(1.) This appeal raises a short question as to the application of Section 10(5) para, xii of the Indian Income-tax Act, 1922, as amended by the Indian Income-tax (Amendment) Act, 1939, in respect of assessments on the appellants for the years 1940-41 and 1941-42. That paragraph provides that in computing profits or gains of a business for the purpose of Income- tax an allowance is to be made for "any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly or exclusively for the purpose of such business." Certain expenditure claimed by the assessee to be a permissible deduction under this paragraph and admitted to have been made "wholly and exclusively for the purpose" of the business of the appllants was disallowed by the Income-tax Officer. His order was confirmed successively by the Appellate Assistant Commissioner of Income-tax, Nagpur, and by the Income-tax Appellate Tribunal, Bombay. Application was made to that Tribunal for a reference to the High Court of Judicature, Nagpur, of the question whether the appellants were entitled to the deduction in question, and the High Court (Grille, C.J, and Sen J.) answered that question in the negative for the reasons given by them in their judgment in another case (Miscellaneous Civil Case, No. 55 of 1943).
(2.) The relevant facts are as follows. The appellants carry on business at several places in the Central Provinces of India as manufacturers and vendors of country made cigarettes which are known as bidis. These cigarettes are composed of tobacco contained or rolled in leaves of a tree known as tendu leaves which fulfil a corresponding function in the finished cigarette to that played by a cagarette paper. The appellants obtain the tendu leaves which they require by entering into a number of contracts with the Government and other owners of forests. Two of these contracts which were taken as typical of the rest are included in the record, one relating to a Government forest and one to a forest belonging to the Rewa State. It is important to examine the terms of these documents. The former is dated September 5, 1939, and is made between the Divisional Forest Officer on behalf of the Secretary of State in Council and the appellants representative described as the "forest contractor." Clause 1 identifies the subject matter of the contract, which is described as "the forest produce sold and purchased under the agreement," as that specified in sch. 1 in the "Contract area" therein indicated. By Clause 2 the quantity of the forest produce is defined as all the said produce "which may now exist or may come into existence in the contract area which the forest contractor may remove from the said area...during the period from September 5, 1989, to June 30, 1941." Schedule lA provides that "the contractor shall commence his work before the...day of... 193, and shall, to the satisfaction of the office empowered to execute the contract on behalf of Government, make continuous and adequate progress throughout the term of the contract." In this provision the dates by an obvious oversight arc left in blank, but the date of commencement could not be later than December 31, 1939. In the second of the two agreements which with certain minor dulerences is substantially in the same form the period of the operations is October 1, 1939, to June 30, 1941, and the work is to be commenced on October 1, 1938. This agreement recites an application for the grant of "the contract of collecting and removing" tendu leaves. The grant is a grant of the right to collect and remove them from the area described. In the case of each contract a sum payable by instalments is fixed as the consideration for the grant. In the former contract the contractor is 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.
(3.) 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 eifect of them. They are merely examples of many similar contracts entered into by the appellants wholly and exclusively for the purpose of their business, that purpose being to supply themselves with one of the raw materials of that business. The contracts grant no interest in land and no interest in the trees or plants themselves. They are simply and solely contracts giving to the grantees the right to pick and carry away leaves, which, of course, implies the right to appropriate them as their own property.