MODI, J - (1.) THIS is a reference by the Income-tax Appellate Tribunal, Bombay Bench B, under sec. 66 (1) of the Indian Income-tax Act, 1922. The reference is a consolidated one, arising out of the Tribunal's orders in income-tax appeals Nos. 7195 to 7197 of 1959-60 inasmuch as a common question of law admittedly arises therein. That question is as follows : - "whether on the facts and in the circumstances of the case the sum of Rs. 96,000/- paid by the assessee during each of the relevant accounting years was rightly allowed as a revenue deduction in computing the business profits of the assessee company. "
(2.) THE facts leading up to this reference may be stated as under. THE assessee is a registered firm bearing the name M/s. Gotan Lime Syndicate, Gotan, and carries on business in the manufacture of lime from lime stone. THE assessee was assessed to income-tax for the assessment years 1954-55, 1955-56 and 1956-57, the corresponding accounting years being the respective financial years for 1953 to 1956. During each of these years, the assessee paid a sum of Rs. 96,000/- to the Mines Department of the Rajasthan State as contract money and claimed it as a deductible expenditure under sec. 10 (2) (xv) of the Income-tax Act of 1922. This was disallowed by the Income-tax Officer and the Appellate Assistant Commissioner as being capital expenditure. On appeal, the Income-tax Appellate Tribunal, Bombay Bench B, however allowed it as revenue expenditure. THEreupon the Commissioner of Income-tax asked for a case to be stated to this Court on the question of law arising out of the orders of the Tribunal, and this is how the present consolidated reference has arisen. By an indenture dated the 4th March, 1949 (Annexure A) entered into between the assessee and the Government of Jodhpur, as it then was, the assessee acquired the right to excavate lime-stone in what is called the acquired area in two villages, namely, Gotan and Tunkaliyan, as well as the monopoly rights to prepare lime therefrom, subject to certain conditions which were set out in that document. By cl. (1) of this agreement, it was provided that the excavation of lime-stone would be made only in the area acquired for this purpose at the villages named above and that if the contractors should encroach upon culturable land or on Bapi holdings in connection with contract, they would have to obtain the permission of the Mines Department of the State for such encroachment and pay compensation to the holders of the lands intended to be encroached upon, as determined by the Government. Under cl. (2) it was provided that lime prepared in the area defined in cl. (1) could be sold within the same area or outside it except where similar other leases existed or might later be entered into, subject to certain conditions which it is unnecessary to mention for our present purposes. Cl. (3) then prescribed the rates at which the various qualities of lime could be sold. By cl. (5) it was provided that the contractors would have to erect and work on adequate number of kilns to meet the demand for lime failing which the monopoly right could be withdrawn without any compensation being paid to them. Under cl. (6) it was laid down that any person wishing to bring lime from any place outside the area defined in cl. (1) for his personal requirements would be at liberty to do so with the permission of the Mines Department and the contractors would not be entitled to levy royalty on such lime, Cl. (7) relates to the term of this monopoly contract and lays down that it was to enure for a period of five years from 15. 7. 1947 to 14. 7. 1952. By cl. (8) it was provided that the contract though heritable would not be transferable. It was further provided thereunder that any subletting of the contract would render it liable to cancellation, and in that case no claim for compensation would be entertained. By cl. (10) it was provided that the lessee would pay the contract money of Rs. 1,81,000/-in the first year which was liable to be increased by ten per cent, after the first two years, and thereafter according to a graduated scale set out in the agreement, and the contract money was agreed to be payable in quarterly instalments in advance which were specified in the indenture. By cl. (13) it was agreed that the contract would be terminable on six months' notice on either side. The last clause to which it is necessary to refer in this connection is No. 15 under which it was provided that the quarrying of lime-stone in the acquired area would be done on approved lines as directed by the Government from time to time. By its letter dated the 14th July, 1952 (Annexure B) the Government of Rajasthan (and not the Government of Jodhpur as mentioned in the statement of facts drawn up by the Tribunal) extended the contract by a period of two months, warning the assessee that it will have to vacate the area on the 14th September, 1952, without any further notice. By a further letter dated 15th September, 1952 (Annexure C), a further extension of two months was ordered. This was followed by another extension upto 31st March, 1953, on the "clear understanding that you will have to vacate the area on the expiry of