judgement:
Civil Appeal No. 587 of 1960.
Appeal by special leave from the award dated December 16, 1958, of the Industrial Tribunal, Bombay, in Reference (I. T.) No. 387 of 1958.
M. C. Setalvad, Attorney General of India and I. N. Shroff, for the appellant.
K. R. Choudhuri, for respondnet No. 1.
Naunit Lal, for respondent No. 2. 1961.
November 17.
The Judgment of the Court was delivered by GAJENDRAGADKAR, J.
This appeal by special leave arises out of the proceedings taken at the instance of the appellant, the Kirloskar Oil Engines Ltd., Kirkee, Poona under section 36A of the (14 of 1947) (hereafter called the Act).
It appears that certain disputes pending between the appellant and the respondents, its workmen, were referred to the industrial tribunal for its adjudication by the Government of Maharashtra.
The disputes in question related to seven demands made by the respondents: two of these were in regard to privilege leave and allowances.
The tribunal which tried the dispute made its award in two parts.
of the award which dealt the demand of privilege leave and different kinds of allowances was made on June 30, 1958, and published on July 7, 1958.
On August 2, 1958, the appellant applied to the State Government for reference of certain points to the tribunal for its clarification under section 36A. Accordingly an order of reference was made in respect of the two items privilege leave and allowances.
The tribunal has made the necessary clarification in regard to its direction as to privilege leave.
It has, however, held that the direction made by it for the payment to the workmen under paragraph 14 of its award needed no clarification.
It held that in substance 493 the appellant was seeking for a modification of the said direction and that could not be done in the clarification proceedings contemplated by section 36A. The clarification award was thus made by the tribunal and submitted to the Government.
It is against this award that the appellant has come to this Court by special leave.
It would be convenient at this stage to indicate briefly the nature of the clarification claimed by the appellant before the tribunal.
In regard the claim for privilege leave the original award by paragraph 10 had directed as follows: "All the workmen, both daily and monthly rated, get privilege leave according to the provisions of the .
The leave usually comes to 14 or 15 days in a year I consider a privilege leave of 15 days a year to both the sections of the workmen in the Kirloskar oil Engines as quite adequate.
At present this leave is allowed to be accumulated for two years.
Here I am of the opinion that the accumulation should be up to 45 days.
I therefore direct that all the workmen of the Kirloskar Oil Engines Ltd., Poona, shall be granted 15 days privilege leave (including privilege leave under the ) which will be allowed to be accumulated up to 45 days.
" The appellant apprehended that the direction of the award may justify a claim by every worker whose name is on the muster roll to 15 days privilege leave irrespective of his actual attendance during the year.
In other words, the appellant argued before the tribunal in the present proceedings that the words used by the original award were wide enough to justify a claim for 15 days privilege leave even where the workman was absent from work, for say 360 days in a year, provided his name appeared on the muster roll of the appellant.
The tribunal appreciated the force of this 494 argument.
It is common ground that under section 79 of the , it is only where a worker has worked for a period of 240 days or more in a factory during a calendar year that he becomes entitled during the subsequent calendar year to leave with wages for a number of days calculated at the rate of one day for every twenty days of work performed by an adult worker in the previous calendar year, or at the rate of one day for every fifteen days work performed by a child.
The tribunal observed that it was not the intention of the award to depart from the basic principle prescribed by section 79; and so it made the necessary clarification by adding that in order to entitle him to the privilege as directed by the award every workman must put in 240 days or more of actual working during the previous calendar year.
Thus, in regard to the provision made by the award as to privilege leave the clarification claimed by the appellant was made.
In regard to the second point on which clarification was sought the relevant direction in the award reads thus: "At present if a workman works on a weekly off or on a holiday, he gets a substituted holiday under the but no additional payment.
In my opinion a workman makes plans well in advance about spending his holidays.
He spends his time in the company of his colleagues and refreshes himself.
If he gets a substituted holiday, he is deprived of his enjoyment.
He should therefore be compensated in money as well as by a day off.
I therefore direct that if a workman has to work on a weekly off or on a holiday (paid or unpaid) he should be paid 1 1/2 times his wages and dearness allowance over and above substituted holiday.
" 495 The appellant urged before the tribunal that this direction needed to be clarified because as it stood it was likely to impose on the appellant very heavy financial burden.
The tribunal held that the direction itself was very clear and that under the guise of clarification the appellant was seeking its modification.
So the tribunal rejected the appellant 's claim for any clarification in that behalf.
In the present appeal the learned Attorney General attempted to argue that the accumulation of privilege leave up to 45 days allowed by the award was not justified.
In our opinion, this argument cannot be entertained in the present appeal for two reasons.
First, no such plea appears to have been made before the tribunal in the present clarification proceedings and so the appellant cannot be allowed to raise a new plea now.
Besides, it is necessary to bear in mind the limitations of the enquiry permitted under the proceedings contemplated by section 36A of the Act.
The said section empowers the appropriate Government to refer any question to the tribunal if the said Government is satisfied that any difficulty or doubt arises as to the interpretation of any provision of an award made by the said tribunal.
It further provides that when such a question is referred to it the tribunal shall, after giving the parties an opportunity of being heard, decide such question and its decision shall be final and binding on all such parties.
It is thus clear that the scope of the enquiry under section 36A is limited to the decision of the difficulties or doubts arising as to the interpretation of any provision in the award.
If the words used in any provision of an award are ambiguous or obscure and it is not reasonably possible to interpret them the difficulty arising from the use of such ambiguous or obscure words may be resolved by moving the appropriate Government to make a reference under section 36A.
It is obvious 496 that any question about the propriety, correctness or validity of any provision of the award would be outside the purview of the enquiry contemplated by the section.
If a party to the award is aggrieved by any of its provisions on the merits the only remedy available to it is by making an appeal, say for instance under article 136 of the Constitution, to this Court.
A grievance felt by a party against any provision of the award can be ventilated only in that way and not by adopting the procedure prescribed by section 36A.
Thus, the enquiry permissible under section 36A is limited to the question of the interpretation of the provision of the award in question and no more.
That is why, we think, that even if the appellant had sought to raise the question about the propriety of allowing the accumulation of privilege leave up to 45 days before the tribunal, and even if such a question had been referred by the State Government to the tribunal under section 36A, the tribunal would have been justified if in refusing to consider it because the point raised had nothing to do with the interpretation of the provision but is concerned with its merits and its propriety.
Therefore, in our opinion, the appellant is not entitled to raise this point before us in the present appeal.
The next contention raised by the appellant is against the refusal of the tribunal to entertain its application for clarification in regard to the provision for the payment to the worker 1 1/2 times his wages and dearness allowance over and above a substituted holiday if he has to work on a weekly off or on a holiday (paid or unpaid).
The grievance of the appellant in substance is that in 1956 and 1957, on account of shortage of electrical energy for industrial purposes the State Government compelled the factories to change their weekly holidays from Sunday to some other week day, each factory or group of factories observing one week day as weekly off.
According to the appellant, if a handful of workmen are to work on a weekly off or on a 497 holiday when the whole factory is closed then there would be some justification for making the payment to the workmen required to work on such a day; but there would be no justification for making such payment where the whole factory works on a weekly off or on a holiday.
In support of this contention the appellant relies on the observation made in the original award that the basis for directing the additional payment for working on a weekly off or on a holiday is that the workman is deprived of an opportunity to spend his time in the company of his colleagues and refresh himself.
It is urged that when all his colleagues are working there is no point in saying that anyone is deprived of an opportunity to spend his time in the company of his colleagues.
The tribunal was not impressed by this argument and so it has refused to make any clarification cum modification in its award.
It is significant that the argument based on the orders issued by the State Government requiring the factories to change their weekly holidays owing to shortage of electric energy was not raised before the tribunal at the time when it originally heard the dispute between the parties.
It has stated in the present order that it looked at its notes of arguments and noticed that no such plea was raised before it at that time.
Besides the tribunal has observed that having regard to the definition of the word "week" under section 2 (f) of the as well as the provisions of section 52 of the said Act it would have been open to the appellant to have another day of the week declared as the first day of the week for its purposes.
If the appellant had adopted such a course the difficulty on which it relied would not have arisen.
The appellant contends that the reasons given by the tribunal in rejecting its claim for clarification are not sound.
We are not impressed by this argument.
As we have already pointed out, the present argument ignores the limitations of the scope of the 498 enquiry under section 36A.
