1965 (11) TMI 35 - SC - Income Tax

Whether, on the facts and in the circumstances of the case, the sum of ₹ 96,000 paid by the assessee during each of the relevant accounting years was rightly allowed as a revenue deduction in computing the business profits of the assessee-company? Held that - in the present case the royalty payment is not a direct payment for securing an enduring advantage ; it has relation to the raw material to be obtained, we must hold that the royalty payment, including the dead-rent, have relation only to the lime deposits to be got. If it has no direct relation to the acquisition of the asset, then the principle relied on by the learned Attorney-General does not afford him any assistance. We, therefore, hold that the yearly payment of ₹ 96,000 should be treated as revenue expenditure and the answer to the question referred to the High Court must be in favour of the assessee. Appeal allowed.

Issues Involved:
1. Whether the sum of Rs. 96,000 paid by the assessee during each of the relevant accounting years was rightly allowed as a revenue deduction in computing the business profits of the assessee-company.

Detailed Analysis:

1. Nature of Payment as Revenue Deduction:

The primary issue revolves around whether the annual payment of Rs. 96,000 by the assessee should be classified as a revenue expenditure or capital expenditure. The Income-tax Officer initially disallowed this expenditure, considering it of a capital nature. However, the Appellate Tribunal later held that the payment should be treated as a revenue expenditure. The High Court, on reference, held that the payment was capital expenditure and could not be allowed as a revenue deduction.

2. Lease Agreement and Conditions:

The assessee, M/s. Gotan Lime Syndicate, had a lease agreement with the government to excavate limestone. The lease was subject to various conditions and was renewed periodically. The terms of possession were governed by the Jodhpur Division Vindhyan Lime-stone Mining Leases Rules, 1954, and the Rajasthan Minor Mineral Concession Rules, 1955. These rules detailed the obligations and rights of the lessee, including the payment of royalty and dead-rent.

3. Legal Tests for Revenue vs. Capital Expenditure:

The judgment discusses the difficulty in distinguishing between revenue and capital expenditure. The court referred to previous cases and the test laid down by Viscount Cave in British Insulated and Helsby Cables Ltd. v. Atherton: "But when an expenditure 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, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital."

4. Arguments by Counsel:

The learned Attorney-General argued that the assessee obtained an asset or advantage of an enduring nature, which should be treated as a capital expenditure. In contrast, the counsel for the assessee contended that the payment had a direct relation to the amount of lime removed and should be treated as revenue expenditure. He cited previous cases where royalty payments were not considered capital expenditure.

5. Court's Analysis and Conclusion:

The court noted that the payment in question was an annual payment of royalty or dead-rent, not a lump sum payment. The court found that royalty payments under a mining lease have a direct relation to the raw material extracted and should be treated as revenue expenditure. The court distinguished this case from others, such as Abdul Kayoom v. Commissioner of Income-tax, where payments had no relation to the amount of material extracted.

6. Final Judgment:

The court concluded that the yearly payment of Rs. 96,000 should be treated as revenue expenditure. The answer to the question referred to the High Court was in favor of the assessee. The appeals were accepted, and the appellant was awarded costs incurred in the court.

Outcome:

Appeals allowed. The sum of Rs. 96,000 paid by the assessee during each of the relevant accounting years was rightly allowed as a revenue deduction in computing the business profits of the assessee-company.

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