TMI Blog1975 (7) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... mencing from the 1st January, 1942. This lease was in renewal of similar earlier leases starting from the 26th November, 1892. The relevant parts of the lease may be noted. The preamble of the lease states as follows : " ............ in consideration of the rents and royalties, covenants and agreements by and in these presents and Schedule hereunder written reserved and contained and on the part of the lessee to be paid, observed and performed the Governor hereby grants and demises unto the lessee all those mines, beds, veins and seams of natural petroleum including natural gas (hereinafter and in the said Schedule referred to as ' the said minerals ') situate, lying and being in or under the lands which are referred to in Part I of the said Schedule together with the liberties, powers and privileges to be exercised or enjoyed in connection therewith which are mentioned in Part II of the said Schedule." The liberties, powers and privileges granted by the lease in favour of the assessee appear in Part II of the deed of lease and includes liberty and power to enter upon the lands forming the subject-matter of the lease and to search for, win, work, get, raise (convert) and carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch of the half-yearly dates mentioned earlier." On the 1st August, 1938, the then Governor of Assam executed another agreement of lease in favour of the assessee in respect of Kharjan area for a period of 30 years. During the subsistence of this lease the assessee was to pay a half-yearly rent of Rs. 2,880 irrespective of any production of oil. In addition, royalty at the rate of 5% on the well-head value or 8 annas per 40 gallons, whichever was greater, of all natural petroleum products from the said lands was payable. The assessee was also required to pay at the rate of Rs. 1/11 per annum per acre of the area occupied under the lease. There were three other leases on the same terms and conditions in respect of the respective areas of Bansapung, Kharjan North and Khatangpani. During the calendar year 1961, the assessee paid a sum of Rs. 10,07,284 as royalty in respect of the said leases. The royalty was based on the production of petroleum and calculated on the oil produced or taken from the land. In the assessment for the relevant assessment year, i.e., 1962-63, made on the 29th November, 1963, the Income-tax Officer allowed the assessee deduction of the said sum of Rs. 10, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was not conclusive to determine whether such payment was of a capital nature or of a revenue nature. He further contended that the fact that such payment was made at a time in a lump sum or periodically was also not conclusive to determine its nature. He contended that what was of fundamental importance was the nature of the assets acquired as a result of such payment. It is the nature of the assets which would determine the nature of the payment made in respect thereof. He submitted that in the instant case what the assessee obtained under the different leases were admittedly capital assets enuring for the benefit of the assessee for a long period. All payments which were made under the said leases should be held to be directed towards obtaining such enuring benefits which were in the nature of capital assets. He relied on the preamble of the leases and submitted that the consideration in respect of the said leases was both rent as also royalty and no distinction should be made between these two payments. Mr. Pal further contended that such royalty could not be in the nature of price paid for the units of product, i.e., in this case, petroleum. The product in the instant cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vour of the assessee was not a royalty in the ordinary sense, familiar in the case of mining leases, but was in fact payment in instalments of part of the price of the lands which she had sold to the company. The Privy Council concluded that this was not an income but a capital receipt. The facts in the case before the Privy Council are entirely different from the facts of the case before us and in view of the distinction drawn by the Privy Council between royalty in ordinary mining leases and the " royalty " as in this agreement for sale, it does not appear to us that this case has any application at all. The next decision which was cited was a decision of the Supreme Court in the case of Pingle Industries Ltd. v. Commissioner of Income-tax [1960] 40 ITR 67 (SC). In this case the assessee carried on the business of selling flag stones which were obtained from a jagirdar under a contract. This contract conferred upon the assessee the right to extract stones from quarries situated in specified places for a period of 12 years on the annual payment of Rs. 28,000. To ensure such annual payment a sum of Rs. 96,000 was paid in advance as security of which Rs. 8,000 was to be adjusted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Alianza Co. Ltd. v. Bell [1904] 2 KB 666, 673 (KB) Channell J. observed : " In the ordinary case, the cost of the material worked up in a manufactory is not a capital expenditure ; it is a current expenditure, and does not become a capital expenditure merely because the material is provided by something like a forward contract, under which a person for the payment of a lump sum down secures a supply of the raw material for a period extending over several years ...... If it is merely a manufacturing business, then the procuring of the raw material would not be a capital expenditure. But if it is like the working of a particular mine or bed of brick earth, and converting the stuff worked into a marketable commodity, then the money paid for the prime cost of the stuff so dealt with is just as much capital as the money sunk in machinery or buildings." In the case of Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax [1955] 27 ITR 34, 45 (SC) before the Supreme Court, Bhagwati J. observed : " 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 capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erm of years." Considering all these principles the Supreme Court held in Pingle Industries case [1960] 40 ITR 67 (SC) that the assessee had acquired an asset of an enduring character and of a capital nature. The amount paid every month was not in any sense a payment for acquisition of the right from month to month. It was really the entire sum chopped into small payments for his convenience. Nor can the amount be described as a business expense, because the outgoings every month were not to be taken as spent over purchase of stones but in discharge of the entire liability to the jagir. The Supreme Court further held that in this case 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 his stock-in-trade in a business sense but a capital asset from which after extraction the stones were converted into stock-in-trade. The payment, though periodic in fact, was neither rent nor royalty but a lump payment in instalments for acquiring a capital asset of enduring benefit to his trade. The next decision cited, referred to earlier, was in the case of Gotan Lime Syndicate v. Commissioner of Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not a direct payment for securing an enduring advantage ; it has relation to the raw material to be obtained. Ordinarily, a mining lease provides for a capital sum payment; but the fact that there is no lump sum payment here cannot by itself lead to the conclusion that yearly payments to be made under the mining lease have relation to the acquisition of the advantage. No material has been placed on the record to show that any part of the royalty must, in view of the circumstances of the case, be treated as premium and be referable to the acquisition of the mining lease." The Supreme Court held that the royalty payment had relation only to the lime deposits to be got, and that the yearly payment of Rs. 96,000 should be treated as revenue expenditure. The next decision of the Supreme Court cited was in the case of M. A. Jabbar v. Commissioner of Income-tax [1968] 68 ITR 493 (SC). Here the assessee carrying on the business of supplying lime and sand obtained a lease for a term of 11 months whereby he obtained exclusive right to enter, occupy, and use for quarrying purpose and to raise, render marketable, carry away, sell and dispose of sand within, or under or upon land demised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and is on the surface, then the expenditure incurred for obtaining the right to acquire the raw material, that is, the mineral, would be a revenue expenditure laid out for the acquisition of stock-in-trade. An expenditure incurred for acquiring a right to take away sand from the surface of river beds has been treated as if the sand was stock-in-trade---M. A. Jabbar v. Commissioner of Income-tax [1968] 68 ITR 493 (SC) in the same way as tendu leaves have been treated by the Privy Council in Mohanlal Hargovind's case [1949] 17 ITR 473 (PC) ." It was further observed that---See [1972] 86 ITR 647, 655 (SC) : " ........... where the mineral is part of the land and some mining operations have to be performed to extract it from the earth, the amount paid to acquire a right over or in the land to win that mineral is of an enduring character and, hence, a capital expenditure ......... The lease in this case was for a long period ; it conferred a right to excavate the mica because on the findings of the Tribunal mica had to be extracted from the mine though the earlier working out of those mines by other companies had made it much easier to perform the final operations and because of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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