G.M.METHA, J. - (1.)THIS is reference by the Income-tax Appellant Tribunal, Bombay Bench "B", under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act). The question referred to by the Appellant Tribunal, are as follows :
"(1) Whether, on the facts and in the circumstances of the case, the prospection licence fee of Rs. 3,200 is allowable as revenue expenditure ?

(2) Whether, on the facts and in the circumstances of the case, the appropriate part of Rs. 1,53,800 was allowable as revenue expenditure ?"

(2.)THE reference has arisen out of the following facts :
THE applicant before the Tribunal, R. B. Seth Moolchand Suganchand (Mining Department), Udaipur, hereinafter referred to as the assessee, was working certain emerald mines in the Udiapur area where the head Office was situated. THE relevant assessment year under reference was 1952-53. At the head Office of the assessee, the accounts are closed On October 31, 1951, and at the branch on March 31, 1952, and those are the relevant previous years. During the relevant assessment applied for certain new licenses, for which it incurred an expenditure of Rs. 5,694 which included prospecting licence fee of Rs. 3,200 paid to the Government at the time of procuring the prospecting licence for the Beguiler emerald area issued under the provisions of Chapter III of the Mineral Concession Rules, 1949. This prospecting licence fee of Rs. 3,200 was payable ar the rate of rupee one per acre per year. Besides this, there were items of expenditure like licence fee for other purposes, application charges, ammunition licence changes, etc. THE other expenses were allowed to the extent allowable and there no dispute in respect to them. THE Income-tax Officer disallowed the sum of Rs. 3,200 on the ground that the licence was obtained by the assessee only that year, that the licence fee was to be paid at rupee one per acre in addition to the royalty to be paid on the value of emerald won, excavated the sold, that the expenditure was an initial expense as or gave the assessee a right of prospecting mines and, that, therefore, it was not as allowable deduction under section10(2) (xv) of the Act.

There was an appeal against the order of the Income-tax Officer to the Appellant Assistant Commissioner, who, after setting out the facts, held as below :

"Now prospecting expenses including prospecting fee are clearly initial expenses and they are being disallowed in mining cases, such disallowances having been upheld even by the Tribunal, the Income-tax Officer was, therefore, right in making the disallowance hereof..."

At the time of arguments before the Tribunal the claim was confined only to the sum of Rs. 3,200, being the prospecting licence fee. Before the Tribunal, the assessees learned counsel mainly based his claim on rule 23 of the Mineral contention Rules, under which, in the case of precious stones like emerald, the licence had a right to win and carry the minerals for commercial purposes which the assessee actually did in this case. The Tribunal negatived this contention for reasons set out in paragraph No. 2 of its order, the relevant portion of which reads :

"Mr. Bhargava, who argued the case on behalf of the assessee, rested this claim mainly on the provisions of rule 23 as mentioned above. We do not think that there is any substance in this contention. The amount is paid as and by way of a prospecting fee. It was not the contention of the assessee that a prospecting licence fee is liable to be allowed as such in all cases. The claim is rested here on the basis of the licence being for prospecting and mining precious stones and mica, the licence in such a case being entitled to sell the products that he mines. But the licence fee paid is in this case as much for initiation of a business as in the case of licence for other minerals. Its character is not changed merely because the licensee has certain rights over the minerals obtained under the prospecting licence. The prospecting licence fee cannot be equated to a payment made for the purchase of stock-in-trade. It is not based on any quantity of minerals. The minerals had be won and extracted from the earn, and the term Prospecting licence shown that the mine had not yet started working as mine It is a fee irrespective of the quantity of minerals obtained. The pain object of the payment is to initiate the business. The character of the payment is not changed by anything that is mentioned in rule 23. The period for which the licence is obtained, viz. one year, does not also make it a revenue payment. In our opinion, the authorities rightly disallowed the amount."

The assessee required the Appellant Tribunal to refer the question of law arising in the case to the High Court and it is how the first question is referred to this court.

The second question has been referred in the following circumstance :

The assessee claimed deduction of a sum of Rs. 7,857. Messrs. Duduwala and company worked a mica mine for about 15 years and thereafter abandoned it. With a view to granting a licence over the area, the state Government issued Notification No. 9453 dated 29th March, 1955, (Annexure "B"). The leases were to be given in accordance with Mineral Concession Rules, 1949, with some relaxation and modification about which reference had been made to the Government of India. Paragraph No. 5 of the notification runs as follows.

