1. This is a reference tinder Section 66(2) of the Income-tax Act, 1961. It relates to the assessment year 1955-56, the relevant previous year ending on May 31, 1954.
2. The assessee was carrying on business in mining and mining leases. In 1941, the assessee took a prospecting licence from the Government of Uttar Pradesh for prospecting marl and incurred an expenditure of Rs. 1,63,832 in prospecting operations in that year. In 1946, the assessee took a mining lease of those lands and developed them by incurring an expenditure of Rs. 1,90,618. The total sum thus spent by the assessee was Rs. 3,54,449 and this amount was shown in its balance-sheet as an asset as on 31st May, 1954. In the meantime, the assessee surrendered the said lease on February 2, 1954, inasmuch as the mining operation was found to be uneconomical and then, in the next year, after writing off this amount, claimed the sum as a business loss in the assessment year under consideration. The Income-tax Officer has disallowed this claim but on appeal, the Appellate Assistant Commissioner, after taking a report, onremand from the Income-tax Officer, has allowed Rs. 1,90,618 and has disallowed Rs. 1,63,832. The Appellate Tribunal has dismissed the second appeal filed by the assessee and has referred the following question to this court:
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that a sum of Rs. 1,63,832 spent for prospecting the Uttar Pradesh Marl Concession was not an admissible business expenditure.'
3. The relevant portion of the order of the Tribunal with which we are concerned is as follows :
'The expenses to the extent of Rs. 1,63,832 has been found by the Appellate Assistant Commissioner to be in regard to the prospecting operations. During the period the prospecting licence was current and the operations were being carried on in that respect, it appears to us to be clear that the expenses incurred were in the nature of preliminary expenses. The prospecting licence does not entitle the licencee to win or carry away the mineral of the kind in question for commercial purposes. Having regard to the nature of the prospecting licence and that the expenses to the extent mentioned above were admitted to be in the operation of that licence, we are of the opinion that the conclusion reached by the Appellate Assistant Commissioner that the expenses to this extent were not admissible is correct. It was argued for the assessee that these expenses also were in regard to stock-in-trade but there is no basis for this and the argument cannot be accepted. The claim of the assessee in this behalf has to be rejected.'
4. It has been argued by Mr. J. C. Pal, the learned counsel for the assessee, that inasmuch as Rs. 1,90,618 has been allowed by the appellate authorities on the basis that the assessee was a dealer in mining leases it should be held that this prospecting licence was the stock-in-trade of the assessee and as such this sum of Rs. 1,63,832 should be allowed as a revenue loss. But, the finding of the Tribunal, namely, that this prospecting licence was not the stock-in-trade of the assessee has not been questioned by the assessee in this reference and, therefore, there is no merit in this contention.
5. Mr. Pal has also argued that this mining lease was acquired by the assessee in the course of its trading activities after the prospecting period was over and, therefore, the amount spent by the assessee during the prospecting period was a revenue expenditure and as such it was a revenue loss. In support of this contention he has relied on the following observation of the Supreme Court in the case of Bombay Steam Navigation Co. (1953) (P.) Ltd. v. Commissioner of Income-tax : 56ITR52(SC) :
'If the outgoing or expenditure is so related to the carrying on or conduct of the business, that it may be regarded as an integral part of the profit-earning process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure.'
6. But the finding of the Tribunal is that this prospecting licence did not entitle the assessee 'to win or carry away the mineral of the kind a question for commercial purpose', and, hence, the above observation of the Supreme Court overrules his contention. He has also cited the case of India Cements Ltd. v. Commissioner of Income-tax : 60ITR52(SC) , in which certain sums were spent by the assessee in connection with the borrowing of a loan in order to carry on its business and, therefore, it was held that the said expenditure was a revenue expenditure. Hence, reliance on this decision was misplaced by him.
7. The Supreme Court says this in the case of Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax : 27ITR34(SC) :
'In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure.'
8. Hence, the submission of Mr. Ajit Sengupta, the learned counsel for the revenue, is that in view of the finding of the Tribunal that Rs 1,63,832 was incurred as preliminary expenses it should be held that this expenditure was incurred as an initial outlay for the acquisition of the said mining lease and, therefore, it being in the nature of a capital expenditure, must be held to be a capital loss. He also argued that this expenditure was incurred 'with a view to bringing into existence an asset', in the words of Viscount Cave in the case of Atherton v. British Insulated and Helsby Cables Ltd.  10 TC 155 and, therefore, it being a capital expenditure, this loss must also be a capital loss.
9. Mr. Sengupta has also relied on the decision of the Supreme Court in the case of R. B. Seth Moolchand Suganchand v. Commissioner of Income-tax : 86ITR647(SC) . At page 651 of the report, it has been observed by the Supreme Court that in the case of a mining lease the 'empirical test is that where minerals have to be won, extracted and brought to surface by mining operations, the expenditure incurred for acquiring such a right would be of a capital nature. But, where the mineral has already been gotten and is on the surface, then the expenditure incurred for obtaining the right to acquire the raw materials, that is, the mineral, would be a revenue expenditure laid out for the acquisition of stock-in-trade'. And at page 655 of the report the Supreme Court has further observed as follows:
'The test for ascertaining whether the amount spent is of a capital nature is, whether it was spent for obtaining a right of an enduring character which in the case of mining leases is to acquire rights over land for winning the mineral. In other words, where the mineral is part of the Land and some mining operations have to be performed to extract it from the earth, the amount paid to acquire a right over or in the land to win that mineral is of an enduring character and, hence, a capital expenditure.'
10. Now, the material facts found and stated by the Tribunal are as follows: The assessee was carrying on business in mining and also in taking over the mining leases; Rs. 1,63,832 was spent as preliminary expenses for prospecting marl; the assessee had no right to win or carry away the mineral under the prospecting license; the mining lease was acquired long after the said prospecting and after that the mining areas were developed with a view to transfer them to a newly floated company.
11. Further, the case of the assessee before the Tribunal was that this expenditure was 'incurred in the course of acquiring the leasehold rights', vide page 31 of the paper book. Hence, on these facts, it must be held that Rs. 1,63,832 was a capital expenditure and, therefore, a capital loss.
12. In the premises, we return our answer in the affirmative and in favour of the revenue.
13. Having regard to the facts and circumstances of the case, we do not propose to make any order as to costs.
14. I agree.