1965 (3) TMI 4 - HC - Income Tax

Business expenditure - assessee, carries on the business of supplying lime and sand and, for the purpose of obtaining sand, the assessee entered into a lease agreement with the Govt. under a deed - payment made under the lease deed were not of the nature of revenue expenditure

Summary

Issues:
Interpretation of lease agreement for sand supply business, classification of expenditure as revenue or capital, determination of nature of sand acquisition, consideration of lease terms and business operations.

Analysis:
The judgment pertains to a reference under section 66(1) of the Indian Income-tax Act, 1922, involving an assessee engaged in the business of supplying lime and sand. The dispute arose regarding the classification of payments made under a lease agreement with the Government for sand supply. The lease agreement, dated 1st February, 1954, granted the assessee the exclusive right to quarry sand from specified areas for a fixed fee of Rs. 82,500. The Income-tax Officer disallowed the claimed payments as revenue expenditure, deeming the sand acquisition as a capital asset. The Appellate Assistant Commissioner and the Tribunal, however, concluded that the sand was stock-in-trade, not a capital asset, leading to the reference to the High Court.

The crux of the issue revolved around whether the sand acquisition constituted a mining operation or was part of the assessee's stock-in-trade. The department argued that the lease agreement resembled a mining lease for sand removal, indicating a capital nature of expenditure. Conversely, the assessee contended that the sand, accumulated naturally on riverbeds post-floods, was merely stock-in-trade requiring minimal labor for removal and sale, akin to a trading operation rather than a mining activity.

The court analyzed the lease terms, which authorized the lessee to quarry and sell sand from specified areas, falling under the definition of "minor minerals" and "quarrying" as per relevant rules. Drawing parallels with precedents like Pingle Industries Ltd. v. Commissioner of Income-tax and Abdul Kayoom v. Commissioner of Income-tax, the court emphasized that expenditure for enduring assets of trade constitutes capital expenditure, not eligible for deductions. The court highlighted the necessity to ascertain the nature of sand acquisition based on business operations and lease terms.

The court scrutinized the lease deed, investigating the nature of sand accumulation, removal process, and the agreement's scope. The court dismissed the argument that the sand was stock-in-trade, emphasizing the enduring benefit and capital nature of the sand acquisition. Referring to Stow Bardolph Gravel Co. Ltd. v. Poole, the court rejected the contention that the sand was readily available stock-in-trade, affirming the capital nature of the payments made under the lease agreement. Ultimately, the court ruled in the negative, determining that the payments were not revenue expenditure, and directed each party to bear their costs.