It is clear that in substance the argument is that the direction issued by the award in regard to the payment in question should be modified, and in support of the claim for modification reliance is placed on the relevant orders issued by the State Government for changing the weekly holidays.
Such a claim cannot obviously be entertained in clarification proceedings under section 36A. A proceeding contemplated by section 36A is not a proceeding intended to enable the tribunal to review or modify its own order; it is intended to enable the tribunal only to clarify the provisions of its award where a difficulty or doubt arises about the interpretation of the provisions.
Quite clearly the impugned provisions contained in paragraph 14 of the award in relation to this demand are clear and unambiguous.
Whatever may be the appellant 's grievance in respect of the validity or the propriety of the said directions there is no difficulty or doubt about their meaning; and so we are satisfied that the tribunal was right in refusing to alter the said direction in the present proceedings.
The result is the appeal fails and is dismissed with costs.
Appeal dismissed.

dataset_name: IN-Abs

summary:
Certain disputes between the appellant and its workmen were referred to the industrial tribunal for adjudication by the State Government under the provisions of the .
The award made by the tribunal provided, inter alia, (1) that if a workman had to work on a weekly off or on a holiday he should be paid 1 1/2 times his wages and dearness allowance over and above a substituted holiday, and (2) that all the workmen shall be granted 15 days privilege leave in a year which could be allowed to be accumulated up to 45 days.
The appellant applied to the Government under section 36A of the Act stating that the directions given by the tribunal had to be clarified on the grounds, inter alia, (1) that the reason for directing the additional payment for working on a weekly off or on a holiday was that the workman was deprived of an opportunity to spend his time in the company of his colleagues and refresh himself, but that there was no basis for this since the whole factory worked on weekly off or on a holiday, and (2) that the accumulation of privilege leave of 45 days to all workmen was not justified.
The tribunal made a clarification as regards privilege leave confining it to only those workmen who had put in 240 days or more of actual working during the previous calendar year so as to be in conformity with the provisions of the , but as regards others matters it held that the directions given were quite clear and that under the guise of clarification the appellant could not seek a modification of the award under section 36A. ^ Held, that 36A of the , was intended to empower a tribunal to clarify the provisions of the award passed by it where a difficulty or doubt arose about their interpretation, and not to review or modify its own order.
Any question about the propriety, correctness or validity of any provision of the award would be outside the purview of the enquiry contemplated by that section.


judgement:
Civil Appeal No. 144 of 1960.
Appeal by special leave from the judgment and order dated July 26, 1957, of the Madhya Pradesh High Court in Civil Revision No. 966 of 1955.
B. R. L. Iyengar and K. P. Bhatt, for the appellant.
G. section Pathak, section N. Andley, Rameshwar Nath and P. L. Vohra, for the respondents.
November 16.
The Judgment of the Court was delivered by SARKAR, J.
In this case an arbitration agreement had been filed in court under section 20 of the , and an order of reference made thereon.
The arbitrator in due course entered 477 upon the reference and made and filed his award in court on July 14, 1955.
The award concerned partition of certain properties between the wife and children of one Bhairon Bux.
The award was however unstamped and unregistered.
An objection was taken to a judgment being passed on such an award.
On such objection, the trial court passed an order remitting the award to the arbitrator for re submitting it to the court on a duly stamped paper and after getting it registered.
Against this order the High Court at Nagpur was moved in revision.
The learned Single Judge hearing the revision application took the view that the award required to be stamped.
But he felt that it could not be remitted to the arbitrator under section 16 of the , which is the only provision under which an award can be remitted to an arbitrator.
It appears that there was an earlier judgment of the Nagpur High Court in the case of Ramkumar vs Kushalchand (1) in which it had been held that where the award was unstamped it could under paragraph 14 of Schedule I to the Code of Civil Procedure be remitted to the arbitrator with a direction to re write it on a stamped paper and re submit it to court.
The provisions of that paragraph of the Code have now been substantially reproduced in section 16 of the .
The trial Judge had based himself on this earlier judgment of the High Court.
The learned Single Judge was apparently not satisfied with the correctness of the decision in Ramkumar 's case (1) and he referred three questions for decision by a larger bench of that High Court.
The questions referred were: (a) Is the award made on a reference by the Court on an application under section 478 20 of the chargeable to stamp duty? (b) Is such an award compulsorily registerable when it relates to partition of immovable property of the value of one hundred rupees and upwards? (c) Has the Court powers under section 16(1) (c) of the of 1940 or otherwise to remit an award to the arbitrator or umpire to get it stamped and/or registered? The matter was thereupon heard by a Division Bench of the High Court constituted by two learned Judges.
Before them it was agreed by both the parties that the award required to be stamped.
This disposed of the first question.
The learned Judges felt that it was not necessary at that stage of the proceeding to answer the second question, namely, whether the award required registration.
In the result they only answered the third question as to whether an award could be remitted under section 16 (1) (c) of the to the arbitrator to get it stamped and they answered that question in the affirmative.
They held that a want of stamp would be an illegality apparent on the face of the award and therefore the case would fall under section 16(1)(c) of the .
They also held, following the case of Lakhmichand vs Kalloolal (1), that the copying of the award on a stamped paper was purely ministerial, and making of an award did not deprive the arbitrator of the authority to copy an award on the requisite stamp paper.
They approved of the decision in Ramkumar vs Kushalchand (1).
The present appeal is against this judgment of the Division Bench.
The only question argued at the bar was whether the answer of the Division Bench to the third question was correct.
479 Now section 16(1)(c) of the Act is in these terms: section 16 (1): The Court may from time to time remit the award or any matter referred to arbitration to the arbitrators or umpire for reconsideration upon such terms as it thinks fit . . . . . . . (c) where an objection to the legality of the award is apparent upon the face of it.
We think that the Division Bench of the High Court was clearly in error.
Under section 16 of the an award can be remitted to the arbitrators only for reconsideration.
When it is remitted for re writing it on a stamped paper, it is not remitted for reconsideration.
Reconsideration by the arbitrators necessarily imports fresh consideration of matters already considered by them.
Now they can only consider and give a decision upon matters which are referred to them under the arbitration agreement.
It follows that the reconsideration can only be as to the merits of the award.
They reconsider nothing when they re write the award on a stamped paper.
We think the matter was correctly put by Mitter, J., in Nani Bala Saha vs Ram Gopal Saha (1) in the following observation: "That cl.
(c) means this and nothing more: namely, that where the court finds an error of law in the award itself or in some document actually incorporated thereto on which the arbitrator had based his award, that is to say, finds the statement of some erroneous legal proposition which is the basis of the award, it can remit the award to the arbitrator for reconsideration" and "Want of registration is a defect dehors the award or the decision of 480 the arbitrator, and so in our judgment is not covered by cl.
(c) of section 16 (1), of 1940".
What was said there about a want of registration is clearly equally applicable to a want of stamp.
Mr. Pathak appearing for the respondent contended that under section 14 (1) of the it was clearly the duty of the arbitrator to inform the parties of the amount of stamp duty payable on the award.
Section 14 (1) is in these terms: Section 14 (1) When the arbitrators or umpire have made their award, they shall sign it and shall give notice in writing to the parties of the making and signing thereof and of the amount of fees and charges payable in respect of the arbitration and award.
We are unable to see how this section can provide the basis for the order made in this case.
It only says that the arbitrators shall inform the parties of the fees and charges payable.
Even assuming that the word 'charges ' includes duty payable for the stamp to be affixed to the award, at best, this section would support an order directing the arbitrators to supply this information.
It would not justify an order requiring the arbitrators to inscribe the award afresh on a stamped paper and re submit it to court.
As at present advised, we have grave doubts if the fees and charges mentioned in section 14 (1) include the stamp duty payable on the award.
Section 17 of the Stamp Act requires that stamping should be at the time of execution.
Under section 14 (1) of the it is only after the singing of the award that is its execution, that the arbitrators are required to supply the information about the fees and charges.
It is, of course, no part of the duty of the arbitrators under the Act or otherwise to find the costs of stamp themselves.
Therefore 481 it is difficult to appreciate how the word `charges ' mentioned in this section includes stamp.
But on this question it is not necessary for us to express any final opinion in this case.
Mr. Pathak contened that even if the case did not come within section 16 (1) (c) of the , the order in the present case can be supported under section 151 of the Code of Civil Procedure which preserves the inherent power of a court to make such orders as may be necessary for the ends of justice.
It is true that section 41 of the makes the provisions of the code of Civil Procedure applicable to proceedings before a court under the .
But it is well known that after making his award the arbitrator is functus officio.
