Shanker Trading (P) Ltd v. The Cit

* IN THE HIGH COURT OF DELHI AT NEW DELHI % Judgment reserved on: 09.05.2012 Judgment pronounced on: 09.07.2012 + ITA 53/2000, ITA 251/2007, ITA 253/2007, ITA 257/2007 & ITA 223/2002 SHANKER TRADING (P) LTD. ..... Appellant versus THE CIT ..... Respondents Advocates who appeared in this case: For the Appellant : Mr Ajay Vohra and Ms Kavita Jha For the Respondent: Mr Sanjeev Sabharwal and Ms Suruchi Aggarwal A N D + ITA 247/2002, ITA 45/2005, ITA 50/2005, ITA 1207/2005, ITA 361/2008, ITA 482/2008, ITA 731/2008, ITA 1191/2008, ITA 1183/2010, ITA 1198/2010, ITA 842/2011 and ITA 246/2005 COMMISSIONER OF INCOME TAX DEL versus ..... Appellant M/S SHANKAR TRADING CO. P. LTD ..... Respondent Advocates who appeared in this case: For the Appellant : Mr Sanjeev Sabharwal and Ms Suruchi Aggarwal For the Respondent: Mr Ajay Vohra and Ms Kavita Jha CORAM: HON'BLE MR. JUSTICE BADAR DURREZ AHMED HON'BLE MR. JUSTICE V.K.JAIN V.K. JAIN, J. 1.M/s Shankar Trading (P) Limited (hereinafter referred to as the assessee) is engaged in the business of Katha and Cutch and had taken on lease, with effect from 01.06.1978, a factory belonging to Mehta Charitable Prajnalay Trust (hereinafter referred to as “the Trust”), which also was engaged in the business of manufacturing of the same products. Shri Bishan Dass and Shri Raj Kumar, two of the trustees of the Trust were also the directors and shareholders of the Assessee Company. 3 out of 5 directors of the assessee company were the sons of two trustees of the Trust. It is also an admitted position that bulk of the shares of the assessee Company was held by the trustees of the Trust and their family members. Initially, the lease rent was fixed at Rs 25,000/- p.m., which was later increased first to be Rs 50,000/- p.m. and then to Rs 1,00,000/- p.m. As on 31.12.1991, the assessee was paying lease rental of Rs 1,00,000/- p.m. to the Trust, in respect of the factory taken on lease. The assessee entered into a fresh lease deed on 18.01.1992, whereby the lease rent was enhanced to Rs 6,75,000/- per month with effect from 01.01.1992. 2.The assessee, in its return of income for the assessment years 1992-93, claimed deductions for the lease rental which it had paid to the Trust. The Assessing Officer was of the view that the assessee Company had acquired an asset of an enduring nature and accordingly disallowed the increased amount of rent on the ground that this payment was in the nature of capital expenses. In this regard, the Assessing Officer invoked the provisions of Section 40A(2) of the Income Tax Act, 1961 (hereinafter referred to as the Act). The Commissioner of Income Tax (Appeals) confirmed the assessment order. He was also of the view that the unusual increase in the rent was primarily for the purpose of reducing the tax incidence on the profits earned by the assessee Company and not for a business consideration and therefore was not allowable. The Income Tax Appellate Tribunal (hereinafter referred to as “the Tribunal”) vide its order dated 16.2.1999 upheld the order of CIT (Appeals) and held that the enhanced lease rent amounting to Rs.17,25,000/- for the period from January to March, 1992 was a capital expenditure and therefore not allowable as a deductible expenditure. ITA No. 53/2000 has been filed by the assessee company, challenging the order of the Tribunal in respect of the Assessment Year (AY) 1992-93. The following question of law in this appeal was framed by this Court on 12.4.2001. “Whether the Tribunal was justified in holding that the payment of rentals to the extent of Rs.17,25,000/- was capital in nature?” 3.For the Assessment Years 1994-95, 1995-96 and 1996-97, since the Appellate Tribunal (hereinafter referred to as “the Tribunal”) vide its order dated 16.2.1999 upheld the order of CIT (Appeals) and held that the enhanced lease rent amounting to Rs.17,25,000/- for the period from January to March, 1992 was a capital expenditure and therefore not allowable as a deductible expenditure. ITA No. 53/2000 has been filed by the assessee company, challenging the order of the Tribunal in respect of the Assessment Year (AY) 1992-93. The following question of law in this appeal was framed by this Court on 12.4.2001. “Whether the Tribunal was justified in holding that the payment of rentals to the extent of Rs.17,25,000/- was capital in nature?” 3.For the Assessment Years 1994-95, 1995-96 and 1996-97, since the disallowance made in the year 1992-93 was maintained by the Assessing Officer in the AY 1993-94 onwards, the assessee preferred appeals before CIT (A) who heard the appeals of the Assessee for the year 1994-95 and 1995-96, disagreed with the view of his predecessor and deleted the addition. It would be pertinent to note here that at the time CIT (A) allowed the appeals of the Assessee for the Assessment Years 1994-95 & 1995-96 he did not have the benefit of the order of the Tribunal dated 16.2.1999 in respect of AY 1992-93. However, for the Assessment Year 1996-97 CIT(A) did have the benefit of Tribunal‟s order dated 16.2.1999 passed in respect of the AY 1992-93. He was of the view since the entire payment of lease rent was paid towards acquisition of capital assets and enduring benefit, the disallowance made by the Assessing Officer should be enhanced to Rs.81 lac, which was the total