"As the area has been worked by a private company during the part fifteen years, all the know mines and quarries and prospecting pits have acquire a value which can be determined by the principles of "mine valuation. Intending applicants are therefore requested to visit the area before 15th April, 1950, and assign their own value and officer it under a sealed tender superscribed mica Rajasthan........"

The assessee offered its tender at Rs. 1,57,150 for a particular block, which was leased out to him for a period of 20 year with an option for renewal as per conditions prescribed in the Mineral Concession Rules 1949. Tender-money was, under the said notification, to be paid within in a period of twelve months of acceptance of the tender. A part of the sum of Rs. 1,57,150 was for the mica scrap lying on the surface the value of which was Rs. 3,360. This amount was allowed to be deducted by the Tribunal in appeal. The assessee paid a sum of Rs. 1,57,150 during the relevant year and wrote off 1/20th of it, that is, Rs. 7,857 as revenue expenditure of the year under appeal.

On the assessees claim for deduction of Rs. 7,857 the 1/20th part of Rs. 1,57,150 the Income-tax Officer observed as follows :

"Tender-money. - A sum of Rs. 7,857 has been claimed as part of the tender money paid. This is claimed to be a revenue expense. I however, do not agree. The assessee got block No. 7 for tender-money of Rs. 1,57,150 vide Director of Mines and Gelogys letter dated December 30, 1950, against the tender supplied by the assessee himself. I am of the view that this money was paid for the value of the land which it had acquired because the mine granted to the assessee had already been worked by other private companies."

There was an appeal against the disallowance to the Appellate Assistant Commissioner, who upheld the disallowance holding that the expenditure was of a capital nature as it as it was for acquisition of a capital assets. There was a further appeal to the Appellate Tribunal. The Tribunal allowed the expenditure of Rs. 3,360 as revenue expenditure as it was paid for mica scrap lying on the surface and as such, was acquisitaion of stock-in-trade. The balance of Rs. 1,53,800 which was paid under the tender, was held to be on capital account. On the above facts, on the application of the assessee, the second question has been referred to this court by the Tribunal.

Learned counsel for the assessee has argued that the Tribunal was in error in holding that the payment of Rs. 3,200 and Rs. 1,53,800 made by the assessee to the Government was expenditure of a capital nature. As regards the amount of Rs. 3,200 he has submitted that this amount, being a prospecting licence fee, was an expenditure of a revenue nature and as regards the payments of Rs. 1,53,800 he has submitted that the amount paid by the assessee was only a estimated value of the mica found lying in the area and it thus represented a payment for the stock-in-trade of the assessee, which was liable to be allowed as an allowable deduction. According to him, it should not be treated as capital expenditure. He has placed reliance on the following cases : Alianaza Co. Ltd. v. Commissioner of Income-tax Banarsidas Jagannath v. Commissioner of Income-tax Assam Bengal Cement Co. Ltd. Commissioner of Income-tax and Gotan Lime Syndicate v. Commissioner of Income-tax.

Learned counsel appearing on behalf of the department contested the stand taken on behalf of the assessee. He has submitted that the prospecting licence fee was expenditure of a capital nature, being an initial expense, which gave the assessee a right of prospecting mine. As regards the payment of Rs. 1,53,800 made by the assessee, it could not be treated according to him as payment for the price of mica. The raw material had to be won and extracted before they could be said to be stock-in-trade. The amount represented the price that was paid by the assessee for obtaining the right to extract and win emerald and mica in an area which had already been worked and developed by the assessees predecessor for a period of 15 years. The payment made by the assessee was thus incurred for the purpose of obtaining benefits of a capital nature and was, therefore, capital expenditure. Besides placing reliance on the authorities Nos. (5) and (6) cited on behalf of the assessee, he referred to the following cases : Pingle Industries Ltd. v. Commissioner of Income-tax Abdul Kayoom v. Commissioner of Income-tax and Commissioner do Income-tax v. Ramlal and Sons.

The Supreme Court has, in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax and Gotan Lime Syndicate v. Commissioner of Income-tax referred to above, reviewed almost all the earlier cases and has laid down how the question regarding determination of what is capital expenditure and what is revenue expenditure is to be approached.

