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PETITIONER: M. A. JABBAR

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH,HYDERABAD

DATE OF JUDGMENT: 23/11/1967

BENCH: BHARGAVA, VISHISHTHA BENCH: BHARGAVA, VISHISHTHA SHAH, J.C. RAMASWAMI, V.

CITATION:  1968 AIR  745            1968 SCR  (2) 413  CITATOR INFO :  F          1973 SC  15  (5)  D          1987 SC 564  (4)  RF         1991 SC 227  (11)

ACT: Income-tax-Lease  of  land for removing  sand-Provision  for payment of lease money-Tests for determining whether capital or revenue expenditure.

HEADNOTE: The assessee was carrying on the business of supplying  lime and sand, and for the purpose of procuring sand, obtained  a lease  of  a  river bed from the State  Government,  for  a. period  of 11 months.  The lease deed provided, (a) for  the payment  of  a  large amount of lease money,  (b)  that  the lessee  (assessee) was to have an exclusive right  to  enter upon  and occupy the land and to carry away sand  within  or under  or  upon the land, and (c) that if  any  mineral  was discovered and the assessee -intimated his intention not  to work or failed to give any intimation to work it,  would  be open  to the Government to sublet the working of such  newly discovered mineral. The  assessee  paid the lease money and in  proceedings  for assessment  of income tax claimed it as a deduction  on  the basis  that  it was a revenue expenditure.   The  Income-tax Officer  disallowed  the claim holding that it  was  capital expenditure.   On  appeal, the Appellate  Assistant  Commis- sioner,  after  a  personal investigation,  found  that  the contract  was for removal 1 of sand lying on the surface  of the  land and that no excavation or skillful extraction  was involved  in the process, and held, that no interest in  the land  was  conveyed to, the lessee and  that  therefore  the amount was deductible as revenue expenditure.  The Appellate Tribunal  confirmed the order observing that the finding  of fact  given by the Appellate Assistant Commissioner was  not challenged  before  the Tribunal.  On  reference,  the  High Court,  relying  on  the terms of the  lease,  reversed  the finding  of fact that the contract was for removal  of  sand lying on the surface of the land- and that no excavation  or skillful extraction was involved, and held that,the assessee bad acquired a right in the land and that the amount was not

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deductible. In appeal to this Court, HELD.  :(I)  The  clauses  in  the  lease  deed,  giving  an exclusive right to the assessee to enter upon and occupy the land, and referring to the right of the Government to sublet the  working of any newly discovered mineral, indicate  that the assessee was the lessee and that an interest in land was conveyed  to him by the lease.  But that is.not decisive  of the  question whether the money paid under the lease  was  a capital  or a revenue expenditure.  That question has to  be decided  on the facts of each case and the decisive  factors are the object with which the lease was take and the  nature of  the payment which was made when obtaining  the  leas-.-. [416 C-E; 418 A] (2)  In spite of the right given to the assessee to dig  and excavate,  the Appellate Assistant Commissioner found  as  a fact  that the sand was lying loose on the surface and  that the contract was only for removal of Sup.Cf/68 -1 2 414 that  sand.   The  finding was  affirmed  by  the  Appellate Tribunal  and is no question was referred to the High  Court that  it was a finding based on no evidence, the High  Court was  in  error in not accepting it.  Therefore, (a)  as  the lease  was  for a short period, and  consequently,  the  ex- penditure  incurred by the assessee was not related  to  the acquisition of an asset or of a right of an enduring  nature or  permanent character but merely to obtain  his  stock-in- trade  in the form of sand; and (b) as the  expenditure  was incurred not for the reservation of a source which had to be excavated  or skillfully worked but for the specific  object of  enabling the assessee to remove sand lying loose on  the surface  of  the  land, the expenditure  was  deductible  as revenue expenditure. [417 D-E, G-H, 419 A-B] Gotan   Lime  Syndicate  v.  Commissioner   of   Income-tax, Rajasthan  and  Delhi,  59  I.T.R.  718  and  Bombay   Steam Navigation Co. (1953) (P.) Ltd. v.   Commissioner of Income-tax, 56 I.T.R. 52, 59 followed. K.T.M.T.M. Abul Kayoom & Anr. v. Commissioner of Income-tax, 44 I.T.R. 689, distinguished.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 2514 and 2515 of 1966. Appeals  from the judgment and order dated March 4, 1965  of the Andhra Pradesh High Court in R. C. No. 15 of 1963. Y.   V. Anjanevulu and Anwaru llah Pasha, J. B. Dadachanii and O.    C.   Mathur,  for  the  appellant  (in  both   the appeals). S.   T.  Desai,  R.  N. Sachthey and S. P.  Nayar,  for  the respondent (in both the appeals). The Judgment of the Court was delivered by Bhargava,  J. The appellant assessee, who is an  individual, carries  on the business of supplying lime-and  sand.   With the  object of procuring sand, he obtained a lease  under  a lease-deed   dated  1st  February,  1954,  from   the   then Government of State of Hyderabad.  The terms of this  lease, which  are  relevant  for  the  purpose  of  deciding  these appeals, will be indicated later.  At this stage, it may  be mentioned that, under this lease, the assessce was  required to  pay  a  sum  of  Rs. 82,500/-  as  lease  money  to  the Government.  The period of lease was from 1st February, 1954 to  31st December, 1954.  The assessee’s account  year  ends

