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TMI Blog1968 (3) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... osed on October 31, 1951 and after the branch on March 31, 1952, and those are the relevant previous/years. During the relevant year, the assessee applied for certain new licences, for which it incurred an expenditure of Rs. 5,694 which included prospecting licence fee of Rs. 3,200 paid to the Government at the time of procuring the prospecting licence for the Baglulla emerald area issued under the provisions of Chapter III of the Mineral Concession Rules, 1949. This prospecting licence fee of Rs. 3,200 was payable at the rate of rupee one per acre per year. Besides this, there were item of expenditure like licence fee for other purposes, application charges, ammunition licence charges, etc. That other expenses were allowed to the extent allowable and there was no dispute in respect of them. The income-tax Officer disallowed the sum of Rs. 3,200 on the ground that the licence was obtained by the assessee only that year, that the licence fee was to be paid at rupee one per acre in addition to the royalty to be paid on the value of emerald won, excavated and sold, that the expenditure was an initial expense as it gave the assessee a right of prospecting mines and, that, therefore, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riod for which the licence is obtained, viz., one year, does not also make it a revenue payment. In our opinion, the authorities rightly disallowed the amount. " The assessee required the Appellate Tribunal to refer the question of law arising, in the case to the High Court and it is how the first question is referred to this court. The second question has been referred in the following circumstances: The assessee claimed deduction of a sum of Rs. 7,857. Messrs. Duduwalla and Company worked a mica mine for about 15 years and thereafter abandoned it. With a view to granting a licence over the area, the State Government issued Notification No. 9453 dated 29th March, 1955, (Annexure " B "). The leases were to be given in accordance with Mineral Concession Rules, 1949, with some relaxations and modifications about which reference had been made to the Government of India. Paragraph No. 5 of the notification runs as follows: " As the area has been worked by a private company during the past fifteen years, all the known mines and quarries and prospecting pits have acquired a value which can be determined by the principles of ' mine valuation '. Intending applicants are therefore reque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as submitted that this amount, being a prospecting licence fee, was an expenditure of a revenue nature and as regards the payment of Rs. 1,53,800 he has submitted that the amount paid by the assessee was only an estimated value of the mica found lying in the area and it thus represented a payment for the stock-in-trade of the assessee, which was liable to be allowed as an allowable deduction. According to him, it should not be treated as capital expenditure. He has placed reliance on the following cases : Alianza Co. Ltd. v. Bell, Atherton v. British Insulated and Helsby Cables Ltd., Mohanlal Hargovind v. Commissioner of Income-tax, Banarsidas Jagannath v. Commissioner of Income-tax, Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax and Gotan Lime Syndicate v. Commissioner of Income-tax. Learned counsel appearing on behalf of the department contested the stand taken on behalf of the assessee. He has submitted that the prospecting licence fee was expenditure of a capital nature, being an initial expense, which gave the assessee a right of prospecting mine. As regards the payment of Rs. 1,53,800, made by the assessee, it could not be treated according to him as payment for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow, I don't say that this consideration is absolutely final or determinative, but in a rough way I think it is not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all, and income expenditure is a thing that is going to recur every year." Then, there is another test which has almost been universally accepted as a test for determining what is capital expenditure as distinguished from revenue expenditure laid down by Viscount Cave L. C. in Atherton v. British Insulated and Helsby Cables Ltd. The observations were as follows : " Now, in Vallambrosa Rubber Co. v. Farmer, Lord Dunedin as Lord President of the Court of Session, expressed the opinion that in a rough way it was not a bad criterion of what is capital expenditure as against what is income expenditure to say that capital expenditure is a thing that is going to be spent once and for all and income expenditure is a thing which is going to recur every year ; and no doubt this is often a material consideration. But the criterion suggested is not, and was obviously not intended by Lord Dunedin to be, a decisive o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. " The Supreme Court has said that the synthesis attempted by the Full Bench of the Lahore High Court truly enunciates the principles which emerge from the authorities. 