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TMI Blog1963 (10) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... responding accounting years being the respective financial years from 1953 to 1956. During each of these years, the assessee paid a sum of ₹ 96,000 to the Mines Department of the Rajasthan State as contract money and claimed it as a deductible expenditure under section 10(2)(xv) of the Income-tax Act of 1922. This was disallowed by the Income-tax Officer and the Appellate Assistant Commissioner as being capital expenditure. On appeal, the Income-tax Appellate Tribunal, Bombay Bench B, however, allowed it as revenue expenditure. Thereupon the Commissioner of Income-tax asked for a case to be stated to this court on the question of law arising out of the orders of the Tribunal, and this is how the present consolidated reference has arisen. By an indenture dated the 4th March, 1949 (annexure A ), entered into between the assessee and the Government of Jodhpur, as it then was, the assessee acquired the right to excavate limestone in what is called the acquired area in two villages, namely, Gotan and Tunkaliyan, as well as the monopoly rights to prepare lime therefrom, subject to certain conditions which were set out in that document. By clause (1) of this agreement, it Was pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was provided that the quarrying of limestone in the acquired alea would be done on approved lines as directed by the Government from time to time. By its letter dated the 14th July, 1952 (annexure B ), the Government of Rajasthan (and not the Government of Jodhpur as mentioned in the statement of facts drawn by the Tribunal) extended the contract by a period of two months, warning the assessee that it will have to vacate the area on the 14th September, 1952, without any further notice. By a further letter dated the 15th September, 1952 (annexure C ), a further extension of two months was ordered. This was followed by another extension up to 31st March, 1953, on the clear understanding that you will have to vacate the area on the expiry of this extended period, that is, on 1st April, 1953, without any further notice and that you will have no claim whatsoever over the area after the due date. (See annexure D dated the 19th November, 1952). By a subsequent letter dated the 17th December, 1952 (annexure E ), the Government of Rajasthan further clarified the position by saying that the extension granted to the assessee would enure either up to the 31st March, 1953, or until th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see shall not encroach upon cultivable land or bapi holdings within the leased area unless with the previous permission of the Director of Mines and Geology and on payment of necessary compensation to the holder of such land as determined by that officer, and, further, that on expiry or sooner determination of the lease, the lessee shall remove all stock of limestone or its products and movable property within six months from the date of expiry of the lease and must pay the royalty on the stock within such period, and that if he fails to do so, the entire stock and movable property shall be forfeited to the Government. This rule also provides that all arrears of rent and royalties shall be recoverable under the Public Demands Recovery Act and that the Director of Mines and Geology may determine the lease if such dues remain in arrear for more than three months. Rule 20 lays down that the lessee may determine the lease at any time by giving not less than 12 months' notice in writing to the Director of Mines and Geology. It may also be pointed out that these rules contemplated that a proper lease agreement shall be executed by the lessee in accordance with the agreement form appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. As. Ps. 1st April to 31st March 1953-54 13,511 tons 30,553 10 6 1954-55 13,308 27,965 11 6 1955-56 18,033 37,332 9 0 We are not concerned with the figures for the years 1956-57, 1957-58 and 1958-59 which were also mentioned in this letter. This officer further stated in his letter that at the end of each financial year it was found that the accrued royalty amount worked out to a far lesser sum ; and, as such, as per agreement royalty payable is ₹ 96,000 in all the years above written . It was further stated in this letter that the royalty for each of these years was settled after the end of each year, i.e., in the subsequent year. Thus for the assessment years under consideration, the assessee paid a sum of ₹ 96,000 to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which has been raised before us in the present case. But, before we do so, we may briefly state the respective cases of the rival parties before us. It has been strenuously contended before us by learned counsel for the department that this was a case where the assessee did not merely carry on a manufacturing business of preparing lime from limestone but it also carried on mining operations for the purpose of finding out limestone, and, therefore, in having obtained a lease from the State Government of the land under reference in connection with its business, it was not purchasing the raw material thereby, but the correct position was that it had acquired a source from which to obtain the necessary raw material, the quantity of lime produced being not limited by contract