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PETITIONER: M/S.  GOTAN LIME SYNDICATE

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, DELHI AND  RAJASTHAN

DATE OF JUDGMENT: 15/11/1965

BENCH: SIKRI, S.M. BENCH: SIKRI, S.M. SUBBARAO, K. SHAH, J.C.

CITATION:  1966 AIR 1564            1966 SCR  (2) 596  CITATOR INFO :  R          1968 SC 745  (4)  E          1973 SC2326  (9)  E          1991 SC 227  (11)

ACT: Income-tax--Royalty paid for mining lease-Capital or Revenue expenditure--Tests.

HEADNOTE: The appellant was a registered firm carrying on the business of  manufacturing  lime from lime-stone.   By  an  indenture dated  March  4, 1949, it was granted by the  Government  of Rajasthan the right to excavate limestone in a certain area, subject  to certain conditions.  The lease expired  on  July 14,  1952.  The lease was extended from time to time by  the Government  for  short  periods.  While working  out  a  new scheme  for leasing out lime-stone quarries  the  Government sanctioned the leasing out of 15 sq. miles of lime  deposits to  the appellant.  Till the new lease was given  effect  to the  appellant  agreed  to pay Rs. 96,000 per  year  to  the Government  as  royalty.  For each of the  assessment  years 1954-55, 1955-56 and 1956-57 the assessee paid a sum of  Rs. 96,000  to  the  Government and claimed it  as  a  deduction against its profits for those years.  The Income-tax Officer disallowed  this expenditure as being of a  capital  nature. On reference the High Court also upheld that view. In appeal to the Supreme Court it was contended on behalf of the  appellant that under the Rajasthan  Mineral  Concession Rules and the arrangement with the Government the  appellant did not get exclusive possession of the mines as such;  what he  got  was a right to get lime for manufacturing  and  the payment had direct relation to the amount of lime removed by the appellant. HELD  :  Under  the, arrangement read  with,  the  Rajasthan Mineral  Concession Rules, 1955. the assessee was  certainly entitled  to    upon the land and had some rights  to  build premises  for the purpose of mining, the lime.  But  it  was also clear that the assessee could not carry away any  other mineral which might be found on the mine and further he  was obliged  to allow other lessees of other minerals to  go  on the land and win their minerals. [603 B-D]

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The, royalty payment by the assessee in the present case was not a direct payment for securing an enduring advantage;  it had  relation  to  the  raw material  to  be  obtained.   No material had 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 permium and be referable to the acquisition of the mining lease. [605 E-G] The  yearly payment of Rs. 96,000 must therefore be  treated as revenue expenditure. [605 H] H.   R.  Rorke  Ltd. v. Commissioner of Inland  Revenue,  39 T.C.  194,  Ogden v. Medway Cinemas Ltd., 18  T.C.  691  and Allenza Company v.  Bell, [1904] L.R. 2 K.B. 666, relied on. Abdul  Kayoom v. Commissioner of Income-tax, 44  I.T.R.  689 and Pingle Industries Ltd. v. Commissioner of Income-tax, 40 I.T.R. 67, distinguished. 597 Assam Bengal Cement Co. Ltd. v. Commissioner of  Income-tax, 27 I.T.R. 34 and British Insulated and Helsby Cables Ltd. v. Atherton, 10 T.C. 155, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 692 to 694 of 1964. Appeal from the judgment and order dated October 9, 1963  of the Rajasthan High Court in D. B. Civil Income-tax Reference No. 73 of 1961. N.   A. Palkhivala, T. A. Ramachandran and J. B.  Dadachanji for  the appellant. C.   K.   Daphtary,  Attorney-General,  S.  T.   Desai,   R. Ganapathy  Iyer, R. N. Sachthey and B. R. G. K. A char,  for the respondent. A.   V. Viswanatha Sastri, J. B. Dadachanji, for interveners Nos. 1    and 2. M.   M.  Tiwari,  .S.  S.  Khanduja  and  Ganpat  Rai,   for Intervener No. 3. The Judgment of the Court was delivered by Sikri, J. These three appeals are directed against the judg- ment of the Rajasthan High Court in a consolidated reference made  to  it by the Income Tax  Appellate  Tribunal,  Bombay Branch,  under S. 66(1) of the Indian Income Tax  Act,  1922 (hereinafter referred to as the Act).  The question referred to by the Appellate Tribunal 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." The reference arose out of the following facts : The  appel- lant,  M/s Gotan Lime Syndicate, hereinafter referred to  as the  assessee,  is  a registered firm  and  carries  on  the business  of  manufacturing  lime from  lime-stone.   By  an indenture dated March 4, 1949, the assessee was granted  the right  to excavate lime-stone in certain area at  Gotan  and Tunkaliyan,  subject  to  certain  conditions.   It  is  not necessary  to  detail  the  conditions  contained  in   this indenture  except that the lease expired on July  14,  1952. The lease was extended from time to time by the Government Sup.  CI/66-8 598 for short periods.  The last letter dated December 17, 1952, extending the lease was in the following terms :               "In  continuation to this office letter  cited

