1. Pursuant to the directions of this court under section 256(2) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal made these references in connection with the income-tax assessment years 1973-74 and 1974-75. An identical question of law is involved in these two references.
2. The assessee is a company incorporated under the Companies Act, 1956. It entered into an agreement with one V. C. Trivedi on March 8, 1972, for securing lease of 25.6 acres of land in Adilabad belonging to the said Trivedi for a period of fifteen years commencing from December 1, 1971. The lease was obtained for use by the assessee of the land for excavation purposes. According to the agreement, the assessee had to pay Rs. 35 by way of rent per month per acre. The rent per year accordingly works out to Rs. 10,752. The assessee deposited with the lessor, the rent for the entire period of fifteen years aggregating to Rs. 1,61,280. According to clause 2 of the agreement, the monthly rental is adjustable against the deposit made by the assessee initially. In connection with the income-tax assessment years 1973-74 and 1974-75, the assessee claimed as business expenditure the annual rental of Rs. 10,752 paid to the lessor. During the course of the assessment enquiry, the Income-tax Officer elicited that the lease was taken for the purpose of excavating the lessor's land to win manganese ore. The Income-tax Officer held that the lease amount claimed by way of deduction could not be allowed as revenue expenditure as, in his opinion, the expenditure was incurred for acquiring an asset or an advantage of an enduring benefit to the business of the assessee and consequently the expenditure was on capital account. Aggrieved by the disallowance of the expenditure in the tax assessments, the assessee filed appeals before the Appellate Assistant Commissioner of Income-tax who confirmed the disallowance. The second appeal filed by the assessee before the Income-tax Appellate Tribunal was also unsuccessful. The Tribunal held that the rent having been paid for excavating the land to win manganese ore, the ratio of the decision of the Supreme Court in Pingle Industries Ltd. v. CIT : 40ITR67(SC) , is directly applicable. The assessee filed reference applications under section 256(1) of the Income-tax Act, 1961, requiring the Tribunal to state a case to this court. On the Tribunal dismissing the applications, the assessee applied for a reference under section 256(2) of the Act and obtained from this court a direction to the Tribunal to state the case regarding the allowance of the above expenditure. Accordingly, the Tribunal referred the following common question of law for both the assessment years for the opinion of this court :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 10,752 paid by the assessee in the accounting year was not expenditure allowable as a deduction in computing the business profit of the assessee-company ?'
3. Learned counsel appearing for the assessee, Sri Ch. Sreerama Rao, contended that the Tribunal was in error in applying the ratio of the decision of the Supreme Court in Pingle Industries' case : 40ITR67(SC) , as the assessee did not obtain any mining lease from the lessor under the terms of the agreement dated March 8, 1972. A copy of the lease agreement was not made part of the record; but learned counsel for the assessee filed a copy of the same during the course of the hearing. Under clause 6, the lease agreement conferred liberty on the assessee 'to use the land for excavation purposes and for subsidiary purposes'. There were also other covenants enabling the assessee to erect, construct and maintain such engines, machinery, workshops, installations, buildings and cottages, hutments and other things necessary and to form such road communications and other conveniences on the said land as may be necessary or convenient. 'Right was also conferred on the assessee' to use any water in or under the demised land and to divert the same and to make, construct or maintain any water-source, ponds or reservoirs but not so as to interfere with the rights of adjoining owners and occupiers in respect of such water. During the course of the assessment enquiry, the assessee explained that the lease was taken for the purpose of exploring manganese ore lying deposited in the land belonging to the lessor and the purpose of the lease was for excavating the land in question to win the manganese ore. Apparently, the assessee had secured rights from the mining department to explore the deposits of manganese ore lying in the land in question and obviously it was for that purpose that the lease agreement was entered into by the assessee with the lessor. The deposits of manganese ore under the earth did not belong to the lessor and he could not have granted any rights to win the ore, as that right can be conferred only by the Government through its mining department in whom the deposits lying under the earth vest. Nevertheless, the deposits lay under the land belonging to the lessor, a private individual, and unless an agreement to excavate the land was entered into with the lessor, the assessee would not be in a position to effectuate the arrangements otherwise made for winning the manganese ore lying deposited under the land. It was the assessee's case throughout that the lease of the land was for the purpose of excavating the land to win manganese ore and it was, on that basis, that the Income-tax Officer as well as the lower appellate authorities dealt with the matter. It is not stated that the land was taken for any purpose other than mining. The lease of the land is, therefore, an inseparable transaction, so far as the assessee is concerned, to excavate the land belonging to the lessor and win the manganese ore deposited under the land. We are, therefore, unable to accept the contention of the learned counsel for the assessee that the lease agreement in question is not an agreement for mining purposes. Although the purpose is not explicitly stated in the agreement, it is clear from the tenor of the agreement that it is for mining purposes and the assessee himself accepted that the lease was taken for such purposes throughout. We must, therefore, proceed on the basis that the lease of the land was obtained by the assessee for the purpose of winning manganese ore lying deposited under the land.
