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TMI Blog1990 (10) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... was a revenue expenditure and was a deduction allowable under the Income-tax Act, 1961?" The circumstances leading to the reference and the appeal are necessary to be stated. The Natural Science (India) Ltd., predecessor-in-interest of the assessee, acquired a lease from the Maharaja of the erstwhile Bikaner State on September 29, 1,948, for mining of gypsum for a period of 20 years over an area of 4.27 square miles at Jamsar. The lease was liable to be renewed after expiry of 20 years. The Natural Science (India) Ltd., by deed of assignment dated December 11, 1948, assigned the rights under the lease to Bikaner Gypsums Ltd., a company wherein the State Government owned 45 per cent. share. Bikaner Gypsums Ltd. (hereinafter referred to as "the assessee") carried on the business of mining gypsum in accordance with the terms and conditions stated in the lease. The assessee entered into an agreement with Sindri Fertilizers, a Government of India public undertaking, for the supply of gypsum of minimum of 88.5 per cent. quality. Under the lease, the assessee was conferred the liberties and powers to enter upon the entire leased land and to search for, win, work, get, raise, convert an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations within 100 yards from any railway, reservoir, canal or other public works. It reads as under: "Clause 3 : No mining operations or working shall be carried on or permitted to be carried on by the lessee in or under the said lands at or to any point within a distance of 100 yards from any railway, reservoir, canal or other public works or any buildings or inhabited site shown on the plan hereto annexed except with the previous permission in writing of the Minister, or some officer authorised by him in that behalf or otherwise than in accordance with such instructions, restrictions and conditions either general or special which may be attached to such permission. The said distance of 100 yards shall be measured in the case of a railway reservoir or canal horizontally from the outer of the bank or of outer edge of the cutting as the case may be and in the case of a building horizontally from the plinth thereof." The above clause had been incorporated in the lease to protect the railway track and railway station which was situate within the area demised to the lessee. Clause 5 of Part VIII of the agreement stated as under: "Clause 5 : If any underground or mineral rights in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y station and other constructions. In addition to that the assessee company further paid a sum of Rs. 7,800 to the Railways as compensation for the surface rights of the leased land. On the shifting of the railway track and station, the assessee carried out mining in the erstwhile railway area and it raised gypsum to the extent of 6,30,390 tons and supplied the same to the Sindri Fertilizers. The assessee company claimed deduction of Rs.3 lakhs paid to the Northern Railway for the shifting of the railway station for the assessment year 1964-65. The Income-tax Officer rejected the assessee's claim on the ground that it was a capital expenditure. On appeal by the assessee, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. On further appeal by the assessee the Income-tax Appellate Tribunal held that the payment of Rs. 3 lakhs by the assessee-company was not a capital expenditure, instead it was a revenue expenditure. On an application made by the Revenue, the Income-tax Appellate Tribunal (hereinafter referred to as "the Tribunal") referred the question as aforesaid to the High Court under section 256 of the Income-tax Act, 1961. The High Court held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that, in the great diversity of human affairs and the complicated nature of business operations, it is difficult to lay down a test which would apply to all situations. One has, therefore, to apply the criteria from the business point of view in order to determine whether, on a fair appreciation of the whole situation, the expenditure incurred for a particular matter is of the nature of capital expenditure or a revenue expenditure. The court laid down a simple test for determining the nature of the expenditure. It observed (at page 45) : " If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is Properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business, is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of an asset or a right of a permanent character the possession of which is a condition for the carrying on of the business, the expenditure may be regarded as a revenue expenditure. But, on the facts of the case, the court held that the assessee's claim was not admissible, as the expenditure was related to the acquisition of an asset or a right of a permanent character the possession of which was a condition for carrying on the business. The High Court has relied upon the decision of this court in R. B. Seth Moolchand Suganchand v. CIT [1972] 86 ITR 647, in rejecting the assessee's contention. In Suganchand's case [1972] 86 ITR 647 (SC) the assessee was carrying on a mining business, and had paid a sum of Rs. 1,53,800 