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             above, Government have been-pleased to  convey               extension up to the 31st March, 1953, or  till               the finalisation of the proposals for  leasing               out  the area whichever may be  shorter,  with               the clear understanding that you will have  to               vacate  the area, when you may be asked to  do               so, and will have no claim whatsoever over the               area after it" By  letter dated December 1, 1953, the Government  intimated to.  the Director of Mines and Geology, Rajasthan,  Udaipur, that the Government had adopted a new policy for leasing out lime-stone  quarries.  The proposal Was to divide the  lime- stone quarries in Jodhpur Division in blocks of 5 sq.  miles each  and  the dead rent was to be charged at Rs.  10/-  per acre while royalty was to be charged at Re. -/1/- per md. of lime-stone.  It was further contemplated that the period  of lease  will  be for five years with option  to  renewal  for another  five years, and the minimum area to be  granted  to each  party would be 10 sq. miles and maximum 30  sq.  miles and  the other terms and conditions would be  generally  the same  as  were  in practice in such cases.  But  as  it  was necessary  to  give  legal  form  to  these  proposals,  the Director of Mines and Geology was directed to frame rules on the lines of the Mineral Concession Rules.  It appears  that on  October 4, 1954, the Government sanctioned  the  leasing out  of 15 sq. miles of lime deposits to the assessee.   The Government in this letter further stated as follows :               "2.  As regards the payment of arrears by  M/s               Gotan  Lime Syndicate for the  period  between               30-7-52,  and the date the new lease is  given               effect  to, it has been decided that they  may               pay @ Rs. 96,000/(Rupees Ninety six  thousand)               per year which has also been agreed to by them               before the Chief Minister (Industries) on  the               basis of dead rent under the new proposals for               15 sq. miles at Rs. 10/- per acre.               3.    Lease  agreement may be got executed  by               them   at  an  early  date  and  the   arrears               recovered.               4.    The new rules may be incorporated in the               Mines Mineral Concession Rules for Rajasthan." It  further  appears that the assessee  never  executed  any lease  but  continued,to  work the  lime  deposits  and  the payments to be 599 made  were finalised by letter dated November 30, 1959  from the  Mining Engineer, Jodhpur, to the assesee.   The  Mining Engineer stated in this letter as follows :               "On  checking  the figures of export  of  lime               stone,  limekali  and  lime  kachra  for   the               settlement of royalty, the figures of  royalty               amount  payable in the following years  is  as               under : - From 1st  April   Year       Export figures        Amount, to 31st March                           Rs.     as. p.                   1953-54    13511  tons30,553  10  6                   1954-55    13308  tons27,965  11  6                   1955-56    18033  tons37,3321  9  0                   1956-57    18382  tons     37,740   0  6                   1957-58   614946  mds      49,162  14  6                   1958-59   604498  mds      43,673  15  0 At the end of each financial year the accrued royalty amount is  far less actually and as such as per  agreement  royalty payable is Rs. 96,000/- in all the years above written. The  royalty for each of these years was settled -after  the