To cite one authority for this proposition we may quote the observations of Mellish, L. J., in Mordue vs Palmer(1).
"I think the result of the cases at law is that when an arbitrator has signed a document as and for his award, he is functus officio, and he cannot of his own authority remedy any mistake." In the present case, ex hypothesi, the award has already been made and the arbitrator has therefore become functus officio.
It is that award which requires stamp.
Section 151 of the Code cannot give the court power to direct the arbitrator to make a fresh award; that would be against well established principles of the law of arbitration.
It would again be useless to have another copy of the award prepared and stamped for the copy would not be the award and no action in a court can be taken on it.
The order cannot therefore be supported by section 151 of the Code.
It is of some interest to read here the following passage from Russel on Arbitration 14th Ed., p. 325.
482 "The usual practice in preparing an award is to have two copies made of it.
One the arbitrator signs, which then becomes then the original award, and this is delivered to the party who takes up the award.
The other copy is available for the other parties if they apply for it." "The original award, before it is available for any purpose whatsoever, must be duly stamped, but there is no obligation upon the arbitrator to stamp it, and he does not usually do so.
" We should observe here that the last paragraph in the aforesaid quotation does not appear in the 16th edition of Russel 's work.
Perhaps this is because in England an award is no more required to be stamped by virtue of section 35 Sched.
8, of the Finance Act, 1949, which was passed after the 14th edition was published.
Lastly, Mr. Pathak tried to support the order under sections 13 (d) and 15 (b) and (c) of the .
A bare perusal of the provisions mentioned would show that the order made in this case cannot be based on any of them.
Section 13 (d) deals with correction of clerical mistakes or accidental slips in the award, neither of which we think an omission to stamp is.
Further more, section 13 is only an enabling section giving certain powers to the arbitrator.
The arbitrator cannot be compelled to exercise these powers.
Section 15 deals with a court 's power to modify or correct an award.
In the present case, the Court did not purport to exercise that power.
We, therefore, think that the Division Bench was in error in thinking that an order could be made remitting the award to the arbitrator with a direction to re write it on a stamped paper and resubmit it to court.
That is the only point that we decide in this case.
483 In the result this appeal is allowed.
The orders of the Courts below remitting the award are set aside.
The appellant will get the cost throughout.
Nothing that we have said in this judgment will affect the right of the parties to take such steps, if any are available to them at law, for curing the defect arising from the award being on an unstamped paper.
Appeal allowed.

summary:
An arbitration agreement was filed in court under section 20 of the , and an order of reference was made thereon.
The arbitrator entered upon the reference and in due course filed his award in court.
The award was however, unstamped and on objection raised that no judgment 476 could be passed on such an award, the trial court passed an order remitting the award to the arbitrator for re submitting it to the court on duly stamped paper.
The High Court took the view that want of stamp would be an illegality apparent on the face of the award, which could therefore be remitted under section 16(1) (c) of the Act. ^ Held, that all unstamped award cannot be remitted under section 16(1) (c) of the , to the arbitrator to get it stamped, because want of stamp is a defect dehors the award or the decision of the arbitrator and does not amount to an illegality apparent upon the face of it within the meaning of that section.
Ramkumar vs Kushalchand, A.I.R. 1928 Nag.
166 and Lakshmichand vs Kalloolal, 1956 N.L.J. 504, disapproved.
Nani Bala Saha vs Ram Gopal Saha, A.I.R. 1945 Cal.
19, approved.
Held, further, that after making an award the arbitrator is functus officio, and section 151 of the Code of Civil Procedure cannot therefore give the court power to direct the arbitrator to make a fresh award and re submit it after writing it on proper stamp paper.
Mordue vs Palmer, , relied on.
Dubitante, it is doubtful if the fees and charges mentioned in section 14(1) of the Arbitration act, 1940, include the stamp duty payable on the award.


judgement:
eview Petition No. 16 of 1960.
519 Petition for Review of this court 's Judgment and order dated April 26, 1960, in Civil Appeal No. 64 of 1956.
A. V. Viswanatha Sastri, R. Ganapathy Iyer and Gopalkrishnan, for the petitioners.
K. N. Rajagopala Sastri, and P. D. Menon, for respondent.
November 23.
Das, J., delivered his own Judgment.
The Judgment of Kapur and Hidayatullah, JJ. was delivered by Hidayatullah, J. section K. DAS, J. I had taken a view different from that of my learned brethren when this appeal was heard along with Pringle Industries Ltd., Secunderabad vs The Commissioner of Income tax, Hyderabad (1), and that view was expressed in a very short judgment dated April 26, 1960.
Now, we have had the advantage of hearing a very full argument with regard to the facts of the appeal, and I for myself have had the further advantage and privilege of reading the judgment which my learned brother Hidayatullah, J., is proposing to deliver in this appeal.
I have very carefully considered the question again with reference to the facts relating thereto and, much to my regret, have come to the conclusion that I must adhere to the opinion which I expressed earlier.
My view is that the facts of this case are indistinguishable from the facts on which the decision of the Privy Council in Mohanlal Hargovind vs Commissioner of Income tax, C.P. and Berar(2) was rendered, and on the principles laid down by this court in Assam Bengal cement Co., Ltd. vs The Commissioner of Income tax, West Bengal (3), it must be held that the expenditure of Rs. 6111/ in this case was on revenue account and the respondent firm was entitled to the allowance which it claimed.
520 The short facts are these.
The respondent firm carried on a business in the purchase and sale of conch shells (called chanks).
It used to acquire the stock of conch shells (1)by purchase from the Fisheries purchase from the Fisheries Department of the Government of Madras and (3) by fishing for and gathering such shells from the sea.
It disposed of the stock so acquired at Calcutta, the different between the cost price and selling price less expenses being its profit made in business.
On November 9 1945 it took on lease from the Director of Industries and Commerce, Madras, the exclusive right.
liberty and authority to fish for, take and carry away "chank" shells in the sea off the coast line of the South Arcot District including the French Kuppama of Pondicherry.
The boundary of the area within which the right could be exercised was given in a schedule to the lease.
The lease was for a period of three years from July 1, 1944 to June 30 1947 on a consideration of an yearly rent of section 6111/ to be paid in advance.
Clause 3 of the lease contained the material terms there of and may be set out in full.
The lesser hereby convenants with the lesson as follows: (i) To pay the rent on the day and in manner aforesaid.
(ii) To deliver to the Assistant Director of Pearl and Chank Fisheries, Tuticorn all Velampuri shells that may be obtained by the lessee upon payment of their value as determined by the Assistant Director.
(iii) To collect chanks caught in nets and by means of diving as well.
In the process of such collection of shells not to fish chank shells less than 2/1/4 inches in diameter and if any chank shells less than 2/1/4 inches in 521 diameter be brought inadvertently to shore, to return at once alive to the sea all such undersized shells.
(iv) Not at any time hereafter to transfer or underlet or part with possession of this grant or the rights and privileges hereby granted or any part thereof without the written consent of the lessor.
(v) At the end or sooner determination of the term hereby created peaceably and quietly to yield to the lesson the rights and privileges hereby granted, and (vi) To report to the Assistant Director of Pearl and Chank Fisheries (South), Tuticorn the actual number of shells kept unsold in different stations after the expiry of the lease period.
For the assessment year 1946 47, the respondent firm submitted a return of its income to the Income tax Officer, Karaikudi Circle, showing its income from sale of chanks purchased from divers at Rs. 7194/ by sale of chanks purchased from Government Department at Rs. 23, 588/ and Rs. 2819/ by sale of chanks gathered by themselves (through divers) after deducting Rs. 6111/ being the rent paid to Government under the contract referred to above.
It sought to deduct Rs. 6111/ from its profits from business on the ground that this was an expenditure not of a capital nature but wholly and exclusively laid out for the purpose of business under section 10(2)(xv) of the Income tax Act.
This claim was disallowed by the Income tax Officer and on appeal by the Appellate Assistant Commissioner.
On further appeal to the Appellate Tribunal the respondent firm contended that the 522 decision of the Privy Council in Mohanlal Hargovind vs Commissioner of Income tax(1)applied to this case inasmuch as the payment was to secure the stockin trade for its business.
The Appellate Tribunal was of the opinion that the Privy Council decision covered the case, but felt itself bound by the decision of the Full Bench of the Madras High Court in K. T. M. T. M. Abdul Kayum Hussain Sahib vs Commissioner of Income tax, Madras (2).
