1. This is a reference by a Division Bench in what was a reference to that Bench under Section 66-A of the Income-tax Act, 1922.
(2) The material facts leading up to this Reference may be shortly stated as follows :-
3. The assessee is a firm called 'Ramlal Kachhawa and Sons, Banner', otherwise also known as 'Ramlal and Sons'. It was assessed for income-tax for the year 1952-53, the corresponding accounting year having ended on 31st of March, 1952. The question before us arises Out of the firm's new business of mica mining in Mandol in Udaipur Division. The State Government invited tender for fresh leases of a certain area of mica-bearing tract in Udaipur and Bhilwara Districts as per notice No. 9453 dated 29th March, 1950 (Annexure 'A') in accordance with the Mineral Concession Rules, 1949, subject to certain modifications mentioned therein. Prospective applicants were advised that the mines, quarries and prospective pits had acquired a value which can be determined by the principles of 'Mine Valuation' and that the intending applicants should visit the area and assign their own value and tender for the same under 'a sealed cover'.
It was also mentioned therein that the amount so offered will be one of the factors on which selection of the lessees will be made, the other factors specified being -- experience in mining, proved competence and sound financial position, though these qualifications were not insisted on in the case of displaced persons with which class of case we are not concerned. The whole area having been divided into certain blocks in three separate parts which were called 'A', 'B' and 'C', it was notified that for. these areas falling in Part 'A', a dead rent of Rs. 8/-. per acre will be charged,, white of areas in Part 'B' and 'C'' like rent of. Rs. 3/- and Rs. 5/- per acre will be charged respectively. It was also made clear that annual dead rent would be payable from the second year of the lease in four quarterly instalments, except, where the Government should direct otherwise far special reasons, and all instalments would be required to be paid in advance.
Two other provisions contained in the notice to which it is necessary, to draw attention are, first, that the rate of royalty was to be 10% of the sale value of mica at pit's mouth and a formula for calculating it was laid down but into the details of which it is not necessary to enter for the purpose of the present reference, and secondly that the period of the lease was to be 20 years with option of renewal for another 20 years as per conditions prescribed in the Mineral Concession Rules, 1949. In pursuance, of this notice the assessee firm made a tender for Block No. 6 in Part 'A' and offered its tender, the tender price, being Rs. 1,55,000/-. By its letter No. 12406, dated 3oth of December, 1950, (Annexure 'B'), the Government of Rajasthan accepted this tender by which a lease for period of 20 years with option of renewal for another 20 years as per conditions prescribed in the Mineral Concession Rules, 1949, was granted to the assessee firm for the aforesaid area subject only to such variations as were contained in the letter of acceptance.
It may be pointed out in this connection that the rate of royalty was reduced from 10%, as specified in the tender notice to 5% only A formal lease agreement was required to be en-tered into between the parties but admittedly that does not appear to haye been done until the 30th of March, 1954. It is also admitted that the assessee firm had worked the mines in the accounting year ended on the 31st of March, 1952. Consequently it claimed to deduct the entire sum of Rs. 1,55,000/- from the income accruing during that year. The Income-tax Officer, however, rejected this claim on the ground that it was clearly of a capital nature. The assessee then went in appeal to the Appellate Assistant Commissioner. The aforesaid contention was reagitated before him, and, in the alternative, it was contended that as the period of lease was 20 years certain, at least 1/20th of the value should be allowed as revenue expenditure for the year in question.
The appellate Assistant Commissioner rejected this claim on the ground that the said expenditure was incurred to acquire an 'advantage for the enduring benefit of trade' and therefore it could nob but be treated as capital expenditure. Aggrieved by this decision, the assessee went in further ap-peal to the Income-tax Appellate Tribunal, Bombay Bench 'C'. The contentions which we have set out above and which were raised before the Appellate Assistant Commissioner were not pressed before the Tribunal but an altogether new contention was raised before it, and that contentions was that as no dead rent was payable by the assessee for the first year, a certain element of rent was necessarily included in the payment of Rs. 1,55,000/-/- which was to be made by the assessee under the terms of the lease.
