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Ford and Macdonald Ltd Vs. Commissioner of Income-tax, U.P. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 163 of 1958 and Misc. I.T. Cases Nos. 378 and 423 of 1959
Reported in[1964]54ITR133(All)
AppellantFord and Macdonald Ltd
RespondentCommissioner of Income-tax, U.P.
Excerpt:
- - under those contracts, the assessee could also set up an engine for the manufacture of lime and use the land in any manner which the assessee liked. in further appeal the income-tax appellate tribunal held that the annual payment was rent paid periodically to the owner in respect of the lease of the property and was different in nature from the price paid for the transfer of the right to enjoy the property and relying on the ruling in rajah manyam meenakshamma v. that in a matter like this the manner in which an assessee deals with a payment of this nature is relevant, has been held in the full bench decision of the lahore high court referred to above, namely, benarsidas jagannaths case. at page 203 of the ruling the lahore full bench observed as follows :i would like to observe.....brijlal gupta j - these three references under section 66(1) of the income-tax act relate to the same assessee for different assessment years and arise more or less a common question and can be conveniently disposed of by a common judgment.the first reference relates to the assessment years 1948-49, 1949-50, 1950-51, 1951-52 and 1952-53. the second reference relates to the assessment year 1953-54 and the third reference to two assessment years, namely, 1954-55 and 1955-56.the question which has been referred in the first reference is :'whether, on the facts and in the circumstances of this case, the lease money and rent paid by the assessee to the lessor is a permissible deduction within the meaning of clause (xv) to sub-section (2) of section 10 of the indian income-tax act ?'it will be.....
Judgment:

BRIJLAL GUPTA J - These three references under section 66(1) of the Income-tax Act relate to the same assessee for different assessment years and arise more or less a common question and can be conveniently disposed of by a common judgment.

The first reference relates to the assessment years 1948-49, 1949-50, 1950-51, 1951-52 and 1952-53. The second reference relates to the assessment year 1953-54 and the third reference to two assessment years, namely, 1954-55 and 1955-56.

The question which has been referred in the first reference is :

'Whether, on the facts and in the circumstances of this case, the lease money and rent paid by the assessee to the lessor is a permissible deduction within the meaning of clause (xv) to sub-section (2) of section 10 of the Indian Income-tax Act ?'

It will be clear from the form of the question that relates to two classes of money paid : (1) the 'lease' money; and (2) the rent. It may be stated that in the fifteen leases which are under consideration in these cases a certain sum of money was paid by the assessee in a lump sum at the time of the execution of the lease, and this has been described in the question as 'lease' money. Another sum of money was payable by the assessee year after and this has been described in the question as 'rent'.

In the second and the third references the questions referred are stated respectively as follows :

'Whether, on the facts and in the circumstances of the case, part of the initial lease amount paid by the applicant to its lessors and adjusted during the year in question, is a permissible deduction within the meaning of clause (xv) of sub-section (2) of section 10 of the Income-tax Act and

Whether, on the facts and circumstance of the case, the sum of Rs. 1,215 and Rs. 1,630 representing the lease amounts paid in the assessment years 1954-55 and 1955-56 by the applicant to its lessors are permissible deductions within the meaning of clause (xv) of sub-section (2) of section 10 of the Income-tax Act

Whether the lessors conferred on the lessee an asset of an enduring nature ?'

It will be seen that these two questions concern themselves only with one class of payment, namely, the payment made by the lessee initially in a lump sum at the time of execution of the lease and do not concern themselves with the second class of payment, namely the rent which was to be paid year after year. This was so far the reason that in the years involved in the last two references the amount paid annually as rent was allowed by the Income-tax Appellate Tribunal as a permissible deduction and, therefore, in those years no question arose of the allowability or otherwise of this latter class of payment.

The facts giving rise to the references may be shortly stated : The assessee is a private limited company and carried on the business of manufacture and sale of bricks. It takes plots of land on lease, erects kilns, extracts clay from the land, manufactures bricks and sells them, and thus earns its income.

It had plots of land on the lease and had executed 15 leases for varying periods and it is the payments made in respect of these 15 leases with which we are concerned in these references. The serial number, the name of the lessor, the date of the lease, the period of the lease, the rights of the assessee under the lease and the initial and annual amounts paid by the assessee under the leases are stated below in a tabular form :

S. No.

Name of lessor

Date of lease

Period of lease

Right of the assessee under the lease

Amount paid by the assessee

1

2

3

4

5

6

Initial

Rs. As. Ps.