The Tribunal acceded to the demand for a reference to the High Court, and accordingly referred the following question to the High Court for its decision. "Whether on the facts and circumstances of the case the payment of the sum of Rs. 6111/ made by the assessee under the terms of the agreement entered into with the Director of Industries and Commerce, Madras on 9th November, 1945 was not an item of revenue expenditure incurred in the course of carrying on the business of the assessee and, therefore, allowable under the provisions of section 10 of the Indian Income tax Act?" The reference first came before a Division Bench and was then referred to a Full Bench.
By its judgment dated April 2, 1953 the Full Bench answered the question in favour of the respondent firm.
On a certificate of fitness granted by the High Court the Commissioner of Income tax, Madras, brought the present appeal to this Court.
In Assam Bengal Cement Co., Ltd. vs The Commissioner of Income tax (3), this Court referred to the decision in Benarsidas Jagannath.
In re.(4) and accepted the following broad principles for the purpose of discriminating between a capital and a revenue expenditure.
523 (1) The outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment [See Commissioners of Inland Revenue vs Granite City Steamship Company Ltd.(1)].
Such expenditure is regarded as on capital account, for it is incurred not in earning profits but in setting the profit earning machinery in motion.
In my opinion this test does not apply in the present case where no profit earning machinery was set in motion.
(2) Expenditure may be treated as properly attributable to capital when it 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.
[See Atherton vs British Insulated and Helsby Cables Ltd. (2)].
In elucidation of this principle it has been laid down in several decisions that by "enduring" is meant "enduring in the way that fixed capital endures" and it does not connote a benefit that endures in the sense that for a good number of years it relieves the assessee of a revenue payment.
In Robert Addie & Sons Collieries Ltd. vs Commissioners of Inland Revenue (3) Lord Clyde formulated the same test in these words: "What is 'money wholly and exclusively laid out for the purposes of the trade ' in 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 one 's self the question, is it a part of the Company 's working expenses? is it expenditure laid out as part of the process of profit earning? or, on the other hand, is it a capital outlay? is it expenditure necessary for the acquisition of property or of rights of a permanent character, 524 the possession of which is a condition of carryin on its trade at all?" This test was adverted to by the Privy Council in Tata Hydro Electric Agencies Ltd. vs Commissioner of Income tax(1).In my opinion the application of this test makes it at once clear that the sum of Rs. 6111/ which the respondent firm spent was expenditure laid out as part of the process of profit earning; it was not a capital outlay, that is, expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which was a condition of carrying on its trade.
Under the contract in question the respondent firm did not acquire any right to immovable property.
It acquired no right in the bed of the sea or in the sea.
The only right conferred on the respondent firm was the right to fish for, gather and carry away conch shells (in motion under the surface of the sea) of a specified type and size.
The respondent firm was under an obligation to return to the sea conch shells less than 2 1/2 inches in diameter.
The business of the respondent firm consisted in buying and selling conch shells.
No manufacturing process was involved in it.
Therefore, the stock in trade of the respondent firm was conch shells.
It secured this stock in trade in many different ways, by purchase from divers, by purchase from Government and private parties, and also by gathering conch shells under the contract in question.
In my opinion, the contract into which the respondent firm entered was merely for securing its stock in trade.
It is indeed true that in considering whether an item of expenditure is of a capital or a revenue nature, one must consider the nature of the concern, the ordinary course of business usually adopted in that concern, and the object with which the expense is incurred.
The true nature of the transaction must be collected from the entire 525 document with reference to all the relevant facts and circumstances.
Having regard to the nature of the respondent firm 's business and the course adopted by it for carrying it on, it appears to me to be rather far fetched to hold that by the contract in question the respondent firm acquired property or right of a permanent character, the possession of which was a condition of carrying on its trade.
To me it seems that the better view, in a business sense, is that the respondent firm merely acquired by means of the contract its stock in trade, rather than a source or enduring asset for producing the stock in trade.
It was argued before us, as it was argued in the High Court, that what was acquired in the present case was the means of obtaining the stock in trade for the business rather than the stock in trade itself.
I am unable to accept this argument as correct.
The contract entered into by the respondent firm was wholly and exclusively for the purpose of obtaining conch shells, which were its stock in trade.
As I have stated earlier, the contract granted no interest in the sea, sea bed, or sea water etc.
It was simply a contract giving the grantee the right to pick and carry away conch shells of a specified type and size which of course implied the right to appropriate them as its own property.
In my opinion, in a case of this nature no distinction can be drawn in a business sense between the right of picking and carrying away conch shells and the actual buying of them.
It is not unusual for businessmen to secure, by means of a contract, a supply of raw materials or of goods which form their stock in trade, extending over several years for the payment of a lump sum down.
Even if the conch shells were stored in a godown and the respondent firm was given a right to go and fetch them and so reduce them into its ownership, it could scarcely have been 526 suggested that the price paid was capital expenditure.
I may explain what I have in mind by giving a simple illustration.
Take the case of a fisher may who sells fish.
Fish is his stock in trade.
He man buy the fish he requires from other persons; or he may obtain the supply of fish he requires by catching the fish of a specified size and type in particular water over a short period under a contract entered into by him and take them away.
I do not think that in a business sense any distinction can be made between the two means of obtaining the stock in trade.
Both really amount to securing the stock in trade rather than acquiring an enduring asset or a permanent right for producing the stock in trade.
And a business man, like the fisher man in the illustration given above, would indeed be surprised to learn that buying of fish for his business is revenue expenditure whereas catching fish in particular water under a contract entered into by him for the purpose of obtaining his stock in trade on payment of a lump sum down, is capital expenditure.
(3) The test whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business does not arise in the present case and need not be considered.
No different principles were laid down by my learned brethren in their decision in Pringle Industries Ltd. vs Commissioner of Income tax(1) and so far as that case is concerned, their decision must hold the field.
The difficulty and difference of opinion that arise now relate to the application of those principles to the facts of the present case.
One is reminded in this case of what Lord Macmillan said in Tata Hydro Electric Agencies Ltd. vs Commissioner of Income tax(2) at page 209: 527 "Their Lordships recognise and the decided cases show how difficult it is to discriminate between expenditure which is and expenditure which is not, incurred solely for the purpose of earning profits or gains.
" Lord Greene (Master of the Rolls) expressed himself more strongly and adverting to the distinction between capital and income, said: "There have been many cases where this matter of capital or income has been debated.
There have been many cases which fall upon the borderline: indeed, in many cases it is almost true to say that the spin of a coin would decide the matter almost as satisfactorily as an attempt to find reasons." [Vide Commissioners of Inland Revenue vs British Salmson Aero Engines Ltd.(1)].
Perhaps, the case before us is not as bad as the cases which the Master of the Rolls had in mind when he made the above observations.
It is, however, a truism that each case must turn upon its own facts.
Nevertheless the decisions are useful as illustrations of some relevant general principles.
The nearest illustration that we can get is the decision of the Privy Council in Mohanlal Hargovind vs Commissioner of Income tax(2).
That decision was binding on the Indian Courts at the time when it was given and as I think that it is still good law and is indistinguishable from the present case, I offer no apology for referring to it in great detail.
The facts of that case were these.
The assessees there carried on a business at several places as manufacturers and vendors of country made cigarettes known as bidis.
These cigarettes were composed of tobacoo rolled in leaves of a tree known as tendu leaves, which were obtained by the assessees by entering into a number of 528 short term contracts with the Government and other owners of forests.
Under the contracts, in consideration of a certain sum payable by instalments, the assessees were granted the exclusive right to pick and carry away the tendu leaves from the forest area described.
The assesees were 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 and bigger leaves.
The picking of the leaves however had to start at once or practically at once and to proceed continuously.
On these essential facts, the Privy Council held that the contracts were entered into by the assessees wholly and exclusively for the purpose of supplying themselves with one of the raw materials of their business, that they granted no interest in land, or in the trees or plants, that under them it was the tendu leaves and nothing but the tendu leaves that were acquired, that the right to pick the leaves or to go on to the land for the purpose was 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, and that therefore the expenditure incurred in acquiring the raw material was in a business sense an expenditure on revenue account and not on capital, just as much as if the tendu leaves had been bought in a shop.
I can find no distinction which would make any difference between the facts of that case and the facts of the present case.
Let me compare the essential facts of these two cases and see whether there is any difference.
(1) Two of the contracts were taken as typical of the rest by the Privy Council.
One contract was for the period from September 5, 1939 to June 30, 1941 and the other was for the period from October 1, 1938 to June 30, 1941.