lease rent paid in that year. He accordingly disallowed the entire claim of payment of lease rent of Rs.81 lac for the year 1996-97. The appeals were filed by the Revenue for the Assessment Years 1994-95 and 1995-96 and by the assessee for the year 1996-97, against the orders passed by CIT (A). The Tribunal, while deciding the appeals of the Revenue for the Assessment Years 1994-95 and 1995-96 and the appeal of the assessee for the Assessment Year 1996-97 vide order dated 25.2.2002, held that since the assessee did not have any enduring benefit by obtaining capital assets of the lessor against payment of monthly lease rent, the expenditure incurred by it was a revenue expenditure. The Tribunal however held that the provisions of Section 40A(2) of the Act had rightly been invoked, as there was a direct relationship between the trustees and directors of the assessee company. The Tribunal noted that 03 out of the 05 directors of the assessee company were the sons of trustee No.1 Shri Bishan Das Mehta and brother of second trustee Shri Raj Kumar Mehta. It was noted by the tribunal that the maximum share holding in the assessee company was owned by the trustees and their relatives as defined in Section 2(41) of the Act. The Tribunal however accepted the contention of the assessee that since the Assessing Officer had not recorded a specific finding that the expenditure incurred by it was excessive or unreasonable having regard to (i) the market value of goods or services, (ii) the legitimate business needs, and (iii) benefits derived by the assessee thereforom, invocation of provisions of Section 40A(2) was not proper. The Tribunal held that the reasonableness of payment of lease rent should be examined afresh by the Assessing Officer, in the light of the valuation report which the assessee had submitted before it and other evidence available on record. ITA No. 223/2002 has been filed by the Assessee, whereas ITA No. 247/2002 has been filed by the Revenue challenging the order of the Tribunal dated 25.2.2002 in respect of the Assessment Years 1994-95, 1995-96 and 1996-97. The following questions of law were framed by this Court in ITA No. 223/2002 and ITA No. 247/2002 on 11.12.2002: “Whether the facts and in the circumstances of the case, the Tribunal is correct in law in holding that Section 40A(2) of the Income-Tax Act, 1961 is applicable in ITA No. 223/2002 has been filed by the Assessee, whereas ITA No. 247/2002 has been filed by the Revenue challenging the order of the Tribunal dated 25.2.2002 in respect of the Assessment Years 1994-95, 1995-96 and 1996-97. The following questions of law were framed by this Court in ITA No. 223/2002 and ITA No. 247/2002 on 11.12.2002: “Whether the facts and in the circumstances of the case, the Tribunal is correct in law in holding that Section 40A(2) of the Income-Tax Act, 1961 is applicable in respect of the lease rent paid by the assessee to M/s Mehta Charitable Prajnalaya Trust?” (ITA 223/2002) “Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the expenditure of Rs.6,75,000/- per month paid by the assessee to M/s Mehta Charitable Prajnalaya Trust in terms of agreement dated 18 January, 1992 was revenue expenditure?” (ITA 247/2002) 4.For the Assessment Years 1997-98, 1998-99 and 1999-2000 the Tribunal vide its order dated 26.5.2004 followed its earlier decision dated 25.2.2002. ITA No. 45/2005, 50/2005 and 246/2005 have been filed by the Revenue against the orders for assessment years 1999-2000, 1997-98 and 1998-99, whereas ITA No. 251/2007, 253/2007 and 257/2007 have been filed by the assessee against orders for assessment years 1997-98, 1998-99 and 1999-2000. The following questions of law were framed by this Court on 11.2.2005/15/02.2005/06.04.2005 and 19.3.2007 in these appeals: “Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the expenditure of Rs.7,87,000/- per month paid by the assessee to M/s Mehta Charitable Pranjnalaya Trust in terms of agreement dated 18[th] January, 1992 was revenue expenditure?” (ITA 45/2005) “Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the expenditure of Rs.7,50,000/- per month paid by the Assessee to M/s Mehta Charitable Pranjnalaya Trust in terms of agreement dated 18[th] January, 1992 was revenue expenditure?” (ITA 50/2005) “Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the expenditure of Rs.7,87,500/- per month paid by the assessee to M/s Mehta Charitable Pranjnalaya Trust in terms of agreement dated 18[th] January, 1992 was revenue expenditure?” (ITA 246/2005) “Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is correct in law in holding that the Section 40A(2) of the Income Tax Act, 1961 is applicable in respect of the lease rent paid by the Assessee to M/s Mehta Charitable Pranjnalaya Trust?” (ITA 251/2007, 253/2007 & 257/2007) 5.Vide order dated 22.6.2005, the Tribunal with respect to AY 1993-94, following its earlier order passed in respect of AY 1994-95, 1995-96 and 1996-97 held that the payment of lease rent to the trust was a revenue expenditure and that the provisions of Section 40A(2) of the Act were applicable. The Tribunal therefore directed that the matter should be restored to the Assessing Officer for fresh consideration. ITA No. 1207/2005 has been filed by the Revenue against that order. The following question of law was framed by this Court on 21.3.2007 in this appeal: “Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was correct in law in holding that the expenditure of Rs.6,75,000/- per months paid by the Assessee to M/s Mehta Chairtable Prajnalaya Trust in terms of the agreement dated 18[th]January, 1992 was a revenue expenditure?” 