Judgement Appeal (No. 10 of 1948) from a judgment of the High Court at Nagpur (December 8, 1944) delivered on a reference made to it under s. 66, sub-s. 1, of the Indian Income-tax Act, 1922, by the Income Tax Appellate Tribunal, Bombay. This appeal raised a short question as to the application of s. 10, sub-s. 2 (xii), of the Indian Income-tax Act, 1922, as amended by the Indian Income-tax (Amendment) Act, 1939, in respect of assessments on the appellants for the years 1940-1 and 1941-2. That paragraph provided that in computing profits or gains of a business for the purpose of income tax an allowance was to be made for " any expenditure " (not being in the nature of capital expenditure or personal " expenses of the assessee) laid out or expended wholly and " exclusively for the purpose of such business . . . . " The relevant facts, which are taken from the judgment of the Judicial Committee, were as follows. The appellants carried on business at several places in the Central Provinces of India as manufacturers and vendors of country made cigarettes, which were known as bidis. Those cigarettes were composed of tobacco contained or rolled in leaves of a tree known as tendu leaves, which fulfilled a corresponding function in the finished cigarette to that played by a cigarette paper. The appellants obtained the tendu leaves which they required by entering into a number of contracts with the Government and other owners of forests. Two of those contracts, which were taken as typical of the rest, were included in the Record, one relating to a government forest and one to a forest belonging to the Rewa state. It was important to examine the terms of those documents. The former was dated September 5, 1939, and was made between the Divisional Forest officer on behalf of the Secretary of State in Council and the appellants representative described as the " forest contractor/ Clause 1 identified the subject-matter of the contract, which was described as " the forest produce sold and " purchased under the agreement/ as that specified in sch. 1 in the " contract area " therein indicated. By cl. 1 in the " contract area " therein indicated. By cl. 2 the quantity of the forest produce was defined as all the said produce " which may now exist or may come into existence in the “contract area which the forest contractor may remove " from the said area .... during the period from the 5th day " of September, 1939, to the 30th day of June, 1941." Schedule IA provided that " the contractor shall commence " his work before the .... day of .... 193 , and shall, " to the satisfaction of the office empowered to execute the " contract on behalf of Government, make continuous and " adequate progress throughout the term of the contract/ In that provision the dates, by an obvious oversight, were left in blank, but the date of commencement could not be later than December 31, 1939. In the second of the two agreements which, with certain minor differences, was substantially in the same form, the period of the operations was October 1, 1938, to June 30, 1941, and the work was to be commenced on October 1, 1938. That agreement recited an application for the grant of " the contract of collecting " and removing " tendu leaves. The grant was a grant of the right to collect and remove them from the area described. In the case of each contract a sum payable by instalments was fixed as the consideration for the grant. In the former contract the contractor was allowed to coppice small tendu plants a few months in advance to obtain good leaves and to pollard tendu trees a few months in advance to obtain better bigger leaves. The sum paid by the appellants under the contracts and claimed by them to be a permissible deduction under s. 10, sub-s. 2 (xii), of the Indian Income-tax Act, 1922, as amended, and admitted to have been made “wholly and exclusively” for the purpose "of the business of the appellants was disallowed by the Income Tax officer. His order was confirmed successively by the Appellate Assistant Commissioner of Income Tax, Nagpur, and by the Income Tax Appellate Tribunal, Bombay. Law Rep. 76 Ind. App. 235 ( 1948- 1949) Mohanlal Hargovind of Jubbulpore v. C ommnr. His order was confirmed successively by the Appellate Assistant Commissioner of Income Tax, Nagpur, and by the Income Tax Appellate Tribunal, Bombay. Law Rep. 76 Ind. App. 235 ( 1948- 1949) Mohanlal Hargovind of Jubbulpore v. C ommnr. of Income Tax 132 Application was made to that Tribunal for a reference to the High Court of Judicature, Nagpur, of the question whether the appellants were entitled to the deduction in question and the High Court (Grille C.J. and Sen J.) answered that question in the negative for the reasons given by them in their judgment in another case (Miscellaneous Civil Case, No. 55 of 1943). 