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end of each year i.e. in the subsequent year." At this stage it would be convenient to mention the terms on which  the  assessee remained in possession.  It  is  common ground  that  these  terms  are  contained  in  the  Jodhpur Division Vindhyan Lime-stone Mining Leases Rules, 1954,  and the  Rajasthan Minor Mineral Concession Rules, 1955.   These rules were made in exercise of the powers conferred by r.  4 of  the  Central  Mineral Concession Rules,  1949.   In  the Jodhpur  Division Vindhyan Lime-stone Mining  Leases  Rules, 1954, "Mining’ lease" was defined to mean "a lease to  mine, quarry,  bore,  dig, search for, win, work  and  carry  away lime-stone".  Under these rules the assessee had to make  an application for a mining lease in response to a Notification issued by Director of Mines and Geology, Rajasthan, inviting applications in respect of a lime-stone- deposit.  Rules  13 provided  that the lease shall be in respect of  plots  com- prising  of 5 sq. miles each.  The applicant had to  deposit security equal to one-fourth of the annual dead rent of  the lease in cash or Government bonds, for due observance of the terms and conditions of the lease.  The lessee was  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 6 00 five-  years for a lease and the lease was renewable at  the option -of the assessee- for a further period of five years. Rule  19 prescribed the conditions which had to be  inserted in the lease.  The following conditions are relevant (1)the  lessee  shall not encroach upon cultivable  land  or Bapi  holdings,  within, the leased area,  unless  otherwise after  ,obtaining  permission  of  Director  of  Mines   and Geology; (2)the  lessee shall perform a minimum development  work  as instructed  from time to time by the Director of  Mines  and Geology,   whose  instructions  in  this  respect   and   in maintaining  standards  of lime products, and  arranging  an adequate  supply  of the same in the  market  at  reasonable price shall be binding upon the.’ lessee;. (3)On  expiry  or sooner determination of lease  the  lessee -shall  remove  all stock of limestone or its  products  and movable  property within six months from the date of  expiry of the, lease and shall pay the royalty on the stock  within this  period.  There was a proviso to this condition to  the effect that the Rajasthan Government would be free to  lease out  the  deposits  afresh to any person on  expiry  of  the tenure  of  the lease, and the lessee shall  hand  over  the quarry to the new lessee in a workable condition. Rule  31  of the Rajasthan Minor Mineral  Concession  Rules, 1955, prescribed inter alia the following conditions  (i)  -  The  lessee  shall  pay  the  royalty  on  minerals despatched  from, the leased area at the rate  specified  in the First Schedule to these rules. (ii)The  lessee shall pay for  the surface area used by  him for  the purpose of mining, surface rent at such  rate  ’not exceeding  the  land  -revenue as may be  specified  by  the Government in such case. (iii) The  lessee  shall  also  pay,  for  every   year, such,yearly  dead-rent within the -limits specified  in  the Second  Schedule  to these rules as may be.  fixed,  by  the Director in each case, and if the lease permits. the working of  more than one mineral in the same area;- the  Government may charge separate deed-rent in respect of each,mineral. (iv)The  lessee  shall keep correct  accounts  showing  the,

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quantity  and particulars of all minerals obtained from  the mines, etc. (v)The  lessee shall allow existing and future licensees  or lease-holders of any land’-which is comprised in or  adjoins or 601 is  reached  by  the land held  by  the  lessee,  reasonable facilities for access thereto.    (vi)   The  lessee may erect on the area granted  to  him any  building  required  for bona  fide  purposes  and  such buildings  shall  be the property of  the  Government  after expiry of the lease.     (Vii) The  lessee  if he discovers any new  mineral  was entitled to apply for a mining lease in respect of the newly discovered mineral.     (viii) The Government shall the have right of preemption at  current  market rates over all minerals demised  by  the lease and shall be indemnified by the lessee against  claims of any third party in    respect of such minerals.      (ix) In  case of any breach on the part of the  lessee, of any covenant     or  condition  contained  in  the  lease other  than  a  condition regarding  rent  or  royalty,  the Government  may determine the lease and take  possession  of the said premises, or in the alternative, may impose payment of  a penalty not exceeding twice the amount of  the  annual dead-rent from the lessee.       (x) At  the end or sooner determination of  the  lease the lessee shall deliver up the said premises and all mines, if any, dug therein in a proper and workable state, save  in respect of any working as to which the Government might have sanctioned abandonment.      For  each of the assessment years 1954-55, 1955-56  and 1956-57,  the  assessee  paid  a  sum  of  Rs.  96,000/-  to Government and claimed it 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 profit of the assessee.      These   appeals   raise  the  difficult   question   of distinguishing  between  revenue  expenditure  and   capital expenditure.   The learned counsel for the assessee, Mr.  N. A.  Palkhiwala, and the leaned counsel for the Revenue,  the Attorney General both cited a number of cases before us  but we agree with Hidayatullah J.’s observations in Abdul Kayoom v.  Commissioner  of Income Tax(1) that "none of  the  tests (laid down in various Authorities) (1) 44 I.T.R. 689. 602 is  exhaustive or universal.  Each case must depend  on  its own  facts,  and  a close similarity between  one  case  and another  is not enough , because even a  single  significant detail may alter 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."  Therefore,  we do not propose to review  all  the cases  cited before us, especially as this Court has,  after reviewing  the relevant cases, formulated certain  tests  in Assam  Bengal  Cement  Co. Ltd. v.  Commissioner  of  Income Tax(1).  The cases were reviewed again in Pingle  Industries Ltd.  v.  Commissioner of Income-tax, Hyderabad  (2)  ,  and Abdul Kayoom v. Commissioner of Income Tax (3).