6.Vide its order dated 28.9.2007, passed in respect of Assessment Year 2000- 01 and 2001-02, the Tribunal deleted the entire disallowance. ITA No. 361/2008 and 482/2008 have been filed by the Revenue against orders for AY 2000-01 and 2001-02 respectively. The following question of law was framed by this Court in these cases on 20.3.2009/25.9.2008. that order. The following question of law was framed by this Court on 21.3.2007 in this appeal: “Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was correct in law in holding that the expenditure of Rs.6,75,000/- per months paid by the Assessee to M/s Mehta Chairtable Prajnalaya Trust in terms of the agreement dated 18[th]January, 1992 was a revenue expenditure?” 6.Vide its order dated 28.9.2007, passed in respect of Assessment Year 2000- 01 and 2001-02, the Tribunal deleted the entire disallowance. ITA No. 361/2008 and 482/2008 have been filed by the Revenue against orders for AY 2000-01 and 2001-02 respectively. The following question of law was framed by this Court in these cases on 20.3.2009/25.9.2008. “Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the expenditure of Rs.99,22,500/- per month paid by the assessee to M/s Mehta Charitable Prajnalaya Trust in terms of agreement dated 18.01.1992 was revenue expenditure? (ITA 361/2008) “Whether on the facts and in the circumstances of the case, the Income Tax Tribunal was correct in law in holding that the expenditure of Rs.8.68,219/- per month paid by the Assessee to M/s Mehta Charitable Prajnalaya Turst in terms of Agreement dated 18.01.1992 was revenue expenditure?” (ITA 482/2008) 7.In respect of Assessment Year 2002-03, the Tribunal followed its earlier order dated 28.9.2007 in respect of AY 2000-01 and 2001-02. ITA No. 731/2008 has been filed by the Revenue against this order passed by the Tribunal dated 18.1.2008. The following question of law was framed by this Court on 2.7.2008: “Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the expenditure of Rs.7,87,500/- per month paid by the Assessee to M/s Mehta Charitable Prajnalaya Trust in terms of Agreement dated 18.1.1992, was revenue expenditure?” 8. Vide order dated 28.3.2008 for the Assessment Year 2003-04, the Tribunal maintained the view taken by it for the Assessment Years 2001-02 and 2002-03. The following question of law was framed by this Court on 22.09.2008 in ITA No. 1191/08 which has been filed by the Revenue against the said order. “Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was correct in law in holding that the expenditure of Rs.9,11,630/- per month paid by the Assessee to M/s Mehta Charitable Prajnayala Trust in terms of Agreement dated 18.1.1992 was revenue expenditure?” 9. Vide order dated 31.7.2009 in respect of AY 2004-05 and 2005-06, the Tribunal again maintained its earlier orders for the AY 2001-02 to 2003-04 and ITA No. 1183/2010 and 1198/2010 have been field by the Revenue against the said order. The following question of law was framed by this Court in these appeals on 20.08.2010: “Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that Section 40A(2) of the Income Tax Act, 1961 is applicable in respect of the lease rent paid by the assessee to M/s Mehta Charitable Prajnalaya Turst?” 10.Vide order dated 15.11.2010 in respect of AY 2007-08, the Tribunal again followed its earlier decision for the year 2004-05 and 2005-06 and ITA No. 842/2011 has been filed by the Revenue against the said order. The following questions of law were framed by this Court in this appeal on 14.07.2011: (i)“Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was correct in law in deleting the addition made by the AO on account of lease charges amounting to Rs.1,14,86,544/-? case, the Income Tax Appellate Tribunal was correct in law in deleting the addition made by the AO on account of lease charges amounting to Rs.1,14,86,544/-? 10.Vide order dated 15.11.2010 in respect of AY 2007-08, the Tribunal again followed its earlier decision for the year 2004-05 and 2005-06 and ITA No. 842/2011 has been filed by the Revenue against the said order. The following questions of law were framed by this Court in this appeal on 14.07.2011: (i)“Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was correct in law in deleting the addition made by the AO on account of lease charges amounting to Rs.1,14,86,544/-? case, the Income Tax Appellate Tribunal was correct in law in deleting the addition made by the AO on account of lease charges amounting to Rs.1,14,86,544/-? (ii)Whether the order of the Income Tax Appellate Tribunal is perverse, as it has not appreciated the facts and circumstances of the case and that the lease charges are in the nature of capital expenditure and give the assessee benefiting of enduring nature? Tribunal is perverse, as it has not appreciated the facts and circumstances of the case and that the lease charges are in the nature of capital expenditure and give the assessee benefiting of enduring nature? (iii)Whether on the facts and in the circumstances of the case, the ITAT is correct in law in not holding that Section 40A (2) of the Income Tax Act, 1961 is applicable in respect of the lease rent paid by the Assessee to M/s Mehta Charitable Prajnalaya Trust?”the case, the ITAT is correct in law in not holding that Section 40A (2) of the Income Tax Act, 1961 is applicable in respect of the lease rent paid by the Assessee to M/s Mehta Charitable Prajnalaya Trust?” 