Govinda Bhatt, J.
1. This is a reference under section 66(1) of the Indian Income-tax Act, 1922, at the instance of the assessee and arises out of his assessments for the years 1953-54, 1954-55, 1955-56 and 1956-57. The question referred by the Income-tax Appellate Tribunal, Hyderabad Bench, for our decision is as follows :
'Whether, on the facts and in the circumstances of the case, the lease amount of Rs. 5,361 for the assessment year 1953-54, Rs. 3,750 for the assessment year 1954-55, Rs. 19,724 for the assessment years 1955-56, and Rs. 1,200 for the assessment year 1956-57 paid to the owners of the lands for extracting iron ore were capital expenditure or revenue expenditure in the respective years ?'
2. The assessee was carrying on iron are mining business. For the relevant assessment years, he claimed deduction as revenue expenditure the amounts specified in the question referred. The Income-tax Officer disallowed the claims holding that what the assessee purchased was not his stock-in-trade, but merely a right or means or source to get iron are which, when excavated and taken into possession, will form part of his stock-in-trade, and therefore the amounts paid to the land-owners constituted capital expenditure. On appeals by the assessee, the Appellate Assistant Commissioner held that as the terms of the lease deeds, except in the case of M. Bharmayya, did not give the assess any interest in the land as such, but merely allowed him to collect the ore either from the surface of the land or by digging into it, the lease money paid was, in his opinion, to be allowed as revenue expenditure. He, however, held that under the agreement with Mr. Bharmayya the assessee acquired a permanent and proprietary interest in land, and, as such, the amount paid to her was capital expenditure and, therefore, disallowed the claim of the assessee to the extent of Rs. 2,500. The assessee and the department preferred appeals to the Tribunal. The Tribunal allowed the appeals of the department holding that the payments made under the relevant agreements by the assessee to the owners of the lands, constituted capital expenditure, as the said payments were made for acquiring the means of getting iron ore. The Tribunal also held that the character of the payment to Bharmayya was not different from the rest of the payments, and therefore dismissed the appeals preferred by the assessee.
3. The Tribunal in their further agreed statement of case under section 66(4) of the Act, have stated that the Government is the owner of the sub-soil rights including the right to minerals in the lands in question, and the ryotwari pattadars holding the said lands own the right of cultivation and have a claim for compensation for the loss they may sustain in the course of mining operations. Mining leases in favour of the assessee were granted by the Government, but before such leases were granted, the assessee entered into agreements with the pattadars, who in consideration of the sums paid by the assessee, permitted the assessee to carry on mining operations in their lands during the period specified in the agreements.
4. The contention of the assessee was that the payments made to the pattadars were allowable as revenue expenditure. The question whether an amount paid is capital expenditure or revenue expenditure is of some nicety and often presents difficulties. If the outgoing result in the acquisition of a fixed capital asset, or produce an advantage of a permanent and enduring nature, the outgoing are not allowable as revenue expenditure. After the decision of the Supreme Court in Abdul Kayoom v. Commissioner of Income-tax, it is no longer open to argument that payments made by a mining business man to acquire mining rights is allowable as revenue expenditure under section 10(2)(xv) of the Act. As observed by Rowlatt J. in Mallett v. Staveley Coal & Iron Co. Ltd., 'When a colliery company acquire a lease, the expense of acquiring a capital asset and is a capital expenditure....and that receipts and payment in connection with the acquiring and disposing of leaseholds of minerals to be worked by collieries... are capital transactions...' If the payments by the assessee were made for acquiring the right to carry on mining operations in the lands of the pattadars, the said payments undoubtedly constitute expenditure of a capital nature.
