- (1.) This appeal is directed against the judgment and order of the High Court of Rajasthan dated 24-4-1975 (reported in 1976 Tax LR 30) answering the question referred to it by the Income-tax Appellate Tribunal in the negative, in favour of the Revenue and against the assessee. The question referred to the High Court was as under (at p. 31 of Tax LR).: "Whether on the facts of and in the circumstances of the case, the Tribunal was right in holding that the payment of Rs. 3 lakhs to the Northern Railway was a revenue expenditure and was a deduction allowable under the Income-tax Act, 1961 - The circumstances leading to the reference and the appeal are necessary to be stated. The natural Science (India) Ltd. predecessor-in interest of the assessee acquired a lease from the Maharaja of the erstwhile Bikaner State on September 29, 1948 for mining of gypsum for a period of 20 years over an area of 4.27 square miles at Jamsar. The lease was liable to be renewed after expiring of 20 years. The Natural Science (India) Ltd. by a deed of assignment dated December 11, 1948 assigned the rights under the lease to the Bikaner Gypsums Ltd, a company wherein the State Government owned 45 per cent share. The Bikaner Gypsums Ltd. (hereinafter referred to as 'the assessee') carried on the business of mining gypsum in accordance with the terms and conditions stated in the lease. The assessee entered into an agreement with Sindri Fertilizers, a Government of India Public Undertaking for the supply of gypsum of minimum of 83.5 per cent quality. Under the lease, the assessee was conferred the liberties and powers to enter upon the entire leased land and to search for win, work, get, raise, convert and carry away the gypsum for its own benefits in the most economic, convenient and beneficial manner and to treat the same by calcination and other processes. Clause 2 of Part 11 of the lease authorised the lessee to sink, dig, drive, quarry, make, erect, maintain and use in the said lands any borings, pits, shafts, inclines, drifts, tunnels, trenches, levels, water-ways, airways and other works and to use, maintain, deepen or extend any existing works of the like nature in the demised land for the purposes of winning aid mining of the mineral. Clause 3 granted liberty to erect, construct, maintain and use on or under the land any engines, machinery, plant, dressing, floors, furnaces, brick kilns, like kilns, plaster kilns etc. Clause 4 conferred liberty on the lessee to make roads and ways and use existing roads and ways. Clause 7 granted liberty to the assessee to enter upon and use any part or parts of the surface of the said lands for the purpose of stacking, heaping or depositing thereon any produce of the mines or works carried on and any earth materials and substance dug or raised under the liberties and powers. Clause 8 conferred liberty on the lessee to enter upon and occupy any of the surface lands within the demised lands other than such as are occupied by dwelling houses or farms and the offices, gardens and yards. Clause 3 conferred power on the lessee to acquire, take up and occupy such surface lands in the demised lands as were then in the occupation of any body other than the Government on payment of compensation and rent to such occupiers, and if the lessee is unable to acquire such land from the tenants and occupiers, the Government undertook to acquire such surface land for the lessee at the lessee's cost. Clause 15 of Part II conferred liberty and power on the lessee to do all things which may be necessary for winning, working getting the said minerals and also for calcining, smelting, manufacturing, converting and making merchantable.
(2.) Part III of the lease contained restrictions and conditions to the exercise of the liberties and powers and privileges as contained in Part II of the lease. Clause 2 of Part III provided that the lessee shall not enter upon or occupy surface of any land in the occupation of any tenant or occupier without making reasonable compensation to such tenant or occupier. Clause 3 prescribed restriction on mining operation within 100 yards from any railway, reservoir, canal or other public works. It reads as under: "Clause 3: No mining operations or working shall be carried on or permitted to be carried on by the lessee in or under the said lands at or to any point within a distance of 100 yards from any railway, reservoir, canal or other public works or any buildings or inhabited site shown on the plan hereto annexed except with the previous permission in writing of the Minister, or some officer authorised by him in that behalf or otherwise then in accordance with such instructions restrictions and conditions either general or special which may be attached to such permission. The said distance of 100 yards shall be measured in the case of a Railway Reservoir or canal horizontally from the outer of the bank or of outer edge of the cutting as the case may be and in the case of a building horizontally from the plinth thereof." The above clause had been incorporated in the lease to protect the railway track and railway station which was situate within the area demised to the lessee. Clause 5 of Part VIII of the agreement stated as under: "Clause 5: If any underground or mineral rights in any lands or mines covered and leased to the lessee in accordance with the provisions of those presents be claimed by any 'Jagirdar', Pattedar', 'Talukdar', tenant or other person then and in all such cases the Government shall upon notice from the lessee forthwith put the lessee in possession of all such lands and mines free of all costs and charges to the lessee and any compensation required to be paid to any such 'Jagirdar', 'Pattedar', 'Talukdar', tenant or other person claiming to have any underground or mineral rights shall be paid by the Government."
(3.) The assessee company exclusively carried on the mining of gypsum in the entire area demised to it. The Railway Authorities extended the railway area by laying down fresh track, providing for railway siding. The Railways further constructed quarters in the lease area without the permission of the assessee company. The assessee company filed a suit in civil Court for ejecting the Railways from the encroached area but it failed in the suit. The assessee company, thereupon, approached the Government of Rajasthan which had 45 per cent share of it and the Railway Board for negotiation to remove the Railway Station and track enabling the assessee to carry out the mining operation under the land occupied by the Railways (hereinafter referred to as the 'Railway Area'). Since, on research and survey the assessee company found that under the Railway Area a high quality of gypsum was available, which was required as raw material by the Sindri Fertilizers. All the four parties namely, Sindri Fertilizers, Government of Rajasthan, Railway Board and the assessee company negotiated the matter and ultimately the Railway Board agreed to shift the railway station, track and yards to another place or area offered by the assessee. Under the agreement the Railway authorities agreed to shift the station and all its establishments to the alternative site offered by the assessee company and it was further agreed that all the four parties, namely, Sindri Fertilizers, Government of Rajasthan, Indian Railway and the assessee company shall equally bear the total expenses of Rs. 12 lakhs incurred by the Railways in shifting the railway station, yards and the quarters. Pursuant to the agreement, the assessee company paid a sum of Rs. 3 lakhs as its share to the Northern Railway towards the cost of shifting of the Railway Station and other constructions. In addition to that the assessee company further paid a sum of Rs. 7,300/- to the Railways as compensation for the surface rights of the leased land. On the shifting of the Railway track and Station the assessee carried out mining in the erstwhile Area and it raised gypsum to the extent of 6,30,390 tons and supplied the same to Sindri Fertilizers.;