11.The following three issues arise for our consideration in these appeals:- (i) whether the lease rent of Rs 6,75,000/- per month paid by the assessee to the Trust was a capital expenditure or revenue expenditure or partly capital and partly revenue expenditure; (ii) whether the payment made by the assessee to the Trust or part of it comes within the purview of Section 40-A(2) of the Act; (iii) if issue No. 2 is decided in favour of the revenue, whether the payment made by the assessee to the Trust was excessive or unreasonable, having regard to the fair market value of the goods, services or facilities for which the payment was made or legitimate needs of the business of the assessee or the benefit derived by or accruing to it from those goods, services or facilities. 12.A perusal of the lease deed dated 18.01.1992, executed between the Trust and the assessee-company would show that the Trust had established a production unit known as „Mahesh Udyog‟ in Tatehra Tehsil of District Una in Himachal Pradesh, in the year 1972 and that unit was engaged in production of Katha andCutch. It further shows that the Trust leased whole of its production unit „Mahesh Udyog‟ to the assessee-company vide Lease Deed dated 14.07.1978, which came into operation with effect from 01.06.1978, so as to generate funds to meet the expenses on its charitable activities. The lease rent was revised from Rs 25,000/- to Rs 50,000/- per month with effect from 01.04.1987 and further to Rs 1,00,000/- per month with effect from 01.04.1989. The lease deed further shows that even after selling its production unit „Mahesh Udoyog‟ to the assessee, the Trust continued to be engaged in manufacturing and trade of Katha and Cutch and was making sufficient profits. Such trading by the lessor resulted in its product being in competition with the assessee. The lease deed shows that the assessee approached the Trust to stop its commercial dealings in Katha and Cutch and agreed to compensate it for the losses, which it was likely to sustain on account of discontinuing such activities. The Trust also agreed to relinquish its rights and interest for purchase of Khair wood in Himachal Pradesh by way of commercial dealings followed by its processing for manufacture of Katha and Cutch. It also agreed not to indulge in competition for purchase of Katha and Cutch in a radius less than 1000 kms from the premises which it had leased to the assessee. The lease deed also indicates that on the request of the assessee, the Trust made considerable modernization and improvement in the plant and machinery, including enhancement of its production capacity in the year 1989-90. 13.It would thus be seen that the lease rental was enhance from Rs 1,00,000/- to Rs 6,75,000/- for the following reasons:- (a) The Trust relinquishing its rights to purchase Khairwood in Himachal Pradesh; (b) The Trust agreeing not to indulge in competition with the assessee in a radius of less than 1000 kms. (c) The Trust having incurred expenditure in the year 1989-90 on modernization and improvement of the plant and machinery which it had leased to the assessee. Yet another factor contributing to revision of lease money could be the normal appreciation in the lease rental, in line with the lease rent prevailing in the market. 14.There is no dispute that the normal lease rental in this case would be a revenue expenditure and not a capital expenditure, as the ownership of the property as well as the plant and machinery continued to vest in the trust and in any case the lease granted to the assessee company was neither a perpetual lease nor a lease for such a long term as would bring it at par with a perpetual lease. 15.There can be no dispute that enhancement of lease rental from Rs.1 lac p.m. to Rs.6,70,000/- p.m., to the extent it is attributable to the expenditure incurred by the trust in the year 1989-90 on modernization and improvement of the plant and machinery which the lessee had taken on lease, would be a revenue expenditure, since it would have the effect of enhancing the lease rent of the plant and machinery in the open market. How much of the enhancement in the lease rent is attributable to the moderation and improvement in the plant and machinery is a matter which the Assessing Officer has to decide after giving an opportunity to the assessee, to lead evidence in this regard. In particular, the Assessing Officer will have to ascertain what lease rent the modernized and improved plant and machinery would have fetched in the market, as on 1.1.1992, when the revised lease commenced and the rent which such plant and machinery would have fetched in the open market prior to its modernization and improvement in the year 1989-90. 