Law: Income Tax Act, 1922

Section: 10(2)(xv)

Law: Income Tax Act, 1922

Section: 10(2)(xv)

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 1954-55 to 1956-57 - Assessee-company was engaged in business of manufacturing lime from lime stone and was granted right to excavate limestone in certain areas by Government - Government had sanctioned leasing out of lime deposits to assessee under a new mining lease agreement under which assessee agreed to pay royalty of Rs. 96,000 per year to Government on basis of dead rent - Assessee claimed deduction in respect of royalty so paid to Government as revenue expenditure which was disallowed by ITO as being of capital nature - Whether since royalty payment had relation only to lime deposits to be got, and had no direct relation to acquisition of asset, yearly payment of royalty including dead rent should be treated as revenue expenditure - Held, yes FACTS The assessee was a registered firm and carried on the business of manufacturing lime from limestone. By an indenture dated 4-3-1949, the assessee was granted the right to excavate limestone in certain areas at Gotan and Tunkaliayan, subject to certain conditions. That lease expired on 14-7-1952. The lease was extended from time to time by the Government for short periods. On 4-10-1954, the Government sanctioned the leasing out of 15 sq. miles of lime deposits to the assessee and the assessee agreed to pay a royalty of Rs. 96,000 per year as per lease agreement to Government on basis of dead rent under new proposals for 15 sq. miles. For each of the assessment years 1954-55, 1955-56 and 1956-57, the assessee paid a sum of Rs. 96,000 to Government as royalty and claimed it as a revenue deduction against its profits for those years. The ITO disallowed this expenditure, as being of a capital nature. The AAC upheld his view, but on appeal the Appellate Tribunal held that the payment should be treated as a revenue expenditure. The High Court held on a reference that the payment was capital expenditure and could not be allowed as a revenue deduction in computing the business profits of the assessee. On appeal to the Supreme Court : HELD It is…

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