Thus one of the contracts was for a period of about two years and the other contract for a period of about three years.
529 In the case under our consideration the period of the contract is three years.
Indeed, there is no vital difference between the periods in the two cases.
(2) In the case before us the contract area is described in a schedule.
In the two contracts which were under consideration by the Privy Council the contract area was also indicated in a schedule.
The boundaries of the forests in which tendu leaves could be plucked were delimited by the schedule.
Same is the case with the contract before us.
The contract area in which conch shells of a specified type and size can be picked and gathered is described in a schedule.
Such description does not mean that the assessee gets any right other than the right to gather conch shells.
In the Privy Council case the assessees were granted no interest in 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 no interest was given in the sea bed or in the sea water or in any of the products thereof.
Conch shells of a specified type and size and nothing but such conch shells were acquired by the contract.
I do not think that the reference to the coast line off the South Arcot District makes any difference between the present case and the case on which the decision in Mohanlal Hargovind vs Commissioner of Income tax (1) was rendered.
If in the matter of plucking of tendu leaves the expenditure under the contract was, in a business sense, expenditure on revenue account, I fail to see why a similar expenditure for gathering conch shells in motion under the surface of the sea near the coast line should not, in a business sense, be considered as expenditure on revenue account.
This aspect of the case was emphasised by their Lordships in the following paragraph: 530 "It appears to their Lordships that there has been some misapprehension as to the true nature of these 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 a appropriate them as their own property.
" In the case under our consideration the only right granted to the respondent firm was to take and carry away conch shells of a specified type and size, which of course, implies the right to appropriate them as the respondent firm 's own property.
The right to go into the sea and cast nets etc.
was merely ancillary to the real purpose of the contract.
Nor do I think that the circumstance that the contracts conferred an exclusive privilege or right is a matter of any significance.
In Mohanlal Hargovind vs Commissioner of Income tax (1) the contracts were exclusive and their Lordships stated: "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.
These observations are as apt in their application to the present case as they were in the case before their Lordships of the Privy Council.
(3) The Privy Council draw a distinction between cases relating to the purchase or leasing of 531 mines, quarries, deposits of brick earth, land with standing timber etc.
On one side and the case under its consideration on the other.
It referred to the decision in Alianza Co. vs Bell(1) and said: ". the present case resembles much more closely the case described and distinguished by Channell, J. at page 673 of the report in Alianza Co. vs Bell of the cost of material worked up in a manufactory.
That side 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 Kauri Timber Co. Ltd. vs Commissioner of Taxes(2) the company 's 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.
It was pointed out that 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 these circumstances it was held that the expenditure was capital expenditure.
In the case before us some reliance was placed by the appellant on the term that shells less than 2 1/4 inches in diameter brought inadvertently to shore had to be returned at once alive to the sea.
532 The argument was that such shells might later grow in size by receiving sustenance and nutriment from sea water and could be later gathered by the respondent firm when they reached the size of 2 1/4 inches in diameter or more.
This, it was argued, brought the present case nearer the decision in Kauri Timber case (1).
I am unable to agree.
It is to be remembered that live shells move under the surface of the sea and they do not remain at the same place, as trees do.
A shell less than 2 1/4 inches in diameter returned alive to the sea may move away from the contract area and may never be gathered by the respondent firm.
In these circumstances the appellant is not entitled to call to his aid the test of "further vegetation" or "sustenance and nutriment" referred to in the Kauri Timber case (1).
From whatever point of view we may look at the case, it seems to me that the facts of the present case are indistinguishable from those of the case in Mohanlal Hargovind vs Commissioner of Income tax(2) In Mohanlal Hargovind 's case (2) the right was to pluck tendu leaves; in our case the right was to gather conch shells of specified type and size.
This distinction, it is obvious, makes no difference.
In the High Court it was contended on behalf of the appellant that Mohanlal Hargovind 's case (2) related to the acquisition of raw materials whereas the present case relates to the acquisition of "chanks" by a dealer who sells them without subjecting them to any manufacturing process, and this distinction, it was contended, made the decision in Mohanlal Hargovind 's case (2) inapplicable to the present case.
The High Court rejected this contention and in my opinion rightly.
I agree with the High Court that on principle and in a business sense, there is no distinction between acquiring raw materials for a manufacturing business and acquiring or purchasing goods by a dealer for the purpose of sale, particularly when there is no question of any excavation 533 etc., in order to win the goods and make such goods parts of the stock in trade, a point which weighed with the Court of Appeal in Stow Bardolph Cravel Co. Ltd. vs Poole (1) and with my learned brethren in Pingle Industries Ltd. V. Commissioner of Income tax (2).
No such point is present in this case.
I have been unable to find any other distinction between the two cases which would make a difference in the application of the principles for discriminating between capital expenditure and revenue expenditure.
To adopt again the language of Lord Green, I see no ground in principle or reason for differentiating the present case from the case in Mohanlal Hargovind vs Commissioner of Income tax (3).
On behalf of the respondent firm a further question was agitated, namely, whether an allowance for the cost of gathering the conch shells by nets etc., should not be given, even though the rent paid under the contract was not allowable, under section 10 (2) (xv) of the Income tax Act and a reference was made in this connection to the decision in Hood Barrs vs Commissioners of Inland Revenue (4).
I do not think that we are concerned with that matter in the present appeal.
The only question which arises for decision is the one referred to the High Court.
I have held that the High Court correctly answered the question which related to the payment of the sum of Rs. 6111/ only.
The question having been correctly answered by the High Court, the appeal fails and must be dismissed with cost.
HIDAYATULLAH, J.
This appeal was heard with Pingle Industries, Ltd., Secunderabad vs The Commissioner of Income tax (5), in which judgment was delivered by us on April 26 1960.
In accordance with the decision in Pingle Industries case (1), 534 this appeal was allowed.
Later, a review petition of (No. 16 of 1960) was filed on the ground that this appeal was not governed by the decision in Pingle Industries case (1), and that as it was not fully argued, it should be reheard.
It is unnecessary to go into the reasons why the rehearing was granted, except to say that there was perhaps a misunderstanding about the concessions made by counsel.
We were, therefore, satisfied that we should grant the rehearing, and have since heard full arguments in this appeal.
K. T. M. T. M. Abdul Kayoom and Hussain Sahib (respondent) is a registered firm, and carries on business in conch shells locally known as "chanks", which are found on the bed of the sea all along the coast line abutting on the South Arcot District.
The respondent took on lease from the Director of Industries and Commerce, Madras "the exclusive right, liberty and authority to take and carry away all chanks founnd in the sea" for a period of three years ending on June 30, 1947.
The consideration was Rs. 6, 111/ per year payable in advance.
For the year of assessment, 1946 47 (the year of account ending June 30, 1945) the respondent in showing its profits from business sought to deduct Rs. 6,111/ on the ground that this was an expenditure not of a capital nature but wholly and exclusively laid out for the purpose of business under section 10 (2) (XV) of the Income tax Act.
This claim was disallowed by the Income tax Officer, and on appeal, by the Appellate Assistant Commissioner.
On further appeal to the Appellate Tribunal, the respondent contended that the ruling of the Privy Council in Mohanlal Hargovind 's case (2) applied to the case, inasmuch as the payment was to secure the stock in trade for its business.
The Appellate Tribunal, though it was of opinion that the Privy Council case applied, felt itself bound by the earlier Full Bench decision of the Madras High 535 Court in K.T.M.T.M. Abdul Kayoom Hussain Sahib vs Commissioner of Income tax, Madras (1) relating to this respondent, and dismissed the appeal.
The Tribunal, however, acceded to a demand for a case, and referred the following question to the High Court for its decision : "Whether on the facts and circumstances of the case the payment of the sum of Rs. 6,111 made by the assessee under the terms of the agreement entered into with the Director of Industries and Commerce, Madras, on 9th November 1945 was not an item of revenue expenditure incurred in the course of carrying on the business of the assessee and, "therefore, allowable under the provisions of section 10 of the Indian Income tax Act".
The reference went before a Divisional Bench, which referred the case for decision of a Full Bench.
The Full Bench held that the case was covered by the Privy Council case above referred to, observing: "In our opinion, the facts in the case before the Judicial Committee are indistinguishable from the facts of the present case.
In one case, the leaves had to be picked from trees by going upon the land, while in the other case the chanks had to be collected and gathered by dividing into the sea.
It is impossible to construe the documents in the present case as conferring any interest in that portion of the sea from which the exclusive right of winning the chanks was conferred upon the assessee.