16.In Commissioner of Income Tax v. Madras Auto Services Pvt. Ltd.:233 ITR 468 (SC), the assessee company took premises on lease for 39 years. In terms of the lease agreement, the premises taken on lease were demolished and a new building was constructed by the assessee at its own expenses. The lease deed also provided that the new construction right from the commencement of the work, was to be the property of the lessors and under no circumstances the lessee shall be entitled to any compensation on account of its putting up the new construction in place of the old. The expenditure incurred by the assessee on raising new construction was claimed as business expenditure. The Assessing Officer did not agree with the assessee but the Tribunal as well as the High Court held in its favour. Dismissing the appeal filed by the Revenue, the Supreme Court held that by incurring the aforesaid expenditure the assessee did not acquire any capital asset and the only advantage it got by spending money was lease of a new building at a low rent and, therefore, from business point of view, the assessee got benefit of reduced rent on account of such expenditure. The Court was of the view that saving in expenditure was saving in revenue expenditure in the form of rent and whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. In the case before us, even the expenditure on improvement and modernization of plant and machinery was carried out by the Trust and not by the assessee. On determination of lease, the modernized plant and machinery was to revert back to the Trust. Hence, the case of the asseesse before us stands on a much stronger footing. 17.Similarly, if there was any appreciation in the market in the lease rentals of such properties, the enhancement in the lease rent of the property to the extent it is attributable to such normal appreciation in the lease rentals prevailing in the market, would be a revenue expenditure. Again, it would be for the Assessing Officer to determine whether there was any such appreciation in lease rentals, and if so, to what extent. 18.The distinction between capital expenditure and revenue expenditure is a vexed question of fact and law which has baffled the Courts to such an extent that even a toss has been suggested, to decide whether an expenditure is a capital expenditure or a revenue expenditure. Though broad parameters for distinguishing capital expenditure from the revenue expenditure have been laid down from time to time, no uniform test which would provide an appropriate answer in all the cases in which such a question comes up for consideration of the Court, however, has been possible. The Courts, therefore, are required to apply the broad tests laid down in various judicial pronouncements to the facts of the case before them and try to find an answer which is broadly in consonance with those tests. It has been repeatedly emphasized that even minor variations in the facts may lead to an altogether different conclusion being reached by the Court. time, no uniform test which would provide an appropriate answer in all the cases in which such a question comes up for consideration of the Court, however, has been possible. The Courts, therefore, are required to apply the broad tests laid down in various judicial pronouncements to the facts of the case before them and try to find an answer which is broadly in consonance with those tests. It has been repeatedly emphasized that even minor variations in the facts may lead to an altogether different conclusion being reached by the Court. 19.One of the tests to determine whether the expenditure in question is revenue expenditure or a capital expenditure is to ascertain whether it had the effect of bringing in an advantage of an enduring benefit to the assessee. An enduring benefit does not mean permanent benefit but, at the same time, it certainly cannot be a short-term advantage and needs to last for a substantially long period, before it can qualify to be an advantage of an enduring nature. Moreover, even if an advantage brings about an enduring benefit that by itself would not be determinative in every case, because in certain cases even a revenue expenditure may bring about an advantage of an enduring nature to the assessee. As observed by Supreme Court in Empire JuteMills(infra), what is important to see is as to whether the advantage which occurred to the assessee, was in the capital field or in the field of revenue. The whole matter has to be examined from the point of view of a prudent businessman, applying a commercial sense and taking business necessity and expediency into consideration. If the expenditure incurred by the assessee is so intrinsically connected to the conduct of his business as to become an essential component of his profit making process and is not incurred for acquisition of an asset or right of a permanent nature, the expenditure should ordinarily be regarded as revenue expenditure. 20.In Empire Jute Company Ltd. v. Commissioner of Income Tax:124 ITR 1, the Supreme Court referred to the following test laid down by Lord Cave (LC) in Atherton v. British Insulated and Helsby Cables Ltd.: (1925) 10 TC 115:- “........... when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." The Court also referred to the following observations made by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd.: (1965) 58 ITR 241:- “...........There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.” 