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Commissioner of Income-tax Vs. Amalgamated Jambad Syndicate Pvt. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference Nos. 173, 174 and 175 of 1969
Judge
Reported in[1979]117ITR698(Cal)
AppellantCommissioner of Income-tax
RespondentAmalgamated Jambad Syndicate Pvt. Ltd.
Appellant AdvocateSuhas Sen and ;Ajit Sengupta, Advs.
Respondent AdvocateNone
Cases ReferredMorant v. Wheal Grenville Mining Company
Excerpt:
- .....coal surface was reached. in such cases, the expenditure was considered to be in the nature of capital expenditure. on analogy, the ito came to the conclusion that the removal of overburden in a restricted area was in the nature of sinking of a shaft and should be deemed to be sinking a number of pits or shafts for the purpose of reaching the surface of the coal. the ito considered the principles laid down in the english decisions in the cases of coltness iron co. v. black [1881] 1 tc 287 , morant v. wheat grenville mining company [1894] 3 tc 298 and in re addie & sons [1875] 1 tc 1 and came to the conclusion that the entire cost of removal of overburden represented capital expenditure. he disallowed the deductions claimed.3. from the assessments, the assessee preferred appeals to.....
Judgment:

Dipak Kumar Sen, J.

1. This reference arises out of the assessment of Amalgamated Jambad Syndicate Pvt. Ltd. for the assessment years 1958-59, 1959-60 and 1960-61. The facts found as appearing from the statement of the case and the annexures thereto may be briefly narrated as follows :

The Amalgamated Jambad Syndicate Pvt. Ltd., the assessee, ran a colliery. For the assessment years in question the assessee claimed deductions of three sums, respectively, of Rs. 82,830, Rs. 1,96,012 and Rs. 2,01,104 on account of expenses incurred for removal of overburden. The assessee claimed that the said expenses were of a revenue nature and, therefore, the assessee was entitled to claim deduction for the said sums.

2. At the assessment the ITO was informed that the process of removal of overburden was a continuous process and was likely to increase from year to year on account of the seam being deeper with the advancement of mining operations. The ITO considered the cases where shafts were sunk in mines through which coal surface was reached. In such cases, the expenditure was considered to be in the nature of capital expenditure. On analogy, the ITO came to the conclusion that the removal of overburden in a restricted area was in the nature of sinking of a shaft and should be deemed to be sinking a number of pits or shafts for the purpose of reaching the surface of the coal. The ITO considered the principles laid down in the English decisions in the cases of Coltness Iron Co. v. Black [1881] 1 TC 287 , Morant v. Wheat Grenville Mining Company [1894] 3 TC 298 and In re Addie & Sons [1875] 1 TC 1 and came to the conclusion that the entire cost of removal of overburden represented capital expenditure. He disallowed the deductions claimed.

3. From the assessments, the assessee preferred appeals to the AAC. In his consolidated order disposing of the three appeals in respect of the said three assessment years, the AAC noted that the ITO had compared the removal of overburden with the sinking of pits or shafts. He found that in a quarry only the coal in the portion where the over burden was removed could be raised unlike a pit or shaft through which different parts of the seam could be worked. He also found that in the instant case the coal seam was not parallel to the ground surface but was inclined at an angle and, consequently, with the progress of mining, the expenditure of removing overburden would go on increasing. He held that the ITO was not right in holding that by removal of overburden the appellant would have an enduring advantage for a number of years and came to the conclusion that removal of overburden was not an expenditure to get at the coal surface but was an expenditure which necessarily had to be incurred for the purpose of raising coal. On the basis as above, he held that such expenditure for the said three assessment years were allowable deductions.

4. The revenue went up on appeal from the order of the AAC to the Tribunal. The Tribunal found 'that the ITO had been influenced by the quantum of expenditure for removal of overburden in relation to the net profit earned. The Tribunal held that it was well established that in open quarry working, the earth covering the coal seam was removed, and, thereafter, the coal itself, so that the total expenditure incurred on removing the overburden as well as the coal would represent the actual cost of recovering the coal or of raising coal. The Tribunal did not accept the contention that the depth involved in removing such overburden had anything to do with the matter. The Tribunal agreed with the findings of the AAC and held that the expenditure incurred for removal of overburden should be treated as revenue expenditure.

5. From the above order of the Tribunal the following questions have been referred to us under Section 66(2) of the Indian I.T. Act, 1922 :

1958-59 assessment year:

'Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in holding that the sum of rupees sixty-seven thousand six hundred and seventy-five claimed by the assessee to have been incurred in removal of overburden was a revenue expenditure? ' 1959-60 assessment year:

'Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in holding that the sum of rupees one lakh ninety-six thousand nine hundred and twelve only claimed by the assessee to have been incurred in removal of overburden was a revenue expenditure and not a capital expenditure and in allowing thesame ' 1960-1961 assessment year: 'Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in holding that the sum of rupees two lakhs one thousand one hundred and four only claimed by the assessee to have been incurred in removal of overburden was a revenue expenditure and not a capital expenditure and in allowing the same ?'

6. Mr. Suhas Sen, learned counsel appearing on behalf of the revenue, has cited before us the English decisions which were considered by the authorities below as also another English decision not cited earlier. First, he cited the decision in the case of Coltness Iron Company v. Black [1881] 1 TC 287 . The facts of this case were that the colliery company concerned had spent during the year of assessment a sum of money for the purpose of sinking new pits and in the background of the relevant fiscal statute they claimed that they were not assessable to tax. The House of Lords held that for expenses of sinking pits, deduction was not allowable. In his judgment Earl Cairns observed as follows (p. 312):

'I am not prepared to say that under the words of the 5th and 6th Victoria, Chapter 35, a mine owner might not in some cases be entitled to an allowance in respect of the cost of sinking a pit by means of which pit the minerals are gotten which are the source of profit for the year in which the pit was sunk.'

