Sharfudding Ahmed, J.
(1) This is a reference under Section 66(1) of the Indian Income-tax Act, 1922. The assessee Sri M.A. Jabbar, Secunderabad, carries on the business of supply lime and sand and for the purpose of obtaining sand, the assessee entered into a lease agreement with the Government of Hyderabad under a deed dated 1-2-54. The lease was for the period from 1-2-54 to 31-12-54. It was renewable at the option for another term of one year. Under the said lease deed the assessee was required to pay a fixed sum of Rs. 82,500/-. The assessee paid the amount of Rs. 56,100/- for the assessment year 1955-56 the accounting year for the period ending on the accounting year for the period ending on 30-9-54 and the balance of the amount of Rs. 26,400/- was paid subsequently for the assessment year 1956-57, the accounting year ending 30-9-55. He, however, claimed these payments as revenue expenditure in the concerned assessment. This, was disallowed by the Income Tax officer as in his view the assessee had secured the right to recover sand from the river bed which was in the nature of a capital asset. The matter was carried in appeal to the Appellate Asst. Commissioner who, on examination of the terms of the lease and as a result of his personal investigation, came to the conclusion that what the assessee had secured under the lease deed was only stock-in-trade of his business. The Income-tax Officer preferred an appeal to the Tribunal challenging the finding of the Appellate Asst. Commissioner. The Tribunal upheld the order of the Appellate Assistant Commissioner. The Department has therefore referred the following question to the High Court:
'Whether on the facts and circumstances of the case the payment of Rs. 56,100 for the assessment year 1955-56 and Rs. 26,400 for the assessment year 1956-57 made under the lease deed dated 1-2-54 were the expenditure of revenue nature.'
The learned counsel for the Department contends that under the lease deed dated 1-2-54 (Annexure-A) the assessee had entered into an agreement with the Government to quarry sand areas situated at Musi river and various nalas mentioned in Schedule A annexed to the lease deed. He had deposited the fixed quarry-fee of Rs. 82,500 and therefore it was more or less a mining lease for the removal and recovery of sand from the specified sand areas. The conclusion of the Appellate Assistant Commissioner and of the Tribunal based on the personal investigation carried on by the Assistant Appellate Commissioner sometime in 1960 could not be taken into consideration for reaching the conclusion not consistent with the terms of the lease. The learned counsel for the assessee on the other hand, with reference to the statement of facts made by the Department which according to him were not controverted, argued that the assessee had bargained for sand which had accumulated in the beds of Musi river and various nalas as the result of floods. There was no question of equating it with any mining operation.
(2) The fact beyond controversy is that the lease deed dated 1-2-1954 was entered into between the assessee and the Director of Mines and Geology on behalf of the then Government of Hyderabad subject to the rules in force in the State regarding the quarry leases. The relevant portions of the lease deed are as under:-
'(2) Whereas the Lessee has, in accordance with the Rules in force in Hyderabad State regarding the grant of quarry leases, applied for a lease and in consideration of a deposit of 50% of the amount of quarrying fee made by the Lessee as security for the due fulfillment of the covenant and agreements of the Lessee's part hereinafter contained and which deposit shall be forfeited on any failure thereof, the Government have agreed to grant a quarry lease hereinafter contained in respect of the sand areas and situated at Moosi river and various nallahs, particularly mentioned and described in Schedule A hereto annexed in which lands are hereinafter called 'The Quarries.'
(3) .. .. .. the Government do hereby demise and grant upto the Lessee exclusive lease and liberty to enter, occupy and use for quarrying purpose and to raise, render marketable, carry away, sell and dispose of sand within or under or upon the lands specified in this lease and for the period named therein.
(4) The Lessee shall pay to the Government the fixed quarrying fee of Rs. 82,500.