'The Court also referred to the following observations made in Hallstorms 'The Court also referred to the following observations made in Hallstorms Property Ltd. v. Federal Commissioner of Taxation(72 CLR 634) - " What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency. If the outgoing expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure.” Right to purchase Khairwood 21.In the case before us, the Trust relinquished its rights to purchase khairwood in Himachal Pradesh by way of commercial dealing, as a consideration for enhancement of the lease rent by the assessee. The assessee company is engaged in manufacturing of Katha which is a necessary ingredient in pan and pan masalas. Katha is derived from the Khair tree, the central portion of which is used for this purpose. The central portion of the Khair tree is thus a raw material for the assessee company. It appears from the lease deed dated 18.01.1992 that not everyone can purchase Khair wood in Himachal Pradesh from the Government. It also appears that the Trust possessed rights to purchase Khair wood in the State and it were those rights which were relinquished in favour of the assessee, at the time of enhancement of the lease rent. This is not the case of the revenue that the Trust held ownership or even leasehold rights in the land on which Khair wood trees stood in the State of Himachal Pradesh and those leasehold rights were surrendered in favour of the assessee. This is also not the case of the revenue that certain specified trees or specified area having Khair trees on it had been allocated to the Trust and it had the right to cut and remove them at any time during a stated period of say 10, 20 or 30 years. We, therefore, assume that the Trust was not entitled either to any particular piece of land with Khair trees on it or to specified Khair trees with right in the further growth of those trees, for a substantially long period. Therefore, this case is not akin to a case of acquiring land with standing trees or the trees with right to cut them at any point of time, during a stated period. What we gathered during the course of arguments was that in the absence of right to purchase Khairwood from the Government, the assessee would have to purchase them from the open market and, therefore, relinquishment of the right of the Trust to purchase Khair tree resulted in better availability of material besides making it available to the assessee at a cheaper price, which, in turn, had the effect of increasing its profit. Therefore, it cannot be said that by obtaining relinquishment of the right to purchase Khair wood, the assessee had acquired the source of raw material itself. It only got a right to participate in the process of purchase of Khair wood from the Government in the State of Himachal Pradesh, which facilitated acquisition of raw material by it. In Empire Jute Mills(supra), the Supreme Court, while culling out the distinction between revenue expenditure and capital expenditure, inter alia, held as under:- In Empire Jute Mills(supra), the Supreme Court, while culling out the distinction between revenue expenditure and capital expenditure, inter alia, held as under:- “Take a case where acquisition of raw material is regulated by quota system and in order to obtain more raw material, the assessee purchases quota right of another. Now it is obvious that by purchase of such quota right, the assessee would be able to acquire more raw material and that would increase the profitability of his profit making apparatus, but the amount paid for purchase of such quota right would indubitably be revenue expenditure, since it is incurred for acquiring raw material and is part of the operating cost. The right to purchase khair wood from the Government in the State of Himachal Pradesh is not superior to acquiring a quota which enables a person to obtain the raw material. If purchase of quota right of another person does not constitute capital expenditure, it is difficult to say that relinquishment of right to purchase khair wood in the State of Himachal Pradesh by the Trust, in favour of the assessee, would constitute capital expenditure. In Mohanlal Hargovind v. Commissioner of Income Tax(1949) 17 ITR 473 (PC), the assesses were engaged in the business of manufacture and sale of country made cigarettes known as bidis. Tendu leaves were thus the raw materials of the business. Tendu leaves can be brought from dealers who sell tendu leaves in a large way. The firm took leases of forests with a right to pick the leaves. This right carried with it the right to coppice small tendu plants and to pollard the tendu trees. There was, however, no right in the trees or the land and the right to go over the land was merely ancillary. The Privy Council was of the view that, looked at from the point of view of business, there was no more than a purchase of the leaves, and the leaves were needed as raw material of the business. The right of entry upon the land was also considered ancillary to the main purpose of the contract which was acquisition of tendu leaves and tendu leaves alone, and it was observed that even if this right of going on the land and plucking the leaves was not expressed in the contract, it would have been implied by law. The Privy Council, inter alia, concluded as under: “if the tendu leaves had been stored in a merchant‟s godown and the appellant had bought the right to go and fetch them and so reduce them