1949. June 22, 23. Sir Roland Burrows K.C., Handoo and T. P. Naik for the appellants. The expenditure in question was, on a true interpretation of the contracts concerned and a correct appreciation of the nature of the appellants business, normal revenue expenditure and not " capital expenditure/ It was admittedly incurred wholly and exclusively for the purpose of the appellants business, represented the cost, and nothing but the cost, of part of the raw material used in the bidis which the appellants manufactured and sold, and was therefore a proper item to be charged against receipts in a computation of the appellants profits and gains. By the expenditure and under the contracts the appellants did not acquire any asset, enduring or otherwise, other than supplies of raw materials used in their business, nor any interest or right in the lands concerned. The contracts did not differ in any material respect from ordinary contracts of purchase and sale of raw materials subsequently to be manufactured; the right and obligations as to entry, collection, removal, storage, etc., were merely incidental to the acquisition of the raw material. It is easy to lose ones way in the cases which were discussed in the court below, but the principle is stated in Tata Hydro-Electric Agencies, Bombay v. Income Tax Commissioner ([ 1937] A. C. 685, 696.), where it was said " What is money " wholly and exclusively laid out for the purposes of the " trade is a question which must be determined upon the " principles of ordinary commercial trading. It is necessary, " accordingly, to attend to the true nature of the expenditure, " and to ask oneself the question Is it a part of the companys " working expenses ; is it expenditure laid out as part of " the process of profit earning ? " The essence of the matter here is that the appellants are acquiring a substance which is a raw material required for the manufacture of their bidis. In the court below it was said that the appellants were acquiring a right or interest in land, and they appeared to think that the principle is that if it can be shown that it is an interest in land it must therefore be capital. The tendu leaves are the property of the owner of the forest ; the appellants do not in any sense of the word acquire any right in the land. [On the general question as to the test to be applied in determining whether a payment is revenue or capital expenditure reference was made to Kauri Timber Co. v. Commissioner of Taxes ([ 1913] A. C. 771.), which turned to some extent on a statute not in the same form as that now in question ; British Insulated and Helsby Cables, Ld. v. Atherton ([ 1926] A. C. 205,212.), which was a long way from the present case, but it might be observed that in that case the deision that it was not revenue expenditure was only arrived at by a majority of three judges to two John Smith & Son v. Moore ([ 1921] 2 A. C. 13.), which was a totally different class of case ; and Golden Horse Shoe (New), Ld. v. Thurgood (H. M. Inspector of Taxes) ([ 1934] 1 K. B. 548, 560.), a case where the material had already been abstracted.] Whether expenditure is capital or revenue expenditure depends primarily on the nature of the business which is being carried on. Here there is an established manufacturing business, the appellants are not acquiring any property in land, or any property in trees standing on land, they are only acquiring the right to the leaves which are growing on them, and the cost has to be deducted. This is a case of looking at the substance of the transaction—that is of paramount importance—and all they are acquiring is the raw material for their business. This is a case of looking at the substance of the transaction—that is of paramount importance—and all they are acquiring is the raw material for their business. The following Indian cases have been decided since this case was before the High Court In re Parma Nand Haveli Ram (( 1945) A. I. R. (Lah.) 137, 145.) ; Commissioner of Income Tax, Punjab v. Bhojraj Harichand (( 1945) 14 I. T. Rep. 277.); Income Tax Appellate Tribunal, Bombay v. Haji Sabumiyan Haji Sirajuddin (( 1944) 14 I. T. Rep. 447.); and Benarsi Das Jagannath of Amritsar v. Commissioner of Income Tax (( 1947) A. I. R. (Lah.) 162,). The judgment below was not so much applying the principle to the facts of the case as going into a mass of cases which were distinguishable on their facts, and it stressed too much the question whether the contract was one which in law established an interest in land. The real nature of the expenditure is Law Rep. 76 Ind. App. 235 ( 1948- 1949) Mohanlal Hargovind of Jubbulpore v. C ommnr. of Income Tax 133 that it was part of the current expenditure of the business and as such should be allowed as a deduction. Millard Tucker K.C. and Subba Row for the respondent. This is a matter of considerable importance to the revenue authorities, because it comes as a complete challenge to what was always accepted—that no deduction ought to be allowed in computing the profits and gains for tax purposes in respect of the wastage of a capital asset. In the view of the