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with the last day of September each year.  The assessee paid a  sum of Rs. 56,1001- in respect of the account year  ended 30th  September, 1954 for the assessment year  1955-56,  and another sum of Rs. 26,400/- for the account year ended  30th September,  1955  relevant to the assessment  year  1956-57. Both  these  payments were claimed by the assessee,  in  the proceedings   for  assessment  to  income-tax,  as   revenue expenditure.   The Income-tax Officer held that,  under  the lease-deed, the assessee had secured a right to quarry  sand from  the  river-bed, which was a right in the nature  of  a capital  asset,  so that these payments made to  secure  the right   were  capital  expenditure,  and  disallowed   their deduction as reve- 415 nue  expenditure.   The assessee appealed to  the  Appellate Assistant    Commissioner.     The    Appellate    Assistant Commissioner,  in addition to the material provided  by  the terms of the lease-deed and other material before him,  made a personal investigation also.  Thereafter, in his appellate order, he recorded findings that the lease was a  short-term contract for one year, that the contract was for removal  of sand  lying  on  the surface of  the  river-beds.  within  a specified  period, and no excavation or skillful  extraction was  involved  in the process, and that no interest  in  the land  was  conveyed  to  the  lessee,  and  if  the   lessee discovered  any minerals not specified in the deed,  he  was required  to report that fact to the Director of  Mines  and obtain a prospecting licence separately.  On these facts, he held that what the assessee had secured under the lease-deed was  only stock-in-trade of his business and not  a  capital asset,  so  that  his claim that the payments  made  by  him Linder  the lease-deed to the Government were deductible  as revenue  expenditure was allowed.  Thereupon an  appeal  was brought  before  the Income-tax Appellate  Tribunal  by  the Department.  ’Re Tribunal upheld the order of the  Appellate Assistant Commissioner.  At the instance of the  Department, the  Tribunal  then  referred  the  following  question  for opinion to the High Court                "Whether,   on   the   facts   and   in   the               circumstances of the case, the payments of Rs.               56,100 for the assessment year 1955-56 and Rs.               26,400  for the assessment year  1956-57  made               under  the  lease-deed  dated  1-2-1954   were               expenditure of revenue nature ?" The  High  Court  answered the  question  in  the  negative, accepting the case of the Department, and thus upsetting the decision  given by the Appellate Assistant Commissioner  and the Tribunal.  The assessee has now come up to this Court in appeal by certificate granted by the High Court. Learned  counsel appearing for the assessee first  contended before us that an examination of the terms of the lease-deed would show that no right at all in land was acquired by  the assessee Linder the lease and that the only right which  had been acquired was the right to remove sand lying on-the land constituting the beds of the river and the nallahs specified in  the deed and the ancillary right to enter the  land  for that  purpose.  It appears to, us that, on the  language  of the  lease-deed,  this submission cannot be  accepted.   The lease  specifically mentions in para. 3 that, under it,  the Government  do  hereby  demise and  grant  unto  the  Lessee exclusive  lease and liberty to enter, occupy, and  use  for quarrying  purpose  and to raise, render  marketable,  carry away,  sell and dispose of sand within or under or upon  the lands  specified  in  this lease and for  the  period  named therein.   Thus,  there was a specific  provision  that  the