In Gotan Lime Syndicates case the following observations sin Abdul Kayoom v. Commissioner of Income-tax were quoted with approval :

"None of the tests (laid down in various authorities) is either exhaustive or universal. Each case must depend on its own facts, and close similarity between one case and another is not enough, because even a single significant detail may altar the entire aspect. In deciding such cases, one should avoid the temptation to decide cases... by matching the colour of one case... against the colour of another."

Their Lordships, however, approved the tests indicated in Assam Bengal Cement Co Ltd. v. Commissioner of Income-tax and we may briefly refer to them.

The earliest test was the one indicated in the following observation of Bowen L. J. in City of London Contract Ltd. v. Styles.

"You do not use it for the purpose of your concern, which means for the purpose of carrying on your concern, but you use it to acquire the concern."

The expenditure in the acquisition of the concern would be capital expenditure; the expenditure in carrying on the concern would be revenue expenditure.

Lord Dunedin in Vallambrosa Rubber Co. Ltd. v. Farmer, suggested another criterion, at page 536, which runs as below.

"Now, I dont say that this consideration is absolutely final or determinative, but in a rough way I think it is 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 that is going to recur every year."

Then, there is another test which has almost been universally accepted as a test for a determining what is capital expenditure as distinguished from revenue expenditure laid down by Viscount Cave L. C. in Atherton v. British Insulated and Helsby Cables Ltd. The observations were as follows.

"Now, in Vallanmbrosa Rubber Co. v. Farmer, Lord Dunedin as Lord President of the Court of Session, expressed the opinion 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, and no doubt this is often a material consideration. But the criterion suggested is not, and was obviously not intended by Lord Dunedin to be, decisive one in every case; for it is easy to imagine many cases in which a payment, though made once and for all, would be properly chargeable against the receipts for the year... But 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 vary 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."

The Privy Council in Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax has held that there was distinction between acquistion of an income-earning asset and the process of earning of the income. Expenditure in the acquisition of that asset was capital expenditure and expenditure in the process of the earning of the profits was revenue expenditure, which test was akin to the one laid down by Bowen L. J. in City of London Contract Corporation v. Styles.

After referring to the various authorities distinguishing capital expenditure from revenue expenditure, their Lordships added, that on the whole, the definition of Viscount, Cave is a good working definition which has almost been universally accepted as a test for determining what is capital expenditure as distinguishable from revenue expenditure.

In Banarsidas Jagnnath v. Commissioner of Income-tax a Full Bench of the Lahore High Court attempted to reconcile all these decisions and deduced board test for distinguishing capital expenditure from revenue expenditure, the pertinent portion of which is in these words :

"1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment : vide Lord Sands in Commissioners of Inland Revenue v. Granite City Steamship Co. Bowen L. J. observed as to the capital expenditure as follows.

You do not use it "for the purpose of" your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern.

2. Expenditure may be treated as properly attributable to capital when it 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 : vide Viscount Cave L. C. in Atherton v. British Insulated and Helsby Cables Ltd.

The Supreme Court has said that the synthesis attempted by the Full Bench of the Lahore High Court truly enunciates the principles which emerges 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 substaintially replaced and that outlay, whatever be its source, whether it is drawn from the capital or the income of the concern, is in the nature of capital expenditure.

In the light of the broad tests that have been indicated above, we proceed to consider as to what is the true and correct import of the two payment in the present case. We take the second question first. The amount of Rs. 1,53,800 represented the price that was paid by the assessee for obtaining the right to extract and win mica in an area which had already been worked and developed by his predecessors for 15 years. If the assessee had to start running a mine he had to incure similar expenditure. The argument of learned counsel for the assessee is that the amount paid was the price of the raw material. In other words, the amount was for stock-in-trade. This was not the correct position. The raw material had to be extracted before it could be said to be stock-in trade. The mica was not lying on the surface but was a part of the quarry from which it had to be extracted skillfully and methodically before it could be sold. Such a deposit cannot be described as the stock-in-trade of the assessee. The mica after it has been excavated and won could only be so described. The amount paid by the assessee represented the price that was paid that was paid by the assessee or obtaining the right to extract mica in an area, which had already been worked and developed for fifteen years. The area was leased out to the assessee for a period of twenty years with an option of renewal. This was sufficiently long to enable the assessee to acquire a benefit of an enduring nature to its business. The amount paid cannot be said to be a payment for raw material. The expenditure with which we are concerned was an expenditure not for the acquiring of the stock-in-trade for the assessee but to acquire a source by which the stock-in-trade was to be excavated and acquired. It was made for initiation of a business by obtaining the right to extract mica in the area. The expenditure was made with a view to bringing into existence an advantage for the enduring benefit of trade. The assessee was given the exclusive right to extract and win the mica from the area given to him on lease. The view that the payment of Rs. 1,53,800 represented expenditure of a capital nature is supported by the assessees own conduct. Had it been an expenditure of a revenue nature, the assessee could not have failed to claim its benefit in the assessment year under reference. Country to it, he wanted that the payment be spread for twenty years, the period of the lease, and claimed its 1/20th only for the assessment year under reference. All these features show that the said payment was of a capital nature.