judges below the principles deducible from Alianza Co. v. Bell ([ 1904] 2 K. B. 666.) and Kauri Timber Co. v. Commissioner of Taxes ([ 1913] A. C. 771.) were applicable in the present case and not the principle enunciated in Golden Horse Shoe (New), Ld. v. Thurgood ([ 1934] 1 K. B. 548, 562.), and they therefore held that the price paid by the appellants was a capital expenditure which could not be allowed as a deduction. The question of what is capital and what is revenue expenditure is not a difficult one; a capital expenditure is one which brings into existence an asset—it merely exchanges one asset for another, and that is why there is no deduction. Here the appellants changed their asset for the right to gather the tendu leaves. The question of what is capital and what is revenue expenditure is not a difficult one; a capital expenditure is one which brings into existence an asset—it merely exchanges one asset for another, and that is why there is no deduction. Here the appellants changed their asset for the right to gather the tendu leaves. [Reference was made to Golden Horse Shoe (New), Ld. v. Thurgood (5) ; Hughes (Inspector of Taxes) v. British Burmah Petroleum Co., Ld. (( 1932) 17 T. C. 287.) ; MacTaggart (Inspector of Taxes) v. Strump (( 1925) 10 T. C. 17, 22, 24.) ; Salisbury House Estate, Ld. v. Fry (Inspector of Taxes) (( 1930) 15 T. C. 266, 308.) ; Commissioners of Inland Revenue v. Adam (( 1928) 14 T. C. 34, 41.) ; John Smith & Son v. Moore ([ 1921] 2 A. C. 13.) ; Commissioner of Income Tax, Madras v. Chengalvaroya Mudaliar (( 1934) 2 I. T. Rep. 395, 398.) ; Chengalvaroya Chettiar v. Commissioner of Income Tax, Madras (( 1936) 5 I. T. Rep. 70, 76.) ; Abdul Kayum Sahib Hussain v. Commissioner of Income Tax, Madras (( 1939) 7 I. T. Rep. 652, 656.) ; and In re Parma Nand Haveli Ram (( 1945) A. I. R. (Leh.) 137.).] The position in Chengalvaroya Chettiars case (( 1936) 5 I. T, Rep. 70, 76.) was the same as in the present case, a lump sum was payable by instalments for the exclusive right not to excavate something under the earth but to take something growing on the earth. It is very difficult to see a distinction there. I am concerned to put the cases clearly before the Board, to see whether the principle covers this case or not. It makes no difference how long the contract is for. What the appellants got "for their money was not the leaves, but the right to go and get them, it is a purchase of an interest in the land, and that is a profit a prendre. It makes no difference how long the contract is for. What the appellants got "for their money was not the leaves, but the right to go and get them, it is a purchase of an interest in the land, and that is a profit a prendre. This case raises a pure question of principle, the effect of which must be felt beyond the bounds of this particular case, and applying all proper and relevant tests the expenditure incurred by the appellants to acquire the right to take tendu leaves was in the nature of capital expenditure, and as such was not a permissible item of deduction under s. 10, sub-s. 2 (xii), of the Act. A reply was not required. July 28. The judgment of their Lordships was delivered by LORD GREENE, who stated the facts set out above and continued It appears to their Lordships that there has been some misapprehension as to the true nature of the agreements and they wish to state at once what in their opinion is, and what is not, the effect of them. They are merely examples of many similar contracts entered into by the appellants wholly and exclusively for the purpose of their business, that purpose being to supply themselves with one of the raw materials of that business. The contracts grant no interest in land and no interest in the trees or plants themselves. They are simply and solely contracts giving to the grantees the right to pick and carry away leaves, which, of course, implies the right to appropriate them as their own property. The small right of cultivation given in the first of the two contracts is merely ancillary and is of no more significance than would be, e.g., a right to spray a fruit tree given to the person who has bought the crop of apples. The contracts are short term contracts. The picking of the leaves under them has to start at once, or practically at once, and to proceed continuously. It is true that the rights under the contracts are exclusive, but in such a case as this that is a matter which appears to their Lordships to be of no significance. Law Rep. 76 Ind. App. 235 ( 1948- 1949) Mohanlal Hargovind of Jubbulpore v. C ommnr. It is true that the rights under the contracts are exclusive, but in such a case as this that is a matter which appears to their Lordships to be of no significance. Law Rep. 76 Ind. App. 235 ( 1948- 1949) Mohanlal Hargovind of Jubbulpore v. C ommnr. of Income Tax 134 The question, therefore, resolves itself into the short one—is expenditure of this character made in acquiring one of the raw