TMI Blog1982 (8) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... licence in respect of Survey No. 30 under the Mines and Minerals Act, 1948. The Government of Gujarat granted to the said company a prospecting licence on 27th August, 1962. Thereafter, the said company made an application for the grant of a mining lease in respect of that survey number on 6th June, 1963. While that application was pending, it prepared a prospecting report on 9th November, 1963, and submitted it to the State Government in support of its claim for a mining lease. However, the Government of Gujarat, by its order dated 4th March, 1964, rejected its application for the grant of a mining lease. The said order was challenged in revision but the Govt. of India rejected the revision application on 26th May, 1965. As its application for the grant of a mining lease was thus rejected, the Madras company filed a Civil Suit No. 1552 of 1964 in the Civil Court at Baroda and also filed a writ petition, being Special Civil Application No. 829 of 1965, in this court. Certain interim orders were obtained in the said proceedings whereby the Govt. of Gujarat was restrained from giving the said survey number on lease to any other party. It appears that in the meantime the assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foresaid reasons set out in the agreement that the assessee paid a sum of Rs. 3,00,000 to the Madras company on receipt whereof the latter withdrew the civil suit as well as the writ petition and vacated Survey No. 30 with a view to facilitating the assessee to obtain mining lease in respect of that land. The assessee claimed deduction of the said amount of Rs. 3,00,000 as revenue expenditure in computing the total income for the assessment year 1970-71. The ITO, however, held that the said expenditure was of a capital nature and rejected the claim for deduction. In appeal the AAC also took the view that the expenditure in question was incurred with a view to persuading the Madras company to withdraw the pending litigation and further with view to avoiding competition and since the benefit derived was of an enduring nature, the expenditure was rightly disallowed as it was in the nature of capital expenditure. The assessee carried the matter in appeal before the Income-tax Appellate Tribunal, Ahmedabad (Bench B), which relying on two decisions of the Supreme Court in R. B. Seth Moolchand v. CIT [1972] 86 ITR 647 and Mewar Sugar Mills Ltd. v. CIT [1973] 87 ITR 400, held that on the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 as under : " The distinction between capital and revenue expenditure is that the former is for property having a life duration extending over several accounting periods, whereas the latter is an expenditure for property which will be consumed within the current accounting period. " Lord Dunedin in Vallambrosa Rubber Co. Ltd. v. Farmer [1910] 5 TC 529 (C Sess), observed 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 ". This statement was qualified by Lord Cave in Atherton v. British insulated and Helsby Cables Ltd. [1926] AC 205; [1925] 10 TC 155, 192 (HL), in the following words: " When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable, not to revenue, but to capital." Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and letting it change masters. " The judicial Committee in Tata Hydro-Electric Agencies Ltd. v. CIT [1937] 5 ITR 202, 209 (PC) observed: " What is 'money wholly and exclusively laid out for the purposes of the trade' is a question which must be determined upon the principles of ordinary commercial trading. It is necessary, accordingly, to attend to the true nature of the expenditure, and to ask oneself the question, is it a part of the company's working expenses; is it expenditure laid out as part of the process of profit earning ? " In IRC v. Granite City Steamship Co. Ltd. [1927] 13 TC 1, 14 (C Sess), Lord Sands characterised as capital an outlay made for the initiation of business, for extension of a business, or for a substantial replacement of equipment. That is why N. H. Bhagwati J. in the case of Assam Bengal Cement Co. Ltd.'s case [1955] 27 ITR 34, 45 (SC), observed : " 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. " It becomes obvious from the aforesaid tests that if the expenditure is incurred w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid for the purchase of mining rights is capital expenditure. In Mohanlal Hargovind v. CIT [1949] 17 ITR 473 (PC), the assessee, a bidi manufacturer, had entered into short-term contracts with the Government and other forest owners to pick up tendu leaves used to roll bidis from the forest. Under the contract the assessee had a right of entry into the forest for collecting the leaves and to coppice small tendu plants and to pollard tendu trees but he had no interest in the forest land as such. The Privy Council held that the contracts were for the purpose of securing supplies of tendu leaves for the business of the assessee. These contracts did not grant any interest in land or the trees to the assessee. It was in these special facts that