1. The following question has been referred to this court for decision under Section 256(1) of the Income-tax Act, 1961 i
'Whether, on the facts and in the circumstances of the case, the sum of $ 15,328 was an item of revenue expenditure allowable under the provisions of Section 28 of the Income-tax Act, 1961 ?'
2. As we felt that the facts of the case as set out in the stated case were slightly different from those stated in the order of the Tribunal out of which the said question of law is said to arise, we called for a better and fuller statement of the case by our order dated 20th March, 1972, In pursuance of the said order, a fuller and detailed statement of 'the case has since been submitted to this court by the Tribunal. The factual position as emerging from the fuller statement of the case is as follows :
3. The assessee in this case is a Hindu undivided family. It owned rubber gardens and house properties in Malaya. It has also been dealing in the purchase and sale of immovable properties. In the year ended April 12, 1961, it acquired the leasehold rights on September 22, 1960, in four lots in respect of 40 acres of land in a place called Bidor for $ 27,363.68 from two China men, who had earlier acquired the leasehold rights from the Government of Malaya for a period of seven years by an agreement dated May 5, 1956. The assessee acquired the said leasehold rights for a period of four years out of the period of seven years fixed under the said agreement dated May 5, 1956. Thereafter, the assessee obtained the permission from the Malaysian Government for conversion of the rubber gardens in respect of which leasehold rights had been acquired from the China men into tin minings on October 22, 1961. The assessee after becomeing the registered lessee of the four pieces of mining land by virtue of his acquiring the leasehold rights from the two China men sub-leased the same to another China man. Lee Kon Fan. The assessee acquired on January 23, 1960, another mining lease at another place called Tambun for $ 13,359.50 in respect of 58 acres. These lands also were sub-leased to a Chinaman. The cost in respect of these mining leases mentioned above had been debited in the accounts kept for immovable properties. In the previous year ending April 13, 1962, the assessee received from the subleases sums amounting to $ 25,506.41, which were called, as 'Tin Tributes' and this amount was offered for assessment. In respect of the four mining leases in Bidor covering an area of 40 acres, 30 acres were worked during the year. The assessee, after revaluing the properties on hand and the value of the mining at $ 14,500 computed the cost of working the 30 acres on a proportionate basis at $ 10,875 (30/40 of $ 14,500). In regard to the other mining leases at Tambun covering an area of 58 acres, the assessee had worked 19 acres and the cost of the area on a proportionate basis was worked out at $ 4,453 (1/3rd of 13,359). The assessee claimed the two sums of $ 10,875 and $ 4,453 as a deduction in the computation of its total foreign income. The Income-tax Officer disallowed the claim in these words :
'The payment made by him at the time of purchase of lands amounts to purchase of the right to winning lead and that is capital in nature. So also when after winning lead, land has to be returned to Government or if the land is of further use, the loss is capital in nature.'
4. On appeal, the Appellate Assistant Commissioner held that the lease rents had been paid for the right to win tin ores from the ground and that it would be covered by the decision in the case of S. V. Reddy Bros. He also held that the assessee was not a dealer in mines, that all his transactions were confined to the purchase and sale of houses and that, therefore, he is not entitled to treat the payment of lease amounts for ore-bearing lands as a revenue expenditure. In that view he upheld the disallowance made by the Income-tax Officer.
5. On further appeal, the Income-tax Appellate Tribunal has held that the assessee was a dealer in lands, that the mining areas cannot be held to be the assessee's stock-in-trade and that the lease amounts received from these areas cannot be treated as a revenue expenditure as the assessee's business is not in leases. The Tribunal further found that the assessee is not engaged in any manufacturing or processing of the mineral as such, that the payment of the lease amounts was not with reference to the quantity of ore extracted and that what was paid to the assessee was not for any limited quantity of ore but for the purchase of the source of supply itself. In this view the Tribunal concurred with the lower authorities in the disallowance of the claim for deduction.
6. Before us, the learned counsel for the assessee has made a three-fold submission. One is that the assessee should be taken to be a dealer in leases, in which event the amount in, question would be the loss in the value of the stock-in-trade. The second is that the assessee should be taken to be a dealer in tin and this will make the amount in question as the deficiency in the tin extracted which is the stock-in-trade. Thirdly, it is contended that in any event the expenditure in question should be taken to be revenue expenditure as the amount represents the cost of working the tin mines. It is also pointed out by the assessee's learned counsel that the profit from the assessee's half share in the exploitation of the mines has been offered for assessment by the assessee in the subsequent year on the basis that the leasehold lands are actually the stock-in-trade and that the tin tributes ($ 25,506.41) received by the assessee have also been offered for assessment on the basis of the tin leases being the stock-in-trade. It is also urged that the amount paid for by the assessee while acquiring the leasehold rights in the lands from which tin was extracted was not for the land but for the tin to be extracted and that, therefore, the expenditure in question which has been incurred for acquiring tin which is the assessee's stock-in-trade should be in reality a revenue expenditure.