to acquire lease of certain areas of land bearing mica for period of 20 years. Those areas had already been worked for 15 years by other lessees. The assessee had paid a sum of Rs. 3,200 as fee for a licence for prospecting for emerald for a period of one year. In addition to the fee, the assessee had to pay royalty on the emerald excavated and sold The assessee claimed the expenditure of Rs. 3,200 paid by it as fee to the Government for prospecting licence as rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce 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." This dictum has been followed and approved by this court in the cases of Assam Bengal Cement Co. Ltd. [1955] 27 ITR 34, Abdul Kayoom [1962] 44 ITR 689 and Seth Suganchand [1972] 86 ITR 647, and several other decisions of this court. But, the test laid down by Lord Cave has been explained in a number of cases which show that the tests for considering the expenditure for the purposes of bringing into existence an asset or an advantage for the enduring benefit of a trade is not always true and perhaps Lord Cave himself had in mind that the test of enduring benefit of trade would be a good test in the absence of special circumstances leading to an opposite conclusion. Therefore, the test laid down by Lord Cave was not a conclusive one as Lord Cave himself did not regard his test as a conclusive one and he recognised that special circumstances might very well lead ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny restriction or obstacle to its business would be in the nature of capital or revenue expenditure has been considered by courts. In Commissioners of Inland Revenue v. Carron Company [1968] 45 TC 18, the assessee carried on the business of iron founders which was incorporated by a charter granted to it in 1773. By passage of time, many of its features had become archaic and unsuited to modern conditions and the company's commercial performance was suffering a progressive decline. The charter of the company placed a restriction on the company's borrowing powers and it placed restrictions on voting rights of certain members. The company decided to petition for a supplementary charter providing for the vesting of the management in a board of directors and for the removal of the limitation on the company's borrowing powers and restrictions on the issue and transfer of shares. The company's petition was contested by dissenting shareholders in court. The company settled the litigation under which it had to pay the cost of legal action and buy out the holdings of the dissenting shareholders and, in pursuance thereof, a supplementary charter was granted. In assessment proceedings, the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness for the purpose of removal of any restriction or obstruction or disability would be on revenue account, provided the expenditure does not acquire any capital asset. Payments made for removal of restriction, obstruction or disability may result in acquiring benefits to the business, but that by itself would not acquire any capital asset. In the instant case, the assessee had been granted a mining lease in respect of 4.27 square miles at Jamsar, under which it had right to win, dig, drive, quarry and extract mineral, i.e., gypsum and in that process, it had a right to dig into the surface of the entire area leased out to him. Clause 3 of Part III of the lease, however, placed a restriction on its right to mining operations from the railway area, but that area could also be operated by it for mining purposes with the permission of the authorities. The assessee had, under the lease, acquired full rights to carry on mining operations in the entire area including the railway area. Under clause 3, it could carry on mining operations only after obtaining the permission of the authorities which had been granted by the railway authorities. The payment of Rs. 3 lakhs was not made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose for which the expenditure is made', and its relation to the carrying on of the business in a profitable manner should be considered. In the instant case, the existence of the railway station, yard and buildings on the surface of the demised land operated as an obstruction to the assessee's business of mining. The Railway authorities agreed to shift the railway establishment to facilitate the assessee to carry on its business in a more profitable manner and, for that purpose, the assessee paid a sum of Rs. 3 lakhs towards the cost of shifting the railway construction. The payment made by the assessee was for the removal of disabilities and obstacles and it did not bring into existence any advantage of an enduring nature. The Tribunal rightly allowed the expenditure on revenue account. The High Court, in our opinion, failed to appreciate the true nature of the expenditure. We are, therefore, of the opinion that the High Court committed an error in interfering with the findings recorded by the Income-tax Appellate Tribunal. We, accordingly, allow the appeal, set aside the order of the High Court and restore the order of the Tribunal. The appellant is entitled to its costs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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