TMI Blog1981 (7) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee's husband began mining operations in the accounting year relevent to the assessment year 1966-67 and began paying the amounts which he owed under the agreement to the assessee on the basis of the gypsum extracted by him from the lands. The assessee accounted for the amounts received from her husband at the aggregate rate of Rs. 3 per ton. As against these receipts, the assessee set off many items of expenses. The chief item of expenditure which she sought to set off against the receipts from the mining operations was the price which the assessee paid to the villagers in Mitratti village and Kattampatti village for purchasing the lands containing gypsum deposits. As a matter of accounting, the assessee did not set off the entire price paid by her for those lands; but she applied some formula to distribute and spread over the total cost price of the lands among the several account years, claiming only a portion of the purchase price as expenditure properly debitable in any given year as against the receipts from mining from her husband for that year. Having done so, the assessee claimed the cost of purchase of the lands or portions thereof to be more accurate, as admissib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AAC, the department filed appeals before the Tribunal. The Tribunal restated the facts as found by the ITO, but agreed with the interpretation put upon them by the AAC. The Tribunal even went further and held that no transaction of purchase of lands at all was involved when the assessee entered into her transactions with the villagers in respect of the gypsum bearing lands. The reasons which the Tribunal gave for this conclusion were as follows: (1) Prior to the transaction with the villagers, the assessee had requisitioned the services of a geologist for the purpose of ascertaining the gypsum potential of the lands. (2) Both the villagers and the assessee were perfectly aware that the subject-matter of this transaction, viz., the lands in question, contained gypsum ore which was fit for mining. (3) Under the terms of the option for repurchase, the villagers were all the while at liberty to cultivate such portions of the lands which were not being mined, even before exercising the option to repurchase. (4) A reference to the consideration which passed from the assessee to the villagers would indicate that it was far below the market price of the lands. The Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the above sale, there was an agreement for reconveyance executed by the assessee in the following terms : " I have this day got a sale for Rs. 679 of the under-mentioned lands belonging to you and in your possession. I agree to reconvey this property after mining and levelling them before December 31, 1966, without any expenses on your part and without any consideration expected from you. If I fail to reconvey before December 31, 1966, I shall be liable to make good all your losses that may accrue to you by my default. I undertake not to encumber the lands by way of sale or mortgage or other encumbrances. You are at liberty to cultivate the portions of land not being mined year after year and also the lands already mined. You can also cultivate all the lands till I start mining. I have not received any amount as advance for this document." It is clear from the tenor of the two documents that one is an outright sale for consideration and the other is an agreement for reconveyance, based upon and closely linked with the earlier conveyance. Mr. S. V. Subramaniam, learned counsel appearing for the assessee, submitted that although there are two different documents, one fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld disappear. In any case, whether during the subsistence of the option or after the right expires, the exclusive title which the purchaser has in the property can hardly be gainsaid. Under the document of sale what the purchaser acquires is the land itself and the entire fee simple in the land, nothing less and nothing different from a full and absolute title in himself. We do not also accept the contention of Mr. Subramaniam that the Tribunal, as a tribunal of fact, was entitled to go behind the form and the agreed provisions of a transaction and go into the so called " reality " of it for the purpose of ascertaining the tax treatment of any consideration payable thereunder. This is a familiar argument heard in tax cases, and the argument is based on the substance of the transaction. Whatever validity an argument of this kind may have in other disciplines of the law, so far as taxation is concerned, the arguments based on the substance of the transaction have long ago been given up as irrelevant. The substance of a transaction is how the parties to the transaction have thought fit to bring it about, when they sit down to translate it in words. If what they have brought about i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case [1935] 19 TC 490 (HL), we may quote the following passage from Wrottesley J. in Margerison v. Tyresoles Ltd. [1942] 25 TC 59 (KB). at p. 68. The learned judge observed as under: " But it is suggested on behalf of the Crown that I am not bound by the language of the agreement. The agreement must be looked at as whole, and so regarded it will reveal, between the lines, something very different from what it bears on its face; and by this is meant, of course, that the payments made under clause 3 are not for the consideration appearing in the agreement, but for other considerations which show these payments to be in the nature of income. No court of law will deny the propriety of the suggestion that this agreement should be looked at as whole. But that does not mean that just because this is a tax case, the court can rewrite the agreement and substitute for the terms upon which the parties agreed, other terms as to which they have not even been consulted." To the same effect are the observations to be found in the judgment of the Supreme Court in CIT v. Motors General Stores (P.) Ltd. [1967] 66 ITR 692, at pp. 699 and 700. The Supreme Court observed that the true principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipts of royalty from her husband, as an item of expenditure in the computation of her net profits. It would have been quite otherwise if the assessee had carried on business as a dealer in gypsum-bearing lands, purchasing and selling the lands in the course of trade. In that case, the lands acquired by her at a price would represent her stock-in-trade in business and the cost of obtaining the lands by purchase would, of course, have had to be regarded as a revenue item of expenditure. But the assessee's business was not that of a dealer in mining properties, but it consisted in farming out the gypsum deposits in the lands, and obtaining profits as royalties. The result was that the cost of purchase of the lands, although the lands themselves carried gypsum deposits, could by no means be regarded as the cost of obtaining that which the assessee subsequently turned to profit as her trading stock. On the contrary, the money laid out by the assessee on the lands was the very means by which she was able to establish her business. It was the income-yielding source with which she intended to do mining operations, whether all by herself or by farming out the mining rights to her husban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect. We are, therefore, clear in our minds that on the basis of the documents themselves, to which the assessee was a party, the amounts paid by her towards the cost of purchase of the lands are not liable to be deducted as revenue expenditure. They were rightly disallowed by the ITO as capital expenditure. The Tribunal was in error in giving a determination to the contrary. On a true construction of the documents, what was done by the assessee in this case was the acquisition of a fixed capital item, that is to say, gypsum-bearing land, and the price paid was for the acquisition of this fixed capital item and was, naturally, capital expenditure. At the hearing of this reference we were referred by learned counsel on both sides with choice citations of cases from the law reports. It has, however, become quite unnecessary to refer to them, since the answer to the question of law referred to us has already emerged on our consideration of the true nature of the assessee's transactions, which we have been able to arrive at on a construction of the assessee's own documents. Nothing else remains in this case excepting to set out the question of law referred to us and return our ..... X X X X Extracts X X X X X X X X Extracts X X X X
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