Learned counsel for the assessee has strongly relied on Mohanlal Hargovinds case and Gotan Lime Syndicate v. Commissioner of Income-tax .

In Mohanlal Hargovinds case the person assessed was a "biri" manufacturer who had obtained short term contracts with Government and other owners of forests. These "tendu" leaves with tobacco are used to roll into cigarettes. The contract gave a right of entry into forests to collect leaves and also to coppice and plant and to pollard the tendu trees, but beyond this it gave no interest in land. The judicial commissioner held that these contracts were in a business sense for the purpose of securing supplies to the manufacturers of one of the raw materials of their business. They granted no interest in land or the plants or the tree. Then the judicial committee observed as follows :

"Case relating to the purchase or leasing of mines, quarries, deposits of brick earth... do not appear to their Lordships to be of assistance....."

The Board distinguished Alianza Co. Ltd. v. Bell, which was said to be a case analogous to purchase or leasing of mine, and Kauri Timber Co. v. New Zealand Commissioner of taxes, which was case of acquisiton of lands or of standing timber which was an interest in land. In either case, it was a capital asset. Their Lordships finally observed :

"In the present case the tree were not acquired : nor were the leaves acquired until the appellants had reduced them into the own possession and ownership by picking them. The two cases can, in their Lordships opinion, in no sense be regarded as comparable. If the tendu leaves had been stored in merchants godown and the purchase price was capital expenditure. Their Lordship see no ground in principle or reason, for differentiating the present case from that supposed."

This case was considered but distinguished by the Court of Appeal in England in Stow Bardolph Gravel Co. Ltd. v. Poole. In that case, the company was doing the business of selling sand and gravel and purchased certain unworked deposits and claimed that the price paid by it foe the same should be deducted from its profits as expenditure for acquiring its trading stock. It was held by Harman J. in appeal from a decision of the General Commissioners that the company had acquired stock-in-trade. In appeal Lord Evershed M. R. disagreed with the conclusion of Harman J. and held on the facts, as found, that what was purchased was a part of the land itself, namely, the gravel in situ. He held that there was a distinction between the purchase of growing crop of levels and the purchase of gravel. Reference was then made by him to case in which what was purchased or taken on lease was land or an interest in land, and Mohanlal Hargovinds case was distinguished on the ground that in that case it was possible to say of tendu leaves that they were acquired as the raw material for manufacture. The argument of Mr. Magnus in the case described as an attempt to substitute sand and gravel for tendu leaves was not accepted. Lord Evershed obsered :

"But I cannot say the same of the sand and gravel, part of the earth itself, which was the subject of the contract here in question and which I think could only sensibly become part of the stock-in-trade of this gravel merchants business when it had in the true sense been won, had been excavated and been taken into their possession."

Relying on this view, their Lordships in Pingle Industries case, observed that they were in entire agreement that such a distinction is not only possible but also sensible. In Pingle Industries case, the assessee under certain leases acquired the right to extract stones from the quarry. The stones were not lying on the surface, but were to be extracted. For the lease, the assessee paid a certain amount in a lump sum and the rest was to be paid in easy installments. The assessee claimed deduction in respect of the lease money paid by him as revenue expenditure. It was held by the Supreme Court that 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 site were not the assessees stock-in-trade in the business sense but a capital asset from which after extraction he converted the stones into his stock-in-trade. The payment was neither rent nor royalty but was for acquiring a capital asset of enduring benefit to his trade and was a capital expenditure.

Mohanlal Hargovinds case relied on behalf of the assessee is clearly distinguishable, whereas Pingle Industries case, relied on behalf of the department has a clear application to the facts of the present case.

