I. N. MODI J. - This is a reference by the Income-tax Appellate Tribunal, Bombay bench B, under section 66 (1) of the Indian Income-tax Act 1922. The reference is a consolidated one, arising out of the Tribunals orders in Income-tax Appeals Nos. 7195 to 7197 of 1959-60, inasmuch as a common question of law admittedly arises therein. That question is as follows.
'Whether on the facts and in the circumstances of the case the sum of Rs. 96,000 paid by the assessee during each of the relevant accounting years was rightly allowed as a revenue deduction in computing the business profits of the assessee company ?'
The facts leading up to this reference may be stated as under. The assessee is a registered firm bearing the name, Messrs. Gotan Lime Syndicate. Gotan, and carries on business in the manufacture of lime from limestone. The assessee was assessed to income-tax for the assessment years 1954-55, 1955-56 and 1956-57, the corresponding accounting years being the respective financial years from 1953 to 1956. During each of these years, the assessee paid a sum of Rs. 96,000 to the Mines Department of the Rajasthan State as contract money and claimed it as a deductible expenditure under section 10 (2) (XV) of the Income-tax Act of 1922. This was disallowed by the Income-tax Officer and the Appellate Assistant Commissioner as being capital expenditure. On appeal, the Income-tax Appellate. Tribunal, Bombay Bench B, however, allowed it as revenue expenditure. Thereupon the Commissioner of Income-tax asked for a case to be stated to this court on the question of law arising out of the orders of the Tribunal, and this is how the present consolidated reference has arisen.
By an indenture dated the 4th March, 1949 (annexure 'A'), entered into between the assessee and the Government of Jodhpur, as it then was, the assessee acquired the right to excavate limestone in what is called the acquired area in two villages, namely, Gotan and Tunkaliyan, as well as the monopoly rights to prepare lime therefrom, subject to certain conditions which were set out in that document. By clause (1) of this agreement, it was provided that the excavation of limestone would be made only in the area acquired for this purpose at the villages named above and that if the contractors should encroach upon cultivable land or on bapi holdings in connection with the contract, they would have to obtain the permission of the Mines Department of the State for such encroachment and pay compensation to the holders of the lands intended to be encroached upon, as determined by the Government. Under clause (2) it was provided that lime prepared in the area defined in clause (1) could be sold within the same area or outside it except where similar other leases existed or might later be entered into, subject to certain conditions which it is unnecessary to mention for our present purposes. Clause (3) then prescribed the rates at which the various qualities of lime could be sold. By clause (5) it was provided that the contractors would have to erect and work an adequate number of kilns to meet the demand for lime, failing which the monopoly right could be withdrawn without any compensation being paid to them. Under clause (6) it was laid down that any person wishing to bring lime from any place outside the area defined in clause (1) for his personal requirements would be at liberty to do so with the permission of the Mines Department and the contractors would not be entitled to levy royalty on such lime. Clause (7) relates to the term of this monopoly contract and lays down that it was to ensure for a period of five years from July 15, 1947, to July 14, 1952. By clause (8) it was provided that the contract though heritable would not be transferable. It was further provided thereunder that any sub-letting of the contract would render it liable to cancellation, and in that case no claim for compensation would be entertained. By clause (10) it was provided that the lessee would pay the contract money of Rs. 1,81,000 in the first year which was liable to be increased by ten per cent. after the first two years, and thereafter according to a graduated scale set out in the agreement, and the contract money was agreed to be payable in quarterly instalments in advance which were specified in the indenture. By clause (13) it was agreed that the contract would be terminable on six months notice on either side. The last clause to which it is necessary to refer in this connection is No. (15) under which it was provided that the quarrying of limestone in the acquired area would be done on approved lines as directed by the Government from time to time.
By its letter dated the 14th July, 1952 (annexure 'B'), the Government of Rajasthan (and not the Government of Jodhpur as mentioned in the statement of facts drawn by the Tribunal) extended the contract by a period of two months, warning the assessee that it will have to vacate the area on the 14th September, 1952, without any further notice. By a further letter dated the 15th September, 1952 (annexure 'C'), a further extension of two months was ordered. This was followed by another extension up to 31st March, 1953, on the 'clear understanding that you will have to vacate the area on the expiry of this extended period, that is, on 1st April, 1953, without any further notice and that you will have no claim whatsoever over the area after the due date.' (See annexure 'D' dated the 19th November, 1952). By a subsequent letter dated the 17th December, 1952 (annexure 'E'), the Government of Rajasthan further clarified the position by saying that the extension granted to the assessee would ensure either up to the 31st March, 1953, or until the finalisation of the proposals for leasing out the area whichever may be shorter and that it will have to vacate the area when asked to do so. By a letter dated the 1st December, 1953, from the Secretary to the Government in the Commerce and Industries Department, Rajasthan, to the Director of Mines and Geology, Rajasthan, Udaipur (annexure 'F'), it was intimated that the Government had adopted a new policy for leasing out limestone quarries in the Jodhpur Division according to which it was proposed, inter alia, to divide limestone quarries including those at Gotan into blocks of five square miles each and dead-rent was to be charged at Rs. 10 per acre for all blocks and royalty at 1 a. 6 ps. per maund lump-lime and one anna per maund of limestone. It was further mentioned therein that the period of lease will be five years with an option of renewal for another five years and that the minimum area to be granted to a party will be 10 sq. miles and the maximum 39 sq. miles. It was, however, mentioned in this letter that before the above proposals could be given practical effect, it was necessary to give them a legal shape under the Indian Mines Act and that the Rules so framed would be called 'Rules for Extraction of Vindhyan Limestone in Jodhpur Division' and further action was ordered accordingly. Consequently, the Jodhpur Division Vindhyan Limestone Mining Leases Rules, 1954 (annexure 'G'), were framed.
