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Petitioner: PINGLE INDUSTRIES LTD. VS Respondent: COMMISSIONER OF INCOME-TAX, HYDERABADHonorable Justice S. K. DASN. A. Palkhivala,H. N. Sanyal
1960 P T D 1256
1960 P T D 1256
[Supreme Court (India)]
Present: S. K. Das, Kapur and Hidayatullah, JJ
PINGLE INDUSTRIES LTD.
Versus
COMMISSIONER OF INCOME‑TAX, HYDERABAD
Civil Appeal No. 190 of 1955, decided on 26th April, 1960.
Income‑tax Act (XI of 1922)----
----S. 10 (2) (xv)‑Business expendi ture‑Right to extract stones from specified lands for 12 years Consideration allowed to be paid in monthly instalments‑Amounts paid whether business expenditure or capital expenditure‑W Nether allowable deduction‑[Hyderabad Income‑tax Act (VIII of 1357F.), S. 12 (2) (xv).]
The assessee company which carried on, inter alia, the business of selling Shahabad flag stones, obtained from a jagirdar under a contract the right to extract stones from quarries situated in six named villages for a period of 12 years on the annual payment of Rs. 28,000. To safeguard payment the 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 jagirdar undertook not to allow any other person to excavate stones in those areas. There was also another similar lease taken from the Government for a period of five years under which the appellant had to pay Rs. 9,000 per year in monthly instalments of Rs. 750 each. The question was whether the amounts paid by the assessee to the jagirdar and the Government each year were revenue expenditure allowable under section 12 (2) (xv) of the Hyderabad Income‑tax Act corresponding to section 10 (2) (xv) of the Indian Income‑tax Act, 1922:
Held, (per Kapur and Hidayatullah, JJ., S. K. Das, J, dissent ing) that the assessee acquired by his long‑term lease the right to win stones, and the leases 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 he converted the stones into his 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 amounts were outgoing on capital account and were not allowable deductions.
In re Benarsidas Jagannath (1947) 15 I T R 185 distinguished.
Commissioner of Income‑tax v. Pingle Industries Ltd. (1954) 25 I T R 226 affirmed.
Abdul Kayoom and Hussain Sahib v. Commissioner of Income tax (1953) 24 I T R 116 ; Alianza Co. v. Bell (1904) 2 K B 666 ; Anglo‑Persian Oil Co. v. Dale (1931) 16 Tax Case 253 ; Assam Bengal Cement Co. Ltd. v. Commissioner of Income‑tax (1955) 27 I T R 34 ; Atherton v. British Insulated and Helsby Cables Ltd. (1926) A C 205 ; Benarsidas Jagannath : In re (1947) 15 I T R 185 ; Commissioners of Income‑tax v. Chengalvaroya Mudaliar (1935) I L R 58 Mad. 1 ; Commissioners of Inland Revenue v. Granite City Steamship Co. Ltd. (1927) Tax Cas. 1 ; Commissioner of Income‑tax v. Globe Theatres Ltd. (1950) 18 I T R 403 ; Chengalvaroya Chettiar v. Commissioner of Income‑tax (1937) 5 I T R 70; Commissioner of Income‑tax v. Kolhia Hirdagarh Co. Ltd. (1949) 17 I T R 545 ; Commissioner of Income‑tax v. Tika Ram & Sons (1937) 5 I T R 544 ; Golden Horse Shoe (New) Ltd. v. Thurgood (1933) 18 Tax Cas. 280 ; Hakim Ram Prasad, In re (1936) 4 I T R 104 ; Henriksen v. Grafton Hotel Ltd. (1942) 24 Tax Cas. 453 ; C A Hood‑Barrs v. Commissioners of Inland Revenue (1958) 34 I T R 238 ; Income tax Appellate Tribunal, Bombay v. Haji Sabumiyan Haji Sirajuddin (1946) 14 I T R 447 ,; John Smith & Son v. Moore (1920) 12 Tax Cas. 266 ; Kamakshya Narain Singh v. Commissioner of Income tax (1943) 11 I T R 513 ; Kanjee and Moolji Bros. v. Shanmugam Pillat (1933) I L R 56 Mad. 169 ; Kauri Timber Co.'s case (1913) A C 771 ; Mohanlal Hargovind v. Commissioner of Income‑tax (1949) 17 I T R 473 ; Nand Lal Bhoj Raj, In re (1946) 14 I T R 181 ; Parmanand Haveli Ram, In re (1945) 13 I T R 157 ; Robert Addie & Sons Collieries Ltd. v. Commissioners of Inland Revenue (1921) 8 Tax (Taxes), Cas. 671 ; Stow Bardolph Gravel Co. Ltd. v. Poole (Inspector of (1955) 27 I T R 146 ; Tata Hydroelectric Agencies Ltd. v. Commissioner of Income‑tax (1937) 5 I T R 202 ; Vallambrosa Rubber Co. Ltd. v. Farmer (1910) 5 Tax Cas. 529 ; Van Den Berghs Ltd. v. Clark (1935) 19 Tax Cas. 390 ref.