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 in the nature of capital expenditure. In the light of the broad tests that have been indicated above, we proceed to consider as to what is the true and correct import of the two payments in the present case. We take the second question first. The amount of Rs. 1,53,800 represented the price that was paid by the assessee for obtaining the right to extract and win mica in an area which had already been worked and developed by his predecessors for 15 years. If the assessee had to start running a mine, he had to incur similar expenditure. The argument of learned counsel for the assessee is that the amount paid was the price of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts to collect leaves and also to coppice and plant and to pollard the tendu trees, but beyond this it gave no interest in land. The judicial Committee held that these contracts were in a business sense for the purpose of securing supplies to the manufacturers of one of the raw materials of their business. They granted no interest in land or the plants or the trees. Then the judicial Committee observed as follows: " Cases relating to the purchase or leasing of mines, quarries, deposits of brick earth ...... do not appear to their Lordships to be of assistance ...... " The Board distinguished Alianza Co. Ltd. v. Bell, which was said to be a case analogous to purchase or leasing of a mine, and Kauri Timber Co. v. New Zealand Commissioner of Taxes, which was a case of acquisition of lands or of standing timber which was an interest in land. In either case, it was a capital asset. Their Lordships finally observed: " In the present case the trees were not acquired nor were the leaves acquired until the appellants had reduced them into their own possession and ownership by picking them. The two cases can, in their Lordships opinion, in no sense be regarded as comparable. If the tendu l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easy instalments. The assessee claimed deductions in respect of the lease money paid by him as revenue expenditure. It was held by the Supreme Court that the assessee acquired by his long term lease a right to win stones and the lease conveyed to him a part of land. The stones in situ were not the assessee's stock-in-trade in the business sense but a capital asset from which after extraction he converted the stones into his stock-in-trade. The payment was neither rent nor royalty but was for acquiring a capital asset of enduring benefit to his trade and was a capital expenditure. Mohanlal hargoind's case relied on an behalf of the assessee is clearly distinguishable, whereas Pingle Industries, relied on on behalf of the department has a clear application to the fact of the present case. Gotan Lime Syndicate's case, on which also strong reliance has been placed on behalf of the assessee equally bears no resemblance to the facts of the present case. In Gotan Lime Syndicate's, case, the important fact was that it was a case of an annual payment of royalty or dead rent which was not a capital expenditure. Sikri J., who delivered the judgment of the court, observed that no case had be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as of a capital nature. The case to which we now wish to refer is the Commissioner of Income-tax v. Ramlal and Sons which is a Full Bench decision of this court. The material facts of that case are these. The assessee was a firm called Ramlal Kachhawa and Sons, Barmer. It was assessed for income-tax for the year 1952-53, the corresponding accounting year having ended on 31st March, 1952. In response to the Notification No. 9453 dated 29th March. 1958 (same as in the present case), the assessee made a tender for Block No. 6 (same area as in the present case, merely the block given to the assesee in the present case is different) in Part A and offered a sum of Rs. 1,55,000, as tender price which was accepted by the Government. A lease for a period of 20 years as, per conditions prescribed in the Mineral Concession Rules. 1949, was granted to them. The terms and conditions of that lease were the same as in the present case. The assessee claimed to deduct the entire sum of Rs. 1,55,000, as revenue expenditure. The Income-tax Officer rejected this claim on the ground that it was clearly a case of expenditure of a capital nature. The assessee then went in appeal to the Appellate Assista ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be charged. It is in this background that the question whether there is an element of rent in the payment of Rs. 1,55,000 made by the assessee as tender money falls to be determined.. ... As we look at the real nature of the payment of Rs. 1,55,000, it clearly seems to us that it has hardly anything to do with any payment by way of rent or royalty, as such and this was a payment which was required to be made by the assessee over and above this, and as the notice puts it, it was merely a bid price based on certain principles of mine valuation for the acquisition of mining rights in certain areas which having been previously worked by other lessees had acquired a value. In fact, the Tribunal itself in the very opening part of its order refers to this payment as ' bid price while tendering for the lease of mica mires in Rajasthan ' ... There can be no doubt, therefore, that it was in the nature of capital expenditure and, with all respect, it appears to us to be a contradiction in terms to say that it includes therein an element of rent which would be a revenue expenditure." Learned counsel for the assessee has stated that though the facts in that case are similar to the facts in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prospecting licence, fee of Rs. 3,200 was also not allowable as revenue expenditure. In the result, therefore, our answer to both the questions is in the negative. In the circumstances of the case, we leave the parties to bear their own costs of the reference. BHANDARI, ACTG. C.J.