1965 Supreme(SC) 301

SUPREME COURT OF INDIA
K. SUBBA RAO, J.C. SHAH AND S.M. SIKRI. JJ.
Gotan Lime Syndicate, Appellant
Versus
Commissioner of Income-tax, Rajasthan and Delhi, Respondent.
1. Dalmia Cement (Bharat) Ltd., (2) Cement Manufacturing Association, (3) Moolchand Sharma, Interveners.
Civil Appeals Nos. 692 to 694 of 1964.
Advocates appeared
Mr. N. A. Palkhivala, Senior Advocate, (Mr. T. A. Ramachandran, Advocate, and Mr. J. B. Dadachanji, Advocate of M/s. J. B. Dadchanji and Co., with him), for Appellant; Mr. C. K. Daphtary, Attorney General for India and Mr. S. T. Desai, Senior Advocate, (M/s. R. Ganapathy Iyer, R. N. Sachthey, and B. R. G. K. Achar, Advocates with them) for Respondent; Mr. A. V. Viswanatha Sastri, Senior Advocate, (Mr. J. B. Dadachanji, 1565 Advocate for M/s. J. B. Dadachanji and Co., with him), for Interveners Nos. 1 and 2; Mr. M. M. Tiwari, Senior Advocate, (M/s. S. S. Khanduja and Ganpat Rai, Advocates of M/s. Ganpat Rai and Co., with him), for Intervener No. 3.

Royalty payment under a mining lease is revenue expenditure and not capital expenditure.

Headnote:

INCOME TAX - Business expenditure - Revenue or capital - Payment of royalty and dead rent under mining lease - Whether revenue expenditure - Held, yes.

Fact of the Case:

The assessee, a registered firm carrying on the business of manufacturing lime from lime-stone, was granted the right to excavate lime-stone in certain area subject to certain conditions. The lease expired on July 14, 1952, but was extended from time to time by the Government for short periods. By letter dated December 17, 1952, the lease was extended up to March 31, 1953, or till the finalisation of the proposals for leasing out the area, whichever may be shorter, with the clear understanding that the assessee will have to vacate the area, when asked to do so, and will have no claim whatsoever over the area after it. The assessee never executed any lease but continued to work the lime deposits and the payments to be made were finalised by letter dated November 30, 1959 from the Mining Engineer, Jodhpur, to the assessee. The Mining Engineer stated in this letter that the royalty payable in each of the years was Rs. 96,000. The assessee claimed the payment of Rs. 96,000 for each of the assessment years 1954-55, 1955-56 and 1956-57 as a revenue deduction against its profits for those years. The Income-tax Officer disallowed this expenditure, as being of a capital nature. The Appellate Assistant Commissioner upheld his view, but on appeal, the Appellate Tribunal held that the payment should be treated as a revenue expenditure. The High Court held on a reference that the payment was capital expenditure and could not be allowed as a revenue deduction in computing the business profits of the assessee.

Finding of the Court:

The Court held that the royalty payment, including the dead rent, have relation only to the lime deposits to be got. If it has no direct relation to the acquisition of the asset, then the principle relied on by the learned Attorney-General does not afford him any assistance. Therefore, the yearly payment of Rs. 96,000 should be treated as revenue expenditure and the answer to the question referred to the High Court must be in favour of the assessee.

Issues: Whether the payment of Rs. 96,000 made 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.

Ratio Decidendi: The Court held that the test laid down by Viscount Cave in Atherton v. British Insulated and Helsby Cables Ltd., (1925) 10 Tax Cas 155 at p. 192, that "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 very 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." does not apply fully to this case because there is no payment once for all; it is a yearly payment of dead-rent and royalty. The Court further held that there is no necessity to decide whether the assessee got a licence or a lease or profit a prendre. Under the arrangement, read with the Rajasthan Minor Mineral Concession Rules, 1955, the assessee was certainly entitled to go upon the land, win the raw-material and had some rights to build premises for the purpose of winning the lime. But it is also clear that the assessee could not carry away any other mineral which might be found in the mine, and further he was obliged to allow other lessees of other minerals to go on the land and win their minerals. Thus there is no doubt that the assessee did derive an advantage by having entered into this arrangement. The Court assumed for the sake of this case that this advantage was to last at least for a period of five years. The Court then held that the circumstances of this case fall within the test laid down by Viscount Cave and relied on strongly by the learned Attorney-General. The Court further held that the royalty payment is not a direct payment for securing an enduring advantage; it has relation to the raw material to be obtained. Ordinarily, a mining lease provides for a capital sum payment; but the fact that there is no lumpsum payment here cannot by itself lead to the conclusion that yearly payments to be made under the mining lease have relation to the acquisition of the advantage. No material has been placed on the record to show that any part of the royalty must, in view of the circumstances of the case, be treated as premium and be referable to the acquisition of the mining lease.

Final Decision: The appeals are accepted and the question referred to the High Court answered in the affirmative. The appellant will have his costs incurred in this Court, one set of hearing fee.