N. A. Palkhivala (R. Ganapathy Iyer with him) for Appellant.
H. N. Sanyal Additional Solicitor‑General of India (H. J. Umrigar D. Gupta with him) for Respondent.
JUDGMENT
S. K. DAS, J.‑This is an appeal by the assessee with leave of the High Court of Hyderabad granted under section 66A (2) of the Indian Income‑tax Act, 1922.
The short facts are these. The appellant is a private limited company carrying on the business, inter alia, of sale of Shahabad stones (flag stones) which had to be extracted from quarries, dressed and then sold. For the purpose of its business, the appellant took on contract the right to excavate stones from certain quarries in six villages in Tandur Taluk for a period of twelve years under a quolnama dated 9th Mehr, 1343 F., from the then jagirdar of the taluk, named Nawab Mebdi Jung Bahadur. The contract provided that the jagirdar should be paid annually a sum of Rs. 28,000 as consideration or extracting the stones till the end of the contract period, as per a plan prepared, within the six villages specified therein. The appellant had no right or interest in the land ; nor did he have any other interest in the quarries apart from excavating stones there from. The contract specifically provided that the appellant, called the contractor, had no right to manufacture cement from the stones ; he had only the right to excavate stones from the quarries till the end of the contract period. I may here quote some of the relevant provisions of the quolnama as to how the annual consideration of Rs. 28,000 was to be paid. It said:
1. The period of contract for excavating stones from the quarries of the villages noted above is for 12 years from 1st Ardibehisht 1346 Fasli to the end of the Farwardi 1358 Fasli and the contractor will be given possession from 1st Ardibehish, 1346 Fasli.
2. The annual contract amount would be Rs. 28,000.
3. For the surety of the contract the sum of Rs. 96,000 O. S. has been received and deposited in the treasury of the jagir towards the advance and earnest money and the security ; a receipt for the same has been issued separately.
4. The remaining annual balance sum of Rs. 20,000 may be deposited in the jagir treasury by instalment every month of Rs. 1,667‑10‑8; if there be any default in paying the instalment regularly, interest at the rate of one rupee percent. per mensem will be charged to the contractor till the full payment."
There was another lease or contract taken from Government for a period of five years for which the appellant was required to pay Rs. 9,000 per year in monthly instalments of Rs. 750. That was also in respect of stone quarries. The terms of the said contract with Government have not been printed in the paper book, presumably because they were similar in nature to those of the quolnama referred to above. The Income‑tax Appellate Tribunal found, and there is no dispute as to this, that under the aforesaid two contracts the appellant had merely the right to extract Shahabad stones. The Tribunal said:
"Flag stones of required thickness are found in layers in those mines or quarries. Before one gets these flag stones of the required thickness, one has also to extract flag stones of greater thickness. The assessee sells these flag stones both of the usual thickness and thickness greater than the usual one, after working on them, if necessary."
There was no finding as to how deep the quarrying bad to be done to extract the stones of required thickness. According to the appellant's books of account, it paid each year of account Rs. 37,000 as lease or contract money to extract the stones under the two contracts and it claimed an allowance in respect thereof under section 12 (2) (xv) of the Hyderabad Income‑tax Act, corresponding to section 10 (2) (xv) of the Indian Income‑tax Act, 1922. The Tribunal stated that the Income‑tax Officer was under some misapprehension or error while examining the appellant's books of account, and held for the assessment year 1357‑F. that the expenditure of Rs. 27,0.54 as lease or contract money was capital expenditure, in respect of which the appellant was not entitled to claim any allowance under the relevant provision of the Hyderabad Income‑tax Act. For the assessment year 1358F, he similarly held that the sum of Rs. 28,158 was capital expenditure and not revenue expenditure. There were two appeals to the Appellate Assistant Commissioner who also held that the expenditure was capital expenditure. Then, there was an appeal to the Income‑tax Appellate Tribunal, Bombay. The Accountant Member of the Tribunal held that the payments in question stood on the same footing as royalties and dead rent which are allowable as working expenses in cases of mines and quarries. The President of the Tribunal expressed his finding thus:
"In the present case, the assessee purchased his stock‑in‑trade. Instead of paying so much for so many cubic feet, he pays a lump sum every year. Parties might as well agree that the so‑called lessee shall pay a sum of money bearing a proportion to the sales or quantum of material extracted or a lump sum for the purpose of convenience. Because these quarry leases are called leases, the assessee does not get an asset of an enduring benefit. In fact, I find that the leases are renewed from time to time. The lease money is, therefore, in my opinion, not capital expenditure but revenue expenditure and should be allowed in computing the assessee's income from the quarries."