7. In a judgment delivered separately, Lord Blackburn also observed as follows (p. 323):

'I do not wish to lay down any general proposition either that money expended in sinking pits can never be in the nature of expenses incurred within the five years, in working the coal so as to be properly taken into account in estimating the profits made in that period, or to say what, if any, the circumstances are under which it may be done.'

8. It appears to us that the facts of this case are not in pari materia with the facts before us and, in any event, the learned Law Lords made it quite clear that they were not laying down any law on the point which is relevant here.

9. Mr. Sen next cited the decision in the case of Morant v. Wheal Grenville Mining Company [1894] 3 TC 298 . This is a decision of the Queens Bench Division of the High Court of Justice in England. The facts of this case were that the colliery company concerned had made a call upon the shareholders of a mine for the purpose of sinking a new shaft and, in arriving at the profits assessable on a five years' average under the relevant fiscal statute, the mining company sought to deduct the amount expended out of such a call. The court, in this case, sent back the matter to the Commissioner for the purpose of determination as a question of fact whether the expenditure incurred was a capital expenditure or not. In his judgment, Wright J. observed as follows (p. 302):

'One can very well imagine in cases of mines, where the minerals lay at shallow depths, and where it was necessary to open them out from time to time frequently by shallow shafts, that in those cases it might well be that the sinking of shafts would be properly treated as part of the ordinary working expenditure. On the other hand, you have a case, such as I suppose the present case is, where a large area of ground has been worked from one shaft, and it is apprehended that it will soon become impossible to work any further from that shaft, and a new mine, so to speak, must be opened by a new shaft altogether.'

10. Mr. Sen next cited the decision in the case of Addie & Sons [1875] 1 TC 1. Here the colliery owners concerned had claimed deduction from profits on account of expenditure incurred for pit sinking and for depreciation of buildings and machinery. The Court of Exchequer, Scotland, held that they were not entitled to such deductions. In his judgment, the Lord President observed as follows (p. 3):

Now, I am quite clear that the making of a new pit in a trade of this kind is in every sense of the term just an expenditure of capital. It is an investment of money, of capital, and must be placed to capital account in any properly kept books applicable to such a concern. Now, if that be so, it seems to me that the provision of the third rule under the first head of Section 100 of the Property Tax Act is conclusive upon the question before us, because it is provided that in estimating the balance of profits and gains chargeable under Schedule D, or for the purpose of assessing the duty thereon, no sum shall be set against or deducted from, or allowed to be set against or deducted from such profits or gains on account of any sum employed or intended to be employed as capital in such a trade.'

11. Lastly, Mr. Sen cited the decision in the case of United Collieries Ltd. v. IRC [1929] 12 TC 1248. The facts of this case were that the assessee carried on the business of colliery and mine owners. Under certain agreements they were obliged to deepen one of the two pits which were being worked by them under a lease to reach certain lower seams of coal and to work such seams.

12. The sinking operations were completed and a small part of the seam was worked. Thereafter, the work in the deepened pit was abandoned and water accumulated in the pit right up to the upper seams. After nine years the lower seams were again freed from water and the assessee claimed a deduction in the computation of profits, for the cost of this dewatering. It was held that the expenditure of the second dewatering was of capital nature. It was held that the second dewatering was no part of the ordinary working expenses of the colliery and that the same was a capital expenditure to make or to complete the part of the permanent works. The completion of such permanent works was a condition precedent to setting at work the process of earning profit by mining the lower seams.

13. The distinction was sought to be made between keeping a pit (once dewatered) free of water, and the process of dewatering a pit-either for the first time, or for a second time, if for any reason the water had been allowed to accumulate. But it was opined that both the operations consisted of removal from the strata or to keep open a permanent access to the minerals. An analogy was drawn with the case of a repair of a haulage road in a pit with the process of constructing that haulage road.

14. On the basis of the law as discussed above Mr. Sen contended that in the instant case the expenditure incurred for the purpose of removal of overburden should be treated as a capital expenditure inasmuch as there was no difference between the removal of overburden and sinking of principal pits ; the net result being the same, namely, that access to the coal to be worked was being obtained.

15. On careful consideration, we are unable to agree with the contentions of Mr. Sen. It has been found as a fact that the removal of overburden and the winning of coal were both continuous processes and were being carried on simultaneously from year to year. The removal of overburden cannot be compared to the opening of a new pit. Once a pit is opened the same confers a permanent benefit on the mine and can be used for winning coal at different seams and for the purpose of reaching new seams. The overburden resting on the surface of a particular area, if removed, could enable the company only to reach the coal under that and not any further. If any further surface had to be exposed, further overburden had to be removed.

16. It appears to us that if the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. On the other hand, if such an expenditure is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce profits it is a revenue expenditure. The above distinction has been made in the decision of the Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT : [1955]27ITR34(SC) . The Supreme Court further went on to observe that if the aim and object of the expenditure would determine the character of the expenditure then the source or the manner of the payment or the test of fixed or circulating capital would not arise.

17. By reason of the aforesaid we return our answer to all the questions referred to us in the affirmative and in favour of the assessee. No one has appeared on behalf of the assessee.

18. In the facts and circumstances of the case, we make no order as to costs.

Deb, J.

19. I agree.


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