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lessee  was to have an exclusive right to enter  and  occupy the land.  Further, there was a provision 416 that,  in. case any mineral not specified in the  lease  was discovered  in  this  land, the lessee was  to  report  such discovery  to  the Director of Mines and Geology  and  could obtain  either  a prospecting licence or a mining  lease  in respect  of  it, but, if he intimated his intention  of  not working the newly discovered mineral, or failed to give  any intimation to work it within the period of three months,  it would  be  open to the Government to sublet the  working  of such  newly  discovered  mineral.   This  use  of  the  word "sublet"  in the deed indicates that, though the  Government reserved to it the right to allow some other person to  work the  newly  discovered mineral, that person  could  only  be admitted  as  a sub-lessee and, obviously, he would  be  the sub-lessee  under  -the assessee.  These terms  do  indicate that an interest it). land ,was also conveyed by the  lease; but  that is, in our opinion, not decisive of  the  question whether  the  money payable under the lease  was  a  capital expenditure or a revenue expenditure.  As -an example, if  a shop is taken on rent by a person to run his business and he pays  monthly  or  annual rent,  he  certainly  acquires  an interest in the building and the land on which it stands  as a  lessee, but no one will contend that the payment of  rent would be an expenditure of a capital nature and not  revenue expenditure.  The decisive. factor is. the object with which the  lease is taken and the nature of the payment  which  is being made when obtaining the lease. In  the present case, there are, a number of  factors  which lead to the conclusion that the expenditure incurred by  the asscssee in obtaining the lease *as revenue expenditure  for the  purpose  of obtaining stock-in-trade  and  not  capital expenditure.   The first point is that the lease was  for  a very  short period of 11 months only.  Consequently,  it  is clear that the assessee did not obtain any capital asset  of an enduring nature by obtaining this lease.  Then the second circumstance  is that the sole right which was  acquired  by him under the lease-deed was to take away the sand lying  on the  leased land.  No doubt, the document mentioned that  he was  entitled to raise, render marketable, carry away,  sell and  dispose  of the sand within or under or upon  the  land specified  in this lease; but there was a clear  finding  of fact  recorded by the Appellate Assistant  Commissioner  and affirmed  by  the Tribunal that all the sand that  could  be removed was lying on the surface and there was, no  question of  raising,  digging  or excavating  for  the  sand  before obtaining   it.   No  operations  were,  therefore,  to   be performed  on  the land itself.  It appears  that  the  High ,Court,  in giving its decision against the  assessee,  fell into an error in not accepting the finding of fact that  the sand  was lying‘ loose on -the surface and the contract  was only  for removal Of that sand and, instead,  recording  for itself  a different -finding.  In its  appellate  order, the Tribunal mentioned the findings of fact recorded 417 by  the Appellate Assistant Commissioner and added : "It  is to be noted that the findings of fact given by the Appellate Assistant Commissioner as quoted from this order above  have not at all been challenged before us in these appeals."  The findings of fact. to which this sentence referred,  included the finding recorded.by the Appellate Assistant Commissioner that  it  was a contract for removal of sand  lying  on  the surface  of the river-beds within a specified period and  no excavation  or skillful extraction was involved.  No  doubt,