Gotan Lime Syndicates case, on which also strong reliance has been placed on behalf of the assessee equally bears no resemblance to the facts of the present case. In Gotan Lime Syndicates case, the important fact was that it was a case of an annual payment of royalty or dead rent which was not a capital expenditure. Sikri J., who delivered the judgment of the court, observed that no case had been referred to their Lordship in which payments of royalty under the lease had been treated as capital expenditure. It has been observed that the royalty payment in that case was not for securing an enduring advantage. In the present case, the payment was made for acquisition of the area for extracting and winning mica. The royalty was to be paid after the mica had been extracted. The payment of royalty would undoubtedly be treated as revenue expenditure Gotan Lime Syndicates case has no application to the facts of the present case.

Out of the decisions relied on of the department, Pingle Industries case has already been referred to. In Abdul Kayooms case, the assessee, which was carrying on business in "conch" shells locally known as "chanks", took on lease the exclusive right, liberty and authority to take and carry away all chanks found in the sea for a period of three years ending on June 30, 1947, along a specified portion of the coast. The consideration of Rs. 6,111 per year was payable in advance. It was held on the facts of that case that "this expenditure was of the nature of capital expenditure and not revenue expenditure." On the face of it, the distinguishing feature was that, in that case, the lessee had to obtain fish from the sea and, consequently, had to operate in the waters of the sea itself, and that was the main reason why the court held against the assessee. This difference is clearly brought out in the judgment of the majority where it was held :

"This is not a case of so much clay or so much saltpetre or a dump of tailings or leaves on the trees in a forest. The two modes in which the respondent did the business furnish adequate distinguishing characteristics. Here is an agreement to reserve a source, where the respondent hoped to find shells which, when found, became its stock-in-trade but which, in situ, were no more the firms than a shell in the deepest part of the ocean beyond the reach of its divers and nets. The expenses of fishing shells were its current expenses as also the expenses incurred over the purchase of shells from the divers. But to say that the payment of lease money for reserving an exclusive right to fish for chanks was on a par with payments of the other character is to err."

The facts in the present case are stronger than in Abdul Kayooms case 1 to hold that the payment made by the assessee was of a capital nature.

The case to which we now wish to refer is the Commissioner of Income tax v. Ramlal and Sons, which is a full Bench decision of this court. The material facts of that case are these. The assessee was a firm called Ramlal Kachhawa and Sons, Barmer. It was assessed for income-tax for the year 1952-53, the corresponding accounting year having ended on 31st March, 1952. In response to the Notification No. 9453 dated 29th March, 1958 (same as in the present case), the assessee made a tender for Block No. 6 (same area as in the present case, merely the block given to the assessee in the present case is different) in Part A and offered a sum of Rs. 1,55,000, as tender price which was accepted by the Government. A lease for a period of 20 years as per conditions prescribed in the Mineral Concession Rules, 1949, was granted to them. The terms and conditions of that lease were the same as in the present case. The assessee claimed to deduct the entire sum of Rs. 1,55,000, as revenue expenditure. The Income-tax Officer rejected this claim on the ground that it was clearly a case of expenditure of a capital nature. The assessee then went in appeal to the Appellate Assistant Commissioner. The aforesaid contention was agitated before him, and, in the alternative, it was contended that as the period of lease was 20 years, at least 1/20th of the value should be allowed as revenue expenditure for the year in question. The Appellate Assistant Commissioner rejected the claim on the ground that the said expenditure was incurred to acquire an advantage for the enduring benefit of trade and, therefore, it could not be treated as revenue expenditure. Aggrieved by this decision, the assessee went in appeal to the Income-tax Appellate Tribunal, Bombay Bench (C). An altogether new contention was raised before it and that contention was that as no dead rent was payable by the assessee for the first year, a certain element of rent was necessarily included in the payment of Rs. 1,55,000, which was to be made by the assessee under the terms of the lease. The Tribunal held that the portion ascribable to rent in the sum of Rs. 1,55,000 may reasonably be fixed at Rs. 25,000. Thereafter, the Commissioner of Income-tax required the Tribunal to refer the following question of law to the High Court :

"Whether, on the facts and in the circumstances of the case, and on a proper construction of the lease deed, the Income-tax Appellate Tribunal was right in holding that a sum of Rs. 25,000 is ascribable to rent for the first year out of the sum of Rs. 1,55,000, paid by the assessee as tender money ?"