(11) The Lessee shall commence quarrying operations within three months from the date of the execution of the lease, and shall thereafter carry on such operations effectually in a proper skillful and workman like manner both as regards prevention of waste by removal of sufficient over burden, careful storeage of waste, drainage and removal of all valuable mineral within the quarry.'
Schedule A gives the sand areas comprising the quarries under the lease situated at Moosi River and various nallahs. They cover extensive areas under river Moosi and also nallahas situate in Taluqas Hyderabad East, West, Taluqa Medical and Shahabad. Admittedly this agreement was entered into in accordance with the Rules and Regulations in force at the relevant period. The Rules define 'minor minerals' to mean building stone, boulder, shingle, gravel, brick-earth, ordinary clay, ordinary sand and road metal. 'Quarrying' has been defined to mean mining, excavating, digging, and searching for winning, working and carrying away, removing, converting, rendering marketable selling or disposing of any minor mineral.
(3) If we go by the terms of the lease deed there is no difficulty in holding that sand is included in the 'minor minerals' and its removal means quarrying within the definition of the words used in the Rules. It was therefore a mining operation as found by the Income Tax Officer. If so, the law on that point is fairly well settled viz., where there was acquisition of an advantage of permanent nature or of enduring character the payment made for such acquisition was towards capital expenditure. In Pingle Industries Limited v. Commr. of Indome Tax : 40ITR67(SC) the assessee company was carrying on business of selling Shahabad flag stones, obtained from a Jagirdar under a contract extending over a period of 12 years on an annual payment of Rs. 28,000. The assessee had acquired the right to excavate the stones and undertook not to manufacture cement while the landlord undertook not to allow any other persons to excavate stones in that area. On the question whether the expenditure incurred was business expenditure or capital expenditure it was held that:
'The stones in site were not his stock-in-trade in a business sense but a capital asset from which after extraction he converted the stones into his stock-in-trade .. .. ... . The amounts were outgoings on capital account and were not allowable deductions.'
(4) With reference to the numerous cases to some of which we will presently advert, the principle laid down is that the expenditure which is incurred for acquiring capital asset of enduring benefit to the trade of the assessee is capital expenditure and does not admit of allowable deductions, and in determining, the character of the expenditure the aim and object of the expenditure would be the decisive factor. In the instant case, the assessee has the business of supplying lime and sand. For the purpose of obtaining sand he acquired the sand areas under the Moosi Bed and various other Nalas. In the circumstance, on the principle enunciated above the sand in the sand areas could not be held to be his stock-in-trade. It is only on quarrying the sand i.e., on removal thereof either by shovelling or by process of digging that he could render it as a marketable commodity. The process does not seem to be in any way different from that of quarrying Shahabad stones in the case of Pingle Industries ltd. v. Commr. of Income Tax : 40ITR67(SC) , though obviously it did not involve as much skilled labour or expenditure as required in that case.
(5) Dealing with a case of similar nature in Abdul Kayoom v. Commr. of Income Tax : 44ITR689(SC) it was laid down by the Supreme Court that the amount attributable to capital and to revenue has to be determined with reference to the nature of the business, the nature of the right of lease and the relation inter se and that was the only mode to resolve the conflicting issue. In that case, the asessee was carrying on business in the purchase and sale of conch (chank) shells for which he had required the exclusive right, liberty and authority to fish for and take and carry away all chank shells in the sea off the coast line of a certain area specified in the lease. The assessee claimed the expenditure as business expenditure but the department held that it was a capital expenditure. A Full Bench of the High Court of Madras was of the view that the expenditure was not of capital nature, but no appeal, the Supreme Court held that the amount was paid to obtain enduring assets in the shape of exclusive right to fishing and it was not an amount spent in acquiring its stockin-trade, it was, therefore, an expenditure of capital nature.