the Privy Council came to the conclusion that the expenditure incurred in acquiring the raw material (tendu leaves) was in a business sense an expenditure on revenue account, and not on capital account, just as much as if the tendu leaves had been bought in a shop. Referring to the decision in Alianza Company's case [1904] 2 KB 666 (KB), their Lordships observed that it was a case of a company whose object was treated as one to work and develop a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In Pingle Industries Lid. v. CIT [1960] 40 ITR 67, the Supreme Court by majority (S. K. Das J., dissenting) held that where an assessee acquires by a long-term lease the right to win stones, in situ, he acquires a capital asset from which, after extraction, he can convert the stones into his stock-in-trade. In such a case if a lump sum payment is made for acquiring a capital asset of enduring benefit to his trade, such expenditure would be on capital account and would not be allowable deduction. That was a case where the assessee-company which carried on the business of selling Shahabad flag stones, obtained under a contract the right to extract stones from quarries for a period of 12 years on the annual payment of Rs. 28,000. To safeguard the payment a sum of Rs. 96,000 was paid in advance as security of which Rs. 8,000 was to be adjusted annually against Rs. 28,000 and the balance of Rs. 20,000 was payable in monthly instalments of Rs. 1,666-10-8. The assessee had only the right to excavate stones and undertook not to manufacture cement and the owner undertook not to allow any other person to excavate stones in those areas. The question was, whether the amounts paid by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the surface of the river beds, that all the sand that could be removed was lying on the surface, and that: no excavation or skillful extraction was to be performed oil the land before obtaining it. It was, therefore, held having regard to the fact that the; assessee acquired merely the right to remove the sand lying loose on the land and that too for a short period of eleven months only, he did not acquire any fixed or capital asset of an enduring nature by obtaining the lease. The Supreme Court, therefore, ruled that the expenditure was of a revenue nature. Their Lordships observed that the fact that an interest in land. was also conveyed by the lease was not decisive of the question whether the money payable under the lease was capital expenditure or a revenue expenditure. The decisive factor is the object with which the lease, is taken and the nature of the payment which is made when obtaining the lease. This decision was considered by the Supreme Court in R. B. Seth Moolchand's case [1972] 86 ITR 647 and it was observed that the right to take away sand from the surface of the river beds must be treated as if the sand was stock-in-trade in the same way as the right to pick ten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 to the German firm. This amount was claimed by the assessee as revenue expenditure. The High Court held that the amount represented capital expenditure and was not a permissible deduction under s. 10(2)(xv) of the Indian I.T. Act, 1922. The High Court observed that the expenditure incurred for the acquisition of plant was surely of a capital nature and could not be claimed as deduction on revenue account merely because the capital asset, namely, dryer plant, was not acquired. In State Trading Corporation of India Ltd. v. CIT [1974] 94 ITR 496 (Delhi), the assessee, which had to abandon its proposal to Construct building as the land meant for the building was acquired by the Government, had yet to pay a sum of Rs. 10,000 as fees to certain architects for the preparation of the plan for construction of the proposed building. The capital asset, namely, the building, did not in fact come into existence. The amount was claimed by way of deduction as revenue expenditure but the claim was disallowed on the ground that the amount paid to the architects was on capital account since the expenditure was incurred for deriving benefit of an enduring nature, the subsequent abandoning of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the test laid down by Lord Cave in Atherton's case [1926] AC 205 (HL), observed as under : "This test, as the parenthetical clause shows, must yield where there out by Lord Radcliffe in Commissioner of taxes v. Nchanga Consolidated Copper Mines Ltd. [1965]58 ITR 241 (PC), it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure, 'so long as the benefit is not so transitory as to have no endurance at all'. There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case Within the principle laid down in this test. What is, material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more effi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engal Cement Co.'s case, [1955] 27 ITR 34 (SC), where he pointed out that this test can be applied only if the test evolved by Lord Cave is not attracted. The learned Judge, speaking for the Supreme Court stated (p.45): "It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated.... One