These rules as stated in their preamble seek to regulate the grant of mining leases of Vindhyan limestone deposits in Jodhpur Division only. They clearly contemplate the invitation of applications in respect of a particular limestone deposit and the grant of a lease for the same in accordance with the procedure laid down in the Rules. It may be noted at this place that such a lease was transferable under certain conditions. It may also be noted that rule 18 of these Rules lays down that the period for which a mining lease may be granted shall be five years and that the lease shall be renewable at option of the lessee for a further period of five years. It has been further provided under this rule that when renewal is granted, the rate of dead rent and royalty may be revised by the Government provided that if the rate thereof is raised, it shall not exceed more than 50% of the original rate of the lease. Rule 19, inter alia, lays down that the lessee shall not encroach upon cultivable land or bapi holdings within the leased area unless with the previous permission of the Director of Mines and Geology and on payment of necessary compensation to the holder of such land as determined by that officer, and, further, that on expiry or sooner determination of the lease, the lessee shall remove all stock of limestone or its products and movable property within six months from the date of expiry of the lease and must pay the royalty on the stock within such period, and that if he fails to do so, the entire stock and movable property shall be forfeited to the Government. This rule also provides that all arrears of rent and royalties shall be recoverable under the Public Demands Recovery Act and that the Director of Mines and Geology may determine the lease if such dues remain in arrear for more than three months. Rule 20 lays down that the lessee may determine the lease at any time by giving not less than 12 months notice in writing to the Director of Mines and Geology. It may also be pointed out that these rules contemplated that a proper lease agreement shall be executed by the lessee in accordance with the agreement form appended to the Rules. It is admitted between the parties that no such agreement was executed between the assessee and the State. By Schedule I of these Rules, the royalty payable by the lessee was fixed at one anna per maund in the case of limestone and 1 a. 6 ps. in the case of lump-lime, and by Schedule II it was provided that dead-rent would be paid at Rs. 10 per acre per year, but if the royalty annually paid should be higher, then the latter would be payable but not both.
By a letter dated the 4th October, 1954 (annexure 'H'), from the Secretary to the Government in the Commerce and Industries Department, Rajasthan, Jaipur, to the Director of Mines and Geology, Rajasthan, Udaipur, the former conveyed sanction of His Highness the Rajpramukh to lease out to the assessee an area of 15 square miles of lime deposits at Gotan in three blocks selected by the assessee on the terms and conditions mentioned in the Jodhpur Division Vindhyan Limestone Mining Leases Rules, 1954, a copy of which was enclosed, and it was further stated that the said Rules had been approved by the Government. It was also stated in this letter that the assessee would have the option of relinquishing 5 sq. miles area if business competition necessitates the same. It was further pointed out - and this is important to note - that the assessee would pay Rs. 96,000 per year to the State as agreed to by it before the Chief Minister (Industries) for the period between the 30th July, 1952, up to the date 'the new lease is given effect to, ' and that the assessee had agreed to pay a similar sum for the future on the basis of dead-rent under the new proposals for 15 sq. miles at ten rupees per acre. A further direction was given that the lease agreement be got executed by the lease at an early date and a copy of this letter was forwarded to the assessee for early compliance. As already stated, this agreement was somehow never executed.
Reference at this stage may also be made to a letter of the Mining Engineer, Jodhpur, dated the 30th November, 1959 (annexure 'I'), to the assessee in which it was stated that on checking the figures of export of limestone, lime kali and lime kachra for the settlement of royalty, the amount of royalty payable in the following years was as under :
to 31st March
We are not concerned with the figures for the years 1956-57, 1957-58 and 1958-59 which were also mentioned in this letter. This officer further state in his letter that at the end of each financial year it was found that the accrued royalty amount worked out to a far lesser sum; and, as such, 'as per agreement royalty payable is Rs. 96,000 in all the years above written'. It was further stated in this letter that the 'royalty' for each of these years was settled after the end of each year, i.e., in the subsequent year.
Thus for the assessment years under consideration, the assessee paid a sum of Rs. 96,000 to the State Government and seeks to claim it as a deduction against its profits for those years under section 10 (2) (xv) of the Income-tax Act. As already stated, both the Income-tax Officer and the Appellate Assistant Commissioner disallowed this, holding that the expenditure was of a capital nature. The Appellate Tribunal on further appeal disagreed with this view, as, in its opinion, the expenditure in question was of a revenue nature, and it is this question which arises before us for decision in this reference.
Now, the question whether a particular expenditure which has been incurred by an assessee in connection with his business is of a revenue nature or of a capital nature is many a time one of no small difficulty or complexity. The Income-tax Act itself has not defined the phrase 'capital expenditure' and the reason for this omission is perhaps not difficult to visualise because the task of evolving a precise yet comprehensive definition of this phrase is attended with tremendous difficulties. Again, it is true that a volume of case law has grown around this subject both in England and in our own country; but; if we may say so, with all respect, it seems to us to have been unhesitatingly accepted by various eminent judges that it is not possible to evolve any satisfactory or conclusive test or tests which should admit of universal application in all situations. Indeed the question is not unoften one of such perplexity that the one conclusion on which the cases taking diverse views seem to agree is that it is not possible to lay down any hard and fast formula or to enunciate any rigid or scientific principle which could be applied as a sure criterion to all the cases, and, therefore, the practical rule that is laid down is that each case must be decided having regard to its own peculiar facts and circumstances.
This question has come up before our Supreme Court in three cases in recent years, namely, Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, Pingle Industries Ltd. v. Commissioner of Income-tax and Abdul Kayoom v. Commissioner of Income-tax and it will be our obvious duty to refer to the various tests which, though not conclusive, have been discussed and applied in those cases as of obvious assistance in determining the difficult question which has been raised before us in the present case.
But, before we do so, we may briefly state the respective cases of the rival parties before us.