(6) The cases are sought to be distinguished mainly on the ground that the sand acquired under the lease-deed was lying loose on the beds and what the assessee had purchased was not the source but the sand itself. It was, therefore, his stock-in-trade and the only process involved was to remove it from bed and sell it as a marketable commodity. The case of the assessee is that during the floods sand would be deposited in the river bed and the various Nalas and would lie loose on the surface - the bed underneath consisting of hard rocks. The assessee had to employ labour at a negligible expense to remove the sand so accumulated, stock it on the bank of the river and dispose it off to the customers. There was no process of quarrying as in the case of Shahabad stones or of diving and collecting chanks in the second case. This argument is sought to be substantiated by the observation of the Appellate Assistant Commissioner made as the result of his personal investigation and a memo issued by the Director of Mines and Geology on 18-10-1960. The Appellate Assistant Commissioner has observed that 'During the floods, the rivers deposit sand either in the middle of the course or on the banks. These deposits come to surface as the flood recedes. After the water level has fallen sufficiently, the work of removing the sand commences. The period is usually November to June. The deposits of sand lie loose on the surface of the river beds which are generally rocky. The lease is granted for the removal of such sand .. .. The sand is shovelled up by the laborers on the backs of buffaloes which transport the same to the Banks .. .. .. ' These operations were verified by the Income Tax Officer and the Appellate Assistant Commissioner by their personal visit to the said quarries in the river Moosi in the area between Oswangunj and Sangam. The Memo reads as under:
'Sand is generally deposited on the river bed during the floods season. Those deposits of sand lie loose on the surface of the river bed and leases are granted for collection of such sand lying in the leased areas. Under the agreement dated 1-2-1954 as in any such lease, he was allowed to collect such sand from the area leased to him.'
(7) It is to be noted that the lease contract was made in February 1954. The investigation conducted by the Appellate Assistant Commissioner in 1960 and so was the memo. It is difficult to see how after a lapse of six years the terms of the lease deed could be varied, altered or clarified so as to confer any benefit on the lessee. The deed has absolutely no reference to the accumulation of sand as the result of floods, its lying loose on the surface and the lessee being allowed to remove the sand merely from the surface without digging underneath. On the other hand, it refers to the acquisition of sand areas comprising the quarries situated at Moosi River and various Nalas. Para 3 of the leasedeed authorises the lessee to carry away, sell and dispose of the sand within or under or upon the lands specified in the lease. The argument that the lease deed was drawn on a pro forma drafted so as to cover all types of quarrying and did not disclose the exact nature of the operation so as to require investigation is not entitled to weight in view of the clear recitals in the lease-deed and that too after a lapse of nearly six years from the date of contract. Further, the investigation carried on was confined to an area lying between Osmangunj and Sangam to Old Bridge whereas the lease pertained to extensive areas not only under the River Moosi but various Nalas lying in different Taluqs. The observation do not apply nor can be accepted in respect of extensive areas covered by the lease deed.
(8) The learned counsel for the assessee has placed much reliance on the case of Stow Bardolph Gravel Co. Ltd. v. Poole (H.M. Inspector of Taxes) 1954 35 Tax Cas 459. In that case a company known as Luddington Estates owned certain lands on which were lying big deposits of gravel and sand which was merely to be shovelled for being made marketable. It was urged that the purchase was stock-in-trade, the stock-in-trade being sand and gravel and all that they had to do was to go on the area, remove it and sell it on road to their customers. It was contended on behalf of the Department that the sand and gravel is not chattel which is detachable from soil and is lying there to be picked up - it is something which must be worked up as if it was a mine or quarry. The ultimate finding was that what the company had purchased was the means of obtaining that raw material for the trade which they were carrying on.
(9) The principle would be attracted only if we hold that the sand was lying loose on the surface and the contract was only for the purchase of sand. The data on record does not warrant that conclusion. Therefore, we answer the question in the negative viz., that the payments made in the year 1955-56 and 1956-57 under the lease-deed dated 1-2-1954 were not of the nature of revenue expenditure. Parties to bear their costs.
(10) Answered in the negative.