Mohanlal Hargovind of Jubbulpore v Commissioner of Income Tax, Central Provinces and Berar, Nagpur

APPEAL (No. 10 of 1948) from a judgment of the High Court at Nagpur (December 8, 1944) delivered on a reference made to it under s. 66, sub-s. 1, of the Indian Income-tax Act, 1922, by the Income Tax Appellate Tribunal, Bombay.

This appeal raised a short question as to the application of s. 10, sub-s. 2 (xii), of the Indian Income-tax Act, 1922, as amended by the Indian Income-tax (Amendment) Act, 1939, in respect of assessments on the appellants for the years 1940–1 and 1941–2. That paragraph provided that in computing profits or gains of a business for the purpose of income tax an allowance was to be made for “any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business ….”

The relevant facts, which are taken from the judgment of the Judicial Committee, were as follows. The appellants carried on business at several places in the Central Provinces of India as manufacturers and vendors of country made cigarettes, which were known as bidis. Those cigarettes were composed of tobacco contained or rolled in leaves of a tree known as tendu leaves, which fulfilled a corresponding function in the finished cigarette to that played by a cigarette paper. The appellants obtained the tendu leaves which they required by entering into a number of contracts with the Government and other owners of forests. Two of those contracts, which were taken as typical of the rest, were included in the Record, one relating to a government forest and one to a forest belonging to the Rewa state. It was important to examine the terms of those documents. The former was dated September 5, 1939, and was made between the Divisional Forest officer on behalf of the Secretary of State in Council and the appellants' representative described as the “forest contractor.” Clause I identified the subject-matter of the contract, which was described as “the forest produce sold and purchased under the agreement,” as that specified in sch. 1 in the “contract area” therein indicated. By cl. 2 the quantity of the forest produce was defined as all the said produce “which may now exist or may come into existence in the contract area which the forest contractor may remove from the said area …. during the period from the 5th day of September, 1939, to the 30th day of June, 1941.” Schedule 1A provided that “the contractor shall commence his work before the …. day of …. 193, and shall, to the satisfaction of the office empowered to execute the contract on behalf of Government, make continuous and adequate progress throughout the term of the contract.” In that provision the dates, by an obvious oversight, were left in blank, but the date of commencement could not be later than December 31, 1939. In the second of the two agreements which, with certain minor differences, was substantially in the same form, the period of the operations was October 1, 1938, to June 30, 1941, and the work was to be commenced on October 1, 1938. That agreement recited an application for the grant of “the contract of collecting and removing” tendu leaves. The grant was a grant of the right to collect and remove them from the area described. In the case of each contract a sum payable by instalments was fixed as the consideration for the grant. In the former contract the contractor was allowed to coppice...