It has been strenuously contended before us by learned counsel for the department that this was a case where the assessee did not merely carry on a manufacturing business of preparing lime from limestone but it also carried on mining operations for the purpose of finding out limestone, and, therefore, in having obtained a lease from the State Government of the land under reference in connection with its business, it was not purchasing the raw material thereby, but the correct position was that it had acquired a source from which to obtain the necessary raw material, the quantity of lime produced being not limited by contract and depending upon its own financial and other resources. It was further contended in this connection that the lease in this case was for a period of five years certain, extensible by renewal for another period of five years at the option of the lessee, and that this was sufficiently long to enable it to acquire a benefit of enduring benefit to its business. Furthermore it was submitted that the payment of Rs. 96,000 annually made by the assessee to the State was a fixed payment which was in the nature of compensation for the asset acquired by it and that the mere periodical nature of this payment should not be sufficient to take it out of the ambit of capital expenditure. It was also stressed in this connection that this amount was payable by the assessee entirely irrespective of the consideration as to the quantity of the limestone quarried by it or of its manufacture into lime as a marketable commodity. A further point that was sought to be made in this behalf was that the assessee had been given a monopoly right to carry limestone and convert it into lime and to sell it in its own area or outside that and there was no restriction as to the depth to which it may go in its quarrying operations and, therefore, as to the quantity of lime that it might manufacture. And on these grounds the submission of learned counsel for the department was that this was a capital asset acquired by the assessee and the expenditure incurred in connection therewith must be held to be a capital expenditure and not revenue, and, therefore, the opinion entertained by the Appellate Tribunal should be held to be wrong and untenable. In support of his submission, learned counsel placed strong reliance on the decision of the Supreme Court in Pingle Industries Ltd. v. Commissioner of Income-tax.
On the other hand, it was equally strenuously contended by learned counsel for the assessee that no lease deed having been executed between the parties as contemplated by the Rules of 1954, and having regard to the short extensions granted to it from time to time as already pointed out, the position of the assessee was a most precarious one, and it could not therefore be said that there was any lease in favour of his client of which it could take advantage, according to law, and that it would be more correct to say that its position was that of a mere licensee who had been granted the liberty or privilege to excavate limestone and to prepare lime in a certain area. Learned counsel further contended that the real nature of the payment in controversy was that if was not 'a once and for all' payment but a 'recurring' or a 'periodical' one and that this payment was not of a fixed amount but was in fact the minimum royalty payable by the assessee liable to enhancement if the royalty amounted to more than what is called dead-rent in the Schedule to the Rules of 1954, depending upon the lime produced and, therefore, it was obvious that such payment was made to obtain raw material for the carrying on of the business of the manufacture of lime from limestone. Furthermore, learned counsel submitted that the main business of the assessee was to manufacture lime and not of a miner and that it was in connection with its manufacturing business that it had agreed to pay the amount of Rs. 96,000 annually to the State so as to be able to get raw material for that business, and as this payment was in the nature of annual royalty on the goods produced in the quarries, there was and would be no justification for holding that this amount was spent for the acquisition of any capital asset to the assessees business, and, therefore, there could be no question of this expenditure having been incurred for the acquisition of an asset of enduring benefit to the assessees business. In support of his submissions, learned counsel placed strong reliance on the decision of the Privy Council in Mohanlal Hargovind v. Commissioner of Income-tax.
At the very outset we think it proper by way of clearing the ground to determine the precise position of the assessee vis-a-vis the so-called lease of lime deposit with which we are concerned and to examine whether the lease was for a long or considerable period as claimed by the counsel for the department or the tenure thereof was a precarious one as contended for by learned counsel for the assessee, and further ascertain whether the payment of Rs. 96,000 was a fixed payment which had to be rendered by the assessee to the State as compensation in lieu of the rights acquired by it or it was in the nature of a royalty depending upon the quantity of goods produced by the assessee in the area allotted to it.
Now, it is unquestionable that no lease deed was actually executed (for reasons which are not disclosed on this record) between the assessee and the State as it should have been done both in accordance with the Rules of 1954 or in compliance with the direction contained in the letter dated the 4th October, 1954, from the Secretary to Government, Commerce and Industries Department, Rajasthan, Jaipur, to the Director of Mines and Geology, Rajasthan, Udaipur, annexure 'H', referred to above. Even so, it is forcefully contended by learned counsel for the department that the sanction of His Highness the Rajpramukh had been conveyed under the last-mentioned letter to lease our an area of 15 sq. miles of lime deposits at Gotan in three blocks to the assessee on the terms and conditions mentioned in the Rules of 1954, and that it clearly appears from this letter that the fixed sum of Rs. 96,000 per year had been agreed to be paid by the assessee to the State from the time of the expiry of the old lease granted by the then Jodhpur Government, that is, from effect to, and further that the assessee had also agreed to pay Rs. 96,000 per year for the future 'on the basis of dead-rent under the new proposals', that is, in accordance with the Rules of 1954. It was further contended that these Rules were statutory, inasmuch as they are stated in the preamble thereof to have been made under rule 4 of the Mineral Concessions Rules, 1949, and clause 18 thereof clearly provides, inter alia, that the period for which a mining lease may be granted shall be five years and that the lease shall be renewable at the option of the lessee for a further period of five years. The contention of learned counsel for the department, therefore, was that in spite of the fact that no lease deed had been executed between the parties, the statutory condition prescribed under clause 18 would still be attracted and, therefore, the period of the lease in this case must be taken to be five years at the minimum and the lessee was further entitled to have it renewed at his option for another term of five years subject to certain conditions mentioned in the rule itself. In support of his contention, learned counsel invited our attention to a Bench decision of this court in Hari Shanker v. State of Rajasthan. The question which arose in that case was whether rule 30 of the Mineral Concessions Rules, 1955, which, broadly speaking, lays down that a mining lease may be granted for a period of five years, unless the applicant himself desires a shorter period, was mandatory in the sense that a lease for less than five years could not have been granted and that the lease deed irrespective of its having been granted for a shorter term should be held to be good for a period five years with option of renewal as mentioned therein. It was held that these Rules were statutory and must be obeyed by the authorities in charge of the settlement of the mines and minerals, and that although the grant of the lease may be discretionary, yet when the lease had been granted, it must be for a period of five years unless the applicant himself wants it for a shorter period. In other words, the choice for a shorter period lies with the applicant; but so far as the authority responsible for the granting of the lease is concerned, it is obligatory for him to grant it for a minimum period of five years and not less. The Rules of 1954 contain an analogous provision and the principle of he above case, in our opinion, is fully attracted in the present and is indeed binding on us. We are fully alive to the fact that from the middle of July, 1952, to the grant of the new lease in the beginning of October, 1954, the Government grants a few small-terms extensions to the assessee but these appear to us to have been regularised with mutual consent by subsequent happenings and do not substantially affect the essential nature of the position involved.
