee paid an initial sum of Rs. 96,000 as security for the whole contract. He was required to pay Rs. 28,000 per year.…

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