TMI Blog2020 (1) TMI 178X X X X Extracts X X X X X X X X Extracts X X X X ..... as contended that the amount of lease was a capital expenditure in as much as the pillars of mica (before it is mined) cannot be said to be stock in trade. Accepting the claim made on behalf of the Revenue, the expenditure was held to be capital expenditure. ITAT could not have held that because the mine continued to belong to the Government (in fact the mineral rights would always belong to the Government) and the observation that the facts speak for themselves are insufficient to interfere with the concurrent finding of fact properly recorded by the AO and the CIT (Appeals). We find that the respondent had obtained a long term captive source of the raw material by purchase of right from Texmaco. However, at the same time the raw material was required to be won, gotten and brought to the surface and as such, cannot be said to be a stock in trade as held by the Hon'ble Supreme Court in the case of R.B. Seth Moolchand Suganchand. Consequently, the substantial question of law framed at serial no. II is answered in the negative and in favour of the appellant. - TAX APPEAL NO. 51 OF 2008 - - - Dated:- 2-1-2020 - M.S. SONAK C.V. BHADANG, JJ. Ms. Amira Raza ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the CIT (Appeals). The CIT (Appeals) by an order dated 14th January 2003, confirmed the order of the AO on the issue of payment made to Texmaco as capital expenditure. However, the CIT(Appeals) allowed the expenditure incurred on the foreign travel as business expense and the interest on borrowings for setting up of Argon Gas Plant as revenue expenditure. The assessee carried the matter in Appeal before the Income Tax Appellate Tribunal (ITAT), insofar as the treatment of the payment made to Texmaco in Appeal No. 27/PNJ/2003 is concerned. The Revenue challenged the order in Appeal No. 38/PNJ/2003 against the issue of expenditure on foreign travel and interest on borrowings. 4. The ITAT by an order dated 25th September 2007, allowed the assessee's Appeal holding the payment made to Texmaco as deferred revenue expenditure thereby permitting the assessee to amortise the amount for a period of eight years. As regards the Revenue's Appeal, the ITAT relying on its earlier decision, directed the AO to delete the disallowance. As regards the issue of interest on borrowings, the ITAT upheld the order of CIT (Appeals). Feeling aggrieved the Revenue is in Appeal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been borrowed for the purposes of the business and (iii) the assessee must have paid interest on the borrowed amount. It was inter alia held that what is germane is whether the borrowing was for the purpose of the business. It has been held that the legislature has made no distinction in Section 36(1)(iii) between capital borrowed for a revenue purpose and capital borrowed for capital purpose. What Section 36(1) (iii) emphasizes is user of the capital and not the asset which comes into existence as a result of the borrowed capital. It has been held that the Explanation 8 to Section 43(1) as well as the concept of actual cost has no application to Section 36(1)(iii) of the Act. It can thus be seen that once it is shown that the borrowing was for business purpose, the interest paid on such borrowing would be an allowable deduction. Thus, no exception can be taken to the finding recorded by the ITAT on the issue of interest on borrowings. The substantial question of law framed at (I) is answered against the appellant and in favour of the assessee. 9. This takes us to the second substantial question of law as framed. In order to appreciate the rival content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In fact, the CIT (Appeals) found startling similarities between the facts in the present case and the one obtaining in the case of R.B. Seth Moolchand Suganchand. 11. The ITAT on the contrary found that the limestone quarries were not acquired by the respondent through the transaction with Texmaco. It was found that the quarries continued to be owned by the Andhra Pradesh Government. The rights acquired by the respondent are only in substitution of the rights of Texmaco for extracting limestone from the quarries. The ITAT found that in that way the amount paid by the assessee company was in the reserve of materials necessary for running its business . The ITAT has noted the submissions made on behalf of the assessee in the case of Pingle Industries Ltd. Vs. Commissioner of Income Tax [1960] 40 ITR 67 (SC). This is what is held by the ITAT in para 11 of its order: 11. We have duly considered the rival contentions and gone through the records carefully. The assessee company had paid a sum of ₹ 7,09,10,000/- to M/s Texmaco in acquiring the right to extract limestone from the mines taken on lease by M/s Texmaco from the Government of Andhra Pradesh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rded by the AO and the CIT (Appeals). On behalf of the appellant, reliance is placed on the following decisions. i. Gotan Lime Syndicate Vs. Commissioner of Income Tax [1966] 59 ITR 718 (SC). ii. Pingle Industries Ltd. Vs. Commissioner of Income Tax [1960] 40 ITR 67 (SC). iii. Aditya Minerals (P) Ltd. Vs. Commissioner of Income Tax [1999] 106 Taxman 337 (SC). iv. R.B. Seth Moolchand Suganchand Vs. Commissioner of Income Tax [1972] 86 ITR 647 (SC). v. Union of India Others Vs. M/s Playworld Electronics Pvt. Ltd. Another (1989) 3 SCC 181. 