Apart from that, we do think that when the Rajpramukh had, according to the letter dated 4th of October, 1954 (annexure 'H'), referred to above, referred to above, regularised the whole case and sanctioned the lease in favour of the assessee on the terms and conditions mentioned in the Rules of 1954, then rule 18 of these Rules was at once attracted, and, that being so, it must reasonably follow from the provisions contained in that rule that the term of lease was for a period of five years certain, and that it was further capable of renewed for a term of another five years at the option of the lessee subject to revision in the amount of the dead-rent or royalty payable on the contract. We further think that this position could not be adversely affected simply because, for some reason or another, which has not been explained on this record, the parties did not fulfill the formality of executing a lease deed as such. It is also important to bear in mind that a copy of the letter, annexure 'H', was also communicated to the assessee. We, therefore, find it not a little difficult to accept that the State Government could have lawfully gone back upon what it had expressly committed itself to, in the letter, annexure 'H', or that it can be lawfully and reasonably maintained that the assessee was merely at the mercy of the State and could be turned out at its sweet will and pleasure or by a simple notice to quit. On a careful and anxious consideration of this aspect of the case, we fell persuaded to think that the position of the assessee was not as precarious or nebulous as its learned counsel would have us accept, and that the correct position in law is and must be that whatever right, advantage or privilege was granted to it under this arrangement was available to it for a period of five years certain, apart altogether from its renewability at the option of the assessee for another period of five years. We hold accordingly.
As to the next point about the nature of the payment of Rs. 96,000, that is, whether it was a fixed annual payment or it was liable to variation depending upon the quantity of lime produced by the assessee in the area granted to it, it seems to us, having regard to the terms of annexure 'H' dated the 4th October, 1954, to be a fixed payment per year from the expiry of the old lease, that is, 30th July, 1952, up to the commencement of the new lease. As for the period of the new lease, however, we must refer to Schedules Nos. 1 and 2 to be found in the Rules of 1954. Schedule I prescribes royalty at one anna per maund for limestone, and one anna and six pies per maund for lump-lime; and Schedule II prescribes the rate of dead-rent at rupees 10 per acre per year, or royalty annually paid whichever is higher but not both. The correct position in this case, therefore, undoubtedly is that while the assessee was required to pay to the State a minimum amount of Rs. 96,000 per year irrespective of the quantity of lime manufactured by it in the area granted for this purpose (this having been fixed on the basis of dead-rent at the rate of Rs. 10 per acre for 15 sq. miles leased out to it) this sum was certainly liable to be enhanced if the amount of the royalty payable on the quantity of lime produced by the assessee worked out to a higher figure at the rates of royalty specified in the Schedule, and, therefore, if in a particular year such a situation arose, then the royalty would have to be paid at such higher figure and not at the minimum figure of Rs. 96,000.
From this two consequences seem to us to follow. The first is that it is not correct to say that the assessee was to make a fixed annual payment under all circumstances. The second is that this payment was in truth and substance in the nature of royalty. If the royalty amounted to something less than the dead-rent fixed at the scheduled rate thereof, then the amount of deal-rent which was fixed at Rs. 96,000 per year would have to be paid. But if the amount of royalty should work out at a higher figure at the rates given in Schedule I, then, the royalty at the higher figure would have to be paid. In this particular context we are inclined to think that there is no difference of substance between 'dead-rent' and 'royalty' as used in there rules and that dead-rent really means the minimum royalty payable. In fact, this meaning is put beyond all doubt in the light of a notification of the State Government No. F3(4) (vii) (Ind)/(B)/61 dated the 19th May, 1961, published in the Rajasthan Rajapatra which reads as follows :
'Dead-rent means the minimum guaranteed amount of royalty payable as per rules or agreement under a mining lease.'
That being so, we are unhesitatingly of the opinion that the amount of Rs. 96,000 was minimum royalty payable every year subject, after commencement of the new lease, to the increase depending upon the measure of production of lime in the deposits leased out to the assessee. We hold accordingly.
Having cleared the aforementioned preliminary facts, we now straightway turn to the case of Pingle Industries which, according to learned counsel for the department, almost directly governs the instant case. If that should turn out to be so, then our task is greatly simplified and we cannot but hold that the payment of Rs. 96,000 is capital expenditure and not revenue. The facts of that case were these. The assessee company there carried on the business, inter alia, of selling Shahabad stones which had to be extracted from quarries, dressed and then sold. For the purpose of its business, the assessee obtained from a jagirdar under a contract the right to extract stones from quarries situated in six named villages for a period of 12 years on an annual payment of Rs. 28,000 each and to safeguard this payment a sum of Rs. 96,000 was paid in advance as security out of which Rs. 8,000 was to be adjusted annually against Rs. 28,000 and the balance of Rs. 20,000 was payable in twelve equal monthly instalments. The assessee had the right to excavate stones only and bound himself not to manufacture cement, while the jagirdar undertook not to allow any other person to excavate stones in those areas. There was also a similar lease taken from the Government for a period of five years under which the assessee had to pay Rs. 9,000 annually in monthly instalments of Rs. 750 each. The question in these circumstances arose whether the amounts paid by the assessee to the jagirdar and the Government each year were revenue expenditure allowable under section 10 (2) (xv) of the Hyderabad Income-tax Act which exactly corresponds to section 10 (2) (xv) of the Indian Income-tax Act. It was held by the majority of their Lordships (Kapoor and Hidayatullah JJ., S. K. Das J. dissenting) that the assessee acquired by his long term lease the right to win stones and that the lease conveyed to him a part of the land, and that the stones in situ 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. It was also held that the payments though periodic in fact were neither rent nor royalty but a lump payment in instalments for acquiring a capital asset of enduring benefit to his trade. In this view of the matter, the conclusion was reached that the amounts were outgoing on capital account and were not revenue.