into their possession and ownership it could scarcely have been suggested that the purchase price was capital expenditure. Their Lordships see no grounds in principle or reason for differentiating the present case from that supposed.” That case thus involved no right in land or trees; the licence to be on the land was merely an accessory right; the right of cultivation was insignificant. The term was short, and the collection of leaves was seasonal. Leaves once collected, the operation pro tempore was over till the fresh crop came. There was thus no acquisition of an enduring asset in the way capital endures; it was more a purchase of crops of two or three successive years skewered on an agreement to ensure the supply of raw materials. That case thus involved no right in land or trees; the licence to be on the land was merely an accessory right; the right of cultivation was insignificant. The term was short, and the collection of leaves was seasonal. Leaves once collected, the operation pro tempore was over till the fresh crop came. There was thus no acquisition of an enduring asset in the way capital endures; it was more a purchase of crops of two or three successive years skewered on an agreement to ensure the supply of raw materials. In the case before Privy Council the area of the forests from which tendu leaves could be plucked were limited by the Schedule but the assessee was granted no interest in the land or in the trees or plants. It was the tendu leaves and nothing but the tendu leaves that were acquired. In the case before us, the Turst did not have any right either in the land on which khair wood trees had grown nor did it have any right in specified khair wood trees. The limited right which the assessee acquired under the lease was the right to purchase khair wood trees from the Government in the State of Himachal Pradesh. The central portion of the khair wood being the raw material for manufacture of katha, the assessee company would have got a right only to purchase the raw material and not the source of raw material. Therefore, in our opinion, that part of the lease rent, which is attributable to the right to purchase Khair wood, in Himachal Pradesh would be a revenue expenditure and not a capital expenditure. The learned Counsel for the Revenue has relied upon the decision of the Supreme Court in Abdul Kayoom (K.T.M.T.M.) v. Commissioner of Income Tax(1962) 44 ITR 689. In the case before the Supreme Court, the assessee firm, which carried on business in the purchase and sale of conch (chank) shells, took on lease from the Government “the exclusive rights, liberty and authority to fish for and take and carry all chank shells” in the sea off the coast line of a certain area specified in the lease, for a period of three years from 1.7.1944 to 30.6.1947, on a consideration of yearly rent of Rs.6,111. The assessee claimed that, in computing its annual income from the sale of chanks it was entitled to deduct the yearly rent of Rs.6,111 paid to the Government, as business expenditure under section 10(2)(xv) of the Income Tax Act. The High Court held that the expenditure was not of a capital nature and the assessee was entitled to deduct the amount claimed as business expenditure. Setting aside the decision of the High Court, the Supreme Court, inter alia, observed as under: “A trader may spend money to acquire his raw materials, or his stock- in-trade, and the payment may often be on revenue account but not necessarily. A person selling goods by retail may be said to be acquiring his stock-in-trade when he buys such goods from a wholesaler. But the same cannot be said of another retailer who buys a monopoly right over a long period from a producer of the expenditure to secure his stock-in-trade is not of the same character as the price he pays in the first illustration. By that payment, he secures an enduring advantages and an asset which is a capital asset of his business. In the same way, if a manufacturer buys his raw materials he makes a revenue expenditure, but when he acquires a source from which he would derive his raw materials for the enduring benefit of his business, he spends on the capital side. Thus, a manufacturer of woollen goods who buys his wool buys his raw materials, but when he buys a sheep farm, he buys a capital asset. There is then no difference between a purchase of a factory and the purchase of the sheep farm, because both are capital assets of an enduring nature. farm, he buys a capital asset. There is then no difference between a purchase of a factory and the purchase of the sheep farm, because both are capital assets of an enduring nature. We may now pass on to the facts of the case before us. The respondent carried on the business of selling chanks. It obtained its supplies from divers, from whom it purchases the chanks, and having got them, perhaps cheap, it resold them at a profits. This is one mode in which it carried on its business. In this business, it was directly buying its stock-in-trade for resale. The other method was to acquire exclusive right to fish for chanks by employing drivers and nets. The business then changed to something different. The sale was now of the product of another business, in which divers and equipment were first employed to get the shells. It thus took leases of extensive coastline with