(3.)THE Tribunal, however, observed that the real point of the reference was not whether the sum of Rs. 25,000, could be asceribed to rent, but whether any portion of the sum of Rs. 1,55,000 could be asceribed to rent, i.e., dead rent for the first year, and on this view of the matter reframed the following question and it was this question that had been referred to this court :
"Whether, on a true construction of the notice dated 29th March, 1950, and the letter of acceptance dated December 30, 1950, any portion of the sum of Rs. 1,55,000 can be considered as dead rent payable for the first year of mica mining lease ?"

The High Court has observed :

"... it clearly seems that only two payments were actually required to be made, the one payment of Rs. 1,55,000 being a general one for the acquisition of the particular lease, and the second being either royalty or dead rent whichever was higher in amount, except that for the first year, no dead rent was to be charged. It is in this background that the question whether there is an element of rent in the payment of Rs. 1,55,000 made by the assessee as tender money falls to be determined.... As we look at the real nature of the payment of Rs. 1,55,000, it clearly seems to us that it has hardly anything to do with any payment by way of rent or royalty, as such and this was a payment which was required to be made by the assessee over and above this, and as the notice puts it, it was merely a bid price based on certain principles of mine valuation for the acquisition of mining rights in certain areas which having been previously worked by other lesses had acquired a value. In Fact, the Tribunal itself in the very opening part of its order refers to this payment as bid price while tendering for the lease of mica mines in Rajasthan....

There can be no doubt, therefore, that it was in the nature of capital expenditure and, with all respect, it appears to us to be contradiction in terms to say that it includes therein an element of rent which would be a revenue expenditure."

Learned counsel for the assessee has stated that though the facts in that cast case are similar to the facts in the present case, the question that was referred by the Tribunal was not the one with we are concerned in the present case. This argument does not seem to us to be well-founded. The material question for determination in Ramlals case was as to what was the real character of the payment of Rs. 1,55,000 made by the assessee and whether that payment included any element of rent in it. Unless the real character of the payment of Rs. 1,55,000 had been determined, it could not be found whether that payment included any element of rent in it. In answering the reference, the court had to decided as to what was the real nature of the payment of Rs. 1,55,000. The Full Bench held that there was no doubt that it was in the nature of capital expenditure and did not include therein any element of rent. It would thus be clear that the same question, by necessary in application, was involved in Ramlals case as is involved in the present case. All that can be said is that there was a distinction without any difference.

Our answer therefore to the second question referred to us is that the appropriate part of the sum of Rs. 1,53,800 was not allowable as revenue expenditure.

Applying the board tests that have been state above regarding determination of what is capital expenditure and what is revenue expenditure, it is to be considered whether the prospecting licence fee of Rs. 3,200 paid by the assessee was allowable as revenue expenditure. The prospecting licence fee was paid by the assessee for initiation of business. The term "Prospect in licence" shows that the mine had not yet started working. It is a fee paid irrespective of the quantity of minerals obtained. The plain object of granting such a licence was to permit the party to initiate the business. Its character is not changed merely because the licence has certain rights over minerals obtained under the prospecting licence. In this connection it is also significant to note that this question was not raised before the Tribunal on behalf of the assessee. The Tribunal has observed that it was not the contention of the assessee that the prospecting licence fee was liable to be allowed as such in all cases. The assessee relied on rule 23 of Mineral Concession Rules, 1949, which was negatived by the Tribunal. The prospecting licence fee cannot be equate to payment made for the purpose of a stock-in-trade. The prospecting licence fee of Rs. 3,200 was also not allowable as revenue expenditure.

In the result, therefore, our answer to both the questions is in the negative. In the circumstance of the case, we leave the parties to bear their own costs of the reference.

BHANDARI, ACTG. C.J. - I agree with my learned brother G. M. Metha J. but would like to make certain observations.

