1968 (3) TMI 3 - HC - Income Tax

Licence fee - paid for the purpose of setting up of a business for mining emerald - expenditure in connection with the obtaining of a prospecting licence - prospecting licence fee of is not allowable as revenue expenditure

Summary

Issues Involved:
1. Whether the prospecting licence fee of Rs. 3,200 is allowable as revenue expenditure.
2. Whether the appropriate part of Rs. 1,53,800 was allowable as revenue expenditure.

Issue-wise Detailed Analysis:

1. Prospecting Licence Fee of Rs. 3,200
The first issue concerns whether the prospecting licence fee of Rs. 3,200 paid by the assessee is allowable as revenue expenditure. The assessee argued that this fee, being for a prospecting licence, should be considered a revenue expenditure. However, the Income-tax Officer disallowed the sum, reasoning that the licence fee was an initial expense granting the assessee the right to prospect mines, thus classifying it as a capital expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922.

The Tribunal upheld this view, stating that the prospecting licence fee was paid irrespective of the quantity of minerals obtained and was meant to initiate the business. The Tribunal concluded that the fee's character as an initial business expense did not change even though the licensee had certain rights over the minerals obtained under the prospecting licence. Consequently, the Tribunal ruled that the prospecting licence fee could not be equated to a payment for stock-in-trade and was not allowable as revenue expenditure.

The High Court agreed with the Tribunal, emphasizing that the prospecting licence fee was for the initiation of business and not for the purpose of carrying on the business. The Court noted that the fee was not based on any quantity of minerals and was paid irrespective of the minerals obtained, thus classifying it as a capital expenditure.

2. Deduction of Rs. 1,53,800
The second issue pertains to whether the appropriate part of Rs. 1,53,800 paid by the assessee for obtaining a mica mining lease is allowable as revenue expenditure. The assessee argued that this amount represented the estimated value of mica found lying in the area and should be considered a payment for stock-in-trade, thus classifying it as revenue expenditure.

The Income-tax Officer and the Appellate Assistant Commissioner disallowed the claim, stating that the expenditure was of a capital nature as it was for acquiring a capital asset. The Tribunal allowed the deduction of Rs. 3,360 for mica scrap lying on the surface but held the remaining Rs. 1,53,800 as capital expenditure.

The High Court reviewed various tests and precedents to determine the nature of the expenditure. The Court noted that the amount paid by the assessee represented the price for obtaining the right to extract and win mica in an area already developed by the assessee's predecessors. The Court emphasized that the expenditure was for acquiring a source to obtain stock-in-trade, not for the stock-in-trade itself. The payment was made for a long-term benefit, indicating a capital expenditure.

The Court distinguished the present case from precedents cited by the assessee, such as Mohanlal Hargovind's case and Gotan Lime Syndicate's case, noting that those cases involved different contexts and facts. The Court found that the payment of Rs. 1,53,800 was for acquiring a capital asset of enduring benefit and was not allowable as revenue expenditure.

Conclusion:
The High Court concluded that both the prospecting licence fee of Rs. 3,200 and the appropriate part of Rs. 1,53,800 were not allowable as revenue expenditure. Both questions referred to the Court were answered in the negative, affirming the decisions of the Income-tax authorities and the Tribunal. No order as to costs was made.