this extended period, that is, on 1st April, 1953, without any further notice and that you will have no claim whatsoever over the area after due date. (See Annexure D) dated the 19th November, 1952. By a subsequent letter dated the 17th December, 1952, (Annexure E), the Government of Rajasthan further clarified the position by saying that the extension granted to the assessee would enure either upto the 31st March, 1953, or until the finalisation of the proposals for leasing out the area whichever may be shorter and that it will have to vacate the area when asked to do so. By a letter dated the 1st December, 1953, from the Secretary to the Government in the Commerce and Industries Department, Rajasthan to the Director of Mines and Geology, Rajasthan, Udaipur (Annexure F), it was intimated that the Government had adopted a new policy for leasing out lime-stone quarries in the Jodhpur Division according to which it was proposed inter alia to divide lime-stone quarries including those at Gotan into blocks of 5 sq. miles each and dead rent was to be charged at Rs. 10/- per acre for all blocks and royalty at Re.-/1/6 per maund lump lime and Re. 1/- per maund of lime-stone. It was further mentioned therein that the period of lease will be five years with an option of renewal for another five years and that the minimum area to be granted to a party will be 10 sq. miles and the maximum 30 sq. miles. It was, however, mentioned in this letter that before the above proposals could be given practical effect, it was necessary to give them a legal shape under the Indian Mines Act and that the Rules so framed would be called "rules for Extraction of Vindhyan Lime-stone in Jodhpur Division" and further action was ordered accordingly. Consequently the Jodhpur Division Vindhyan Lime-stone Mining Leases Rules, 1954 (Annexure G) were framed. These rules as stated in their preamble seek to regulate the grant of mining leases of Vindhyan lime-stone deposits in Jodhpur Division only. They clearly contemplate the invitation of applications in respect of a particular lime-stone deposit and the grant of a lease for the same in accordance with the procedure laid down in the Rules. It may be noted at this place that such a lease was transferable under certain conditions. It may also be noted that rule 18 of these Rules lays down that the period for which a mining lease may be granted shall be five years and that the lease shall be renewable at the option of the lessee for a further period of five years. It has been further provided under this rule that when renewal is granted, the rate of dead rent and royalty may be revised by the Government provided that if the rate thereof is raised, it shall not exceed more than 50% of the original rate of the lease. Rule 19 inter alia lays down that the lessee shall not encroach upon a cultivable land or Bapi holdings within the leased area unless with the previous permission of the Director of Mines and Geology and on payment of necessary compensation to the holder of such land as determined by that officer, and, further, that on expiry or sooner determination of the lease, the lessee shall remove all stock of lime-stone or its products and movable property within six months from the date of expiry of the lease and must pay the royalty on the stock within such period, and, that if he fails to do so, the entire stock and movable property shall be forfeited to the Government. This rule also provides that all arrears of rent and royalties shall be recoverable under the Public Demands Recovery Act and that the Director of Mines and Geology may determine the lease if such dues remain in arrear for more than three months. R. 20 lays down that the lessee may determine the lease at any time by giving not less than 12 months' notice in writing to the Director of Mines and Geology. It may also be pointed out that these rules contemplated that a proper lease agreement shall be executed by the lessee in accordance with the agreement form appended to the Rules. It is admitted between the parties that no such agreement was executed between the assessee and the State. By Schedule I of these Rules, the royalty payable by the lessee was fixed at one anna per maund in the case of lime-stone and at -/1/6 in the case of lump lime, and by Schedule II it was provided that dead rent would be paid at Rs. 10/- per acre per year, but if the royalty annually paid should be higher, then the latter would be payable but not both. By a letter dated the October. 