I take up the second question first. The block of mica mines, of which the assessee is the lessee in this case, hand already been worked to a certain extent by his predecessor. The Government of Rajasthan issued notice, annexure "B", inviting tenders making it clear that all the known mines and quarries and prospecting pits had acquired a value which could be determined by the principles of "mine valuation". It was further mentioned in the notice that all dumps of scrap or waste mica lying within a leased area will belong to the lessee and he must take into account the value of the same when submitting pits tender. The contention of the assessee is that it had submitted a tender after fixing value of the contents of certain pits according to the recognised principles of mine valuation and also of the scrap mice lying above the ground. For the latter he has been granted a deduction by income-tax authorities but the balance of Rs. 1,53,800 which represented the estimated value of the mica in the pits was, according to it, also a permissible deduction. It worked out deduction for each year as 1/20th of the aforesaid amount. The argument is that while deduction has been allowed for mica lying below the surface, deduction has not been permitted for what was lying below the surface in spite of the fact that in both cases the assessee had purchased certain mica valuation. To put it in other words, the argument is that the various pits, and contained specified quantity of mica which had of course to be extracted but which had become stock-in-trade of the assessee even though it was in the pits, and, therefore, the amount spent in acquiring that quantity of mica could not be treated as capital investment but was merely a circulatory investment. This contention cannot be accepted for the reason that the assessee had purchased an interest in the land by way of lease for a long time for the purpose of working out mica mines by digging pits and extracting mica out of them. The fact that matched already been discovered in some of the pits already existing on that land and its value could be estimated would not make any difference.

The nearest cases to the present controversy are Hughes (H. M. Inspector of Taxes) v. British Burmah Petroleum Co. Ltd. and Start ford (H. M. Inspector of Taxes) v. Mole & Lea . In Hughes case, the respondent-company, which carried on the business of oil producing and refining, had for many years bought oil from an Indian oil company. In the year 1928, the said oil company agreed to sell to the respondent-company (a) its plant, equipment, casing tanks, pipe-lines, etc., and (b) all oil won on and after 1st October, 1928, from its existing well. The expressed consideration for the unwon oil was Pounds 70,000, which was stated to have been calculated by reference to the estimated production of the wells. The respondent-company contended that in principle the sum of Pounds 70,000 was an admissible deduction in computing the profits for income tax purposes. It was held that Pounds 70,000, was capital expenditure and no part of it was admissible as deduction. Finlay J. appreciated that there was difficult to apply the law laid down in various cases to different facts in various cases but be came to the conclusion that the principle of Coltness Iron Co. v. Black governed the case before him. His conclusion is summed up in the following paragraph :

"Now here, when the facts are looked at, they appear to me be all one way. It seems to me to be clear that this Pounds 70,000 was paid and was paid to acquire an asset in the business. It was paid - and I do not think that any words can get over the difficulty - simply to acquire oil wells, and what were acquired were oil wells and, by a separate clause, but substaintly by part of the same agreement, as the directors report shows, there were acquired also the means of working the oil wells. therefore I am unable to take the view that this is anything else that a capital expenditure, but I confess that I myself should be content, numerous as the later cases are to, some of which I have alluded, though not to very many (there are a long chain to them) to rest my decision upon the decision of the House of Lords in the Coliness Iron case. There, I think, the principles are laid down and the principles there laid down, as I think, over this case."

There is very little to distinguish the case before me from Hughes case.

In Straford v. Mole & Leo the appellant-company by an agreement dated 1st October, 1934, purchased all the coal which it could "actually sever from the soil or freehold and thereby convert into chattels personal" from specified seams during the two years following; the agreement expressly stated that it was not a mining lease or licence nor the grant of a profit a prendre, but a contract for the sale and purchase of goods. It was held by Lawrence J. that the agreement in each on its true construction granted profits a prendre which was a right, privilege or benefit in, over or derived from land, therefore, the payments under the agreement were not admissible deduction foe income-tax purposes.

In this case it is not contended that the assessees business was some-thing else than that of mining and selling the mica and not of mining by it. Even if its business be taken to be that of a dealer in mica and not of mining mica, the investment made in taking the lease of mica mines was a capital investment. On this point, the case of Stow Bardolph Gravel Co. Ltd. v. Poole is instructive. The following passage from the judgment of Jenkins L. J. summed up the respective contentions of counsel on either side :

"Mr. Magnus for the taxpayers contended that the business of the taxpayers was the business of dealers in sand and gravel, and not the business of quarry owners. He said the taxpayers business was to buy and sell gravel. Therefore, any expenditure necessary to the purchase of gravel must be proper expense of the taxpayers trade. In my view, that states the position too narrowly. I would say that the taxpayers here do carry on the business of dealers in sand and gravel, but I would that one part of the business consists not merely in purchasing gravel but in obtaining gravel, and there may be expenditure necessary or desirable with a view to obtaining gravel which is nevertheless not the purchase price of gravel as stock-in-trade of the business.

