R. B. Seth Moolchand Suganchand v. The Commissioner of Income-Tax, Delhi

JAGANMOHAN REDDY, J. This appeal is by special leave against the judgment of the High Court of Rajasthan in an income~tax reference under s. 66 (1) ·by which it answered the two questions referred to it in the. negative. Before this appeal was filed, Appeal No. 1238/1969 had reen filed on a certificate but that is dismissed without costs because this Court had in several cases held that in Income-tax references if the High Court dcr..s not "give any reasons while granting. the certificate, the ' certificate can be revoked.

The assessee, a firm carrying on mining business at Udaipur with a branch at Manda!, had pursuant to an invitation to tend~ for mica mining in accordance with the terms and conditions prescribed in the Mineral Concession Rules, tendered for certain areas for Rs. 1,57,150/- of which Rs. 3,360/- was payable towards the mica scrap lying on the surface. The lease was for · 20 years and the areas which were offered had !J.~en worked by other private companies for 15 years. This offer of the appellant was accepted and the lease was granted to it. In the relevant assessment year 1952-53 for which the previous year for the head office ended on October 30, 1951 and for the branch ended on ~arch 30, 1952, the appellant claimed Rs. 71857/- being the l/20th of the tend·~r money as revenue expenditure incurred during that year. The claim of the assessee was rejected by the Income-tax Officer on the ground that the money was paid for the ''alue of the land which it had acquired because the mine granted to the assessee had already been worked by the private companies. In an appeal against this order, the Appelia'te Assis-tant Commissioner confirmed the disallowance of the expenditure as in his view, it was a capital nature expended for the acquisition of a capital asset. Against this order, an appeal was filed to the Appellate Tribunal. The Tribunal however allowed Rs. 3,360/· paid for mica scrap lying on the surface as a re\~nue expenditure incurred in the acquisition of stock-in-trade, but disallowed the claim for the balance of Rs. 1,53,800/- which was paid under the tender as a capital expenditure.

The assessee had also claimed Rs. 3,200 as the fee paid by it a.t the rate of Re. 1 ,"- per acre per year for prosRecting licence. The Income-tax Officer disallowed this amount under s. 10(2) (xv) of the Indian Income-tax Act, 1922 (hereinafter called I) the 'Act') on the ground that 'the licence was obtained by the assessee only that year, that the fee was paid in addition to the royalty payable on the value of the emeralds excavated and sold and tha't it was an initial expenditure for procuring a right to respect mines. The Appellate Assistant Cominis~ioner in an appeal by the assessee negatived 'the claim on the _ ground that under that licence the assessee had a right to

win and commercially exploit the minerals which the assessee actually carried out. The Tribunal while dismissing the appeal filed against the order of the Appeliate Assistant Commissioner obrerved that the prospecting licence fee cannot be equated to a payment made for the purchase of stock-in-trade, that it was not based on any quantity of minerals, that the minerals had to be won and ·~xtracted from the earth and the tm'm "prospeoting licence" shows that the mine had not yet started working as a mine and that the payment was to initiate the business. "It also ~eld that the period of 01:·~ year for which the licence was obtai:1ed cannot iu~tifv .the fee paid as a revenue expenditure. The as~ess.ee thereafter filed application under s. 66 (1) of the Act and 11s m its opinion a a_uestion of law .did ~rise., the Tribu.nal re.fe;red the fol-lowing two questions to the H1.2h Court for its op1mon :-

¶1Whether on the facts and iii the circumstances of the case, the prospecting licence fee of Rs. 3.200/- is allowable as revenue expenditure·? ·

¶2WheJther .on the facts and in the circumstances of the case, th~ appropriate part of Rs. 1,53.000/- was allowable as revenue expenditure ?

v. (Ja:anmohan Reddy, J.) 363

MOOLCHAND C.I.T.

Taking the second question first, it is contended before us by t&~ l:arned ad~oca:te for the appellant that Rs. 1,53,800/- paid for pillars of mica standing in the land leased out after the other private companies had worked it was a revenue expenditure b~cause the tender which was given and accepted was on the basis of the calculations in the Indian Mining Hand Book for a specific quantity of mica in the mines which was the assessee's stock-in-trade. The revenue howewr submits ·that the amount of the lease was a capital outlay incurred for the initiation of the busi-ness, and that lhe pillars of mica cannot be stock-in-trade unless the mica was excavated and brought to the surface. A large number of cases decided in this country and in England, dealing with different topics were referred and arguments addres,ed before us dealing with many analogies of one kind or other, tendu leaves. mangoes, apples, sand, brickearth, lime and other commodities all with a view to persuade us to ascertain what is the true test to be applied to the particular facts of this case. We do not however propose to refer to cases dealing with variety of topics except perhaps to determine th·~ nature of the expenditure incurred in this case by the assess-~e.