1954 (Annexure H) from the Secretary to the Government in Commerce and Industries Department Rajasthan, Jaipur, to the Director of Mines and Geology, Rajasthan, Udaipur, the former conveyed sanction of His Highness the Rajpramukh to lease out to the assessee an area of 15 sq. miles of lime deposits at Gotan in three blocks selected by the assessee on the terms and conditions mentioned in the Jodhpur Division Vindhyan Lime-stone Mining Leases Rules, 1954, a copy of which was enclosed, and it was further stated that the said rules had been approved by the Government. It was also stated in this letter that the assessee would have the option of relinquishing 5 sq. miles area if business competition necessitates the same. It was further pointed out and this is important to note, that the assessee would pay Rs. 96,000/- per year to the State as agreed to by it before the Chief Minister (Industries) for the period between the 30th July, 1952, upto the date "the new lease is given effect to. " and that the assessee had agreed to pay a similar sum for the future on the basis of dead rent under the new proposals for 15 sq. miles at ten rupees per acre. A further direction was given that the lease agreement be got executed by the lessee at an early date and a copy of this letter was forwarded to the assessee for early compliance. As already stated, this agreement was somehow never executed. Reference at this stage may also be made to a letter of the Mining Engineer, Jodhpur, dated the 30th November, 1959 (Annexure L) to the assessee in which it was stated that on checking the figures of export of lime-stone, lime-kali and lime Kachhra for the settlement of royalty, the amount of royalty payable in the following years was as under - From Year Export figres Amount paid* Rs. as. p. 1st April 1953-54 13011 tons 30553 10 6 to 31st 1954-55 13308 " 27965 11 6 March 1955-56 18033 " 37332 9 0 *the word 'paid' seems to be a mistake for the word 'payable'. We are not concerned with the figures for the years 1956-57, 1957-58 and 1958-59 which were also mentioned in this letter. This Officer further stated in his letter that at the end of each financial year it was found that the accrued royalty amount worked out to a far lesser sum ; and, as such, as per agreement royalty payable is Rs. 96,000/- in all the years above written". It was further stated in this letter that the "royalty" for each of these years was settled after the end of each year, i. e. , in the subsequent year. Thus for the assessment years under consideration, the assessee paid a sum of Rs. 96,000/- to the State Government and seeks to claim it as a deduction against its profits for these years under sec. 10 (2) (xv) of the Income-tax Act. As already stated, both the Income-tax Officer and the Appellate Assistant Commissioner disallowed this, holding that the expenditure was of a capital nature. The Appellate Tribunal on further appeal disagreed with this view, as, in its opinion, the expenditure in question was of a revenue nature, and it is this question which arises before us for decision in this reference. Now, the question whether a particular expenditure which has been incurred by an assessee in connection with his business is of a revenue nature or of a capital nature is many a time one of no small difficulty or complexity. The Income-tax Act itself has not defined the phrase "capital expenditure" and the reason for this omission is perhaps not difficult to visualise because that task of evolving a precise yet comprehensive definition of this phrase is attended with tremendous difficulties. Again, it is true that a volume of case law has grown around this subject both in England and in our own country; but if we may say so, with all respect, it seems to us to have been unhesitatingly accepted by various eminent Judges that it is not possible to evolve any satisfactory or conclusive test or tests which should admit of universal application in all situations. Indeed the question is not un often one of such perplexity that the one conclusion on which the cases taking diverse views seem to agree is that it is not possible to lay down any hard and fast formulas or to enunciate any rigid or scientific principle which could be applied as a sure criterion to all the cases, and, therefore, the practical rule that is laid down is that each case must be decided having regard to its own peculiar facts and circumstances. This question has come up before our Supreme Court in three cases in recent years namely Assam Bengal Cement Go. Ltd. Vs. Commissioner of Income tax (1 ). Pingle Industries Ltd. Vs. Commissioner of Income-tax (2) and Abdul Kayoom Vs. Commissioner of Income-tax (3), and it will be our obvious duty to refer to the various tests which, though not conclusive, have been discussed and applied in these cases as of obvious as instances in determining the difficult question which has been raised before us in the present case. But before we do so, we may briefly state the respective cases of the rival parties before us. It has been strenuously contended before us by learned counsel for the Department that this was a case where the assessee did not merely carry on a manufacturing business of preparing lime from lime-stone but it also carried on mining operations For the purpose of finding out lime-stone, and therefore, in having obtained a lease from the State Government of the land under reference in connection with its business, he was not purchasing the raw material thereby, but the correct position was that it had acquired a source from which to obtain the necessary raw material, the quantity of lime produced being not limited by contract and depending upon its own financial and other resources. It was further contended in this connection that the lease in this case was for a period of five years certain extensible by renewal for another period of five years