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TMI Blog1987 (2) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) of rule 14 of the Andhra Pradesh Minor Mineral Concession Rules, 1966, for short " the Rules ", postulates that where quarries are sold by public auction, no seigniorage fees shall be collected in addition to the bid amount and the land assessment. In the auction of the lease-hold rights, the assessee became the highest bidder and became the lessee of the State Government during the relevant years The Income-tax Officer held for the years 1972-73 and 1973-74 in the first instance that the lease amount paid to the Government is in the nature of revenue expenditure and, therefore, allowed deductions under section 37(1) and computed the income accordingly. But, the Commissioner of Income-tax exercised his suo motu revisional power under section 263 and by order dated February 2, 1974, held that it is capital expenditure and directed the Income-tax Officer to revise the assessments accordingly. The assessments for the years 1972-73, 1973-74 and 1974-75 were taken up together and it was held that it was a capital expenditure. Therefore, the assessee is not entitled to the deductions. The appeal to the Appellate Assistant Commisioner became unsuccessful. But, on second appeal, the Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The payment is like a seigniorage fee or dead rent. Instead of making payment as seigniorage fee or dead rent, the assessee contracted, by becoming a bidder under rule 14, to pay annually the bid amount though the contract was for five years. Each year the bid amount was variable. There was no fixed amount. Therefore, it is revenue expenditure. When royalty was held to be revenue expenditure, as held by the Supreme Court in Gotan Lime Syndicate v. CIT [1966] 59 ITR 718, the annual payment towards the bid amount would be in the nature of royalty. Therefore, it is revenue expenditure. Even otherwise, it is contended that when the assessee is obliged to pay in the nature of seigniorage fee the recurring amount, if the lease is taken under the normal rules, it is to be paid on each quantum of excavated or extracted napa or Cuddapah slabs in addition to the seigniorage fee. Instead, the assessee undertook to pay the amount in a lump sum. Therefore, the assessee surrogated the amount. It is, accordingly, a revenue outgoing entitled to the deduction under section 37(1) of the Act. In support thereof, he placed strong reliance on CIT v. Madras Auto Service Ltd. [1985] 156 ITR 740 (Mad), J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms and conditions of a quarry lease or a permit granted under these rules. It is admitted that napa or cuddapah slabs are minor minerals. It is rule 12 of the Rules under which the lease may be granted, subject to the provisions of sub-rule (?) thereof. Grant of lease may be (1) on application ; or (2) by calling for tenders; or (3) by holding a public auction. In the case of public auction, rule 13 provides the procedure. Notice thereof in Form " A ", giving due publicity Shall be given. In Form "A", Note to auction condition No. 1 provides thus: Bids shall be offered in terms of yearly rentals and not for the entire period. Yearly rentals shall be paid as per condition No. 8 thereof, i.e., the successful bidder " shall deposit on the spot, 25% of the first year's lease amount or bid amount. The remaining 75% of the first year's lease amount would have to be deposited by the successful bidder before he is given possession of the quarry and prior to the execution of the lease deed. If the lease is granted for a period of more than one year, the second year's lease amount shall be paid in advance in the last month of the first year's lease, " and the same procedure for the remainin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es the Period of quarry lease, subject to the following criteria, namely : First renewal : (a) systematic development of the quarry/quarries; (b) development of good communication facilities and their maintenance; (c) investment on transport (d) training of skilled labour and commitments on labour retention and inducement; (e) preliminary work and investment for establishment of a processing (dressing or upgrading) plant utilising the product from the quarry/quarries in question ; (f) establishment of market for the product either in raw form or in processed or semi-processed form. Second renewal : (a) establishment of processing plant, either individually or in joint partnership with others; (b) development of market in the country or abroad (effort in this direction is very important) ; (c) any long-term contract with established industries for supply of quarry product (d) setting up of an industry in the region, either individually Pr in partnership with others." The lease contains all the necessary covenants which the lessee has to abide by during the period of the lease. A reading of these provisions of the Mines Act, the rules and conditions of the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial for a period extending over several years.... If it is merely manufacturing business, then the procuring of the raw material would not be a capital expenditure. But if it is like the working of a particular mine or bed of brick earth, and converting the stuff worked into marketable commodity, then the money paid for the prime cost of the stuff so dealt with is just as much capital as the money sunk in the machinery or buildings. " In In re Benarsidas Jagannath [1947] 15 ITR 185 (Lah) [FB], Mahajan J. (as he then was) laid down three tests, as approved by Bhagwati