Royalty on raw materials is capital expenditure

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No. Where stones are the raw material used by the assessee-company, the royalty paid on the basis of the quantity of stones excavated is revenue expenditure, vide CIT vs Associated Stone Industries (Kota) Ltd (1981) 130 ITR 868 (Raj).

Further, the royalty payment was not a direct payment for securing an advantage. The payment, including the dead rent, had relation only to the stones. It had no direct relation to the acquisition of the asset. The impugned payments, therefore, ought to be treated as revenue expenditure, vide Gotan Lime Syndicate vs CIT (1966) 59 ITR 718 (SC).

Whether sales tax paid can be claimed as revenue expenditure?

Yes. Sales tax is payable irrespective of any profits being earned and without such payment the business of buying and selling cannot be carried on.

It is, therefore, deductible as a business expense, vide SRVG Press Co vs CEPT (1956) 30 ITR 583 (AP) and AV Thomas & Co Ltd vs CIT (1986) 1590 ITR 431 (Ker) (FB), CIT v Royal Boot House (1970) 75 ITR 507 (Cal), ITO vs HM Traders (1987)28 TTJ (Chd-Trib) 217 and CIT vs Mica Trading Corporation of India Ltd. (1997) 227 ITR 388 (Pat).

Whether wealth tax paid can be claimed as a deduction in computing the taxable income?

No. The Supreme Court (SC) in CIT vs Malayalam Plantations Ltd (1964) 53 ITR 140 (SC) held that wealth tax was not a permissible deduction while computing an assessee's business income, because tax under the Wealth Tax Act is imposed on the owner of the assets and not on any commercial activity. [See also Indian Steel & Wire Products Ltd vs CIT (1968) 69 ITR 379 (Cal), CIT vs Fort Gloster Industries Ltd (1971) 79 ITR 48 (Cal), Orissa Cement Ltd vs CIT (1969) 73 ITR 14 (Del), Kumbakonam Electric Supply Corp. Ltd vs CIT (1963) 50 ITR 809 (Mad), Southern India Tea Estates Co Ltd vs CIT (1964) 51 ITR 47 (Ker), Lakshmi Sugar & Oil Mills Ltd vs CIT (1970) 77 ITR 690 (AllO and CIT vs Asbestos, Magnesia & Friction Materials Ltd (1977) 106 ITR 286 (Bom)] .

However, in its subsequent decision in Indian Aluminum Co Ltd vs CIT (11972)84 ITR 735 (SC), the apex court held that wealth tax paid on assets held by the assessee for business purposes was business expenditure. [See also CIT vs Standard Vacuum Oil Co (1972) 86 ITR 1 (SCO, George Oommen vs State of Kerala (1977) 110 ITR 546 (Ker) and Mrs Grace George & MK Thomas vs Addl ITO (1982) ITR 403 (Ker)].

The Income-tax (Amendment) Act 1972, however, clarified the position by inserting section 40(a) (iia), with effect from April 1, 1962, to the effect that any sum paid by an assessee on account of wealth tax is disallowable in computing his income, chargeable under the head 'profits and gains of business or profession' or "income from other sources".

The corporation collected money at specified rates from persons doing business in its area as betterment charges and spent it on improving roads, building a park, providing better street-lighting and water supply. Can the amount paid as betterment charges be claimed as revenue expenditure?

Judicial opinion is divergent on allowing betterment charges as revenue expenditure. In Arvind mills Ltd vs CIT (1992) 197 ITR 422 (SC), the SC held that betterment charges, on account of increase in the valuation of the assessee's land, should not be held as revenue expenditure, despite the fact that the general improvement in the area might have an impact on bettering the business. However, in Dollar Cos vs CIT (1986) 161 ITR 455 (Mad), the view expressed was that betterment charges were an expenditure of a revenue character due to additional facilities the assessee got.

My view is that it should be allowable as revenue expenditure as nothing gets added to the assessee's business premises. In any cases, for the rented properties, the expenditure should be allowable as revenue expenditure.

The managing director(MD) of the company went abroad for a preliminary survey of new methods of design, processing and manufacturing and to see if better machinery was available to replace the existing one. The AO proposes to disallow the claim of the MD on foreign tour as capital expenditure. Please advise

The AO's view is not correct for the following reasons:

The business of the assessee is still running and the new machinery is required in that connection. If the visit meant either to take a decision if it was suitable for the business or not or for any other such purpose, it would not convert the expenditure incurred on the MD's visit into capital nature. Considering the facts and circumstances, it could not be held that the expenditure incurred by the MD on his/her foreign tour was of capital nature, vide Bralco Metal Industries (P) Ltd vs CIT (1994) 206 ITR 488 (Bom).

Expenditure incurred on the foreign tour of the MD is allowable as revenue expenditure, since all that was sought to be done was to utilise the existing machinery in a better manner and there was no proposal to add this the fixed capital, vide CIT vs Elecon Engg Co Ltd (1981) 132 ITR 752 (Guj)].