at the option of the lessee and that this was sufficiently long to enable it to acquire a benefit of euduring benefit to its business. Furthermore, it was submitted that the payment of Rs. 96000/- annually made by the assessee to the State was a fixed payment which was in the nature of compensation for the asset acquired by it and that the mere periodical nature of this payment should not be sufficient to take it out of the ambit of capital expenditure. It was also stressed in this connection that this amount was payable by the assessee entirely irrespective of the consideration as to the quantity of the lime-stone quarried by it or of its manufacture into lime as a marketable commodity. A further point that was sought to be made in this behalf was that the assessee had been given a monopoly right to quarry lime-stone and convert it into lime and to sell it in its own area or outside that and there* was no restriction as to the depth to which it may go in its quarrying operations and, therefore, as to the quantity of lime that it might manufacture. And on these grounds the submission of learned counsel for the department was that this was a capital asset acquired by the assessee and the expenditure incurred in connection therewith must be held to be a capital expenditure and not revenue, and, therefore, the opinion entertained by the Appellate Tribunal should be held to be wrong and untenable. In support of his submission, learned counsel placed strong reliance on the decision of the Supreme Court in Pingle Industries Ltd, V. Commissioner of Income-tax (Supra ). On the other hand,it was equally strenuously contended by learned counsel for the assessee that no lease-deed having been executed between the parties as contemplated by the Rules of 1954, and having regard to the short-extensions granted to it from time to time as already pointed out the position of the assessee was a most precarious one and it could not therefore be said that there was any lease in favour of his client of which it could take advantage, according to law, and that it would be more correct to say that its position was that of a mere licensee who had been granted the liberty or privilege to excavate lime-stone and to prepare lime in a certain area. Learned counsel further contended that the real nature of the payment in controversy was that it was not "a once and for all" payment but a "recurring"or a "periodical" one and that this payment was not of fixed amount but was in fact the minimum royalty payable by the assessee liable to enhancement if the royalty amounted to more than what is called the dead-rent in the Schedule to the Rules of 1954, depending upon the lime produced and, therefore, it was obvious that such payment was made to obtain raw material for the carrying on of the business of the manufacture of lime from lime-stone. Furthermore, learned counsel submitted that the main business of the assessee was to manufacture lime and not of a miner and that it was in connection with its manufacturing business that it had agreed to pay the amount of Rs. 96,000/- annually to the State so as to be able to get raw material for that business and as this payment was in the nature of annual royalty on the goods produced in the quarries, there was and would be no justification for holding that this amount was spent for the acquisition of any capital asset to the assessee's business, and, therefore, there could be no question of this expenditure having been incurred for the acquisition of an asset of enduring benefit to the assessee's business. In support of his submission, learned counsel placed strong reliance on the decision of the Privy Council in Mohanlal Hargovind vs. Commissioner of Income-tax (4 ).
(3.) AT the very outset we think it proper by way of clearing the ground to determine the precise position of the assessee vis-a-vis the so-called lease of lime deposits with which we are concerned and to examine whether the lease was for a long or considerable period as claimed by the counsel for the department or the tenure thereof was a precarious one as contended for by learned counsel for the assessee, and further ascertain whether the payment of Rs. 96,000/- was a fixed payment which had to be rendered by the assessee to the State as compensation in lieu of the rights acquired by it or it was in the nature of a royalty depending upon the quantity of goods produced by the assessee in the area allotted to it. Now, it is unquestionable that no lease deed was actually executed (for reasons which are not disclosed on this record) between the assessee and the State as it should have been done, both in accordance with the Rules of 1954 or in compliance with the direction contained in the letter dated the 4th October, 1954, from the Secretary to the Government, Commerce and Industries Department, Rajasthan, Jaipur, to the Director of Mines and Geology, Rajasthan, Udaipur, Annexure H referred to above. Even so, it is forcefully contended by learned counsel for the department that the sanction of His Highness the Rajpramukh bad been conveyed under the last-mentioned letter to lease out an area of 15 sq. miles of lime deposits at Gotan in three blocks to the