J. in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC). The same was approved in Pingle Industries Ltd.'s case [1960] 40 ITR 67 (SC). In the Assam Bengal Cement Co.'s case [1955] 27 ITR 34 (SC), the facts are that a mining lease for twenty years to extract limestone for manufacturing cement with a further right to renewal at variable rent for certain duration was obtained from the Government. The rent paid was held to be a capital expenditure. Bhagwati J. in Assam Bengal Cement Co.'s case [1955] 27 ITR 34 (SC), approved the tests laid down by Mahajan J. for the Full Bench in In re Benarsidas Jagannath's c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... While accepting the said propositions, it was held by Hidayatullah J. in Pingle Industries Ltd.'s case [1960] 40 ITR 67, 89 (SC) thus: Here, the stones are not lying on the surface but are part of quarry from which they have to be extracted methodically and skillfully before they can be dressed and sold. These deposits are extensive, and the work of the assessee carries him deep under the earth. Such deposit cannot be described as the stock-in-trade of the assessee, but stones detached, and won can be so described." The facts in that case are that the assessee-company is a private limited company carrying on the business, inter alia, of sale of Shahabad stones (flag stones) which had to be extracted from quarries, dressed and then sold. For the purpose of its business, the assessee-company took on contract the right to excavate stones from quarries in six villages for a period of 12 years from a jagirdar on annual payment of Rs. 28,000. To safeguard the payment, a sum of Rs. 96,000 was paid in advance as security of which Rs. 8,000 was to be adjusted annually against Rs. 28,000 and the balance of Rs. 20,000 was payable in monthly instalments of Rs. 1,667-10-8. The assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r accordingly worked out to Rs. 10,752. The assessee deposited with the lessor, the rent for 15 years aggregating to Rs. 1,61,280. In connection with the income-tax assessment, the assessee claimed as business expenditure the annual rental paid to the lessor, While negativing the claim as business expenditure, our learned brother, Anjaneyulu J., speaking for the Bench, had held that the expenditure was incurred for acquiring an asset or an advantage of an enduring character to the business of the assessee and must, therefore, be held to be capital in nature and hence was not allowable as a business expenditure. We, therefore, hold that the settled law is that in each case the question to be posed is whether the expenditure is laid out or expended as current expenditure as part of the process of profit-earning or whether it is necessary for the acquisition of a capital asset or of a right of a permanent character the possession of which is a condition of carrying on the trade. Such an expenditure could be broached from the angularity of what is the source from which the expenditure is incurred. If it is expended to acquire an asset or an enduring advantage to trade or a source from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are unable to agree with learned counsel whether any mineral is available on the surface so as to treat it as revenue expenditure. No finding was recorded by the Tribunal in that regard. It is seen that a lease of minor mineral was granted for excavating and winning over the napa or cuddapah slabs. It is not as if they are available on the surface. Operations have to be carried out; equipment is to be installed ; skilled labourers are to be employed to excavate the mineral from underneath and bring it to the surface. As stated earlier, rule 15 of the Rules itself recognises the carrying on of these activities. Therefore, it goes without saying that there is no dichotomy in its operation and it is an integral process and so it constitutes capital expenditure. Had it been the case that the Tribunal has recorded a finding that the minerals are available on the surface itself, it would have made a world of difference and the principle in M. A. Jabbar v. CIT [1968] 68 ITR 493 (SC) would have squarely applied to the facts. But, that is not the position in this case. It is true, as contended by Sri Y. Ratnakar, that as laid down in Jabbar's case [1968] 68 ITR 493 (SC), where without ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok to construct a new building subject to the condition that the landlord could lease it out to the assessee for a period of 39 years and for 35 years the landlord contracted to take rent at Rs. 1,000 per month and for the last four years at Rs. 2,000 per month. Pursuant to that contract, it expended Rs. 1,62,835 on the construction in the assessment year 1968-69 and Rs. 50,937 in the assessment year 1969-70. It claimed it as a business loss and the Tribunal upheld the same and on a reference to the Division Bench, the learned judges have held that it is a business loss and the amount surrogated by the assessee would be treated as a business loss. In that case, if the facts are carefully analysed, it would be clear that the assessee intended to acquire an asset to carry on his business on payment of lesser rent. In that case, it was admittedly found that the prevailing rent was Rs. 12,000 odd per month for a similar accommodation. Therefore, with a view to ward off the recurring revenue expenditure of the business outgoing, the assessee entered into the aforesaid contract and an agreement with the landlord to construct a building by expending the amount. Thereby he incurred expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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