It may be pointed out at this place that the Income-tax Appellate Tribunal had considered the payments to be in the nature of rent or royalty and as price for raw materials with which finding the High Court disagreed holding that as there was no manufacturing business in that case, the money expended could not be regarded as price of raw materials or even as rent. These points, in our opinion, require to be carefully noted in order to understand the implications of this case.
This brings us to the various tests which have been laid down by the judges in England and in our country and which were considered by their Lordships in this case :
(1) The first test to which reference was made was that laid down in Vallambrosa Rubber Co. Ltd. v. Farmer, where Lord Dunedin observed that in a rough way it was not a bad criterion to distinguish capital expenditure from revenue, that the former is something that is going to be spent once and for all and that the latter which is going to recur every year though this test was accepted to be by no means absolutely final and determinative. This proposition was then stated to have been qualified by what Lord Cave laid down in Atherton v. British Insulated and Helsby Cables Ltd. :
'When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.'
Then it is explained that the phrase 'enduring' in Lord Caves test means enduring in the way capital endures and does not mean 'everlasting.'
(2) Another test is that propounded by Viscount Haldane in John Smith & Son v. Moore and which is based on whether the expenditure is met out of fixed capital or circulating capital. If an expenditure is met out of fixed capital, it must be treated as capital but if it is from circulating capital, then revenue. Adam Smith, the well-known economist, described fixed capital as what the owner turns to profit of by parting with it and letting it change masters. Lord Macmillan however pointed out in Van den Berghs Ltd. v. Clark that this test is not very helpful.
(3) The third test is based on the judgment of the Privy Council in Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax and that is this : 'Is it a part of the companys working expenses; it is expenditure laid out as part of the process of profit earning ?' It was further laid down in the same connection that '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,' and therefore it was necessary to attend to the true nature of the expenditure in the sense referred to above.
(4) The fourth test that has been referred to by their Lordships is the one a opted by Lord Sands in Commissioner of Inland Revenue v. Granite City Steamship Co. Ltd. and that is that where an outlay has been made for the initiation of a business or for extension thereof or for a substantial replacement of equipment that would amount to capital expenditure.
(5) The last test which is referred to in Pingle Industries case is whether the expenditure incurred by the taxpayer was for ensuring supplies of raw material or for purchasing them, which test is based on the case of Alianza Co. Ltd. v. Bell, Channell J. in this case observed as follows :
'In the ordinary case, the cost of the material worked up in a manufactory is not a capital expenditure; it is a current expenditure, and does not become a capital expenditure merely because the material is provided by something like a forward contract, under which a person for the payment of a lump sum down secures a supply of the raw material of a period extending over several years....... If it is merely a manufacturing business, then the procuring of the raw material would not be a capital expenditure. But if it is like the working of a particular mine or bed of brick earth, and converting the stuff worked into a marketable commodity, then the money paid for the prime cost of the stuff so dealt with is just as much capital as the money sunk in machinery or buildings.'
We pause here to point out that learned counsel for the department strongly relies on the observations of Channell J. which we have underlined above, and contends that the business of the assessee in the instant case was not merely manufacture of lime from limestone but it partook of the nature of mining operations also in so far as limestone deposits had to be discovered in the area allotted to the assessee and then quarried or worked up. It was therefore strenuously argued that the money paid by the assessee for acquiring the right to work the lime deposits was as much capital as the money sunk in machinery or building, and was therefore not deductible.
Their Lordship of the majority then referred to the case of Assam Bengal Cement Company Ltd. v. Commissioner of Income-tax and pointed out that the approval given therein to Benarsidas Jagannath, In re was to the summary of the tests settled in it but not to the actual decision of that case and then summed up the facts of the case before them like this :
'The agreements in the present case are long-term contracts. They give the right to extract stones in six villages without any limit by measurement or quantity. They give the right exclusively to quarry for a number of years.... Further, the duration of the right which seems to have weighed with the Full Bench in the Punjab High Court has little to do with the character of the expenditure even if it be a relevant factor to consider.'
Thereafter they referred to the case of Mohanlal Hargovind on which learned counsel for the assessee strongly relies before us and distinguished it.
Now the facts in that case may be shortly stated. The assessee there carried on business at several places as manufacturers of country-made cigarettes known as bidis. For that purpose, they entered into short-term contracts with the Government and other owners to obtain tendu leaves from certain forests, which were required as a cover for the tobacco contained in the bidis. These contracts in consideration of certain sums payable by instalments gave to the assessees the exclusive right to enter in the forests to collect the leaves and also to coppice the plants and to pollard the tendu trees but otherwise gave them no interest in the land and no interest in the trees or plants themselves. In the language of their Lordships they were simply and solely contracts giving to the grantees the right to pick and carry away leaves which of course implied the right to appropriate them as their own property. Their Lordships were of the opinion that the small right of cultivation was merely ancillary and that the exclusive nature of the grant was, under the circumstances, a matter of no significance. Their Lordships then proceeded to observe as follows :
'The question, therefore, resolves itself into the short one - is expenditure of this character made in acquiring one of the raw materials of the appellants manufacture capital expenditure within the meaning of this Act There is no definition of that expression which must in their Lordships opinion be construed in a business sense save in so far as there may be rules of construction applicable to it. Their Lordships feel no doubt that in a business sense this expenditure is expenditure on revenue account and not on capital account just as much as if the tendu leaves had been bought in a shop. Under the contracts it is the tendu leaves and nothing but the tendu leaves that are acquired. It is not the right to pick the leaves or to go on to the land for the purpose - those rights are merely ancillary to the real purpose of the contracts and if not expressed would be implied by law in the sale of a growing crop.'