Annual rate

Rs, As. P.

1.

Sarju Pd

7-6-46

10 Yrs

Dig earth up to a specific depth of 7 ft.construct katcha and pucca wells, construct buildings without foundation for residence of employees, construct roads, construct kilns, manufacture tiles, bricks and set up an engine for manufacture of lime, surkhi, build a workshop, use the land in any manner they wish and transfer their rights under the lease.

3,760

150-6-0

2.

Mst.Raj Dulari

24-4-46

10 Yrs

do

12,760

508-6-0

3.

Saraswati Pd.

10-10-46

10 Yrs

Dig earth up to a specified depth of 10 ft. construct wells pucca and katcha. Construct buildings without foundation for the residence of employees, construct roads, construct kilns, manufacture tiles, and set up an engine for manufacture of lime, build a workshop, use the land in any manner they wish and transfer their rights under the lease.

6,400

40-6-0

4.

Ashrafali

25-2-41

5 Yrs

Construct katcha and pucca wells, roads, kilns, houses for employees and labourers, stock bricks and tiles, dig earth up to a depth of 12 ft., cultivate the land and sublet it.

1,170

47-12-0

5.

Ramraj & Others

1-2-46

10 Yrs

Dig earth up to a depth of 10 ft. build a kiln, manufacture bricks, tiles, and on the land, instal an engine, cultivate the land, sublet the land or do whatever he might choose to do on the land.

145-4-0

8-4-6

6.

Cheedi & Others

1-2-46

10 Yrs

do.

344-8-0

19-11-0

7.

Ramshankar

1-2-46

10 Yrs

do.

91-8-0

5-4-0

8.

Mahadeo & Others

1-2-46

10 Yrs

do.

657-14-0

37-8-0

9.

Sheo Shanker & Others

4-2-46

10 Yrs

do.

2,600-0-0

57-0-0

10.

Th Bhanu

14-10-41

5 Yrs

Dig earth. No Pratap specification, construct thatched sheds. construct wells, manufacture bricks construct kilns and to use the land he may choose for the use of workshop.

630-0-0

11.

Th Bhanu

2-12-47

3 Yrs

Dig earth. No Pratap specification about depth, construct thatched sheds, construct katcha and pucca wells construct kilns, manufacture bricks and to use the land for any purpose he may choose for the use of workshop.

825

12.

Sheosaran and others

1-2-46

15 Yrs

Construct roads and use it in any manner

36

3-6-0

13.

Ramraj & Others

1-2-46

15 Yrs

do.

72

7-8-0

14.

Dwarka

1-2-46

15 Yrs

Construct roads and use it in any manner.

64

6-6-0

15.

Bhaggal

1-2-46

15 Yrs

do.

16

3-0-0

It will appear from the aforesaid table that leases at Nos. 12, 13, 14 and 15 do not refer to the extraction of any clay from the land. It appears from those lease deeds that what was given to the assessee was a right to construct roads, possible approach to the other neighboring plots taken on lease by the assessee. In leases at Nos. 10 and 11, there was no construct between the lessor and the assessee about the annual payments by way of lease money nor was there any contract about the depth up to which clay could be extracted from the land. Those documents also show that there was a contract between the assessee and the lessors whereby the assessee could construct thatched sheds, dig wells, or construct kilns and use the land for any purpose it might choose. Lease deeds at Nos. 1 to 9 show that the assessee could dig earth up to a particular depth. Those documents further show that the assessee could construct wells, buildings, for the residence of employees, and also construct roads and kilns. Under those contracts, the assessee could also set up an engine for the manufacture of lime and use the land in any manner which the assessee liked. The assessee could also transfer its rights under the leases. Lease deeds at Nos. 5 to 9 speak of the right of the assessee to cultivate the land in addition of the other uses to which the land could be subjected. Copies of the leases are are made parts of the case and are annexures 'A' to 'A-14'.

It appeared from the assessment record that the assessee itself had added back Rs. 9,277 and Rs. 3,431 paid to the lessors as lease money in the assessment years 1948-49 and 1949-50 respectively though during the assessment proceedings an allowance in respect of those amounts was claimed. In the subsequent years, however, it claimed the allowance of the amounts paid as lease money etc. The details of the payments claimed are as under :

Rs.