This plea was resisted on behalf of the Depart-ment and it was submitted that the payment in question was of a capital nature and could not be dissected in the manner sought for by the assessee. This objection was, however, ruled out, and the Tribunal held that as three payments were to be made under the agreement, and one of them was in connection with the rent and no provision therefore had been made for the first year, it would be reasonable to hold that a reasonable portion of it was rent, and having regard to the rent which was paid by the assessee for the next following year, the Tribunal further came to the conclusion that the portion ascribable to rent in the sum of Rs. 1,55,000/- may reasonably be fixed at Rs. 25,000/-. Thereafter the Commissioner of Income-tax required the Tribunal to refer the following question of law to the High Court :-
'Whether on the facts and in the circumstances of the case and on a proper construction of the lease deed, the Income-tax Appellate Tribunal was right in holding that a slim of Rs. 25,000/- is ascribable to rent for the first year out of the sum of Rs. 1,55,000/- paid by the assessee as tender money?'
The Tribunal, however, observed that the real pioint of the reference was not whether the sum of Rs. 25,000/- could be ascribed to rent, but whether any portion of the sum of Rs. 1,55,000/- could be ascribed to rent, i. e., dead rent for the first year, and on this view of the matter referred the question, and it is this question that has been referred to us :-
'Whether on a true construction of the notice dated 29th March, 1950, and the letter of acceptance dated December 30, 1950, any portion of the sum of Rs. 1,55,000/- can be considered as dead rent payable for the first year of mica mining lease?'
The Tribunal further observed that it was common ground between the parties that if the sum of Rs. 1,55,000/- included any element of dead rent, then that element would be an item of 'reve-nue expenditure'.
4. It is in these circumstances that the particular question for determination before us as to what was the real character of the payment of Rs. 1,55,000/- made by the assessee to the Government and whether that payment included any element of rent in it so far as the first year of the lease is concerned.
5. We have heard learned counsel for the parties and perused the entire relevant record including the notice issued by the Government dated the 29th of March, 1950, and its letter of acceptance dated soth of December, 1950. It is indeed not disputed before us, nor is it disputable, that no dead rent was chargeable from the assessee for the first year of the lease. The further question that arises for consideration before us is whether that was conclusive of the question whether anything in the shape of rent was payable at all to the Government by the assessee for that year, and in that Connection it clearly seems to us that the Tribunal was not quite right when it entertained the view) that no such payment was to be made at all. The principal reason which persuades us to come to that conclusion is that there is a provision both in the notice and in the letter of acceptance referred to above that the assessee was required to pay even for the first year of the lease a certain amount of royalty. After providing in Paragraph 12 (d) of the notice that annual dead rent will be pay-able from the second year of the lease, the payment to be made at certain specified points of time mentioned in the paragraph itself, it was laid down in Paragraph 13 that a certain amount, of royalty will be payable at 10% on a certain formula which has been mentioned in that paragraph.
In the letter of acceptance the royalty was also required to be paid, though there was a variation in the rate. It may also be pointed out at this place that ganerally speaking the assessee was required to start mining operations within one month of the grant of the lease. During the course of the arguments before us, we called upon learned counsel of the assessee to tell us precisely whether the assessee was required to pay both dead rent as well as royalty for the years next following the first year, but he was unable to give us any satisfactory answer, on that point. This made it, necessary' for us to look into the Mineral Concession Rules, 1949, as we thought that these might throw light on the point on which we required enlightenment, and we are glad to note that they certainly make the position quite clear in this respect. That position is stated in Clause (iii) of Sub-rule (i) of Rule 41 and its proviso which read as follows :-
'41.--(1) ** ** **(iii) The lesssee shall also pay, for every year, except the first year of the lease, such 'yearly dead rent within the limits specified in the Third Schedule to these Rules, as may be fixed by the State Government in the lease; and if the lease permits the working of more than one mineral in the same area, the State Government may charge separate dead rent in respect of each mineral: Provided that the lessee shall be liable to pay the dead-rent or royalty in respect of each mineral, whichever be higher in amount, but not both.'