Referring to the case of Alianza Co. v. Bell and the case of Kauri Timber Co. Ltd. v. Commissioner of Taxes their Lordships held that those cases bore no resemblance to the facts of the case before them and pointed out that the case before them was more like case which was distinguished by Channell J. at page 673 of the report in Alianza Co. v. Bell as being a case of the cost of material worked up in a manufactory which should be held to be 'a current expenditure and does not become a capital expenditure merely because the material is provided by something like a forward contract, under which a person for the payment of a lump sum down secures a supply of the raw material for a period extending over several years.' As to Kauri Timbers case the leases there were for a period of 99 years and further the standing timber purchased could be allowed to remain standing as long as the purchasers liked. Their Lordships, if we may say so with all respect, concluded their judgment with the following trenchant observations :
'If the tendu leaves had been stored in a merchants godown and the appellants had bought the right to go and fetch them and so reduce them into their possession and ownership it could scarcely have been suggested that the purchase price was capital expenditure. Their Lordships see no ground in principle or reason for differentiating the present case from that supposed.'
Another case referred to in Pingle Industries case was the case of Stow Bardolph Gravel Co. Ltd. v. Poole. In that case the assessee company was doing the business of selling and gravel and purchased certain unworked deposits and claimed that the price paid by it for the same should be deducted from its profits as being expenditure for acquiring its trading stock. It was held by Harman J. in appeal from a decision of the General Commissioners that the deposits acquired constituted the stock-in-trade of the taxpayer. In appeal, Lord Evershed M. R. disagreed with that conclusion and held on the facts found that what was purchased was a part of the land itself, namely, the gravel in situ. The learned Master of the Rolls further observed that if proper inquiry had been made, it might have been possible to hold that, after the price was paid, the sand and gravel became in truth the stock-in-trade of the taxpayer. But that had not been found, and consequently it was held that what was purchased was a part of the land itself, and the case of Mohanlal Hargovind was distinguished by Lord Evershed observing as follows :
'But I cannot say the same of the sand and gravel, part of the earth itself, which was the subject of the contract in the present case and which I think could only become part of the stock-in-trade of this gravel merchants business when it had, in the true sense, been won, been excavated and been taken into their possession.'
Relying on this view, their Lordships in Pingle Industries case observed as follows :
'We are in entire agreement that such a distinction is not only palpable but also sensible. The present case is a fortiori. Here, the stones are not lying on the surface but are part of a quarry from which they have to be extracted methodically and skillfully before they can be dressed and sold. These deposits are extensive, and the work of the assessee carries him deep under the earth. Such a deposit cannot be described as the stock-in-trade of the assessee, but stones detached and won can only be so described'
and eventually held that that was a case in which the assessee had acquired an asset of an enduring character and payments in instalments were fixed merely as a matter of convenience, and therefore such outlay could not be accepted as a business expenditure but was of a capital nature.
Now, we are unable to hold from the elaborate analysis which we have made of the Pingle Industries case that that case by itself can be said to completely govern the present. The assessee in that case does not appear to us to have been a manufacturing firm. Again, the contract there was taken for a period of twelve years. Perhaps the feature that distinguishes that case from the present is that it was not a case of which it could be predicated that the assessee was paying any rent or royalty and a recurring one, at that, as in the present case.
The case to which we next wish to refer is Abdul Kayoom v. Commissioner of Income-tax. The assessee firm in that case carried on business in the purchase and sale of conch-shells (locally called chanks). In connection with that business, the assessee obtained on lease from the Government of Madras the exclusive right, liberty and authority to fish for and take and carry away all conch-shells in the sea off the coastline of a certain area specified in the lease for a period of three years on a yearly rent of Rs. 6,000 odd. The assessee claimed that in computing its annual income from the sale of conch-shells it was entitled to deduct the yearly rent paid to the Government as business expenditure under section 10 (2) (xv) of the Income-tax Act. The income-tax authorities held that it was capital expenditure. On a statement of the case to the High Court of Madras, it was held by a Full Bench that the expenditure was not of a capital nature. On appeal to the Supreme Court, the judgment of the High Court was reversed and their Lordships by a majority of two to one (the Bench consisting of the same learned judges as in the case of Pingle Industries) observed as under :
'Here is an agreement to reserve a source, where the respondent hoped to find shells which, when found, became its stock-in-trade but which, in situ, were no more the firms than a shell in the deepest part of the ocean beyond the reach of its divers and nets. The expenses of fishing shells were its current expenses as also the expenses incurred over the purchase of shells from the divers. But to say that the payment of lease money for reserving an exclusive right to fish for chanks was on a par with payments of the other character is to err. It was possible to say of the former, as it was possible to say of the tendu leaves in Mohanlal Hargovinds case that the chanks were bought because the money paid was the price of the chanks. But it would be a straining of the imagination to say that the amount paid for reserving the coastline for future fishing was the price of chanks, with which the respondent did its business. That amount was paid to obtain an enduring asset in the shape of an exclusive right to fish, and the payment was not related to the chanks, which it might or might not have brought to the surface in this speculative business. The rights were not transferable, but if they were and the firm had sold them, the gain, if any, would have been on the capital side and not a realising of the chanks as stock-in-trade, because none had been bought by the firm and none would have been sold by it.'