7. A case similar to the one before us came up before this court inCommissioner of Income-tax v. Chengalvaroya Mudaliar : 2ITR395(Mad) and Commissioner ofIncome-tax v. Sidda Reddy Venkatasubba Reddy : 17ITR15(Mad) and Bros. In the first casethe expenditure incurred was for acquiring a lease of land for excavationof lime shells and it was held that as the lease conferred exclusive privilegeon the land, the payment was not for the shells excavated but for theright to win shells. In the next case the assessees were carrying onbusiness of winning mica and selling it after refinement. They enteredinto agreements with different parties under which in consideration ofpayment of sums of money in instalments they were granted the miningrights in different plots of land. The periods for which the assessees wereentitled to enjoy the mining rights varied from 5 to 9 years. They claimeddeduction of the amounts paid by them as per the agreements under Section 10(2)(xv) of the Indian Income-tax Act, 1922. Rajamannar C.J.,speaking for the Bench, after a thorough examination of all the earliercases on the point, if we may say so with respect, held that as the assesseeswere carrying on business of winning mica and selling it and for thatpurpose acquired the mining rights in various places, money expended forthe acquisition of such rights was capital expenditure and was, therefore,not allowable under the said section. The learned Chief Justice in the course of the judgment referred to the leading decisions of the English courts and stated that those decisions were tersely summed up in Halsbury's Laws of England, volume 17, Section 325, in the form of the following working Rule1
'Outgoings which result in the acquisition of a fixed capital asset, or which produce an advantage of a permanent and enduring nature are not allowable, but such advantage must be analogous to an asset,'
8. But it was pointed out that while applying the above test whether the outgoing was for the acquisition of a business or of a fixed capital asset, an exception had to be made as regards the expenditure incurred for acquiring raw material for the purpose of the manufacturing business of an assessee, which has been held to be of the nature of revenue expenditure. The above decision has laid down the proposition that the acquisition is of the leasehold right in land in which the mining operations had been performed, the cost of acquisition will be a capital expenditure, but if the acquisition is of mineral that had already been won, then the cost of acquisition will be a revenue expenditure.
9. In Pingle Industries Ltd, v. Commissioner of Income-tax : 40ITR67(SC) the Supreme Court also has considered a somewhat similar question. In that case the assessee-company which carried on, inter alia, the business of selling Shahabad flag stones which had to be extracted from quarries, dressed and then sold, took on contract the right to excavate stones in certain quarries in six villages for a period of 12 years from a jagirdar. The contract provided that the jagirdar should be paid a sum of Rs. 28,000 annually in consideration for extracting the stones till the end of the contract period and that the assessee had no right or interest in the land as such apart from the right to excavate stones therefrom. The assessee had also another contract taken from Government for a period of five years in respect of certain stone quarries on condition that the assessee pays a sum of Rs.9,000 annually. The question arose as to whether the amounts paid by the assessee to the jagirdar and the Government each year was revenue expenditure allowable under Section 10(2)(xv) of the Act. The Tribunal held)
'In the present case the assessee purchased his stock-in-trade. Instead of paying so much for so many cubic feet, he pays a lump sum every year. Parties might, as well agree that the so-called lessee shall pay a sum of money bearing a proportion to the sales or quantum or material extracted or a lump pum for the purpose of convenience. Because these quarry leases are called leases, the assessee does not get an asset of an enduring benefit. In fact I find that the leases are renewed from time to time. The lease money is, therefore, in my opinion, not capital expenditure but revenue expenditure and should be allowed in computing the assessee's income from the quarries.'
10. When the matter went before the High Court on reference it held, after an examination of the several decisions rendered in India and in England, that the payments in each year of account were of capital nature and that no deduction could be given under Section 10(2)(xv). When the matter was ultimately taken to the Supreme Court, the Supreme Court by a majority judgment expressed the view that the assessees had acquired by their long-term leases a right to win stones and the leases actually conveyed to them a part of the land, that the stones in situ were not their stock-in-trade in a business sense but a capital asset from which after extraction they converted the stones into their stock-in-trade, that the payment, though periodic in fact, was neither rent nor royalty but a lump sum payment in instalments for acquiring a capital asset of enduring benefit to the trade and that, therefore, the High Court was right in treating the outgoings as on capital account.
11. In Abdul Kayoom v. Commissioner of Income-tax : 44ITR689(SC) a firm which carried on business in the purchase and sale of conch (chank) shells took on lease from the Government certain area in the sea coasts for a period of three years on a consideration of an annual rent of Rs. 6,111. The assessee claimed that in computing the annual income from the sale of chanks it was entitled to deduct the annual rent paid to the Government as business expenditure under Section 10(2)(xv). The revenue held that it was capital. The High Court held that the expenditure was not of a capital nature and the assessee was entitled to deduct the amount claimed as business expenditure. The Supreme Court disagreed with the view taken by the High Court and held that the yearly rent paid by the assessee was an amount paid to obtain an enduring asset in the shape of an exclusive right to fish the conch shells, that the payment was not related to the conch shells which it might or might not bring to surface and, therefore, it was not an amount spent in acquiring its stock-in-trade but an amount for acquiring an asset from which it may collect its stock-in-trade. In that view the Supreme Court held that the expenditure is one of a capital nature though it was admittedly incurred for the purpose of the assessee's business. Referring to its earlier decision in Pingle Industries Ltd v. Commissioner of Income-tax the Supreme Court expressed the view that as the tests indicated in all the leading cases had been considered therein, it is not necessary to cover the same ground over again. They, however, observed:
'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 (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 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.'