5. Sri V. Krishnamurthy, learned counsel for the assessee, sought to bring his case within the principles of O'Grady v. Bullcroft Main Collieries Ltd. and contended that the payments by the assessee were limp sums paid in advance for recurring items of surface damages and as such the expenditure items were wholly and exclusively laid for the purpose of the business and they are allowable as deduction under section 10(2)(xv) of the Act. In O'Grady's case the assessee had taken leases of coal seams, under which, in consideration of covenants by the lessors indemnifying the assessee against liability for surface damage, the assessee undertook to make payments to the lessors on specified accounting dates in respect of each acre or part of an acre beneath with coal had first been worked since the previous accounting date, and payments were made by the assessee on the basis of the acreage beneath which coal had been worked. Rowlatt J. held that the payments were not capital payments for getting a right but were incidental payments in the working of the mine, for surface damages, as the colliery workings progressed. He made a clear distinction between payments made to buy outright the right to let down the surface from the surface owners, which according to him constituted capital expenditure, and payments made for surface damage as the colliery workings progressed, which were held to be allowable as revenue expenditure. Rowlatt J. stated the principle thus at pages 102-103 :
'It is conceded on the one hand and, in fact, it appears from Addie's case, that if you by outright the right to let down the surface from the surface owners, however you may described that right in legal language - if you buy that so that you can let down the surface without paying anything more, at the beginning of your operations, that is a capital expenditure; you pay that to enable you to start, really. That is clear. On the other hand, if you do not make any arrangement of this kind at all and, as the damage happens, you go to arbitration and you pay the persons whose property is damaged on the surface each time that you cause the damage, that it is admitted, is a deduction and a revenue expense. What they did here was to provide for a series of payments, not by reference to the ascertained damage, of course, because it was arranged beforehand, nor with reference to the particular amount of coal taken, nor even with reference to the seam from which it was taken; but it was an arrangement acre by acre. As the colliery working progressed, as soon as a new acre was broken, there was a payment made and that made an end of any surface damage from the working of any underlying minerals in that acre... In this case, they do not make this payment except when they go under a new acre. The payments are progressively distributed as they work, as they proceed year by near or, rather, acre by acre - as they proceed in time, going on and on with their work, they have to make from time to time further payments as a condition of their so going on. That is what it comes to. I am not at all certain, on looking at the matter as a matter of substance and broadly, that it does not really come - as Lord Cave pointed out it might sometimes come in the Helsby case - to a question of fact : Have you provided by a capital payment for getting a right or are you really, however it is arranged, conducting your mine upon the principle of having to make incidental payments as you go along to enable you to conduct to mine Not without some diffidence I think that the Commissioner's way of looking at it cannot be disturbed. I think that this really, looking at the matter fairly, was a series of payments which resulted from arrangements having been made to pay as they went along as a matter of income, rather than put their hands in their pockets and make a payment in the way of capital, and that the consideration - it is only chopping up into small pieces a big capital payment - is not one to which one ought to give effect.'
6. In Addie's case, under the terms of a mineral lease, the assesses-company was obliged to restore to an arable state all ground occupied by it or damaged by its workings, or, at its option, to pay the lessor for all such ground not so restored, at the rate of thirty year's purchase of the agricultural value thereof. In the exercise of its option, the assesses-company paid to the lessor a sum of pound 6,104 as representing the value of the damaged lands. It was contended by the assessee that such payment was in the nature of revenue expenditure. Overruling that contention, the court of session held that the payment was in the nature of capital expenditure and was not therefore a proper deduction in computing the assessee's liability to income-tax. The Lord President (Clyde) formulated the test thus :
'What is 'money wholly and exclusively laid out for the purposes of the trade' is a question which must be determined upon the principles of ordinary commercial trading. It is necessary accordingly to attend to the true nature of the expenditure, and to ask one's self the question, is it a part of the company's working expenses - is it expenditure laid out as part of the process of profit-earning - or, on the other hand, is it a capital outlay - is it expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all ...