Now if we may say so with all respect, on the branch of law we are called upon to consider, it is not always easy in spite of the judicial precedents of the highest courts in our country or elsewhere to determine whether a particular asset or expenditure belongs to the one category or the other and each case must therefore be dealt with on its own peculiar facts and circumstances. Indeed, we cannot in this connection do better than what their Lordships who decided Pingle Industries case by majority themselves laid down in Abdul Kayoom v. Commissioner of Income-tax at page 703 :
'What is attributable to capital and what to revenue has led to a long string of cases here and in the English Courts. The decisions of this court reported in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax and indicated the tests, which are usually applied in such cases. It is not necessary for us to cover the same ground again. Further none of the tests is either exhaustive or universal. Each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases...... by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line a 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.'
We would, therefore, proceed to focus our attention on the main features of the present case in so far as they bear on the question under consideration, namely, as to whether the payment of Rs. 96,000 is 'deductible expenditure' being revenue, or not so because it is capital.
It seems to us that the governing considerations to decide the controversy before us are : first, what is the true nature of the assessees business; and, second, what is the precise character of the expenditure for which deduction is claimed, and to these question well shall now address ourselves.
According to all the income-tax authorities, the assessee carried on the business of manufacturing lime from limestone. From the history of the assessees business that we have given in the beginning of our judgment, it is clear that it has been carrying on this business from long before the period of time with which we are concerned, and, consequently, it cannot be justly premised that this is a case where such payment was agreed to in connection with the initiation of the business in question, or the expansion thereof. It has, however, been stressed before us no behalf of the department that the assessees business was not merely one of manufacture of limestone into lime but it also consists of prospecting for and quarrying of limestone in the areas allotted to it before the same is manufactured into lime and then sold in the market. On the other hand, it was contended before us on behalf of the assessee that even if its business is taken to be mining-cum-manufacture of limestone into lime, the assessee stood in need of limestone as raw material in order to carry on its business and the annual payment of Rs. 96,000 (or more if it should so turn out) to the State was expenditure wholly laid out in the carrying on of that business.
Now as regards the precise right of the assessee vis-a-vis land which has been granted to it, it seems to us that the assessee did not acquire any right in the land as such. Its right was confined to the carrying of limestone and its manufacture into lime but otherwise it had no further rights in this land. In fact clause (i) of rule 19 of the Rules of 1954, specifically lays down that the lessee shall not be entitled to encroach upon cultivable land or bapi holdings within the leased area, except with the previous permission of the Director of Mines and Geology and on payment of the necessary compensation to the holder of such lands as may be determined by that officer. It further seems to us that the rights of the assessee were confined to limestone deposits in this land and extended no further. Thus, for example, if any other mineral were to be found in the area in question, the assessee could lay no claim to it.
The Rules of 1954 (annexure 'C'), it is important to note in this connection, are named as the Jodhpur Division Vindhyan Lime Stone Mining, quarry, box, dig and search for, win, work and carry away limestone. Rule 6 then restricts the grant of mining lease to a person holding a valid certificate of approval from the Government of Rajasthan under Rule 5 of the Mineral Concessions Rules, 1949, and fulfilling other conditions mentioned in the various clauses thereof. According to rule 16, a mining lease is transferable with the previous sanction of the Director of Mines and Geology to person holding a certificate of approval from the Mining department subject to certain conditions which it is unnecessary to mention for out present purpose. We may also drew attention in this connection to clause 15 of the agreement dated the 4th March, 1940 (annexure 'A') which laid down that the quarrying of limestone in the acquired area will be done on approval lines as directed by the Government of Jodhpur (as it then was) from time to time.
The assessees right, therefore, was to enter on and under the land and to search whether there were any lime deposits therein and to quarry or mine and win them and then to work them into lime and sell the same. The assessees business, therefore, does not appear to us to be manufacture of limestone into lime but included the prospecting and winning of limestone in the area granted to it, and such business could not be carried on without a mining lease granted under the Rules of 1954. This appears to us to be the real nature of the assessees business, and the true nature of the rights acquired under the lease in question.
What, then, is the nature of the payment made by the assessee It is nobodys case that it is a payment for a sale outright of the land in which the lime deposits were expected to be situated. If that was so, we should have had no hesitation in holding that to be a case of capital expenditure as having been incurred on acquisition of source for obtaining raw material of an enduring character. The payment, again, is not a lump sum down payment but is an annual one. Alive as we are to the consideration that the periodicity of the payment is only a rough and ready test for the determination of the question before us because a lump sum payment may be divided into a number of smaller payments and spread over a number of years for purpose of convenience of the party concerned, it is legitimate to point out that no such consideration of mere convenience appear to us to arise in this case. The payment by its very nature is a recurring one to be paid from year to year. We should further make it clear that although it did not vary during the accounting years in question from Rs. 96,000 to any other figure as the annual amount payable by way of royalty worked out to a much lesser figure than Rs. 96,000 per year, there was nothing to prevent the assessee from expanding his production to the farthest possible limits, and assuming that had the necessary resources, financial and others, at its disposal, it might well have been that the royalty payable on the lime and the allied products should have exceeded the mark of Rs. 96,000 so that a higher sum might have become payable to the State. At the same time, it has to be borne in mind that the minimum royalty or dead-rent (as already discussed, we see no substantial difference between the two) was to be paid by the assessee to the State entirely irrespective of the consideration whether the assessee manufactured any lime or not any particular year. It is, therefore, a question whether such royalty could be rightly characterised as a business expenditure.