1948-49

9,277

1949-50

3,431

1950-51

4,121 (the other items claimed have been allowed by the I.T.O.).

1951-52

2,044

1952-53

3,625

1953-54

1,393 (2320-18-909)

1954-55

1,215

1955-56

1,630

In the years involved in the first reference the Income-tax Officer disallowed both classes of payments, namely, the lump sum payments and the annual payments and also the expense connected with the execution of the leases holding that the expenditure was of a capital nature and not a revenue nature so as to be allowable under section 10(2)(xv). In appeal by the assessee the Appellate Assistant Commissioner allowed 80 per cent. of both classes of payments relying on the Full Bench decision of the Lahore High Court in Benarsidas Jagannath v. Commissioner of Income-tax but holding that as in some of the leases the right of cultivation had also been given to the assessee, and even though no cultivation may actually have been done still as the right was there the entire amount could not be allowed. The department went up in appeal to the Income-tax Appellate Tribunal against the orders of the Appellate Assistant Commissioner and the Tribunal allowed the appeals and reversed the orders of the Appellate Assistant Commissioner holding that under the leases the assessee had acquired an interest in the land and the payments made by it to the lessors were not the purchase price of raw material as claimed by the assessee but was an item of expenditure of a capital nature. It will be noticed that neither the assessee nor any of the authorities below made any distinction between the two classes of payments, the lump sum payments initially made by the lessee at the time of the execution of the lease and the annual payments made or to be made by it for the duration of the lease.

In the assessment year 1953-54 which is under consideration in the second reference the Income-tax Officer disallowed both classes of payments on the ground that the entries made in respect thereof were merely adjustment entries and the payments was not of a revenue nature. In appeal the Appellate Assistant Commissioner also disallowed the expenditure of both the classes following the view of the Income-tax Appellate Tribunal in the appeals relating to the earlier assessment years that the interest acquired by the assessee was an interest in the land itself and the amount paid by it was not merely the purchase price of raw material and as such confirmed the disallowance by the Income-tax Officer that the expenditure was not revenue expenditure. In further appeal the Income-tax Appellate Tribunal held that the annual payment was rent paid periodically to the owner in respect of the lease of the property and was different in nature from the price paid for the transfer of the right to enjoy the property and relying on the ruling in Rajah Manyam Meenakshamma v. Commissioner of Income-tax deleted the additions in respect of the annual rent amounting to Rs. 1,288 and upheld the disallowance only in respect of the lump sum payment.

In the last reference in respect of the two years 1954-55 and 1955-56 the Tribunal again made a distinction between the two classes of payment and allowed only the annual payments while disallowing the lump sum payments following its order in the proceedings year 1953-54. Thereafter the assessee made applications for the statement of the cases to this court and the applications were allowed and the reference are now before us.

The point for decision before us is : 1. Whether the lump sum payment made by the assessee under the various leases was for the acquisition of an interest in land or was the price paid for the purchase of raw material; and 2 Whether the annual payments made by the assessee during the term of the lease was revenue expenditure allowable in the first reference for the five assessment years on question in that reference.

So far as the second class of payment is concerned while it is true that it has been separately mentioned in the question which has been referred to us, the distinction does not appear to have been drawn at any stage of the proceedings before the authorities below nor have the authorities below discussed or decided the matter on the basis of any such distinction. It may also be stated that in the first two years the assessee himself lumped both classes of payment together in its books and added them back in its income and it was only during the assessment proceedings that he claimed an allowance in respect of the entire payment and even when he claimed an allowance, as already stated above, he did not draw any distinction between the two classes of payments or address separate arguments in respect thereof.

That in a matter like this the manner in which an assessee deals with a payment of this nature is relevant, has been held in the Full Bench decision of the Lahore High Court referred to above, namely, Benarsidas Jagannaths case. I am in respectful agreement with the view taken in that case in regard to this matter. At page 203 of the ruling the Lahore Full Bench observed as follows :

'I would like to observe that in deciding a border line case like this it is relevant to consider how a tradesman in thus business treats such an expense in his accounts.'

If I may say so with respect of observation is very proper in judging of the nature of an expenditure to which one cannot apply an empirical or subjective standard. The expenditure has to be judged from the point of view of a businessman and it is relevant to consider how a businessman himself treats a particular item of expenditure, whether as revenue expenditure or as capital expenditure.