and depending upon its own financial and other resources. It was further contended in this connection that the lease in this case was for a period of five years certain, extensible by renewal for another period of five years at the option of the lessee, and that this was sufficiently long to enable it to acquire a benefit of enduring benefit to its business. Furthermore, it was submitted that the payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cement if the royalty amounted to more than what is called the dead-rent in the Schedule to the Rules of 1954, depending upon the lime produced and, therefore, it was obvious that such payment was made to obtain raw material for the carrying on of the business of the manufacture of lime from limestone. Furthermore, learned counsel submitted that the main business of the assessee was to manufacture lime and not of a miner and that it was in connection with its manufacturing business that it had agreed to pay the amount of ₹ 96,000 annually to the State so as to be able to get raw material for that business, and as this payment was in the nature of annual royalty on the goods produced in the quarries, there was and would be no justification for holding that this amount was spent for the acquisition of any capital asset to the assessee's business, and, therefore, there could be no question of this expenditure having been incurred for the acquisition of an asset of enduring benefit to the assessee's business. In support of his submissions, learned counsel placed strong reliance on the decision of the Privy Council in Mohanlal Hargovind v. Commissioner of Income-tax [ 1949 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that the lease shall be renewable at the option of the lessee for a further period of five years. The contention of learned counsel for the department, therefore, was that in spite of the fact that no lease deed had been executed between the parties, the statutory condition prescribed under clause 18 would still be attracted and, therefore, the period of the lease in this case must be taken to be five years at the minimum and the lessee was further entitled to have it renewed at his option for another term of five years subject to certain conditions mentioned in the rule itself. In support of his contention, learned counsel invited our attention to a Bench decision of this court in Hart Shanker v. State of Rajasthan ILR [1961] 11 Raj. 867. The question which arose in that case was whether rule 30 of the Mineral Concessions Rules, 1955, which, broadly speaking, lays down that a mining lease may be granted for a period of five years, unless the applicant himself desires a shorter period, was mandatory in the sense that a lease for less than five years could not have been granted and that the lease deed irrespective of its having been granted for a shorter term should be held to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the letter, annexure H , or that it can be lawfully and reasonably maintained that the assessee was merely at the mercy of the State and could be turned out at its sweet will and pleasure or by a simple notice to quit. On a careful and anxious consideration of this aspect of the case, we feel persuaded to think that the position of the assessee was not as precarious or nebulous as its learned counsel would have us accept, and that the correct position in law is and must be that whatever right, advantage or privilege was granted to it under this arrangement was available to it for a period of five years certain, apart altogether from its renewability at the option of the assessee for another period of five years. We hold accordingly. As to the next point about the nature of the payment of ₹ 96,000, that is, whether it was a fixed annual payment or it was liable to variation depending upon the quantity of lime produced by the assessee in the area granted to it, it seems to us, having regard to the terms of annexure H dated the 4th October, 1954, to be a fixed payment per year from the expiry of the old lease, that is, 30th July, 1952, up to the commencement of the new lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty payable every year subject, after commencement of the new lease, to the increase depending upon the measure of production of lime in the lime deposits leased out to the assessee. We hold accordingly. Having cleared the aforementioned preliminary facts, we now straightaway turn to the case of Pingle Industrie's case (supra )which, according to learned counsel for the department, almost directly governs the instant case. If that should turn out to be so, then our task is greatly simplified and we cannot but hold that the payment of ₹ 96,000 is capital expenditure and not revenue. The facts of that case were these. The assessee company there carried on the business, inter alia, of selling Shahabad stones which had to be extracted from quarries, dressed and then sold. For the purpose of its business, the assessee obtained from a jagirdar under a contract the right to extract stones from quarries situated in six named villages for a period of 12 years on an annual payment of ₹ 28,000 each and to safeguard this payment a sum of ₹ 96,000 was paid in advance as security out of which ₹ 8,000 was to be adjusted annually against ₹ 28,000 and the ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mething that is going to be spent