This Court in Ping/e Industries Ltd. v. Commissioner 9f Income-tax, Hyderabad(') had occasion to examine exhaustively the televant Indian and English cases for determining what is a capital expenditure and what is a reV>~nue expenditure. That was also a case of mining where the assessee obtained leases for ·~xca­ vating Shahabad stones for a period of 12 years for which an annual payment of Rs. 28 ,000 was agreed upon. The majority of Judges, Kapur, J. and Hidayatullah, J. (as he then was) (S. K. Das, J. dissenting) held that the assessee acquired by his long teIT.l Iea>e t!J.~ right to win stones, that the stones in situ were not its stock-in-trade in ~. business sense but a capital asset from which after extraction it converted the stones into its stock-in-trade. It was also held that the payment was neither rent nor royalty but a lump payment in instalments for acquiring a· capital as~t of enduring benefit to its trade; the amounts being outgoings on capital account, were therefore not allowable d·~ductions. The proposition as qualified by Lord Cave in Atherton v. British Insulated and Hclsby Cables Ltd.(') that in the absence of any special circumstances leading to the opposite conclusion. wh~n an expenditure is made, not only once and for all. but with a view to bringing it into existence an asset or advantage for the endurin~ benefit of a trade, has heen applied. explained and varied from time ta time as the circumstances of the particular case required. The application of these principles .to the various ca5e5 and the conclu<ions reached by courts in those cases 0ften

If\ 40 l.T.R. 67. (2) [19261 A. C. 205,213. 6-L498SupCI/73 lead to irreco!)ciliable r~sults. It is because the topic itself is a troublesome one and is not rendered any the Jess difficult by resorting to principles. "It is not always easy". obS'~rved Romer, L.J. in Golden Horse Shoe (New) Ltd. v. Thurgood (H. M. Inspector of Taxes(1) "to determine whether a particular as&~t belongs to one category or the other" nor does it depend in any way "on wha't may be the nature of the asset in fact or ll in law." In our own Court this difficulty has !Jeen put very ter-sely, if we may say so with r~spect, by Hidayatullah, J. (as he then was) in Abdul Kayoom v. Commissioner of lllcome-tax(') when he said :

c: " ...... none of the 1tests is either exhaustive or uni-versal. Each case depends on its own facts, and a close similarity between one case and another is not enough, because even 11 single significant detail may alter the entire aspecit. In deciding such cases, one should avoid th>~ temptation to decide •.cases (as said by Cordozo-The nature of the Judicial Process, p. 20) by matching the colour of one case against the colour of another. To decide, therefore, on which sid·~ of the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases."

The determining factor will d>~pend largely on the nature of the trade in which the asset is employed. The several cases which do not deal with the mining lea&~s but are concem-:d with difli-erent assets are of little help in the same way as in Mohan/al Har-govind v. C.l.T. (8), -::ases relating to the purchase or leasing of mining quarri·~s, deposits of brick earth were considered not to be of assistance by the Privy Council in case of a contract for collecting and removing tendu leaves. The principles enunciated for detcrminin11: the nature of the expenditure have been sought to be applied to different sFtuations arising on the facts of each case, but the difficulty in matching them with the seeming irre-oonciliability are perhaps explicable only on the ground that the determination in anv particular case is dependant on the chrac1er of the lease or agreement, the nature of ~he asset, the purpose for which the expenditure was incurred and such other factors as ht the facts and circumstano~s of that case would indicate. If we confine our attention to the mining leases, what appears to u'

(I) 18 T.C. 280. (2) 64 l.T.R. 689 at 70J.