assessee on the terms and conditions mentioned in the Rules of 1954, and that it clearly appears from this letter that the fixed sum of Rs. 96000/- per year had been agreed to be paid by the assessee to the State from the time of the expiry of the old lease granted by the then Jodhpur Government that is from 30th July, 1952, upto the date of the new lease which was to be given effect to and further that the assessees had also agreed to pay Rs. 96,000/- per year for the future "on the basis of dead rent under the new proposals" that is in accordance with the Rules of 1954. It was further contended that these Rules were statutory, inasmuch as they are stated in the preamble thereof to have been made under R. 4 of the Mineral Concessions Rules, 1949, and cl. 18 thereof clearly provides, inter alia, that the period for which a mining lease may be granted shall be 5 years and that the lease shall be renewable at the option of the lessee for a further period of 5 years. The contention of learned counsel for the department, therefore, was that in spite of the fact that no lease-deed had been executed between the parties, the statutory condition prescribed under cl. 18 would still be attracted and, therefore, the period of the lease in this case must be taken to be five years at the minimum and the lessee was further entitled to have it renewed at his option for another term of five years subject to certain conditions mentioned in the rule itself. In support of his contention, learned counsel invited our attention to a Bench decision of this Court in Hari Shanker vs. State of Rajasthan (5 ). The question which arose in that case was whether R. 30 of the Mineral Concession Rules, 1955 which, broadly speaking lays down that a mining lease may be granted for a period of five years unless the applicant himself desires a shorter period was mandatory in the sense that a lease less than five years could not have been granted and that the lease deed irrespective of its having been granted for a shorter term should be held to be good for a period of five years with option of renewal as mentioned therein. It was held that these rules were statutory and must be obeyed by the authorities in charge of the settlement of the mines and minerals, and that although the grant of the lease may be discretionary, yet when the lease had been granted, it must be for a period of five years unless the applicant himself wants it for a shorter period. In other words, the choice for a shorter period lies with the applicant ; but so far as the authority responsible for the granting of the lease is concerned, it is obligatory for him to grant it for a minimum period of five years and not less. The rules of 1954 contain an analogous provision and the principle of the above case, in our opinion, is fully attracted in the present and is indeed binding on us. We are fully alive to the fact that from the middle of July, 1952, to the grant of the new lease in the beginning of October, 1954, the Government granted a few small-term extensions to the assessee but these appear to us to have been regularised with mutual consent by subsequent happenings and do not substantially affect the essential nature of the position involved. Apart from that, we do not think that when the Rajpramukh had, according to the letter dated the 4th October, 1954 (Annexure H) referred to above, regularised the whole case and sanctioned the lease in favour of the assessee on the terms and conditions mentioned in the Rules of 1954, then R. 18 of these rules was at once attracted, and that being so, it must reasonably follow from the provisions contained in that rule that the term of the lease was for a period of five years certain, and that it was further capable of being renewed for a term of another five years at the option of the lessee subject to revision in the amount of the dead rent or royalty payable on the contract. We further think that this position could not be adversely affected simply because, for some reason or another, which has not been explained on this record, the parties did not fulfil the formality of executing a lease deed as such. It is also important to bear in mind that a copy of the letter Annexure H was also communicated to the assessee. We, therefore, find it not a little difficult to accept that the State Government could have lawfully gone back upon what it had expressly committed itself to, in the letter Annexure H, or that it can be lawfully and reasonably maintained that the assessee was merely at the mercy of the State and could be turned out at its sweet will and pleasure or by a simple notice to quit. On a careful and anxious consideration of this aspect of the case, we feel persuaded to think that the position of the assessee was not as precarious or nebulous as its learned counsel would have us accept, and that the correct position in law is and must be that whatever right, advantage or privilege was granted to it under this arrangement was available to it for a period of five years certain apart altogether from its renew ability at the option of the assessee for another period of five years. We hold accordingly. As to the next point about the nature of the payment of Rs. 96,000/-, that is, whether it was a fixed annual payment or it was liable to variation depending upon the quantity of lime produced by the assessee in the area granted to it, it seems to us, having regard to the terms of Annexure H dated the 4. 