" The High Court also did not see any difference between raw materials acquired for a manufacturing business and the acquisition of chanks in the present case, and held that the chanks were acquired as the stock in trade of the respondent and the transaction was tantamount to purchase of goods, 536 The High Court, however, certified the case as fit for appeal, and the Commissioner of Income tax has filed this appeal.
The material terms of the agreement in the case are as follows : "1.
The lessor hereby grants unto the lessees the full free and exclusive right, liberty and authority to fish or take and carry away all chank shells in the sea off the coast line of the South Arcot District including the French Kuppams of Pondicherry more particularly described in the schedule hereto to hold the premises to the lessees from the first day of July 1944 for a period of three years ending 30th June 1947 paying therefor the yearly rent of Rs. 6, 111 (rupees six thousand one hundred and eleven only) to be paid yearly in advance, the first payment to be made within fifteen days from the date of intimation of acceptance and the second and third payments to be made on or before the 15th June 1945 and 1946, respectively at the Government Treasury at Tuticorin or Madras.
x x x 3.
The lossee hereby covenants with the lessor as follows : x x x (ii) To deliver to the Assistant Director of Pearl and Chank Fisheries, Tuticorin all Velampuri shells that may be obtained by the lessees upon payment of their value as determined by the Assistant Director.
(iii) To collect Chanks in nets and by means of diving as well.
In the process of such collection of shell not to fish chank shells less than 2 1/4 inches in diameter if any chank shells less than 2 1/4 inches in diameter 537 be brought inadvertently to shore, to return at once alive to the sea all such undersized shells.
(iv) Not at any time hereafter to transfer or underlet or part with possession of this grant or the rights and privileges hereby granted or any part thereof without the written consent of the lessor.
x x x (vi) To report to the Assistant Director of Pearl and Chank Fisheries (South), Tuticorin the actual number of shells kept unsold in different stations after the expiry of the lease period.
" An analysis of the agreement shows that the respondent obtained an exclusive right to fish for "chanks" by the method of diving and nets and to appropriate them except those below 2 inches in diameter, which had to be returned alive to the sea and Velampuri shells which had to be sold compulsorily to Government.
The respondent had also to report to its lessors at the end of the term, the number of shells not sold.
The right was exclusive, but was not capable of being transferred or underlet, and it was for a fairly long period.
The coast line involved was also fairly long.
There is no doubt that the payment of Rs. 6,111/ was an expenditure wholly and exclusively for the purpose of the business of selling shells, just as the payment to the divers and other sundry expenses were.
But an expenditure for the purpose of the business may be of a capital nature, and if it is so, it cannot be claimed as a deduction.
The question is whether this payment was of a capital nature.
What is attributable to capital and what, to revenue has led to a long string of cases here and 538 in the English Courts.
The decisions of this Court reported in Assam Bengal Cement Co., Ltd. vs Commissioner of Income tax and Pingle Industries case (1) have considered all the leading cases, and have also indicated the tests, which are usually applied in such cases.
It is not necessary for us to cover the same ground again.
Further, none of the tests is either exhaustive or universal.
Each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect.
In deciding such cases, one should avoid the temptation to decide cases (as said by Cordozo * by matching the colour of one case against the colour of another.
To decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive.
What is decisive is the nature of the business, the nature of the expenditure, the nature of the light acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases.
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 those goods.
The amount, he pays to secure the monopoly, through a part 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 advantage 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 539 raw materials for the enduring benefit of his business, he spends on the capital side.
Thus, a manufacturer of wollen goods 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 purchase of a factory and the purchase of the sheep farm, because both are capital asset of enduring nature.
The respondent in this case has tried to distinguish Pingle Industries case (1) and to bring its case within the ruling of the Privy Council in Mohanlal Hargovind 's case (2).
When the former case was argued, the attempt was to bring it also within the rule of the Privy Council, but now, the differences between the two cases are recognised and Pingle Industries case (1) is said to be entirely different.
In deciding the present appeal, it is hardly necessary to do more than analyses once again the facts and circumstances of these two cases to show why those two cases were differently decided, and the present case will then be easily disposed of, not on its similarity to another but on its own facts.
We shall begin with the Privy Council.
Mohanlal Hargovind and Co., was a firm of bidi manufacturers, which needs tendu leaves in which tobacco is wrapped to make bidis.
Tendu leaves were thus the raw material of the business.
Tendu leaves can be bought from dealers who sell tendu leaves in a large way.
Now, what did the firm do ? It took leaves 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.
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 materials of the business.
In deciding the case, the Judicial Committee discounted the right to 540 coppice small tendu plants and to pollard the tendu trees as a very insignificant right of cultivation necessary to improve the quality of the leaves, but which right ranked no higher than the right to spray a fruit tree.
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.
Their Lordships then observed that the High Court diverted its view from these points, and attached too much importance to cases decided upon quite different facts.
They then observed that "cases relating to the purchase or leasing of mines, quarries, deposits of brick earth, land with standing timber. " were of no assistance, and concluded: "If the tendu leaves had been stored in a merchant 's godown 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." (p. 478) 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 shewered on an agreement to ensure the supply of raw materials, 541 Contrast this with the facts of Pingle Industries case (1).
The business of the assessee there, was selling stone slabe called flag stones.
These stones were first won from the quarries and then dressed and shaped and then sold.
Now, what did the assessee do ? It took leases of stone quarries in a large number of villages for twelve years.
Primarily, this was done to obtain stones for its business.
It could have been a contract by which it would have been entitled to so many cubic feet of stones to be extracted in a particular period.
It took long term leases of vast areas in several villages to ensure supplies for a considerable time.
The leases were not limited by quantity, nor did they refer to any stones in particular.
It could take all or it could take none; but it could not have carried away all the stones, if the supply outran its efforts.
The stones were embedded in earth, layer upon layer, and had to be systematically extracted.
Till the stones at the top were removed, it could not remove those at the bottom, and there were still more layers further below.
In there circumstances, no specific quantity having been bought or sold either expressly or impliedly, the stones being immovable property or a part thereof and the contract being long teem contracts, Mohahlal Rargovind 's case (2) was held inapplicable, and it was held that the assessee in Pingle Industries case (1) had acquired an enduring asset and the expenditure was on capital account.
These cases between them show adequately the dividing line, which exists between capital expenditure and revenue expenditure.
To determine on which side of the line the particular expenditure falls, one may often put himself the question posed by Lord Clyde in Robert Addie and Sons Collieries Ltd. vs Commissioners Inland Revenue (3) 542 "It it part of the Company 's working expenses, is it expenditure laid out as part of the process of profit earning ? or, on the other hand, is it capital outlay, is it expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all?" The same question was again posed by the Judicial Committee in Tata Hydro Electric Agencies, Ltd. vs Commissioner of Income tax (1).
The answer to this question in each of the two case of Mohanlal Hargovind (2) and Pingle Industries (3) is entirely different.
The difference can be noticed easily, if we were to read here what Channell, J. said in Alianza Co. Ltd. vs Bell (4): "In the ordinary case, the cost of the material worked up in a manufactory is not a capital expenditure, it 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 secures a supply of the raw material for a period extending over several years. .If it is merely a manufacturing business, then the procuring of the raw material would not be a capital expenditure.
But if it is like the working of a particular mine, or bed of brick earth and converting the stuff into a marketable commodity, then, the money paid for the prime cost of the stuff so dealt with is just as much capital the money sunk in machinery or buildings.
" The first part of the observation is applicable to Mohanlal Hargovind 's case (2) and the latter part, to Pingle Industries case (3).
What is said of a manufacturing concern is equally applicable to a non manufacturing business.
It is the quality of the payment taken with what is obtained, that is decisive of the character of the payment.
543 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 purchased the chanks, and having got them, perhaps cheap, it resold them at a profit.
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 divers 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 the tendu leaves; but the bargain was about the right to fisht.
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.
To Mohanlal Hargovind, the leaves were raw materials, and that firm preferred to buy a number of crops over years rather than buy them as it went along.
Hence the remark that the leaves were bought, as if they were in a shop.
Under the lease which the respondent obtained, it had a right to take only chanks of particular dimensions and shape, but it had to fish for them and obtain them first.
The rest of the chanks were not its property.
The smaller chanks had to be returned alive to the sea, and Velampuri chanks had to be compulsorily sold to the state.
Of Course, the smaller chanks put back into the sea 544 would grow, and if fished later, be its property to take, but till they grow, it had not claim.
The chanks were on the bed of the sea.