all the right to fish for chanks for some years. The shells were not the subject of the bargain at all, as were tree tendu leaves; but the bargain was about the right to fish. There can be no doubt that what it paid the divers when it bought chanks from them with the view of reselling them was expenditure laid out wholly and exclusively for the purpose of its business, which was not of a capital nature. That business was buying goods and reselling them at a profit. But a different kind of business was involved when it went in for fishing for chanks. To be able to fish for chanks in reserved waters it had to obtain the right first. It therefore, took lease of that right. the ocean beyond the reach of its divers and nets. The expenses of fishing shells were its current expenses as also the expenses incurred over the purchase of shells from the drivers. But to say that the payment of lease money for reserving an exclusive right to fish for chanks was on a par with payments of other character is to err. x x x x It would be a straining of the imagination to say that the amount paid for reserving the coastline for future fishing was the price of chanks, with which the respondent did its business. That amount was paid to obtain an asset in the shape of an exclusive right to fish, and the payment was not related to the chanks, which it might or might not have brought to the surface in this speculative business. The rights were not transferable, but if they were and the firm had sold them, the gain, if any, would have been on the capital side and not a realising of the chanks as stock-in-trade, because none had been bought by the firm, and none would have been sold by it. However, the facts of the case before us are altogether different. As already noted by us, what the assessee acquired while enhancing the lease rent was a right to purchase the raw material and not the source of the raw material. In the case, relied upon by the learned counsel for the Revenue, the assessee had acquired the source of raw material itself, when it was granted exclusive right and authority to fish for and take and carry all chanks shells in a specified area for a specified period. The case before us is akin to the case of Mohanlal Hargovind (supra) where the right to pick tendu leaves was acquired by the lessee. This judgment to our mind could have been of help to the Revenue, had the trust been having rights in the land on which khairwood trees were grown and had it surrendered those rights in favour of the assessee, in consideration of enchancement of lease rent. Elimination of Competition case before us is akin to the case of Mohanlal Hargovind (supra) where the right to pick tendu leaves was acquired by the lessee. This judgment to our mind could have been of help to the Revenue, had the trust been having rights in the land on which khairwood trees were grown and had it surrendered those rights in favour of the assessee, in consideration of enchancement of lease rent. Elimination of Competition 22.As regards that part of the enhancement of the lease rental which is attributable to the trust agreeing not to compete with the assessee in manufacture and sale of katha and Cutch in a radius of less than 1000 kms from the premises which it had leased to the assessee, we find upon a perusal of the lease deed that the trust was earning sufficient profits from these activities. It further shows that both the trust as well as the assessee felt that such direct competition was prejudicial to the interest of both the parties and therefore ought to be avoided. Admittedly, it is the trustees of the Trust and their family members who owned and controlled the assessee company. Shri Bishan Dass and Shri Raj Kumar, who were the directors and shareholders of the assessee company, were also the trustees of the Trust. Three out of five directors of the assessee company were the sons of the trustees. Bulk of the shares of the assessee Company were admittedly held by the trustees and their family members. Considering the fact that the Trust as well as the assessee Company were being controlled by the same set of persons and/or their family members, it can hardly be disputed that the assessee Company could have continued with the lease, so long as it was in the financial interest of the Company to continue with the arrangement it had with the Trust. Considering the close connection between the assessee and the trust, resulting in common control of both the entities, it is difficult to dispute that the benefits, which accrue to the assessee company on account of elimination of competition by the trust were certainly of an enduring nature. This also becomes evident from the fact that the lease deed between the trust and the assessee which came into force from 1.6.1978 continued for more than 22 years till it was finally determined vide letter dated 29.9.2000. Even the lease deed dated 18.1.1992 whereby the lease rent was enhanced from Rs.1 lac to Rs.6,70,000/- p.m. continued for more than 8 years which clearly indicates that despite termination clause contained in the lease deed, the parties to the deed contemplated a long term relationship, which, at the option of the Directors of the assessee company, who were also the trustees of the trust, could have continued for an indefinite period. Therefore, it is di