has therefore got to apply these criteria one after the other from the business point of view and come to the conclusion whether on a fair appreciation of the whole situation the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure in which latter event only it would be a deductible allowance under section 10(2)(xv) of the Income Tax Act." It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit-making apparatus of the assessee was not enlarged and, therefore, the expenditure must be taken to be on revenue account. That, however, does not mean that even if an expenditure is made with a view to acquiring a capital asset or an advantage of an enduring nature and the case falls directly within the test laid down by Lord Cave and there are no circumstances pointing to the contrary, the expenditure would still be on revenue account if no fixed asset or advantage for the enduring benefit of trade is ultimately acquired. We are, therefore, of the view that the decision of the Supreme Court does not go so far as to say that the tests evolved by the courts earlier are not relevant and in order that an expenditure could be branded as on capital account, the Revenue must show that the assessee has acquired a fixed asset or an advantage of an enduring nature by the expenditure so incurred. The next case to which our attention was drawn by Mr. J.P. Shah the learned advocate for the assessee, is the decision of a Division Bench of this court in CIT v. Gujarat Mineral Development Corporation [1981] 132 ITR 377. In that case the assessee, who was the assessee before us, paid a sum o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing fluorspar ore and selling it but in order to enable it to carry on that business more efficiently and more profitably, the beneficiation plant was proposed to be installed and the electric cables and supply lines were laid for that beneficiation plant as has been pointed out by the Tribunal in its order. Once the purpose of the beneficiation plant is properly understood, it is obvious that the advantage consisted merely in facilitating the conduct of the assessee's business and enabling the assessee to carry on its business more efficiently or more, profitably, but the capital in the sense of the block capital, was remaining untouched by the expenditure of this amount of Rs. 20,46 lakhs. Hence, in the commercial sense, it was not an advantage in the capital field. Since it left the fixed capital of the assessee employed for the main business of mining untouched and the advantage was not in the capital field, it would not be said to be an expenditure of a capital nature." It is thus obvious from the above observations that the court came to the conclusion that the expenditure was on revenue account because it was of the opinion that the expenditure was not incurred for the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the right petition and further agreed to furnish a copy of the prospecting report, data and other information to the assessee. Now, s. 11(1) of the Mines and Minerals (Regulation and Development) Act, 1957, lays down that where a prospecting license has been granted in respect of any land, the license shall have the preferential right for obtaining a mining lease in respect of that land over any other person provided that the State Govt. is satisfied that the licensee has not committed any breach of the terms and conditions of the prospecting license and is otherwise a fit person for being granted the mining lease. On a plain reading of this sub-section it is clear that the Madras company which had secured a prospecting license had a preferential right for obtaining a mining lease in respect of that land bearing Survey No. 30. The Madras Company was rejected by the Central Govt. and, therefore, it had taken legal proceedings challenging the said refusal. Those proceedings would have taken a number of years for final disposal and could have ended in favour of the Madras company. The assessee, therefore, thought that unless the Madras company is driven out of the field, its endeav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt in Empire Jute Company's case [1980] 124 ITR 1, as laying down a universal test that if capital asset is not ultimately acquired, the expenditure initially incurred for acquisition of that capital asset would be on revenue account. We are, therefore, of the opinion that in the facts and circumstances of the present case, since the expenditure was incurred with the twin objective of driving out a competitor and clearing the way for the acquisition of capital asset, namely, mining lease, and the capital asset was ultimately acquired, the expenditure incurred was on capital account and not on revenue account. It is well settled that if under the terms of the mining lease, minerals have to be won, extracted and brought to surface by mining operations the expenditure incurred for acquisition of such a right would be of a capital nature but where the mineral is already gotten and is on the surface, then the expenditure incurred for obtaining the