Their exact existence was not known, till the divers found them, or they got netted.
Chanks which were there one day might have been washed back into the deep sea, and might never be washed back into a place where they would be within reach.
Similarly, other chanks not there one day might come within reach on another day.
All these matters make the case entirely different from the case of a purchase from the divers.
In obtaining the lease, the respondent obtained a speculative right to fish for chanks which it hoped to obtain and which might be in large quantities or small, according to its luck.
The respondent changed the nature of its business to fishing for chanks instead of buying them.
To be able to fish, it had to arrange for an area to fish, and that arrangement had to be of some duration to be effective.
This is not a case of so much clay or so much salt petre or a dump of tailings or leaves on the trees in a forest.
The two modes in which the respondent did the business furnish adequate distinguishing characteristics.
Here is an agreement to reserve a source, where the respondent hoped to find shells which, when found, became its stock in trade but which, insitu, were no more the firm 's than a shell in the deepest part of 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 divers.
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 the other character is to err.
It was possible to say of the former, as it was possible to say of the tendu leaves in Mohanlal Hargovind 's case (1), that the chanks were bought because the money paid was the price of the chanks.
But it would be a straining of the imagination to say that the amount paid 545 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 enduring 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 trasferable, 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.
In our opinion, the decision of the High Court, with all due respect, was, therefore, erroneous, and the earlier decision of the Full Bench of the same High Court was right in the circumstances of the case.
In the result, the appeal is allowed; but there will be no order about cost.
BY COURT.
In accordance with the majority judgment of the Court, the appeal is allowed, but there will be no order about costs.

summary:
The assessee firm carried on the business in purchase and sale of conch shells.
It obtained a lease for 3 years for gathering specified types of shells from the sea along the coastline abutting on the South Arcot District.
It sought to deduct the amount paid as lease money from its profits from business on the ground that this was an expenditure not of a capital nature but wholly and exclusively laid out for the purpose of business.
under section 10(2)(xy) of the Income Tax Act.
^ Held, (per kapur and Hidayatullah, JJ., Das, J. dissenting) that the expenditure was capital expenditure and could not be deducted from the profits.
The business of the assessee was buying and selling shells but when it took the lease it went in for a new speculative business of fishing for shells.
The amount paid for reserving the vast coastline for future fishing was not price paid for obtaining the stock in trade i.e. shells with which assessee did his business.
The amount was paid to obtain an enduring asset in the shape of an exclusive right to fish and the payment was not related to the shells.
Mohanlal Hargovind vs Commissioner of Income tax, C. P. & Berar, , distinguished Pringle Industries Ltd., Secunderabad vs Commissioner of Income tax, Hyderabad, [1960] 3 section C. R. 681, applied.
Per Das, J. The expenditure was not capital expenditure and was deductible from the profits.
It was not an expenditure for the acquisition of property or of rights of a permanent character, the possession of which was necessary for carrying on of the assessee 's trade By this lease the assessee acquired its stocks in trade rather than a source or enduring asset for producing the stock in trade.
Mohanlal Hargovind vs Commissioner of Income tax, C. P. & Berar , applied.
Pringle Industries Ltd., Secunderabad vs Commissioner of Income tax, Hyderabad, , distinguished.


judgement:
Appeal No. 12 of 1952.
Appeal from the Judgment and Order dated the 18th January, 1950, of the High Court of Judicature at Madras (Satyanarayana Rao and Viswanatha Sastri JJ.) in Case Referred No. 27 of 1947.
O.T. G. Nambiar (section N. Mukherjee, with him) for the appellant.
M.C. Setalvad, Attorney General for India, and C. K.Daphtary, Solicitor General for India (G. N. Joshi and P.A. Mehta, with them) for the respondent.
December 22.
The Judgment of the Court was delivered by MAHAJAN J.
This is an appeal from the judgment of the High Court of Judicature at Madras dated 18th January, 1950, delivered on a reference by the Incometax .Appellate Tribunal under section 66(1) of the Indian Income tax Act, whereby the High Court answered the two questions referred in the affirmative. ' The appellant is a public limited company incorporated in the United Kingdom and owns a spinning and weaving mill located at Pondicherry in French Indial.
The year of account of the appellant is the calendar year.
In the year 1939 no sales of yarn or cloth manufactured by the company were effected in 456 British India, though in the previous year such sales were effected.
All the purchases of cotton required for the mills were made in British India by Messrs. Best & Co., Ltd. Under an agreement between the appellant and Messrs. Best & Co., Ltd., Madras, dated 11th July, 1939, Messrs. Best & Co., Ltd. were constituted the agents of the appellant for the purposes of its business in India.
Messrs. Best & Co., Ltd. have under the terms of the agreement full powers in connection with the business of the appellant in the matter of purchasing stock, signing bills and other negotiable instruments and receipts and settling, compounding or compromising any claim by or against the appellant.
The agents are empowered to borrow money on behalf of the appellant and to make advances.
They are also expected to secure the best commissions, brokerages, rebates, discounts and other allowances in respect of and in connection with the business of the appellant.
They are enjoined to keep proper accounts of the appellant and to pay over to the appellant the sum standing to its credit.
They are remunerated by a salary of Rs. 6,500 per mouth and a percentage commission on the profits made.
During the relevant year all the purchases of cotton required for the mill at Pondicherry were made by the agents in British India and no purchases were made through any other agency.
The agents exercised their judgment and skill and purchased such qualities and quantities of cotton and at such prices as they in their experience considered most advantageous in the interests of the company.
Prior to 1939 40 the appellant was assessed to income tax in British India on the profits computed on a turnover basis earned by the sales in British India of the goods manufactured by the appellant.
In the course of the assessment year 1939 40 the appellant stated that it discontinued its business in British India with effect from 1st April, 1939, and claimed relief under section 25`3) which was granted.
In the course of his further enquiries the Income tax Officer found 'that though the appellant was not 457 selling its goods in British India and earning a profit thereby, it continued to have an active business connection in British India having regard to the way in which the business of purchasing goods and materials for them ills was carried on.
There upon the Incometax officer held that such purchases of cotton in British India constituted a business connection in British India and that the profits attributable to the purchases were liable to tax under sections 42(1) and 42(3) of the Act.
The net income of the company was computed to be Rs. 2,81,176 and ten per cent.
of this sum was apportioned under section 42(3), of the Act as being the profits and gains reasonably attributable to that part of the business operations, which were carried out in British India.
The appellant appealed against the said order of the Income tax Officer to the Appellate Assistant Commissioner who confirmed the order of the Income tax Officer.
A further appeal by the appellant to the Tribunal was unsuccessful.
At the instance of the appellant, the Tribunal stated a case and referred the following questions for the decision of the High Court under section 66(1) of the Act : " 1.
Whether in the circumstances of this case the assessee company had any business connection in British India within the meaning of sections 42(1) and 42(3) of the Income tax Act ? 2.Whether any profits could reasonably be attributed to the purchase of entire cotton made in British India by the secretaries and agents of the assessee company within the meaning of sections 42(1) and 42(3) of the Income tax Act ? The High Court answered both these questions in the affirmative and, in our opinion, rightly.
The learned counsel for the appellant reiterated before us the arguments that he had addressed in the High Court and contended that on the facts of this case there was no scope for the finding that any profits or.
gains accrued to the assessee directly or 458 indirectly through or from any business connection in India.
It was argued that a mere purchase of raw materials or goods in British India does not result in the accrual or arising of profits and that the profits on the sale of goods arise and accrue only at the place where the sales are effected and that in the present case, there being no sales effected in British India in the year of account 1939, no profits accrued or arose to the company in British India nor could ally profits be deemed to have accrued or arisen in British India.
In support of his proposition, the learned counsel placed reliance on a number of cases, inter alia, on Board of Revenue vs Madras Export Co.(1), Jiwan Das vs Commissioner of Income tax, Lahore (2), Rahim vs Commissioner of Income tax(3), Commissioner of Incometax, of Income tax vs Little 's Oriental Balm Ltd.(5).
Most of these decisions were given under the Act of 1922, before the insertion of section 42 (3) in the Act of 1922 by the amending Act of 1939.
As against the cases relied upon by the learned counsel for the appellant, several authorities have been cited to us which have proceeded on the footing that even purchase of raw materials could be an operation in connection with a business and if it was carried on in British India it might make the profits attributable to such operation taxable under section 42 of the Indian Income tax Act.
The case Rogers Pyatt Shellac Co. vs Secretary of State for India(6) is one of the leading decisions on this point.