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This makes it crystal clear that the assessee was not required to pay both the dead rent' and the royalty for any particular year, and that the general rule was that he would not be required to pay the dead rent for the first year also. This later provision seems to be based on the principle that the lessee will be hard put to it if he was required to pay a fixed sum by way of dead rent for the very first year of production inasmuch as it may not be possible for him to bring his work of production in full swing for obvious reasons; but, what we should like to emphasize is that that does not mean that he is not required to pay anything to the Government by way of rent even for the first year. He has to pay royalty to the Government and royalty, in our opinion, is more or less rent based on the amount of material produced, being a payment proportionate to the amount of the mineral worked or produced within a given area in a certain period.
At this stage, we should also like to point out that the Tribunal does not seem to us to be quite accurate when it stated in its order that the lessee was required to make three payments in this case, to wit (i) tender money (2) dead rent and (3) royalty. As we have analysed the whole position, it clearly seems that only two payments were actually required to be made, the one payment of Rs. 1,55,000/- being a general one for the acquisition of the particular lease, and the second toeing either royalty or dead rent whichever was higher in amount, except that, for the first year, no dead rent was to be charged. It is in this background that the question whether there is an element of rent in the payment of Rs. 1,55,000/-made by the assessee as tender money falls to be determined. On a most careful and anxious consideration of the matter, our answer to this question is in the negative. As we have already pointed out, we are unable to accept the view of the Tribunal that no rent whatsoever was payable by the assessee to the State Government for the first year of the lease for such rent was paid by it in the shape of royalty.
The mere fact that the condition as to the payment of dead rent did not enure for the first year cannot alter that fundamental position. As we look at the real nature of the payment of rs. 1,55,000/-, it clearly seems to us that it has hardly anything to do with any payment by way of rent or royalty, as such, and this was a payment which was required to be made by the assessee over and above this, and as the notice puts it, it was merely a bid price based on certain principles of mine valuation for the acquisition of mining rights in certain areas which having been previously worked by other lessees had acquired a value. In fact, the Tribunal itself in the very opening part of its order refers to this payment as 'bid price while tendering for the lease of mica mines in Rajasthan'. A little later, it further went on to hold, as follows :-
'As laid down by the Supreme Court; in Assam Bengal Cement Co., Ltd. v. Commr. of Income-tax West Bengal : 27ITR34(SC) there can be no doubt that Rs. 1,55,000/- was an amount paid for the right to work the lease for winning mica.'
There can be no doubt, therefore, that it was in the nature of capital expenditure, and, with all respect, it appears to us to be a contradiction in terms to say that it includes therein an element of rent which would be a revenue expenditure. The only argument which seems to have prevailed, however, with the Tribunal was that there was a term in the lease deed which required the lessee to start mining operations within a month of the lessee's possession of mines, and that no provision was made for rent in the first year and therefore in its opinion it was reasonable to hold, that a reasonable portion of it was rent. To us this approach involves a clear fallacy. For one thing, as we have already shown, on the finding of the Tribunal itself, this was a payment of a capital nature. For another, rent was required to be and had in fact been paid by the assessee even for the first year of the lease in the shape of royalty, and therefore, it cannot be legitimately deduced that no rent was paid at all for that year and it was on that score reasonable to treat a portion of the amount paid by way of bid money for the acquisition of the lease as rent.
We should also like to emphasise that in no year the lessee was or could be required to pay both the dead rent and royalty either according to the terms of the lease or the Minor Mineral Con-cession Rules of 1949 and that all that he was required to do was to pay the higher of the two amounts and not both. Learned counsel for the assessee strongly urged before us that he would not have offered the bid price of Rs. 1,55,000/- for this lease if he was required to pay rent for the very first year of the lease. At the best, this argument appears to us to be entirely conjectural, and, at the worst, as we have already shown, it is futile for him to argue that no rent had been paid by the assessee for the first year for the assessee' s liability to pay royalty was unquestionable.
6. For the reasons mentioned above, our answer to the question referred to us is in the negative. The respondent will pay the costs of the Department in this Court.