right to acquire the raw material would be a revenue expenditure laid out for the acquisition of stock-in-trade. In the present case under the terms of the mining lease, fluorspar has to be won, extracted and brought to surface by mining ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. At the request of the assessee the Tribunal formulated the following two points for our opinion : " (3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in not allowing the loss of Rs. 64,503 for A.Y. 1970-71 and Rs. 2,26,496 for A.Y. 1971-72 due to the washing away of the approach bridge u/s. 28 and/or 37 and/or as short-term capital loss and/or as a terminal loss u/s. 32(1) of the Act ? (4) Whether, on the facts and in the circumstances, of the case, the Tribunal was justified in disallowing the expenditure of Rs. 20,40,000 for A.Y. 1970-71 and Rs. 2,92,285 for A.Y. 1971-72 spent for getting the use .of electrical power from Gujarat Electricity Board ?" For reasons which we shall presently state, both the aforesaid questions must be answered in the affirmative that is, in favour of the Revenue and against the assessee. Mr., J. P. Shah, the learned counsel for the assessee did not press his contention based on the language of s. 12(1)(iii) of the Act as the capital asset was not put to use and was washed away on both the occasions when it was only partly completed. It is, therefore, not necessary for us to decide whether the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d counsel for the assessee for the simple reason that the amount spent by the assessee for the construction of approach bridge for laying the pipelines to its benefication plant was expenditure on capital account and could only be treated as a capital loss and not a business loss. In Dalmia Dadri Cement Ltd.'s case [1973] 90 ITR 297 (P H) the High Court after coming to the conclusion that the expenditure incurred by way of advance payment to the German firm was on capital account observed (p.306): "The expenditure for the acquisition of a plant is surely of a capital nature and any loss suffered in that transaction would naturally be of a capital nature." The Tribunal came to the conclusion that the expenditure in incurred for the construction of a bridge for laying of pipes was in the capital field and, therefore, the loss incurred by the assessee on the bridge having been washed away on both the occasions could only be termed as capital loss and not business loss or revenue loss and, therefore, could not be deducted under s.28(i) of the Act. We are in agreement with this view of the Tribunal and, therefore, we answer the point against the assessee. The next question which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of a capital asset shall be chargeable to incometax under the head " Capital gains ". Section 2(47) provides that " transfer" in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law. It was, therefore, held that since the language chosen was of the widest amplitude, the expression " the extinguishment of any rights therein " would cover every possible transaction which results in the destruction, annihilation, extinction, termination, cessation or cancellation, by satisfaction or otherwise, of all or any of the bundle of rights-qualitative or quantitative-which the assessee has in a capital asset, whether such asset is corporeal or incorporeal. Mr. J. P. Shah, therefore, submitted that in the present case since the assessee's rights in the capital asset, namely, the partly constructed bridges were extinguished on both the occasions when the bridge was washed away by floods, there was an extinguishment of the bundle of rights which the assessee had in the said capital asset and hence there was a " transfer " within the meaning of s. 2(47) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Vania Silk Mills [1977] 107 ITR 300 (Guj), also. The decision in R. M. Amin's case [1971] 82 ITR 194 (Guj), was carried to the Supreme Court, vide [1977]106 ITR 368, and the Supreme Court, without entering into the question whether existence of consideration must be established to attract the provisions of s. 45 of the Act, held that there was no transfer within the meaning of s. 2(47) of the Act. Therefore, so far as we are concerned in view of the decision in R. M. Amin's case which was followed in the case of Vania Silk Mills, we must hold that in the absence of consideration, section 45 would not be attracted and hence deduction by way of short-term capital loss is not available to the assessee. We must, therefore, answer this contention also against the assessee and in favour of the Revenue. So far as the expenditure of Rs. 20,40,000 is concerned, the same has been allowed as revenue expenditure by the decision of this court in CIT v. Gujarat Mineral Development Corporation [1981] 132 ITR 377, in the assessment year 1969-70. There can, therefore, be no question of allowing deduction for the said amount or any part thereof in the assessment year 1970-71 or 1971-72. The s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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