MOOLCHAND v. C.I.T. (!aga11111oha11 Reddy, J.) 3G5 lO be an empirical test is that where n;ill'~rals have to be won, extracte4 and brought to surface by minmg operations, the ex-penditure incurred for acquiring such a right would be of a capital· nature. But where the mineral has already b~een gotten and is on the surfac~, then the expenditure incurred for obtaining 1the nght to acqmre the raw material-. that is-the mineral, wouid be a revenue ~xpenditure laid out for the acquisition of stock-in- 'trade. An expenditure incurred for .. acquiring a right to take away sand from the smiace of ri'l'~r beds has been treated as if the sand was stock-in-trade,-M. A. Jabbar v. Commissioner of lncome-tax(')-·in the same way as tendu leaves have been trearod by ithe Privy Council in Mohan/al Hargovind's case. In the former case, Bhargava, J. indicated a number of factors which led to the conclusion that the expenditure incurred by the assessce in obtaining the lease was revenue expenditure for the purpose of obtaining ''tock-in-trade and not capital expenditure which were : (I) that the lease was for a wry short period of 11 months only; (2) that the sole right which was acquired by the assessee under ithe leas•J deed was to take away the sand lying on the surface of the leased land where no question of raising, digging or excavating for th~ sand before obtaining it was in-volved. 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 s-~nse" as apointed out in Golden Horse Shoe (New) Ltd.'s case "was won from the soil .... it is merely shovelled up where it lies." In the latter case the Privy Council said that the leases for th·~ right to collect and remove tendu leaves under which a certain sum was payable by instalments as a consideration for the grant of that right was a revenue expenditure. It pointed out that the contracts were short term conracJts, that the picking of the leaves !lad to start at once or practically at once and to proceed continuously and that under the contract ft is tendu leaves and nothing but tendu leaves that are acquired. At page 478 while comparing that case with the case of Kauri Timber Co. Ltd. v. Commissioner of Taxes(') where the company's business consist-ed in cutting and disposing of timber and it had in some cases acquir>:xl timber-bearing lands and in other cases it purchased the standing timber, 1the lease itself being for 99 years, the Privy Council observed :-

"In the present case too trees were not acquired : nor were the leaves acquired until the appe1lants had re-duced them into their own possession and own·~rship by picking them. The two cases can, in their Lordshoos' ooinion, in no sense be regarded as compa!able. If the tendu leaves had been stored tn a

merchant's godown and ithe appellants had bought the nght to go and fetch them and so reduce them into their possession and ownership it could scarcely have been suggested that the parchase prioo was capital expenditure. Their Lordships see no ground in orin-cipal or reason for differentiating th~ present case from .that supposed." I The analogy referred ro in the above passage is sought to be applied to the facts of this case but in our v~~w there is hardly any iustification for such a conclusion having regard to the findings of the Tribunal and the Income-tax authorities.

The learned advocate for the assessee contends that the Income-tax Officer, tll:e Appellant Assistant Commissioner and the Tribunal, each of them had given different findings for coming to the celnclu~ion that the expenditure was of a capital nature while the High Court gave yet another reason to answ•": the questions against the assessee. Inasmuch as the correctness or otherwise of the order depends-. greatly upon what has been found as facts of this case, it would be useful to examine the respective orders.

The Income-tax Officer, as we have earlier stated held that the money was paid for the value of the land which tM assessee had acquired because the mine granted to the assessee had already been worked by other private companies. This finding, according to the learned advocate, is contrary to the facts set out in the statement of the case by the Tribunal in which a reference was made to paragraph 5 of the invitation to tender. It reads :-

"As the area has been worked by a private com-pany during the past fifreen years, all the known mines . and quarries and prospecting pits have acquired a value which can be d~termined on the principles of 'mine valuation'. Intending applicants are therefore request-ed to visit the area before April 15, 1950 and assign their own value and offer it. . . ; "

According to •the assessee, as already pointed out, it had .olI7red Rs. 1,57,150/-after the mica had been valued on the p:mc1ples of mine valuntion which represented a payment of stock-m-trade. The Appellate As•istant Commissioner has rejected the claim of the assessec with these observations :-

"On merits the appellant's claim cannot be sustain-ed because the circumstances detailed above clearly indicate that the payment of tender money was for the acquisition of capital asset and not, as sought to be made out, for the stock of lores. The stock was not

here on the surface bu't it was still embedded with the only :liffereno~ tha.t its availability could be more defi-nitely gauged t:Jan in the case of an unworked area. It would not make any material difference whether th•3 miner acquires a lease on ordinary terms for an area which does not give a clear indication of the possible existence of ore or he acquires on more expensive terms an area which is in such a condition that it gives definite indication about the possibility of existence of ore therein and also broadl:V· the eictent thereof. Acqui-sition in either case would be of a capital asset and payment the1dor, small or large, a capital expenditure." Earlier the Appellate Assistant Commissioner had stated that when the lease was allotted to tho~ appellant by the Mining De-partment "it was made clear th!lt any mica scrap left by the predecessor exploiters M/s. Duduwala & Co., on tho~ surface would be removed either by these exploiters within three months or if not so removed it would stand forfeited to the Rajasthan Govern-ment in any case it was not to come to the appellants." In the light of what has been stated, it is clear rthat the Appellate Assistant Commissioner made a distinction betw;:en mica tltat has been excavated and brought to the surface and the mica which was still embedded and had to be excavated ev>~n though it was more easily available because of the labour already expanded in the working out of the mine by ·the other private companies.