A word as to the duration of the lease. We do not think that that factor, in any view of the matter, can be accepted on the authoritative current of decisions in our country as a factor of any great significance. As stated by the majority of their Lordship in their judgment in Pingle Industries case at page 92 of the report, it is not the long or the short term that so much matters, but the decisive factors are the nature of the acquisition the reason for the payment. We have already dealt with both these aspects of the present case, and judged by both these tests, in the light of the principles laid down in the majority decision of the Supreme Court in Pingle Industries case and Abdul Kayooms case, which are binding on us, it seems to us, on the whole, that this was a case where the periodic payment of Rs. 96,000 as royalty for the nature of the rights acquired was in the nature of capital expenditure.
As we look at the present case in the light of the analysis made above and in the light of the guiding tests laid down by the Supreme Court in Pingle Industries case and Abdul Kayooms case we think that that is the only conclusion to which we may properly come.
It may be permissible further to refer to the following analogous cases on which we have been able to lay our hands and which appear to us to afford fairly close parallels to the present case : Commissioner of Income-tax v. Tika Ram and Sons, Sardar Singh and Sons v. Commissioner of Income-tax and Commissioner of Income-tax v. S. V. Reddy and Brothers.
In Commissioner of Income-tax v. Tika Ram and Sons, the assessee company carried on business of manufacturing bricks. It owned as proprietor a part of the land from which earth was taken for the manufacture of bricks and it also held a lease of the other portion of the land. The assessee claimed that a certain sum representing the value of the earth used up in the manufacture of bricks during the year of account should be deducted in computing its income for purposes of income-tax, as depreciation of property or business expenditure. It was held that by taking this lease the company had not purchased so many maunds of earth for so much money and that the position of a brick field was very similar to that of a quarry or a mine and that the lease or the proprietor of such land was not a mere purchaser of raw materials but a person who had acquired certain rights in the land and the amount invested by it must therefore be treated as capital expenditure within the meaning of section 10 (2).
In Sardar Singh and Sons v. Commissioner of Income-tax, the assessee took leases of certain plots of land for excavating earth for the manufacture of bricks. The leases were for a period of ten to twelve years. In the first lease it was stated that sum of Rs. 500 had been recovered on account of the rent of the land and costs of the kiln which was already in existence. By the second agreement, it was provided that the costs of earth to be dug to a depth of 12 feet had been recovered at the rate of Rs. 500 per bigha. The third deed stated that the rent of the plot of land would be Rs. 47 a year and the earth which was to be excavated continuously from one side of the plot should not be dug to an extent of more than eight feet in depth and that the compensation of earth so excavated should be paid at the rate of Rs. 350 per bigha. The assessee contended that he had been buying clay as raw material and making it into bricks. And, therefore, he was entitled to deduct the price of the raw material from his income. It was held that the price or compensation for earth payable under the lease were akin to royalties on coal extracted from coal mines, and it was further laid down that although it was true that coal was extracted from deep mines and clay was dug from the surface of the earth, that did not furnish any valid ground for distinction and therefore the expenditure incurred was of a capital nature.
In Commissioner of Income-tax v. S. V. Reddy and Brothers the claim related to certain expenditure in respect of which deduction was claimed on the ground that it was incurred as rent for certain mining lease obtained from the Government to win mica and sell in after refinement. The periods of the lease varied from five to nine years. It was held that in the case of an agreement for the acquisition of mining rights it was impossible to say that there was a sale of so much of raw material, inasmuch as the winning of mica depended upon so many factors, and that it would be contrary to common sense to say that the acquisition of rights to win mica was a sale of mica itself and therefore the money expended for the acquisition of such rights was held to be capital expenditure.
Then again, even at the risk of some repetition, we desire to invite pointed attention of the observations of Channell J. in Alianza Co. Ltd. v. Bell at page 673, where the learned judge observed that if it is merely manufacturing business, then the procuring of raw material would not be a capital expenditure, but if it is a case of the working of a mine or brick-field and manufacturing the deposits therein into a marketable commodity, then the money paid for the prime cost of the stuff so dealt with would be just as much capital as the money sunk in machinery or buildings. The case of Hargovind, on which learned counsel for the assessee placed strong reliance cannot, with all respect, be held applicable to a case like the present, for their Lordships themselves were at some pains to point out that 'cases relating to the purchase or leasing of mines, quarries, deposits of brick earth, land with standing timber' stood on an entirely different footing from that applicable to the case of the acquisition of tendu leaves before them.
Our conclusion, therefore, is that the expenditure with which we are concerned here was an expenditure not for the acquiring of the stock-in-trade for the assessee but for acquiring a source from and/or the means by which the stock-in-trade was to be acquired. The limestone in situ was not the stock-in-trade, it could and would be stock-in-trade only when it was excavated and won but not otherwise. Putting the whole thing in a slightly different way, we think that what the assessee acquired in this case by the expenditure in question was not so much of limestone deposits as such-these were part of the land and lay deep thereunder until they were searched for and excavated and won - and therefore the expenditure could not be held to have been incurred for the purchase of raw material for its business or merely that, but what the assessee really acquired thereby was a far more complex right, that is, the right to enter on and under the land leased out to it and extract lime deposits from it and then convert it into lime and sell it, or, in other words, it acquired the means to obtain the raw material for its business. It must follow from this that the expenditure in question was incurred for the acquisition of an asset or advantage for the enduring benefit of the assessees business, and that being so, it is tantamount to capital expenditure for which no deduction can be allowed to the assessee under section 10 (2) (xv) of the Income-tax Act. The circumstance that the assessee was required to make an annual and recurring payment to the State and that this payment might have varied from year to year under certain contingencies, in our opinion, does not make any substantial difference to the conclusion to which we have come. We should also like to add that it seems to us that if the assessee had sold its rights to another person -and under the Rules of 1954 it did possess such a right, subject, of course, to certain conditions - such receipt would be on account of capital and not on account of the sale of any raw material for the simple reason that the raw material had yet to come into existence and therefore could not possibly be sold as such.
For the reasons mentioned above, we answer the question raised before us in the negative. Having regard to all the circumstances of the case, there will be no order as to costs in this court.
Question answered in the negative.