materials of the appellants manufacture capital expenditure within the meaning of this Act ? There is no definition of that expression, which must, in their Lordships opinion, be construed in a business sense save in so far as there may be rules of construction applicable to it. Their Lordships feel no doubt that in a business sense this expenditure is expenditure op revenue account and not on capital account just as much as if the tendu leaves had been bought in a shop. Under the contracts it is the tendu leaves and nothing but the tendu leaves that are acquired. It is not the right to pick the leaves or to go on to the land for the purpose—those rights are merely ancillary to the real purpose of the contracts and if not expressed would be implied by law in the sale of a growing crop. In their Lordships opinion the High Court has adopted an approach to the question which has diverted its view from the real point and has attached too much importance to cases decided on quite different facts. Cases relating to the purchase or leasing of mines, quarries, deposits of brick earth, land with standing timber, etc., referred to in the judgment and relied on in the argument before the Board do not appear to their Lordships to be of assistance nor do their Lordships consider that the elaborate distinction between movable and immovable property drawn in the judgment affords in such a case as the present a reliable test. The cases principally relied on in the judgment are the Alianza Co. v. Bell ([ 1904] 2 K. B. 666; [ 1905] 1 K. B. 184 ; [ 1906] A. C. 18.) and Kauri Timber Co., Ld. v. Commissioner of Taxes ([ 1913] A. C. 771.). The cases principally relied on in the judgment are the Alianza Co. v. Bell ([ 1904] 2 K. B. 666; [ 1905] 1 K. B. 184 ; [ 1906] A. C. 18.) and Kauri Timber Co., Ld. v. Commissioner of Taxes ([ 1913] A. C. 771.). The former was the case of a company whose object was treated as one to work and develop a bed containing a substance called caliche from which nitrates and iodine could be obtained by a process of manufacture. It was analogous to the purchase or leasing of a mine and was obviously capital expenditure. The claim was one equivalent to a claim to deduct the expenditure made in acquiring the land, for it was a claim to deduct the amount carried year by year to a sinking fund set up to meet the exhaustion of the caliche. This case appears to their Lordships to bear no resemblance to the facts of the present case, which resembles much more closely the case described and distinguished by Channell J. at p. 673 of the report in [ 1904] 2 K. B. of the cost of material worked up in a manufactory. That, said the learned judge, is " a " current expenditure, and does not become a capital " expenditure merely because the material is provided by " something like a forward contract, under which a person " for the payment of a lump sum down secures a supply of " the raw material for a period extending over several years.” In the Kauri Timber case ([ 1913] A. C. 771.), the companys business consisted in cutting and disposing of timber. It acquired in some cases timber bearing lands, in other cases it purchased the standing timber. The leases were for 99 years. So far as the cases where the land was acquired were concerned there could have been no doubt that the expenditure made. in acquiring it was capital expenditure. In the case of the purchase of the standing timber what was acquired was an interest in land. The purchasers bought the trees which they could allow to remain standing as long as they liked. As Lord Shaw said in delivering the judgment of the Board (Ibid. 776.) " So long as the timber, at the option of the company, " remained upon the soil, it derived its sustenance and " nutriment from it. The purchasers bought the trees which they could allow to remain standing as long as they liked. As Lord Shaw said in delivering the judgment of the Board (Ibid. 776.) " So long as the timber, at the option of the company, " remained upon the soil, it derived its sustenance and " nutriment from it. The additional growths became ipso jure the property of the company/ In the present case the trees were not acquired nor were the leaves acquired until the appellants had reduced them into their own possession and ownership by picking them. The two cases can, in their Lordships opinion, in no sense be regarded as comparable. If the tendu leaves had been stored in a merchants go-down and the appellants 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 ground in principle or reason for differentiating the present case from that supposed. Their Lordships will humbly advise His Majesty that this appeal should be allowed and that the Law Rep. 76 Ind. App. 235 ( 1948- 1949) Mohanlal Hargovind of Jubbulpore v. C ommnr. of Income Tax 135 respondent should be ordered to pay the costs of the appellants of and relating to the reference to the High Court. The respondent will pay the costs of this appeal.