The nature of an expenditure whether revenue or capital is in the ultimate analysis a question of fact. Before an assessee can ask the High Court to consider the quality of an expenditure he should raise that question at least before the final fact finding authority, viz., the Tribunal and obtain the finding of that authority on that point. In this case as already stated above the point was not raised by the assessee before the Income-tax Appellate Tribunal that at least so far as the annual payments were concerned they were in the nature of revenue expenditure. For the omission of the assessee to raise that point and in the absence of any consideration or specific finding on the question by the Tribunal it is not possible to say that the question arises out of the appellate order of the Tribunal. Thus in so far as the question does not arise out of the appellate order of the Tribunal this court has no jurisdiction to entertain or to pronounce upon the question whether so far as the annual payments were concerned any different considerations applied to the same and whether or not the lump sum payments were capital or revenue payments the annual payments were different in nature and were revenue payments. So far as the lump sum payments are concerned, the basis of the arguments of learned counsel for the assessee is that as earth was to be dug to be taken away by the assessee from specific plots only up to a specified depth, the quantity of earth to be dug and taken away by it, was a specified quantity and as such the lump sum payment was the price of raw material and was not a payment for the acquisition of an interest in land or for the acquisition of an asset of an enduring nature in other words, that it was not for the acquisition of an apparatus of profit making or a capital asset. From the analysis of the leases made in the early part of this judgment it will be seen that it was only in nine lease deeds, namely, the lease deeds Nos. 1 to 9 there was mention of the depth to which earth could be dug. In the other six leases there was no mention of any depth. It follows that so far as the last six leases namely, Nos. 10 to 15. are concerned the assessee could not, on his own argument, urge that the lump sum payment made by the lessee was for the purchase of raw material and not for the acquisition of an interest in land. In these subsequent leases the lump sum payment is described as nazrana and not as the price of earth. It follows that upon counsels argument the question of the character of the lump sum payment arises only, if at all, in respect of the first nine leases and not all in respect of the remaining leases.

Before the argument is examined on the merits by reference to the findings recorded by the Income-tax Appellate Tribunal and the materials in support of those findings including the nature and effect of the lease deeds and the proper construction thereof it may be stated that the description by a party of the nature of the transaction in the document under consideration is not conclusive. The description given by a party to a transaction may be inaccurate or may have been influenced by the desire to disguise the transaction. It is for the court in every case upon a consideration of the entire document to pronounce upon its real nature. I may refer to an observation by Lawrence J. in Stratford v. Mole & Lee and Old Silkstone Colleries Ltd. v. Marsh. Referring to the argument of Mr. Grant, counsel in that case, 'that it was obvious from the very words used that the intention of the party was no make a sale of goods and not to create a profit a prendre or any other interest in land', Lawrence J. observed :

'As to that, although it may be possible for parties to effect that purpose by the terms of the contract into which they enter, it depends upon what they really want to do and what they really intend to do, not only what they intend to say, and if what they intend to do creates a profit a prendre or interest in land, it will not prevent it being so merely because they say it is not to be deemed to be a profit a prendre or an interest in land.'

I may also quote the observations of our Supreme Court in this connection in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax (sic) :

'In order to determine whether a particular item of expenditure is of a revenue or capital nature the substance and not merely the form of transaction should be looked into;'

and in Sir Kikabhai Premchand v. Commissioner of Income-tax : In revenue cases regard must be glad to the substance of the transaction rather than to its mere form.'

It follows that the decision of the question in the present case depends not on the form of words used in lease deeds but on the real nature of the transaction evidenced by the first nine leases.

Before proceeding to decide the question I should like to quote an observation made by the Supreme Court in a recent decision where a similar of Income-tax. It is stated there as follows :

'What is attributable to capital and what to revenue has led to a long string of cases here and in the English Courts. A decision of the court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax and Pingle Industries case have considered all the leading cases, and have also indicated the test, which are usually applied in such cases... None of the tests is either exhaustive or universal. Each case depends on its own facts, and a close similarly between one case and another is not enough, because even a single signification detail may alter the entire aspect. In deciding such cases one should avoid the temptation to decide cases (as said by Cordozo) by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line the case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation, inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases.'