The conclusions of th·~ Tribunal are set out in the following passage :.-

"In our opinio.n, the amount paid cannot be equated to payment for raw materials. The raw materials have to be "\\'..<l!l and extracted befom ·they could be said to be stock-in-trade. The sum represents the price that was paid by the assessei~. for obtaining the right to ex-tract and win emerald and mica in an area which had alredy been worked and developed by a predeo~sor for ~5 years. If the assessee had to start running a mine, it had to incur similar expenditure. In this case, the amount had been incurred and was paid for by the assessee. Thus this amount in our opinion represents capital expenditut>~ incurred for the purpose of obtain-in_g certain benefits of a capi•tal nature. This is not in the nature of any royalty or rent paid by the assessee to the authorities. In this connection, reference was made 0n behalf of the assessee to the provisions of Rule 51 of the Mineral Concession Rules which pro-hibits. premium bein_g paid for obtaining such a licence. This rule occurs in Chapter 5 which applies to grant

of mineral concessions by private persons and we do not consider dim the rule i~ relevant for considering the questton Ill issue before ~.is where the grant is by the Stat·~. We do not also think that this is in the nature of any premium. This is merely for the pur-pose of gettin.g benefits of certain structures and other works carried out in tho~ area which had already been worked as a mine previously.' This cannot be equated to a premium that is contcn1platcd by rule 51. . We therefore agree with the authorities below in holding that the assessec has not made out the claim for de-duction of the amount.., The finding of the Tribunal given in the above excerpt is clear and consistent with that given by the Income-tax Officer and the Appellate Assistant Commissioner in that all of them distin-guisho~d between raw materials which had already been extracted and brought to the surface and those that have stiil to be extracted. AP.art from the objection that no question was formulated by which the findings of the Tribunal were challenged on any ad-missible grounds, there are, in our view, no contradictions in the finding of the Tribunal as submitted by rthe learned advocare for the assessee because what tM Tribunal was dealing with in the latt·~r part of 'the passage cited above, were the contentions urged on behalf of the assessee, firstly, that the amount was a royalty or rent paid to the authorities and secondly, what was paid was in the nature of premium. While rejecting these con-tentions the Tribunal gave its reasons but that is not to say that the conclusion that the amount was a capital expenditure was not based on the finding that mica had to be extra~ted and brought to the surface before it could be considered as the asse~see's s'tock-in-trade.

In our view th·~ principles which have been applied in the Ping/e Jndustn'es' case are equally applicable to tbe facts and circumstances of this case. The test for ascertaining whether the amount spent is of a capital nature is, whether it was spent for obtainin" a right of an enduring character which in th~ case of mining l~ases is to acquire rM1ts over land for winning the mineral. In other words. where the mineral is part of the land and wme mining op~rations 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 a,1 enduring character ·and hence a capital exoendituP~. In this d1se the mica pillars which ba_ve been exposed by the nfr1ing operation of othe.r private compames had no doubt enhanced the vals·~ of the riglit which was leased to the appellan't but nonethe}~s the appellant still had to carry out some mining operations to extract the mineral from the pillars which was embedded in the land. If 'tb~ private companies be-fore the mica was exposed had taken the lease, they would have paid a much lesser amount which nonetheless would have been a capital expenditure. It is ithe labour and expense which II the private companies expanded that has enured for the benefit

of the .Governme11t and enhanced the capital value of the lease. This is net a case, as 1s contended; of m!Ca navm_g tieen gvucn so as to form part of the stock-in-trade of 1the assessee as in the case of Golden Horse Shoe (New) Ltd. v. Thurgood (Ii. M. Inspector of Taxes) ( 1 In that case the company had acquired ) rights in certain dumps of 'tailings' or residuals that remained after the extraction of gold from ore taken from certain gold mines. It was contended on behalf of the revenue that the com-pany's rights in tailings and dumps were part of the undertaking which the company was formed 1to acquire and any sum paid therefor was capital expenditure, and that the company's rights in the dump was the purchase of a wasting asset. This contention was negatived and it was held that the purchaso~ price of the tailings was an admissible deduction in computing the company's profits for income-tax purposes. Lord Hanworth, M.R. at page 298 observed :-