10. 1954, to be a fixed payment per year from the expiry of the old lease that is 30. 7. 1952, upto the commencement of the new lease. As for the period of the new lease, however, we must refer to Schd. Nos. I and II to be found in the Rules of 1954. Schd. I prescribes royalty at one anna per maund for lime-stone, and one anna and six pies per maund for lump lime; and Schd. II prescribes the rate of dead-rent at Rs. 10/- per acre per year, or, royalty annually paid whichever is higher but not both. The correct position in this case, therefore, undoubtedly is that while the assessee was required to pay to the State a minimum amount of Rs. 96,000/- per year irrespective of the quantity of lime manufactured by it in the area granted for this purpose (this having been fixed on the basis of dead-rent at the rate of Rs. 10/- per acre for 15 sq, miles leased out to it) this sum was certainly liable to be enhanced if the amount of the royalty payable on the quantity of lime produced by the assessee worked out to a higher figure at the rates of royalty specified in the schedule, and, therefore, if in a particular year such a situation arose, then the royalty would have to be paid at such higher figure and not at the minimum figure of Rs. 96000/ -. From this two consequences seem to us to follow. The first is that it is not correct to say that the assessee was to make a fixed annual payment under all circumstances. The second is that this payment was in truth and substance in the nature of royalty. If the royalty amounted to something less than the dead-rent fixed at the scheduled rate thereof, then the amount of dead-rent which was fixed at Rs. 96,000/- per year would have to be paid. But if the amount of royalty should work out at a higher figure at the rates given in Schedule I, then the royalty at the higher figure would have to be paid. In this particular context we are inclined to think that there is no difference of substance between "dead rent" and ''royalty" as used in these rules and that dead-rent really means the minimum royalty payable. In fact, this meaning is put beyond all doubt in the light of a notification of the State Government No. F3 (4) (viii) (Ind)/8/61, dated the 19th May, 1961, published in the Rajasthan Rajpatra dated. . . . . . . . . which reads as follows - "dead rent means the minium guaranteed amount of royalty payable as per rules or agreement under a mining lease. " That being so, we are unhesitatingly of the opinion that the amount of Rs. 96,000/- was minimum royalty payable every year subject after Commencement of the new lease to increase depending upon the measure of production of lime in the lime deposits leased out to the assessee. We hold accordingly. Having cleared the aforementioned preliminary facts, we now straightway turn to the case of the Pingle Industries (Supra) which, according to learned counsel for the department almost directly governs the instant case. If that should turn out to be so, then our task is greatly simplified and we cannot but hold that the payment of Rs. 96,000/- is capital expenditure and not revenue. The facts of that case were these. The assessee company there carried on the business, inter alia, of selling Shahabad stone which had to be extracted from quarries dressed and then sold. For the purpose of its business, the assessee 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 an annual payment of Rs. 28,000/- each and to safeguard this payment a sum of Rs. 96,000/- was paid in advance as security out of which Rs. 8,000/- was to be adjusted annually against Rs. 28,000/- and the balance of Rs. 20,000/- was payable in twelve equal monthly instalments. The assessee had the right to excavate stone only and had bound himself not to manufacture cement, while the Jagirdar undertook not to allow any other person to excavate stone in those areas. There was also a similar lease taken from the Government for a period of five years under which the assessee had to pay Rs. 9,000/- annually in monthly instalments of Rs. 750/- each. The question in these circumstances arose whether the amounts paid by the assessee to the Jagirdar and the Government each year were revenue expenditure allowable under sec. 10 (2) (xv) of the Hyderabad Income-tax Act which exactly corresponds to sec. 10 (2) (xv) of the Indian Income-tax Act. It was held by the majority of their Lordships (Kapoor and Hidayatullah, JJ. ; S. K. Das, J. dissenting) that the assessee acquired by his long term lease the right to win stone and that the leases conveyed to him a part of the land, and that 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. It was also held that the payments though periodic in fact were neither rent nor royalty but a lump payment in instalments for acquiring a capital asset of enduring benefit to his trade. In this view of the matter, the conclusion was reached that the amounts were outgoings on capital account and were not revenue. ;