The nature of the business of the assessee-company in this case is the business of the manufacture and sale of tiles and bricks, lime and surkhi. From a perusal of the fifteen leases which are part of the paper book it is also clear that the modus operandi of the assessee is to erect kilns for burning tiles and bricks, to set up engines for the manufacture of lime and surkhi and to build workshops for these purposes on plots of land taken on lease in the usual course of its business. It is also necessary for it for carrying on its business to construct roads for purposes of transport and temporary structures to house its employees and workmen and to dig katchha and pucca wells to supply it with water for its manufacturing processes and for its employees and workmen.

The nature of its expenditure over the leases with which alone we are concerned is that the expenditure is incurred over leases of plots of lands for periods extending up to 15 years. In the case of the first nine leases, except in the case of one lease where the period is five years, the period of the other is 10 years. The consideration for the leases has been split up into two portions, a lump sum amount payable at the time of the execution of the lease and the other an annual payment payable during the term of the lease. In the first nine leases the lump sum payment is described as the price of the earth and the annual a payment as rent. In the remaining leases the lump sum payment is described as nazrana and not as the price of the earth. To my mind nothing at all turns on the description of the lump sum payment as the price of the earth. In this connection I may usefully quote from a decision of the Andhra High Court in Rajah Manyam Meenakshamma v. Commissioner of Income-tax. Subba Rao C.J. (as he then was) observed as follows :

'When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital income and the latter a revenue receipt. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price. It is not the form but what matters is the substance of the transaction. The nomenclature used may not be decisive or conclusive but it helps the court, having regard to the other circumstances, to ascertain the intention of the parties. In the decided cases, where the lease was for a long period and the documents provided both for salami and periodical payments of rent, the courts came to the conclusion that the initial payment was in the nature of a capital income.'

It cannot be disputed that the consideration for a lease may be premium plus rent or premium or rent alone. Thus merely because part of the consideration is payable as premium and part as rent both are parts of the total consideration of the lease. Premium has been defined in section 105 of the Transfer of Property Act as a price for the transfer of a right to enjoy the leasehold property and rent has been held to be a periodical payment for the continuous enjoyment of the benefits conferred under the lease. Merely because a party chooses to describe the lump sum payment or the premium or the nazrana or the price for the transfer of the right to enjoy the property by a particular name cannot alter the nature of the payment. It may be merely a device to describe the lump sum payment as a price to disguise the real nature of the acquisition as the purchase of the stock-in-trade and not as the acquisition of an asset of an enduring nature. Here the lump sum payment was for the entire area. If the earth of the entire area up to a certain depth was bought, what for was the annual payment made The annual payment was not illusory. Substantial interest in the land had been acquired. It is clear that the description of the lump sum payment as price of the earth alone was illusory and a disguise.

This leads to the consideration of the nature of the rights acquired by the assessee under the leases. Under the first eleven leases there was no substantial difference between the nature of the rights acquired. The rights were to dig earth, to erect brick kilns for manufacturing tiles and bricks, to set up engines for the manufacture of lime and surkhi, to build workshops, to construct roads, katchha and pucca wells, to put up temporary structures for the residence of employees and workmen. Besides these rights which were specifically enumerated, the assessee was given the general right to use the land in any manner it liked including the right to cultivate the land and the right to sublet it. Possession of the land under the leases was delivered to the assessee and continuity of possession was guaranteed by the lessor. It was provided that if the possession of the lessee was challenged or disturbed the lessee would be entitled to compensation and any expense incurred by it in maintaining its possession. In the remaining leases the right was only to construct the roads and to use the land in any manner which the lessee liked. It may be stated that the learned counsel for the assessee has pressed the case only in respect of the first nine leases and not in respect of the rest. This he did for the reason that it is in the first nine leases and not leases alone that a depth has been specified up to which only the lessee could dig and remove earth, Kankar and sand for the purpose of its business. By reason of the specification of the depth in these nine leases learned counsel argued that the actual description of the depth of the lump sum payment as price of the earth in the lease deeds was also the correct description as by reason of the specification of the depth up to which the digging could be carried on, the payment was a payment of the price of a measured quantity of earth which was the raw material required by the assessee for its business of manufacturing bricks. Learned counsel strongly relied on the Full Bench decision of the Lahore High Court in Benarsidas Jagannath and urged that as in that case, so in this case the lump sum payment should be treated as a revenue expenditure and not as a capital expenditure and should be allowed as a deduction under section 10(2)(xv). It appears to me that there are two difficulties in the acceptance of this argument. One is by reason of the decision of the Supreme Court in Pingle Industries v. Commissioner of Income-tax. In that case the question arose with reference to a payment made for acquiring a lease of the right to extract stones from quarries. Kanpur and Hidayatullah JJ. held the payment to be a capital payment, S. K. Das J. dissenting. At page 73 of the report S. K. Das J. observed as follows :