--I agree with my learned brother G.M. Mehta J. but would like to make certain observations. I take up the second question first. The block of mica mines, of which the assessee is the lessee in this case, had already been worked to a certain extent by his predecessor. The Government of Rajasthan issued notice, annexure " B ", inviting tenders making it clear that all the known mines and quarries and prospecting pits had acquired a value which could be determined by the principles of " mine valuation ". It was further mentioned in the notice that all dumps of scrap or waste mica lying within a leased area will belong to the lessee and he must take into account the value of the same when submitting his tender. The contention of the assessee is that it had submitted a tender after fixing value of contents of certain pits according to the recognised principles of mine valuation and also of the scrap mica ly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficulty to apply the law laid down in various cases to different facts in various cases but he came to the conclusion that the principle of Coltness Iron Co. v. Blacks governed the case before him. His conclusion is summed up in the following paragraph : " Now here, when the facts are looked at, they appear to me to be all one way. It seems to me to be clear that this pound 70,000 was paid and was paid to acquire an asset in the business. It was paid--and I do not think that any words can get over the difficulty--simply to acquire oil wells, and what were acquired were the oil wells and, by a separate clause, but substantially by part of the same agreement, as the director's report shows, there were acquired also the means of working the oil wells. Therefore I am unable to take the view that this is anything else than a capital expenditure, but I confess that I myself should be content, numerous as the later cases are, to sum of which I have alluded, though not to very many (there are a long chain of them) to rest my decision upon the decision of the House of Lords in the Coltness Iron case. There, I think, the principles are laid down and the principles there laid down, as I th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d themselves with a means of supplying themselves with gravel which when procured would form part of their stock-in-trade. Jenkins L.J. then proceeded to decide the matter : " The question is not free from difficulty. Is this a case of a purchase of the raw material of the trade, or of the stock-in-trade in which a particular trader deals, or is it a case of a purchase of a capital asset from which the taxpayers will be able to derive raw material or stock-in-trade as and when the requirements of the taxpayer's business make it expedient to do so? In my view, the latter conclusion is the correct one, and I think that conclusion accords with Alianza Co. Ltd. v. Bell and Coltness Iron Co. v. Black and also with the observations of Lord Shaw in Kauri Timber Co. Ltd. v. New Zealand Commissioner of Taxes. The distinctions drawn by the cases are not altogether satisfying to some minds. It may seem strange that a purchase of a heap of tailings, as in the Golden Horse Shoe case, should be regarded as a purchase of raw material or stock-in-trade, whereas the sum expended in acquiring a quantity of caliche or nitrates embedded in a quarry, as in the Alianza case should be a capital expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an be said to have been set up by obtaining the prospecting licence even when the licence contained such a term. Under section 10(2AA) of the Indian Income-tax Act, 1922, special provision was made for deduction in case of business for prospecting mineral oils. The same provision is repeated in section 42 of the Indian Income-tax Act, 1961. Learned counsel for the assessee has relied on the following observations of Subba Rao J. in Commissioner of Income-tax v. Malayalam Plantations : " The expression for the purpose of the business' is wider in scope than the expression ' for the purpose of earning profit '. Its range is wide ; it may take in not only the day to day running of a business but also the rationalisation of its administration and modernization of its machinery ; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory duties and taxes imposed as a pre-condition to commence or for carrying on of a business ; it may comprehend many other acts incidental to the carrying on of a business." The aforesaid ob ..... X X X X Extracts X X X X X X X X Extracts X X X X
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