12. As pointed out by the Supreme Court, what is ultimately decisive in a matter of this kind is the nature of the business, the nature of the expenditure and the nature of the right acquired and the relation between the contracting parties. In this case the deduction claimed is in respect of a sum of $ 15,328 paid as part of consideration in respect of two tin mines which the assessee had taken on lease in Malaya, The lease monies paid in respect of these two mines were $ 14,500 and $ 13,359. The assessee has sub-leased his leasehold right in the mines to third parties who have worked portions of the leasehold lands. The proportionate cost of the acquisition of the leasehold rights in the land wherein mines have become exhausted is claimed as a deduction. As pointed out by Mr. Balasubrahmanyan, the learned counsel for the revenue, the amount claimed as deduction has not been expended in the year of assessment and it is a case of clearly writing off a part of the cost of acquisition as against the income in the assessment year. Admittedly, the assessee has not worked the mines and it has leased out the right to work the mines to third parties. There is, therefore, no question of the assessee incurring any expenditure for the working of the mines during the assessment year and all expenses of working the mines would have been incurred by the sub-lessee who actually worked the mines. As already pointed out, the sum of $ 15,328 represented a part of the amount spent on outlay in the course of the acquisition of the leasehold right in the mines and, therefore, there is no question of writing off the said sum as an expenditure incurred in the course of the assessment year. In all the decided cases referred to above, expenditure had been incurred during the assessment year and the only question was whether such expenditure was capital or revenue. But in this case the amount claimed has not been expended in the year of account, Therefore, it cannot be said to be an expenditure, whether it is capital or revenue, which could be considered for deduction under Section 10(2)(xv). If at all, the amount can be considered as a depletion allowance which has not, however, been given as an item of deduction under the Income-tax Act of 1961 until 1971 when a new provision, Section 35E, came to be added in the Income-tax Act of 1961 which specifically provided for a mine depletion allowance. As a matter of fact, from the enclosures filed by the assessee to its reference application before the Tribunal, it is seen that the assessee claimed the deduction in question only as a depletion allowance. The Income-tax Officer has stated in his order I
'The rupee equivalent is Rs. 1,48,724. The assessee purchased lead bearing mines for $ 14,500 and $ 13,359 respectively. 2/3rds of the former and l/3rd of the latter has been worked out and after winning lead from these lands, the same is lying barren which has to be surrendered to the Government. The assessee has to write off the notional value of such lands as allowable loss.'
13. The Appellate Assistant Commissioner has also observed that :
'The assessee had worked these mines for some time and as the mines had become exhausted they were surrendered to the Government. As they had not been worked for the entire period of the lease the balance of the lease money paid amounting to $ 15,328 has been claimed as a deduction.'
14. The above extracts also indicate that the assessee's claim was substantially on the basis that the capital asset acquired stands depleted in value and, therefore, the proportionate cost of the acquisition of the said wasted or depleted asset should be allowed as a deduction. Whatever be the basis on which the deduction is claimed before the authorities below, the only basis on which the claim for deduction is sought to be sustained is that it is a revenue expenditure coming under Section 10(2)(xv). But, as already stated, the amount in question has not been expended during the account year and, therefore, no question of deduction will arise under that section.
15. The learned counsel for the assessee, of course, persuaded us to hold that the acquisition of the leasehold right in this case was only to acquire a specific quantity of minerals within a specified area and that, therefore, it should be treated as acquisition of stock-in-trade. But, as we have pointed out already, the assessee is not a dealer in tin mines or in tin ore and it did not actually win the mineral from the leasehold lands and it has sub-leased its leasehold right to third parties. Therefore, there is no question of acquisition of a stock-in-trade by the assessee and any depreciation in the value of that stock-in-trade.
16. The learned counsel for the assessee very strongly relies on the fact that the assessee has shown the lease amounts of $ 25,506.41 received from the sub-lessee as 'tin tributes' and has offered the same for assessment in the later year and this can only be on the basis that the tin leases are its stock-in-trade. Even if such a thing has happened and the assessment has been made on the said sum of $25,506.41 as 'tin tributes' on the basis that it is taxable, that cannot be taken to be decisive and the taxability or otherwise of the sum in question could not be decided with reference to the conduct of either the assessee or the income-tax authorities in any assessment year. On the facts of this case, we are clearly of the opinion that the assessee is not a dealer in leases or tin mines. It is true that he is a dealer in real estate. But that will not make him a dealer in leasehold rights. The mere fact that he took a lease of certain lands for mining purposes and thereafter sub-leased the same to third parties will not make him a dealer in leasehold rights or mining rights.
17. The result is that all the contentions advanced on behalf of the assessee are rejected and the question is answered in the negative and against the assessee. The revenue will have its costs. Counsel's fee Rs. 250.