'I now refer to four decisions which in my opinion come closest to the controversy before us : 1. In re Benarsidas Jagannath, 2. Mohanlal Hargovind v. Commissioner of Income-tax, 3. Abdul Kayoom v. Commissioner of Income-tax (the Full Bench case of the Madras High Court in Abdul Kayoom and Hussain Sahib v. Commissioner of Income-tax has been reversed by the Supreme Court in Abdul Kayoom v. Commissioner of Income-tax) and 4. Stow Bardolph Gravel Co. v. Poole' and at page 74 he observed (re. the case of Benarsidas Jagannath).

'It is worthy of note that this decision was approved by this court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax' and again at page 75 referring to the observations of Bhagawati J. at page 45 of the report of the Assam Bengal Cement Cos case he observed as follows :

'I do not read these observations as merely indicating an approval of decision in Benarsidas Jagannath. In cases of this nature it is the application of the principles to the facts of a case which presents difficulties, and I do not think that this court would have made the observations it made, unless it was approving the actual decision in Benarsidas Jagannath in so far as it applied the principles to the facts of that case. I see no significant distinction between that case and the one before us. In both cases, what was acquired was raw material, earth in one case and stone in the other, and the payments made were the price of the raw material. The only distinction pointed out is the difference in the period of the contracts; that is a relevant factor but not determinative of the problem before us.... I think that the real test is, in the context of the controversy before us, what was acquired - an enduring asset or advantage, or raw materials for running the business Judged by that test the present case stands on the same footing as the case of Benarsidas Jagannath.'

I have quoted these observations of S. K. Das J. to show two things : (1) that the learned judge was of the opinion that the Supreme Court had approved of the decision in Benarsidas Jagannaths case in Assam Bengal Cement Co. case, and (2) that the case in Pingle Industries Ltd. stood on the same footing as the case in Benarsidas Jagannath and as such the amount spent in acquiring the right to extract stones from quarries should be held to be a revenue expenditure and not a capital expenditure.

The majority view was, however, different on both the points. Hidayatullah J. who delivered the majority judgment in the case observed at page 87 as follows :

'The approval given to Benarsidass case by this court does not extend beyond summary of the tests settled in it, and the tests have to be applied to the facts of each case in the manner indicated by this court. But the actual decision was not before this court, and cannot be said to have been approved.'

With regard to the facts of Benarsidas case Hidayatullah J. observed at page 86 as follows :

'In Benarsidass case the person sought to be assessed was a manufacturer of bricks. He had obtained certain leases for digging out earth for his manufacture. Under the deeds which gave him this right, he could dig up to a depth of 3 ft. to 3 1/2 ft. He had no interest in the land, and as soons as the earth was removed his right was at an end.'

The learned judge also observed at page 87 that the contracts in the case before them were long term contracts, implying thereby that it may be different where the term of the contracts is a short one as in the case of Benarsidas Jagannath and even though the term may not be a determinative factor it was a relevant factor.

From these observations it appears to be clear that even though not expressed in so many words the majority view of the Supreme Court was not an approval of the actual decision in Benarsidas Jagannath case. Assuming, however, that them Supreme Court did not overrule the case of Benarsidas Jagannath let us examine the facts of that particular case to see how far it can be of assistance to the learned counsel in this case. There were several leases of lands containing brick earth in that case. Two of these leases on the special terms of which the decision turned were exhibits TG and TH printed at pages 189 and 190 of the report. The term of the first lease was one year and eight months and of the second lease only one year. The right to dig earth was confined to 3.5ft. in the first and to 3 ft. in the second. The lump sum consideration in the first lease was Rs. 570 and in the second Rs. 257-8-0. No annual payments were to be made. The lessee under both the leases was to vacate the land as soon as the digging was over. On the basis of these terms Mehr Chand Mahajan J. who delivered the judgment of the Full Bench observed at page 196 of the report as follows :