In the result, the Tribunal allowed the claim of the appellant that the payment of the two sums of Rs. 27,054 and Rs. 28,158 for the assessment years 1357E and 1358E respectively was in its true nature a revenue expenditure rather than capital expen diture. On being satisfied that a question of law arose out of its order, the Tribunal stated the following question for the decision of the High Court:
"Whether the lease money paid by the assessee company to Nawab Mehdi Jung Bahadur and to Government is capital expenditure or revenue expenditure."
The High Court answered the question against the Appellant. Hence the present appeal.
My learned brethren have come to the conclusion that the expenditure in question was capital expenditure. Reluctantly and much to my regret I have come to a different conclusion, and I proceed now to state the reasons for my conclusion as briefly as I can.
It is not disputed that if the expenditure was capital expenditure, then the appellant was not entitled to the benefit of section 12 (2) (xv) of the Hyderabad Income‑tax Act in the relevant years. It is equally undisputed that if the expenditure, was revenue expenditure then the appellant could claim an allowance in respect thereof. Therefore, it is unnecessary to read the provisions of section 12 (2) (xv) of the Hyderabad Income‑tax Act or the corres ponding provisions of section 10 (2) (xv) of the Indian Income‑tax Act, 1922. I plunge at once in medias res to a consideration of the crucial question in this case: Were the two payments in question of the nature of capital expenditure or revenue expenditure?
This distinction between capital and revenue, either on the receipt or expenditure side, is almost a perennial problem in income‑tax law. In general the distinction is well‑recognised and is based on certain principles which are easy of application in some cases ; but from time to time cases arise which make the distinction difficult of application. A large number of decisions were cited before us, but no infallible criterion of universal application emerges therefrom and each case must turn on its own facts, though the decisions are useful as illustra tions and as affording indication of the kind of considerations which may relevantly be borne in mind in approaching the problem. I shall refer in this judgment to such decisions only as have a bearing on the real controversy between the parties.
In view of the submissions made before us, the real contro versy in this case appears to me to be this: in the context of the terms of the contract between the parties, was the expenditure incurred intended to create or bring into existence an asset or advantage of an enduring character or was it intended to get only the stock‑in‑trade or the raw materials for the business? If it was the former, then it was capital expenditure ; if latter, then revenue expenditure. There is no doubt that receipts and payments in connexion with acquiring or disposing of leaseholds of mines or minerals are usually on capital account: Kamakshya Narain Singh v. Commissioner of Income‑tax ((1943) 11 I T R 513). The reason why the price paid for the purchase of mining rights is a capital expenditure was explained by Channell, J in Alianza Co. v. Bell ((1904) 2 K B 666, 673), in the following words:
"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 manufactur ing 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 the machinery or buildings."
Learned counsel for the Department has strongly relied on these observations and has contended that the appellant had no manufacturing business in the present case and the price he paid for working the quarries was as much capital expenditure as money sunk in machinery or buildings. But this contention ignores the absence of one very important circumstance in this case. The acquisition of a mine or a mining right is an enduring asset, because, it is not a mere purchase of minerals but is an acquisition of a source from which flows the right to extract minerals ; in other words, the acquisition provides the means of obtaining the raw material rather than the raw material itself ; therefore, it relates to fixed capital, and in a business sense the acquiring of a leasehold of a mine is not the purchase of raw materials only. It is something more than that. In the case before us except the stones, nothing else was acquired. Clauses 5 and 7 of the quolnama said:
"5. The contractor shall have no right to excavate stones from other places of the Jagir Ilaqa except the villages specified within the prescribed period of contract. The Jagir authorities will not allow any other person to excavate these stones within the jurisdiction of villages other than the villages specified above.
7. The contractor shall have to excavate stones from the quarries as per the plan. In case he requires a further area of land in the village for excavation of stones, this will be done on his application four months in advance. The contractor will have no right to manufacture cement from the stones in the villages noted above."
In view of these clauses and the recital in the quolnama that it was a quarry contract for excavating stones only, it is in my view not reasonable to hold that what the appellant acquired in the present case was the means of obtaining raw material rather than the raw material itself.
