Law: Income Tax Act, 1961

Section: 37(1)

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 - Assessee-company was carrying on business in timber and other products of forest - It took three leases of forest - First lease was for a period of 30 years and second and third for a period of six years each - Assessee claimed deduction under section 10(2)(xv) in respect of lease money paid to leasor which claim was rejected on ground that same was capital expenditure - Whether since there was no duty on lessee for immediate removal and taking away of produce, lease money was laid out and expended not for acquisition merely of stock in trade but for acquisition of asset of enduring nature - Held, yes - Whether, therefore, amounts paid under terms of leages were not admissible under section 10(2)(xv) of 1922 Act - Held, yes FACTS The assessee-company was carrying the business of dealing in timber and other products of the forest and also to carry on the business of cattle breeding. It took leases of three forests known as Salwan forest, Dhak forest and Chiryapur forest. The first lease was for a period of thirty years and the second and the third leases were for a period of six years each. The question was whether the lease monies paid by the assessee was admissible expenditure under section 10(2)(xv) of 1922 Act. The authorities below treated the expenditure as capital expenditure and disallowed the deduction. On reference : HELD The distinction upon which the decision of the question, whether an expenditure is a capital expenditure or a revenue expenditure depends, is whether the expenditure is incurred to acquire trading stock as such or to acquire a source of supply. In other words whether the expenditure is to acquire stock-in-trade or an asset of an enduring nature. The principles which emerge may be summarised as follows: 1.Whereunder a lease of timber bearing lands there is a duty of instant removal of standing timber, it may be possible to say that there is a case of acquisition of stock-in-trade. 2.Where the right of removal is co-existent with the period of the lease and the cutting and the…

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