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this  finding  of fact was partially based on  the  personal investigation  made by the Appellate Assistant  Commissioner and this investigation was made, as held by the High  Court, about  six years after the lease contract had  been  entered into.  The High Court was of the view that it was  difficult to  see  how, after a lapse of six years, the terms  of  the lease  deed could be varied, altered or clarified so  as  to confer  any benefit on the lessee, and that  the  lease-deed contained  absolutely no references to the  accumulation  of sand as the result of floods. its lying loose on the surface and the lessee being allowed to remove the sand merely  from the  surface without digging underneath.  In examining  this question  of fact, it is clear that the High Court  exceeded its  jurisdiction.   The  finding of fact  recorded  by  the Appellate  Assistant Commissioner had been affirmed  by  the Tribunal and no question was referred to the High Court that it  was a finding which was based on no  evidence.   Whether the  evidence  on  which the finding  was  accepted  by  the Tribunal was good or bad did, not fall for consideration  by the  -High  Court.- The finding being binding  on  the  High Court,  that Court should have proceeded on the  basis  that these  facts  did exist and should have examined  the  legal position  on that premise.  This circumstance that the  sand was  lying  loose and merely required  removal  without  any excavation or digging makes it clear that what the  assessee was  taking under the lease for the purpose of his  business was  the  right  to remove that sand  and  that,he  was  not acquiring  the land or any other rights in the land for  any other purpose.  Then, there is the additional fact that  the lease  was for a very short period of 11 months.   On  these facts, the conclusion was irresistible that, in agreeing  to pay this large sum of Rs. 82,500/the assessee was bargaining for  the  right to remove the sand lying loose on  the  land within that short period of II months to the extent to which he  could  do so.  He did not acquire any fixed  or  capital asset of an enduring nature by obtaining this lease and  all he had in view was to have the right to obtain his stock-in- trade in the form of sand. During the course of arguments before us, a number of  cases were brought to our notice which related to quarrying leases of  various  types  in  India and in  England.   We  do  not consider  it necessary to refer to those cases, because  the question whether a 418 particular  expenditure,  is  of a capital nature  or  is  a revenue expenditure has always to be decided on the  special facts  of each case.  We may, however, make a  reference  to the  decision  of  this Court in  Gotan  Lime  Syndicate  v. Commissioner of Income-tax, Rajasthan and Delhi(1).  In that case also, Rule 13 of the Rajasthan Minor Mineral Concession Rules,  1955, which was applicable, provided that the  lease shall  be in respect of plots comprising of 5  square  miles each.  The lessee was even entitled to transfer his lease or any  right, title or interest therein to a person holding  a certificate of approval on payment of a fee, subject to  the previous sanction of the Director of Mines and Geology.  and subject  to  some other conditions.  Rule  18  prescribed  a period  of  5 years for a lease and the lease was  renewable at the ,option of the assessee for a further period of  five years.   Even  ,on  these facts, this Court  held  that  the lessee  in  that case, in obtaining- the  lease  and  paying lease  money, had not incurred an expenditure of  a  capital nature, and was entitled to claim that the lease money  paid by him was a revenue expenditure.  In that case also,  thus, the lease was in respect of plots, so that interest in  land

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was  conveyed, but the Court, on considering the  object  of the  lease and the manner in which the rights under it  were to  be  exercised,  came  to the  finding  that  no  capital expenditure  was involved and that the only  right  acquired was  the right to obtain raw material from the leased  land. The payment was not for securing an enduring advantage.   In the case before us, the facts are much stronger in favour of the  assessee.  The period of lease is shorter and the  only object  of  the lease is to remove sand lying loose  on  the surface,  without  exercising any other right  on  the  land included in the lease. In  Bombav  Steam  Navigation Co.  (1953)  Private  Ltd.  v. Commissioner  of Income-tax, Bombay(1), this Court explained the  principle of determining the nature of an  expenditure. The -Court held :-                "Whether a particular expenditure is  revenue               expenditure   incurred  for  the  purpose   of               business must be determined on a consideration               of  ail  facts and circumstances, and  by  the               application   of  principles   of   commercial               trading.   The question must be viewed in  the               larger   context  of  business  necessity   or               expediency.  If the outgoing or expenditure is               so  related to the carrying on or  conduct  of               the  business, that it may be regarded  as  an               integral  part of the  profit-earning  process               and not for acquisition of an asset or a right               of  a permanent character, the  possession  of               which is a condition of the               (1) 59 I.T.R. 718.                (2) 56 I.T.R. 52, 59.                419                carrying on of the business, the  expenditure               may be regarded as revenue expenditure,". Clearly,  in the present case, the expenditure  incurred  by the assessee was not related to the acquisition of an  asset or  a  right  of  a permanent character.   It  was  for  the specific object of enable the assessee to remove sand  lying loose  on  the surface which was the stock-in-trade  of  the business of the assessee, so that the expenditure has to  be regarded as revenue expenditure. Counsel appearing for the Department relied on a decision of this  Court  in K. T. M. T. M. Abdul Kayoom and  Another  v. Commissioner  of Income-tax(1).  The majority judgment in that  case  shows that 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 wag  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 saltpeter 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

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             the  respondent  hoped to find  shells  which,               when  found,  became  its  stock-in-trade  but               which, in situ, were no more the firm’s 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." It  is  clear that, in the present case, there  is  no  such reservation  of an exclusive right in respect of  any  land. In  fact,  the  first sentence in  the  quotation  above  is clearly  applicable  to the present case if, for  ’the  word clay", the word "sand" is substituted. (1) 44 I.T.R. 689, 707. 420 The present is a case where sand lying loose on the  surface of  the  land is to be removed and the whole object  of  the lease  was to obtain the right to the sand which was  to  be the  stock-in-trade  of  the  assessee.   The  appeals  are, consequently,  allowed  with costs, the order  of  the  High court is set aside and the question referred is answered  in the affirmative. V.P.S.                                 Appeals allowed. 421