Now when this company began to work its mine it was obvious that it would require to use a certain amount of the surface of the lessor's estate for a number of purposes. The first of these was the making of roads and footpaths. That was one of the conditions precedent to starting work in the mine. The company might, if they had thought fit, have purchased or feud the land required for those purposes. or they might have acquired some form of servitude right across the surface owner's property. As is common in such a case, they did none of these things but got under the lease right to use the surface for, inter alia, these purposes; and as the consideration for the right so acquired, they came under obligation, at the end of their lease, to restore the land so occupied to its original agricultural condition, or otherwise to pay to the lessor the equivalent of its agricultural value. It seems to me that on the question of the capital or revenue character of the cost of restoration, or of the compensation payable for land damaged and not restored (as the case may be), it makes no difference whether the company had acquired the property or a servitude right at the commencement of the lease in consideration of a price paid, or whether they merely acquired a personal right for the duration of the lease upon condition that they paid for it at the end of the lease by restoring the land to its original condition, or by paying the value of the land if it was not restored.......
A right to work the coal in such a manner as to sacrifice the value of the surface was a material asset for the company to possess, and, not unnaturally or unusually, the same principles was applied in the lease to the conferment of that right on the company as in the case of surface occupation by debris heaps and the like. The price of acquiring that right is a capital outlay. No distinction can, in my opinion, be drawn between the payment or consideration paid for permanent injury done by subsidence as the result of operations under the lease and permanent injury done by the depositing of debris as the result of those operations. Neither the expense of restoration, nor the compensation payable failing restoration, appear to me to fall within working expenses. They are, in my opinion, capital charges.'
7. In Chintalapudi Ranganayakulu v. Commissioner of Income-tax, compensation paid by the assessee, who was a mining lessee for failure to restore and re-deliver the land during the crop season was held to be expenditure of a capital nature. Under the relevant agreement, the assessee had agreed to conduct the mining operations when there were no crops on the lands and further in case the mining operations were conducted during the crop season, he agreed to pay to the owner of the lands compensation. The High Court of Andhra Pradesh held that the amount paid to the land-owner as crop compensation was amount paid by the assessee as the price for carrying on mining operations even during the period when there were crops on the land, and that, in effect, it was money expended for acquisition of the mining rights for that period also, therefore, must be held to be capital expenditure.
8. We put it to Mr. Krishnamurthy that if the right for the minerals and the right over the land had vested in the same person, instead of in the State and the ryotwari pattadar as in the case before us, can the assessee successfully urge that the amounts paid were not for acquiring the right to mine the iron ore in the land The learned counsel did not contend that he could have put forward such a contention. The legal position would not be different when the occupancy rights over the land vests in the pattadars and the right to minerals vests in the Government, and the mining lessee acquires rights from the two owners. For acquiring the right to work the mines and extracts iron ores, the rights of both the owners have to be acquired, and the payment made to the pattadars were of the same character as the payments to the Government for acquiring the mining leases. Without obtaining the rights from the ryotwari pattadars to work the mines on their lands the assessee could not have acquired the full right to work the mines and extract iron ores. Mr. Krishnamurthy urged that under the Minerals Concession Rules, 1949, a mining lessee from the Government has the right to work the mines and he called upon to pay compensation to the ryotwari pattadars who own occupancy rights over the land. This is not a case where compensation was paid to the pattadars in connection with the Mining Rules. The decision in every case must rest on its facts. The terms of the agreements, which are annexed to the further statement of the case, are quite clear. Whether the assessee worked the mines or not, he paid consideration for acquisition of the right to dig the surface of the land belonging to the pattadars. They were not payments for surface damages as the works progressed. The payments made by the assessee for the acquisition of the right to dig the surface land at the beginning of the mining operations, in our operations, is clearly capital expenditure.
9. Our answer to the question referred is against the assessee, and it is that, on the facts and in the circumstances of the case, the amount of Rs. 5,361 for the assessment year 1953-54, Rs. 3,750 for the assessment year 1954-55, Rs. 19,724 for the assessment year 1955-56, and Rs. 1,200 for the assessment year 1956-57 paid to the owners of the lands for extracting iron ore were capital expenditure in the respective years.
10. The assessee will pay the costs of this reference which we fix at Rs. 250.
11. Question answered accordingly.