It is, I think, an accepted position now that the expression "capital expenditure" must normally be construed in a business sense and emphasis should be placed upon the business aspect of the transaction rather than on the purely legal and technical aspect. It is not, therefore, necessary to determine whether the quolnama in the present case was in law a lease, or a licence, or a licence, coupled with a grant. What we have to consider is the nature of the transaction from the business point of view, and it seems to me that having regard to the terms of the quolnama, the transaction in its true nature and quality was a sale of raw materials coupled with a licence to the appellant to come on the land and remove the materials sold ; the purchase price was to be paid partly in a lump sum and partly in monthly instalments. If that is the true nature of the transaction, there is no difficulty in answering the question raised. The only answer then is that the payments in question were revenue expenditure.
I now refer to four decisions which in my opinion come closest to the controversy before us: In re Benarsidas Jagannath ((1947) 15 I T R 185), Mohanlal Hargovind v. Commissioner of Income‑tax ((1949) 17 I T R 473), Abdul Kayoom and Hussain Sahib v. Commissioner of Income‑tax ((1953) 24 I T R 116) and Stow Bardolph Gravel Co., Ltd. v. Poole (Inspector of Taxes) ((1955) 27 I T R 146). The first is a decision of the Full Bench of the Lahore High Court, the second a decision of the Privy Council, the third a decision of the Full Bench of the Madras High Court and the last a decision of the Court of Appeal in England. The facts in Benarsidas Jaganath were these. The assessee, who was a manufacturer of bricks, obtained certain lands on leases for the purpose of digging out earth for the manufacture of bricks. Under the deeds he had the right to dig earth up to three to three and a half feet. He had no interest left in the lands as soon as the earth was dug out and removed. The periods of the leases varied from six months to three years. The income tax authorities and the Appellate Tribunal held that the con sideration paid by the assessee to the owners of the lands was a capital expenditure and was therefore not an allowable deduction under section 10 (2) (xv) of the Indian Income‑tax Act. It was held by the Full Bench that the main object of the agreement was the procuring of earth for manufacturing bricks and not the acquisition of an advantage of a permanent nature or of an enduring character, that the payments made were the price of raw material and that the assessee was therefore entitled to claim them as business expenditure under section 10 (2) (xv). It is worthy of note that this decision was approved by this Court in Assam‑Bengal Cement Co. Ltd. v. Commissioner of Income tax (1). ((1955) 27 I T R 34, 45). Bhagwati, J., delivering the judgment of this Court, said;
This synthesis attempted by the Full Bench of the Lahore High Court truly enunciates the principles which emerge from the authorities. 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 capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question, however, arises for con sideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which `the expenditure is incurred. 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. If on the other hand it is made not for the purpose of bringing into existence any asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expendi ture would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or manner of the payment would then be of no consequence. 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 be 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. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations. 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 deducatible allowance under section 10 (2) (xv) of the Income‑tax Act. The question has all along been considered to be a question of fact to be determined by the Income‑tax authorities on an application of the broad principles laid down above and the Courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles."
I do not read these observations as merely indicating an approval of certain general principles, but not necessarily an approval of the actual decision in Benarsidas Jagannath. In cases of this nature it is the application of the principles to the facts of a case which presents difficulties, and I do not think that this Court would have made the observations it made, unless it was approving the actual decision in Benarsidas Jagan nwh in so far as it applied the general principles to the facts of that case. I see no significant distinction between that case and the one before us. In both cases, what was acquired was raw material‑earth in one case and stone in the other and the payments made were the price of the raw material. The only distinction pointed out is the difference in the period of the contracts ; that is a relevant factor but not determinative of the problem before us. Even in our case the contract in favour of Government was for five years only. Surely, it cannot be argued that three years in one case and five years in the other will make all the difference. I think that the real test is, in the context of the controversy before us, what was acquired‑an enduring asset or advantage, or raw material for running the business? Judged by that test the present case stands on the same footing as the case of Benarsidas Jagannath.
In Mohanlal Hargovind the facts were these. The assessees carried on business at several places as manufacturers and vendors of country made cigarettes known as bidies. These cigarettes were composed of tobocco rolled in Laves of a tree known as tendu leaves, which were obtained by the assessees by entering into a number of short term contracts with the Government and other owners of forests. Under the contracts, in con sideration of certain sum payable by instalments, the assessees were granted the exclusive right to pick and carry away the tendu leaves from the forest area described. The assessees were allowed to coppice small tendu plants a few months in advance to obtain good leaves and to pollard tendu trees a few months in advance to obtain better and bigger leaves. The picking of the leaves however had to start at once or practically at once and to proceed continuously. The Privy Council distinguished Alianza Co. v. Bell and overruling the decision in Income‑tax Appellate Tribunal v. Haji Sirajuddin ((1946) 14 I T R 447), held that the expenditure was to secure raw material and was allowable as being on revenue account. Lord Greene delivering the judgment of the Board said:
It appears to their Lordships that there has been some misapprehension as to the true nature of these agreements and they wish to state at once what in their opinion is and what is not the effect of…
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