Sir Lynn Ungoed-Thomas, on the other hand, contended for the Crown that it could not be said hear that the taxpayers had purchased a quantity of gravel as part of the taxpayers stock-in-trade. He said that the true view was, when the terms and effect of the agreement were examined, that the taxpayers had provided themselves with a means of supplying themselves with gravel which when procured would form part of their stock-in-trade".

Jenkins L. J. then proceeded to decide the matter :

"The question is not free from difficulty. Is this a case of a purchase of the raw material of the trade, or of the stock-in-trade in which a particular trader deals, or is it a case of a purchase of capital asset from which the taxpayers will be able to derive raw material or stock-in-trade as and when the requirements of the taxpayers business make it expedient to do so ? In my view, the latter conclusion is the correct one, and In think that conclusion accords with Alianza Co. Ltd. v. Bell, and Coltness Iron Co v. Black and also with the observations of Lord Shaw in Kauri Timber Co. Ltd. v. New Zealand Commissioner of Taxes The distinctions drawn by the cases are not altogether satisfying to some minds. It may seem strange that a purchase of a heap of tailings, as in the Golden Horse Shoe case, should be regarded as a purchase of raw material or stock-in-trade, whereas the sum expended in acquiring a quantity of caliche or nitrates embedded in a quarry as in the Alianza case should be a capital expense; or again that, as I think is the result in the present case, the right to obtain or win gravel lying in the soil should be a capital expense. But these matters of taxation must depend on the rules laid down by the relevant legislation by reference to which income for tax purposes is to be measured, and under which capital expenditure is not deductible. In my view, when all the authorities are looked at, it is reasonably plain that an asset such as that acquired by the taxpayers in the present are must be regarded as a capital asset and not so much stock-in-trade purchased by the taxpayers for the purposes of their trade."

In Pingle Industries Ltd. v. Commissioner of Income-tax the assessee had acquired the right to extract stones from the quarry under certain leases. The stones were not lying on the surface but were to be extracted methodically and skillfully before they were processed and sold. For the lease the assessee paid a certain amount in a lump sum and the rest was to be paid in easy monthly installments. The assessee claimed deduction in respect of the lease-money paid by him as revenue expenditure. It was held that the entire lease-money was a capital expenditure for acquiring a capital assets of enduring benefit. It has been urged before us that this case should be distinguished on the ground that there was no payment for the estimated value of the stone. I am unable to draw any such distinction. If such a distinction is drawn, then in every case in which the contents of a mine could be estimated in money value by adopting scientific device would become stock-in-trade if the mine has been taken on lease after such estimation is worked out, while in case of mine which is taken on lease without working out any such estimate, it will be a capital expenditure. In my opinion, the answer to the second question should be in the negative.

Now I take up the first question. The expenditure in connection with the obtaining of a prospecting licence is an expenditure for the purpose of setting up of a business for mining emerald if it is found. It was a preliminary expense in order to start a business and such expense is not an allowable deduction. It is contended that the assessee could have treated as his property any emerald found by him after paying royalty even during the course of his prospecting under the licence. None the less no business can be said to have been set up by obtaining the prospecting licence even when the licence contained such a term. Under section 10(2AA) of the Indian Income-tax Act, 1922 special provision was made for deduction in case of business for prospecting mineral oils. The same provision is repeated in section 42 of the Indian Income-tax Act, 1961.

Learned counsel for the assessee has relied on the following observations of Subba Rao J in Commissioner of Income-tax v. Malayalam Plantations.

"The expression for the purpose of the business is wider in scope than the expression for the purpose of earning profit. Its range is wide; it may take in not only the day to day running of a business but also the rationalisation of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business."

The aforesaid observations it is contended, show that any amount paid as fee or tax for commencing a business must be treated as revenue expenditure. These observations apply to a case in which expenditure has been incurred for the purpose of carrying on the business which postulates that the business has been set up. I am of the view that the aforesaid observations of Subba Rao J are of no help to the assessee. I am therefore, of the opinion that the first question should also be answered in the negative.

BY The COURT

Both the question are answered in the negative. No order as to costs.

Question answered in the negative.

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