14. Mr. Agrawal, the learned Counsel for the respondent has submitted that the respondent has only purchased rights to mine the mineral, namely, the limestone and there is no purchase or transfer of leasehold rights. It is submitted that even assuming that it was a benefit of an enduring nature, it was essentially an expenditure on revenue account for obtaining raw material. It is submitted that the substance of the transaction has to be looked into while determining whether the expenditure is on revenue or capital account. It is submitted that looked from commercial view, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16. The AO has considered the issue in details and has held that the amount was spent for acquiring a benefit of enduring nature and was thus on capital account. The CIT (Appeals) has concurred with the finding of the AO. While doing so, the AO and CIT (Appeals) have relied on the decision of the Hon'ble Supreme Court in the case of R.B. Seth Moolchand Suganchand. As noticed earlier, the only reasoning articulated by the ITAT to differ is to be found in para 11 of the order. A bare perusal of the same would show that the ITAT has not even adverted to the decision in the case R.B. Seth Moolchand Suganchand. The ITAT has referred to the propositions made by Mr. Palkhiwala, while arguing the case of Pingle Industries Ltd. , which the ITAT has found to be relevant. The ITAT has then found that the quarries were not acquired by the respondent and same continued to be owned by the Andhra Pradesh Government. Lastly, the ITAT has found that the payment was made by the assessee to substitute itself in the place of Texmaco and to assume their rights for the purpose of extracting limestone from the quarries. The ITAT has found that no interest having been acquired or created in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m which after extraction it converted the stones into its stock in trade. The Hon'ble Supreme Court noted its earlier decision in the case of Abdul Kayoom Vs. Commissioner of Income Tax [1962] 44 ITR 689, in which it has been held that what is decisive is (i) the nature of the business (ii) the nature of the expenditure (iii) the nature of the right acquired and (iv) their relation interse and this is the only key to resolve the issue in the light of the general principles governing such cases. It can thus be seen that the nature of the right acquired may be one of the criteria, however, it alone is not decisive. We find that what has weighed with ITAT is predominantly the nature of the right. Even here, we are unable to agree with the proposition that there is no creation of any right or interest in the land. This is because by transfer of rights of Texmaco, the respondent is authorized to mine and to win the mineral from the mines, remove it and use it as a raw material in its cement Plant. 20. Coming back to the case of R.B. Seth Moolchand Suganchand this is what is held: The determining factor will depend largely on the nature of the trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sand lying on the surface of the leased land where no question of raising, digging or excavating for the sand before obtaining it was involved. In other words, no operation had to be performed on the land itself and is not a case where the gravel is in any true sense as pointed out in Golden Horse Shoe (New) Ltd.'s case was won from the soil .... it is merely shovelled up where it lies . Thus insofar as a case of mining lease is concerned, the empirical test as held by the Hon'ble Supreme Court is that where the mineral has already been gotten and is lying on the surface (unlike in the present case), it would be a revenue expenditure. However, where the mineral has to be removed, brought to the surface and then used, it cannot be regarded as a stock in trade and thus the expenditure made will be an expenditure on a capital account. 22. In the case of Pingle Industries Ltd., the Hon'ble Supreme Court has noted the submission made on behalf of the assessee that all cases of mines and quarries fall into following three classes: i. in which mines and quarries are purchased outright ii. in which ownership is not aquired but only a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27. We would now propose to make a brief reference to the other decisions cited on behalf of the parties. 28. In the case of Gotan Lime Syndicate, the assessee which was a registered firm was carrying on the business of manufacture of lime from limestone. The government had sanctioned leasing out of a certain area of lime deposits in favour of the assessee on an agreement to pay royalty of ₹ 96,000/- per annum. The question was whether it was a capital or a revenue expenditure. The Hon'ble Supreme Court found that in that case there was annual payment of royalty or dead rent and no lumpsum payment was ever settled or paid. In such circumstances, it was found that the payment was not a direct payment for securing an enduring advantage, but had a relation to the raw material to be obtained. It is significant to note that the case of Pingle Industries Ltd. was cited on behalf of the Revenue. The Hon'ble Supreme Court found that the said case is distinguishable on the ground that in the case of Pingle Industries Ltd., there was a lumpsum payment for acquiring a capital asset of enduring benefit to his trade. It is necessary to emphasize that in the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a jetty under a licence granted by the government for the purpose of handling chemicals manufactured by it. Under the terms of the agreement the jetty was always to belong to the government. The assessee was however given preferential rights to use the jetty without payment of any charges for a period of three years after which it was required to pay fees in the discretion of the government. This Court found that the expenditure was incurred to obtain commercial advantage and to facilitate trading and thus, was a revenue expenditure. The case is distinguishable on facts as the expenditure was incurred to obtain advantage in the field of revenue, namely, to save fees for the use of the jetty and to have a commercial advantage of the preferential use of the same. What is significant is that the jetty was to belong to the government. We are unable to see as to how the case can come to the aid of the assessee in the present case. 33. Lastly, in the case of Madras Auto Services (P) Ltd., the assessee had taken premises on lease for a period of thirty nine years. The lease premises were eventually demolished and a new building was constructed by the assessee at its expense ..... X X X X Extracts X X X X X X X X Extracts X X X X
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