This case was decided under section 33 of the Indian Income tax Act, 1918, and the judgment shows that the principle followed in the case was similar to that which was subsequently embodied in section 42 (3) of the Income tax Act, 1922.
The question referred to the High Court in that case was in these terms: "Is this company which purchased shellac and mica in India for sale in the open market in America (1) Mad.
(2) (I929) 1.
L. R. (3) A.I.R. 1949 Orissa 60.
(4) A.T.R. (5) [1950) (6) (1925) I.L.R.52 Cal.
459 liable to be assessed to income tax and super tax under either Income tax Act VII of 1918 or Act XI of 1922 and the Super tax Act, VIII of 1917.
" And it was answered in the affirmative.
The same line of reasoning was adopted by the Rangoon High Court in Commissioner of Income tax Burma vs Steel Bros. Co. '(1).
Among recent cases on this point which were decided under section 42 of the Income tax Act, 1922, can be mentioned the case of Motor Union Insurance Co. Ltd. vs Commissioner of Income tax, Bombay(2) and that of Webb Sons & Co. vs Commissioner of Income tax, East Punjab(3).
In the last case, the assessee company which was incorporated in the United States of America was carrying on in America the business of manufacturing carpets.
Its only business in British India was the purchase through its agent in British India, of wool as raw material for use in the manufacture of carpets.
It was held that the purchase was an operation within the meaning of section 42 (3), and the profits from such purchases could be deemed to arise in British India and it was consequently assessable under section 42 (3) of the Indian Income tax Act.
The questions referred to the High Court in this case and relevant to this enquiry were these: "(i) Is mere purchase of raw material an operation within the meaning of section 42 (3) of the Act? (ii)Can any profit arise out of mere purchase of raw material?" While answering these questions in the affirmative it was said: "It is clear that the purchase of raw material by a firm of manufacturers is one of the processes or operations which contributes to an appreciable degree to the ultimate profit which is realized on the sale of manufactured articles.
" There is thus no uniformity of judicial opinion on the question that the mere act of purchase produces no profit.
(1) Rang.
(2) A.I.R. 1945 Bom.
(3) [1950) 460 In our judgment, the contention of the learned counsel for the appellant, and on which his whole .argument is founded, that it is the act of sale alone from which the profits accrue or arise can no longer be sustained, and has to be repelled in view of the decision of this Court in Commissioner of Income tax, Bombay vs Ahmedbhai Umarbhai & Co.(1).
That was a case that arose under the Excess Profits Tax Act, XV of 1940.
A firm which was resident in British India and carried on the business of manufacturing and selling groundnut oil, and owned some oil mills within British India also owned a mill in Raichur in the Hyderabad State where oil was manufactured.
The oil manufactured in Raichur was sold partly within the State of Hyderabad and partly in Bombay.
It was held by this Court that the profits of that part of the business, viz., the manufacture of oil at the mill in Raichur accrued or arose in Raichur even though the manufactured oil was sold in Bombay and the price was received there, and accordingly, that part of the profits derived from sales in Bombay which was attributable to the manufacture of the oil in Raichur was exempt from excess profits tax under the proviso to section 5 of the Act.
Reference in this case was made to the decision of the House of Lords in In re Commissioners of Taxation vs Kirk (2), wherein it was held that where income was in part derived from the extraction of ore from the soil of New South Wales Colony, and from the conversion in the latter colony of the crude ore into a merchantable product, this income was assessable under the New South Wales Land and Income Tax Assessment Act of 1895, section 15, sub sections 3 and 4, nowithstanding that the finished products were sold exclusively outside the colony.
Lord Davey while delivering the judgment of the Privy Council observed as follows : "It appears to their Lordships that there are four processes in the earning or production of this income (I) the extraction of the ore from the soil ; (2) the (1) ; (2) 461 conversion of the crude ore into a merchantable product, which is a manufacturing process; (3) the sale of the merchantable product; (4) the receipt of the moneys arising from the sale.
All these processes are necessary stages which terminate in 'money, and the income is the money resulting less the expenses attendant on all the stages.
The first process seems to their Lordships clearly within sub section 3, and the second or manufacturing Process, if not within the meaning of ' trade ' in subsection 1, is certainly included in the words any others source whatever in sub section 4.
So far as relates to these two processes, therefore, their Lordships think that the income was earned and arising and accruing in New South Wales.
" On a parity of reasoning it can well be said in this case that the profits accrue or arise to the appellant from three business processes or operations, those being (1) the purchase of cotton in British India; (2) its conversion by the process of manufacture in Pondicherry into yarn or cloth ; and (3) the sale of the merchantable product, and those have to be apportioned between these three operations.
The same line of reasoning was adopted by the Madras High Court in Bangalore Woollen, Cotton & Silk Mills Co. Ltd. vs Commissioner of Income tax, Madras(1).
There it was held that the purchase of raw materials by the man aging agents in British India would be an operation within the meaning of section 42(3) and it was reasonable to attribute a portion of the profits to such purchases in British India.
After a careful consideration of the decided cases on the subject and in view of the insertion of section 42 (3) in the Act of 1922 by the amending Act of 1939, we have reached the conclusion that in the present state of the law there is hardly any scope for maintaining the view contended for by the learned counsel for the appellant and we therefore agree with the High Court in repelling it.
While maintaining the view taken by the High Court in this case we wish (1) 462 to point out that it is not every business activity of a manufacturer that comes within the expression "operation" to which the provisions of section 42(3) are attracted.
These provisions have no application unless according to the known and accepted business notions and usages the particular activity is regarded as a well defined business operation.
Activities which are not well defined or are of a casual or isolated character would not ordinarily fall within the ambit of this rule.
Distribution of profits on different business operations or activities ought only to be made for sufficient and cogent reasons and the observations made here are limited to the facts and circumstances of this case.
In a case where all that may be known is that a few transactions of purchase of raw materials have taken place in British India, it could not ordinarily be said that the isolated acts were in their nature " operations " within the meaning of that expression.
In this case the raw materials were purchased systematically and habitually through an established agency having special skill and competency in selecting the goods to be purchased and fixing the time and place of purchase.
Such activity appears to us to be well within the import of the term " operation " as used in section 42 (3) of the Act.
It is not in the nature of an isolated transaction of purchase of raw materials.
The first contention of the assessee is therefore negatived.
The learned counsel argued in a rather half hearted manner that there was no business connection of the assessee in British India.
This contention does not require serious consideration.
An isolated transaction between a non resident and a resident in British India without any course of dealings such as might fairly be described as a business connection does not attract the application of section 42, but when there is a continuity of business relationship between the person in British India who helps to make the profits and the person outside British India, who receives or realizes the profits, such relationship does constitute business connection.
In this case there 463 was a regular agency established in British India for the purchase of the entire raw materials required for the manufacture abroad and the agent was chosen by reason of his skill, reputation and experience in the line of trade.
The terms of the agency stated in by earlier part of this judgment fully establish that Messrs. Best & Co. Ltd. were carrying on something almost akin to the business of a managing agency in India of the foreign company and the latter certainly had a connection with this agency.
We therefore negative this contention of the learned counsel as well.
For the reasons given above we uphold the view taken by the High Court and dismiss the appeal with costs.
Appeal dismissed.

summary:
Though a few isolated transactions of purchase of raw mate rials in India by a manufacturer carrying on business outside India may not amount to the carrying on of an " operation " in India within the meaning of section 42 (3) of the Indian Income tax Act, where raw materials are purchased systematically and habitually in India through an established agency having special skill and competency in selecting the goods, such an activity will be an "operation" within a. 42 (3), and the portion of the profits 455 attributable to the purchases in India can be assessed to incometax under section 42(1) and (3) of the Indian Income tax Act.
Bangalore Woollen, Cotton & Silk Mills Co. Ltd. vs Commis sioner of Income tax, Madras , Commissioner of Income tax, Bombay vs Ahmedbhai Umarbhai d Co. ([1950] S.C.R. 335), Commissioners of Taxation vs Kirk ([1900] A.C. 588), Rogers Pyatt Shellac Co. vs Secretary of State for India ([1925] I.L.R. and Webb Sons & Co. vs Commissioner of Incometax, East Punjab ([1950] relied on.
An isolated transaction between a non resident and a resident in India without any course of dealings such as might fairly be described as a business connection does not attract the application of section 42, but when there is a continuity of business relationship between the person in India who helps to make the profits and the person outside India who receives or realises the profits, such relationship constitutes a business connection.