4. Learned counsel for the assessee fairly stated that, in respect of manganese ore that may be extracted by excavating the land, royalty is payable to the mining department of the Government separately. By payment of rent under the lease agreement to the lessor, the assessee is not entitled to carry away the manganese ore that may be secured on excavation of the deposits. The assessee is under an obligation to inform the mining department immediately as soon as the manganese ore deposits are discovered after due excavation and royalty, as provided under the Mineral Concession Rules, has to be paid separately to the mining department in respect of the manganese ore removed from the earth. On these facts, it is not possible to accept the contention of the learned counsel for the stock-in-trade, which is manganese ore in their case. The rent is paid for the limited right conferred on the assessee to excavate the land to discover manganese ore deposits, if any.
5. On the facts, as above referred, there can be no escape from the conclusion that the ratio of the decision of the Supreme Court in Pingle Industries' case : 40ITR67(SC) , is directly applicable to the present case. In Pingle Industries' case : 40ITR67(SC) , there were two separate leases, one taken from a jagirdar, who owned the quarries, and the other from the Government. In respect of the lease taken from the Government, royalty was payable in respect of the flag stones extracted from the quarries. In addition to the royalty, a fixed sum was also payable to the Government by way of rent. The rent was also paid to the jagirdar in a lump sum for the leases of the quarries taken. It was urged in that case that the rent paid to the Government partook of the same character as the royalty, which was held to be business expenditure, and there was no justification to treat the rent as capital in nature. The Supreme Court rejected that contention. It was held that under the lease, the assessee acquired a right to excavate the quarries and obtain the flag stones. The rent paid for acquiring such a right was held to be not the price paid for securing the raw material. The Supreme Court held that the raw material was the flag stones which were dressed after due processing. In that view, the Supreme Court held that the rent paid could not be held to be the price for securing the raw material or stock-in-trade. It was further held that the rent paid was for acquiring an asset or advantage of an enduring character to the business of the assessee in that case and, in that view the expenditure was held to be capital in nature. In our opinion, the above principle directly applies to the facts of the present case also. We also find that the principles set out by the Supreme Court in R. B. Seth Moolchand Suganchand v. CIT : 86ITR647(SC) , are directly applicable to the present case.
6. Learned counsel for the assessee invited our attention to the decisions of the Supreme Court in Golan Lime Syndicate v. CIT : 59ITR718(SC) and M. A. Jabbar v. CIT : 68ITR493(SC) . It is urged, that the Supreme Court explained its decision in Pingle Industries' case : 40ITR67(SC) , in the above-referred two decisions and held that, on the principles set out in those two decisions, royalty paid was allowable as expenditure. We are unable to agree that any principle contrary to the one in Pingle Industries' case : 40ITR67(SC) , was enunciated by the Supreme Court held that the lease amount paid was for the purpose of securing stock-in-trade. In view of the finding that the lease amount was paid for obtaining raw material or stock-in-trade, the Supreme Court held that the lease amount paid was revenue in character and was allowable. It may be noted that, in the case of Golan Lime Syndicate : 59ITR718(SC) , the Supreme Court specifically referred to the fact that the royalty was payable with reference to the quantity obtained. There was a direct relationship between the amount paid and the raw material obtained. On these facts, the Supreme Court held that the lease amount paid in those cases was revenue in character. In our opinion, those cases have no application to the facts found in the present case.
7. Learned counsel also invited our attention to the decision of the Supreme Court in Empire Jute Co. Ltd. v. CIT : 124ITR1(SC) . Our attention has, in particular, been invited to the observations, which were succinctly summarised in headnotes (ii) and (iii) which read as follows :
'(ii) There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.
(iii) What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency.'
8. Relying on the above observations, learned counsel urged that the character of the expenditure incurred in the present case must be viewed from a commercial point of view and the object for which the expenditure was incurred would be a decisive factor in determining whether the assessee obtained an advantage of enduring benefit on capital account. It is submitted that the object of paying the rent was to excavate the land and remove the manganese ore deposits lying hidden. Strictly, from a businessman's point of the view, the expenditure was incurred for the purpose of securing manganese ore. It is, therefore, urged that, from a commercial point of view, the expenditure must be held to be on revenue account. It has to be borne in mind that the present case is one of mining lease. The question whether lump sum payments made to obtain rights for excavation of land to explore minerals represented capital expenditure or not was the subject-matter of consideration in number of cases. It is not possible to ignore the principles originating from the class of cases relating to mining leases. Application of the principles set out in the case of mining leases such as Pingle Industries' case : 40ITR67(SC) , etc., can only lead to one conclusion in the present case, viz., that the expenditure incurred by the assessee by way of annual lease amount is not for the purpose of raw material or stock-in trade. The expenditure was incurred for acquiring an asset or an advantage of enduring character and must, therefore, be held capital in nature.
9. For the aforesaid reasons, we hold that the Tribunal was right in coming to the conclusion that the lease amount paid by the assessee is not allowable as business expenditure in computing the assessee's income for the assessment years 1973-74 and 1974-75. We accordingly answer the question in the affirmative, that is to say, in favour of the Revenue and against the assessee. In the circumstances of the case, we direct the parties to bear their own costs.
10. After the judgment is pronounced, learned counsel for the assessee made an oral request for leave to appeal to the Supreme Court. We see no reason to grant leave as we are of the view that this case is not a fit one to appeal to the Supreme Court. Request is rejected.