"After car>~ful consideration of the present case, in the course of which my mind has fluctuated on either side, I think it is to be decided upon ifs own factS--that none of the tests suggested affords a strict rule of guid-ance. It seems, then, that the Company bought these dumps-which were no longer in a natural but in an artificial condition; which were in such a state that they would not have passed under a lease of "beds opened, or unopened, minerals", see Boileau v. Heatli (I 898-2 Ch. D. 301 )-. . for the purpose of treating them as their stock-in-trade, lying stored and ready to their hand, at a· fair' price of £ 122, 750, and their intention was to use them up and make what they could of them by and after treatment. '.fhey had.not to winthem fiorri'the soil: they had been gotten already. If the metaphor of working a mine be applied, it might be said tha•t the purchase of the dumps was a capital outlay. If the metaphor of making gas or coke from coal, or of a miller making flour from wheat, be apolied, it may be said that it was an outlay to be placed in the orotit and Joss account. But metaphors do not provide ex-act definitions and are often misleading. It is safer . ii) 18 T.C. 280.

to give an int·~rpretation ty-, the facts· of this case as found in the case stated, and upon the law relevant tci them.·· This passage at once indicates the difficulties which he in common with other Judgo~s have felt when called upon de'lermine the nature of the 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 Tri~unal mk?. had to be extractc4 from t~e mine though the earher workmg out of the ihose nunes by other conrnanies had mad·~ it much easier to perform the final operations a~d because of it a higher amount had to be paid. Nonetheless the amount paid was for acquiring a right of enduring nature to extract and remove the mica 1to bring it to the surface, grade it and pay !

royalty to th·~ Government in accordance with the quality of each grade of mica extrac'ted. We accordingly hold that the expenditure incurred is a capital expenditure and that the second qwstion has been rightly am.wered.

On the first question whether the prospecting licence fee of Rs. 3,200/- is allowable as revenue ·~xpenditure, the contention on behalf of the assessee is that it is a licence fee, not a lease amount nor does it create an interest in the land. The Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal have all held that the fw paid for prospecting licence was not of a revenue nature. It was submitted before the Tribunal that under a prospecing liceno~ issued under Chapter 3 of the Mineral Concession Rules, 1943 the licehsee had a right to win and carry away the minerals for commercial purposes, and for that reason tho~ amourrt should be treated as' in the nature of a purchase price of a stock-in-trade. In support of this contention the provisions of r. 23 were referred to but the Tribunal rejected that contention because in its view the amount was paid, as and by way of pros-pecting fe.~s which was for initiation of a business as in the case of other minerals and 1that the' character of the licence did not change merely because the Jio~nsee had certain rights over the minerals obtained under the prospecting licnce nor was it based on any quantity of minerals. The minerals had to be won and ex-tracP.xl from the earth and the term 'prospecting licence' shows that rthe mine has not yet started working as a mine. It was a fee paid irrespective of the quantity of minerals obtained w~~h demonstrated clearly that the object of the payment was to m1-tiate the business. That apart, the period for which the liceno~ was obtained viz., one year, does not also mak~. it a revenue payment and consequently it held that the authorities rightly disallowed the amount. The finding by the Incom~-tax authorities as well as the Tribunal that it was a payment for

MOOLCHAND v. C.I.T. (Jaganmohar. Reddy, !.) 371 initiating the mining operations was a finding of fact. In our view also the fee was paid to obtain a lio~nce to carry out, in-vestigate, search and find the mineral with the object of con-ducting the business of ·~xtracting ore from 'the earth. It is therefore clear that the fee was paid for initiating the business and is of a capital nature. By no stretch of argument can the fee paid for a prospecting licence oe equated to a payment made for the purposes of stock-in4rad·~. We think that the Income-tax authorities, the Tribunal and the High Court are right in coming to that conclusion. Our answer to the first question is, therefore also in the negative. The two questions· having been answen.'li against the assessee, the appeal is dismissed with costs.

CIVIL APPELLATE JURISDICTION : c. A. No. 2020 of 1972; Appeal by certificate from the judgment and order dated March 28, 1968 of the Rajasthan High Court at Jodhpur · in Income-tax Reference No. 11 of 1963.

N. D. Karkhanis and A. G. Ratnaparkhi, for the appellant. S. C. Manchanda, P. L. Juneja, s.'P. Nayar arid R. N. Sachtlzey, for the respondent. ·

The Judgment of tho~ Court was delivered by