'... they provide for the purchase of earth alone and confer no substantial rights in the land at any rate such as are not subsidiary for the purpose of digging the earth. The main object of the agreement s was no other than the procuring of earth for the purpose of preparing bricks.... The agreements.... clearly prescribed the limits not only to the extent of the length and breadth of the land but even the extent of its depth to which earth was to be excavated. These agreements did not convey the property in favour of the assessee. In effect and substance, they are for the purchase of earth with a privilege to enter upon the land for the purpose of digging and removing the earth. The agreements evidenced by these transactions are transitory in character and the whole intention and purpose of these so-called leases was to procure raw material for the manufacture of bricks. Once the earth was dug and removed, the right created by these agreements in the assessee had automatically to come to an end. The arrangements evidenced by these documents can neither be given the status of leases nor of permanent grants. All that may be reasonably suggested is that they confer on the assessee temporary rights of easements, even if they are found to vest some very limited and insignificant interest in the land out of which earth had to be dug. But no advantage of a permanent nature of an enduring character can be held to have been gained by them. In short, the transaction evidenced by these leases were for the sale of earth.'

It is needless to say that the rights acquired by the assessee in our case even under the first nine leases are of an altogether different quality and content than the rights under the two leases in the Lahore Full Bench case. The leases in our case confer substantial rights in the land. The main purpose of the leases is not merely to provide the lessee with earth which is the raw material for his manufacturing business but of providing him with an interest in land for setting up brick kilns, engines, work-shops and residences for carrying on his manufacturing business. In other words the leases provide him with an asset of an enduring nature. Here we have a transfer of property in a real sense and not merely as being incidental to the right of digging the earth. The rights extend also to using the land in any other way that it may choose to use it and even to cultivate the land. It has also acquired the right of subletting the land. In the absence of demarcation of the area for digging from the area for other uses the mere specification of depth did not result in quantification of the earth to be dug.

In Benarsidas case itself a distinction was drawn between leases exhibits TG and TH and lease exhibit TD. With regard to that lease, the learned judge observed at page 204 of the report as follows :

'The other agreement, exhibit TD, however, is of a different character. It is a lease of land for a period of 20 years and confers cultivating rights in land on the assessee and cannot be regarded as merely an arrangement made for the purchase of earth. It is a conveyance of the land for twenty years to the assessee and amounts to the acquisition of an asset to the trade of a permanent character. It is a payment made once and for all for the acquisition of a benefit of an enduring advantage and more resembles a case where to save labour bill a tradesman buys a labour saving machinery rather than a case of a person who buys raw material in advance. The sums spent under the agreement cannot be held to be valid deductions...'

The learned judge summarised his conclusion in the penultimate paragraph of the judgment as follows :

'.... expenses incurred to exhibit TE, page 192 (similar to exhibits TG and TH) are admissible deductions while sums spent for obtaining leases for a substantially long period varying from 10 to 20 years cannot be held to be valid deductions.'

The learned judge attached considerable importance to the term of the lease. If the term was 10 to 20 years the learned judge would not allow expenditure in obtaining the lease as an admissible deduction of a revenue nature. It has been noticed that the terms in exhibits TG and TH were only one year and eight months and one year respectively. It follows that apart from other considerations only by reason of the ten years term of eight of the present leases and the five years term of the remaining lease the learned judge in the Benarsidas case would not have allowed the expenditure in the present leases as an admissible deduction. It may be mentioned that the Supreme Court did not hold that the length of the term was an irrelevant consideration. It only held that it was not be itself determinative of the question. Apart from this as already shown above under the leases with which we are concerned the assessee acquired a substantial interest in land and not merely the right to dig earth even though that right was limited by specification of the depth. The mere description of the premium as price of the earth can make no difference to the real position which arises under the leases. It appears to me that the description of the premium or nazrana as price was a mere device to disguise the real nature of the transaction for purposes of claiming an allowance under section 10. The result is that for the reasons stated above the questions referred to this court in these references should all be answered in the negative and against the assessee.

The references be returned to the Income-tax Appellate Tribunal, Allahabad, with the above answer. The department should be entitled to its costs fixed at Rs. 100 in each case.

Questions answered in the negative.


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