once and for all and that the latter which is going to recur every year though this test was accepted to be by no means absolutely final and determinative. This proposition was then stated to have been qualified by what Lord Cave laid down in Atherton v. Pritish Insulated and Helsby Cables Ltd. [1926] AC 205: 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. Then it is explained that the phrase enduring in Lord Cave's test means enduring in the way capital endures and does not mean everlasting. (2) Another test is that propounded by Viscount Haldane in John Smith Son v. Moor [1920] 12 Tax Cas. 266 and which is based on whether the expenditure is met out of fixed capital or circulating capital. If an expenditure is met out of fixed capital, it must be treated as capital but if it is from circulating capital, then revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odity, then the money paid for the prime cost of the stuff so dealt with is just as much capital as the money sunk in machinery or buildings. (The underlining* is ours). We pause here to point out that learned counsel for the department strongly relies on the observations of Channell J. which we have underlined above, and contends that the business of the assessee in the instant case was not merely manufacture of lime from limestone but it partook of the nature of mining operations also in so far as limestone deposits had to be discovered in the area allotted to the assessee and then quarried or worked up. It was therefore strenuously argued that the money paid by the assessee for acquiring the right to work the lime deposits was as much capital as the money sunk in machinery or building, and was therefore not deductible. Their Lordships of the majority then referred to the case of Assam Bengal Cement Company Ltd. v. Commissioner of Income-tax [1955] 27 ITR 34 ; [1955] 1 SCR 972 and pointed out that the approval given therein to Benarsidas Jagannalh, In re [1947] 15 ITR 185 was to the summary of the tests settled in it but not to the actual decision of that case and then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tendu leaves had been bought in a shop. Under the contracts it is the tendu leaves and nothing but the tendu leaves that are acquired. It is not the right to pick the leaves or to go on to the land for the purpose-those rights are merely ancillary to the real purpose of the contracts and if not expressed would be implied by law in the sale of a growing crop. Referring to the case of Alianza Co. v. Bell [1904] 2 KB 666 affirmed on appeal [1905] 1 KB 184 ; [1906] AC 18 ; Tax Cas. 172 and the case of Kauri Timber Co. Ltd. 's case (supra) their Lordships held that those cases bore no resemblance to the facts of the case before them and pointed out that the case before them was more like the case which was distinguished by Channell J. at page 673 of the report in Alianza Co.'s case (supra)as being a case of the cost of material worked up in a manufactory which should be held to be a current expenditure and does not become a capital expenditure merely because the material is provided by something like a forward contract, under which a person for the payment of a lump sum down secures a supply of the raw material for a period extending over several years. As to Kauri Tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also sensible. The present case is a fortiori. Here, the stones are not lying on the surface but are part of a quarry from which they have to be extracted methodically and skilfully before they can be dressed and sold. These deposits are extensive, and the work of the assessee carries him deep under the earth. Such a deposit cannot be described as the stock-in-trade of the assessee, but stones detached and won can only be so described and eventually held that that was a case in which the assessee had acquired an asset of an enduring character and payments in instalments were fixed merely as a matter of convenience, and therefore such outlay could not be accepted as a business expenditure but was of a capital nature. Now, we are unable to hold from the elaborate analysis which we have made of the Pingle Industrie's case (supra) that that case by itself can be said to completely govern the present. The assessee in that case does not appear to us to have been a manufacturing firm. Again, the contract there was taken for a period of twelve years. Perhaps the feature that distinguishes that case from the present is that it was not a case of which it could be predicated that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt was not related to the chanks, which it might or might not, have brought to the surface in this speculative business. The rights were not transferable, but a they were and the firm had sold them, the gain, if any, would have been on the capital side and not a realising of the chanks as stock-in-trade, because none had been bought by the firm and none would have been sold by it. (The underlining* is ours) Now if we may say so with all respect, on the branch of law we are called upon to consider, it is not always easy in spite of the judicial precedents of the highest courts in our country or elsewhere to determine whether a particular asset or expenditure belongs to the one category or the other and each case must therefore be dealt with on its own peculiar facts and circumstances. Indeed, we cannot in this connection do better than what their Lordships who decided Pingle Industries' case (supra) by majority themselves laid down in Abdul Kayoom v. Commissioner of Income-tax [1962] 44 ITR 689 (SC) at page 703 : What is attributable to capital and what to revenue has led to a long string of cases here and in the English Courts. The decisions of this court reported i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sists of prospecting for and quarrying of limestone in the area allotted to it before the same is manufactured into lime and then sold in the market. On the other hand, it was contended before us on behalf of the assessee that even if its business is taken to be mining-cum-manufacture of limestone into lime, the assessee stood in need of limestone as raw material in order to carry on its business and the annual payment of ₹ 96,000 (or more if it should so turn out) to the State was expenditure wholly laid out in the carrying on of that business. Now as regards the precise right of the assessee vis-a-vis the land which has been granted to it, it seems to us that the assessee did not acquire any right in the land as such. Its right was confined to the carrying of limestone and its manufacture into lime but otherwise it had no further rights in this land. In fact clause (i) of rule 19 of the Rules of 1954, specifically lays down that the lessee shall not be entitled to encroach upon cultivable land or bapi holdings within the leased area, except with the previous permission of the Director of Mines and Geology and on payment of the necessary compensation to the holders of suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he acquisition of a source for obtaining raw material of an enduring character. The payment, again, is not a lump sum down payment but is an annual one. Alive as we are to the consideration that the periodicity of the payment is only a rough and ready test for the determination of the question before us because a lump sum payment may be divided into a number of smaller payments and spread over a number of years for purposes of convenience of the party concerned, it is legitimate to point out that no such considerations of mere convenience appear to us to arise in this case. The payment by its very nature is a recurring one to be paid from year to year. We should further make it clear that although it did not vary during the accounting years in question from ₹ 96,000 to any other figure as the annual amount payable by way of royalty worked out to a much lesser figure than ₹ 96,000 per year, there was nothing to prevent the assessee from expanding his production to the farthest possible limits, and assuming that it had the necessary resources, financial and others, at its disposal, it might well have been that the royalty payable on the lime and the allied products should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture of bricks and it also held a lease of the other portion of the land. The assessee claimed that a certain sum representing the value of the earth used up in the manufacture of bricks during the year of account should be deducted in computing its income for purposes of income-tax, as depreciation of property or business expenditure. It was held that by taking this lease the company had not purchased so many maunds of earth for so much money and that the position of a brick field was very similar to that of a quarry or a mine and that the lessee or the proprietor of such land was not a mere purchaser of raw materials but a person who had acquired certain rights in the land and the amount invested by it must therefore be treated as capital expenditure within the meaning of section 10(2). In Sardar Singar Singh and Sons's case (supra), the assessee took leases of certain plots of land for excavating earth for the manufacture of bricks. The leases were for a period of ten to twelve years. In the first lease it was stated that a sum of ₹ 500 had been recovered on account of the rent of the land and costs of the kiln which was already in existence. By the second agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch capital as the money sunk in machinery or buildings. The case of Hargovind's case (supra) , on which learned counsel for the assessee placed strong reliance cannot, with all respect, be held applicable to a case like the present, for their Lordships themselves were at some pains to point out that cases relating to the purchase or leasing of mines, quarries, deposits of brick earth, land with standing timber stood on an entirely different footing from that applicable to the case of the acquisition of tendu leaves before them. Our conclusion, therefore, is that the expenditure with which we are concerned here was an expenditure not for the acquiring of the stock-in-trade for the assessee but for acquiring a source from and/or the means by which the stock-in-trade was to be acquired. The limestone in situ was not the stock-in-trade, it could and would be stock-in-trade only when it was excavated and won but not otherwise. Putting the whole thing in a slightly different way, we think that what the assessee acquired in this case by the expenditure in question was not so much of limestone deposits as such-these were part of the land and lay deep thereunder until they were se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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