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    In   this  case,  in  view  of  the-arguments  of   the respondent  and the judgment of the High Court, we  have  to concentrate on the following test laid down by Viscount Cave in British Insulated and Helsby Cables Ltd. v. Atherton (4):                    "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." The  learned Attorney-General, relying on this  test,  urges that what the assesses got by entering into the mining lease was  an asset or advantage of an enduring nature; that  this asset or advantage was an interest in land for not only  has the assessee the right to go upon the land and excavate  but also has the right to use part of the area as premises,  and it  was by virtue of this that the assessee  eventually  got raw-material for his manufacturing business.       Mr. Palkhiwala, the learned counsel for the  assessee, on  the Other hand, contends that under the Rajasthan  Minor Mineral  Concession  Rules and the arrangement  between  the assessee  and  the  Government, the  assessee  did  not  get exclusive possession of the mines as such; what he got was a right  to  get lime for manufacturing and  the  payment  had direct  relation  to  the  amount of  lime  removed  by  the assessee.   He  says that the cases decided  in  this  Court (Pingle Industries Ltd. v. Commissioner of Income (1) 27 1. T. R. 34.      (2) 40 I. T. R. 67. (3) 44 I. T. R. 689.     (4) 10 T. C. 155 at p. 192. 603 Tax Hyderabad(1), and Abdul Kayoom v. Commissioner of Income  Tax  ( 2 ) were distinguishable.  He  further  urges that in no case has royalty payment been treated as  capital expenditure,  and as a matter of fact, in Pingle  Industries Ltd.  v.  Commissioner  of Income Tax(1) it  was  a  lumpsum payment  that was under dispute and not the royalty  payable under the lease.     We do not think there is any necessity to decide whether the assessee got a licence or a lease or profits 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.  We  will assume for the sake of this case that this advantage was  to last atleast for a period of five years.  The question  then arises  whether the circumstances of this case  fall  within the  test laid down by Viscount Cave and relied on  strongly by  the learned Attorney-General.  In our opinion, the  test does  not  apply  fully to this case  because  there  is  no payment once for all; it is a yearly payment of deadrent and royalty.  It is true that if a capital sum is arrived at and payment  is  made  every year by chalking  out  the  capital amount in various instalments, the payment does not lose its character  as  a capital payment if the sum  determined  was capital in nature.  But it is an important fact in this case that  it is a case of an annual payment of royalty or  dead-

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rent.  No lumpsum payment was ever settled or paid.  We have not  been referred to any case in which payments of  royalty under   a  mining  lease  have  been  treated   as   capital expenditure.  In H. R. Rorke Ltd. v. Commissioner of  Inland Revenue(3) Cross, J., while dealing with a similar  question observed as follows :                   "The  case  then proceeds to set  out  the               leases  in question, which were  substantially               in the same form.  The first was an  agreement               made  on  16th December, 1957, between  a  Mr.               Parker, the lessor, and the Company.  Clause 1               provided  that the lessor, being the owner  of               the land in question (four acres and five per-               ches of agricultural land in Yorkshire) should               let the (1) 40 I. T. R. 67 (3) 39 T. C. 194 at 202 (2) 44 I. T. R. 689. 604               land,to  the  lessee-that  is,  the  Appellant               Company from 5th November, 1957, for one year,               paying  therefor a royalty of Is. 3d. per  ton               for  all coal recovered from the demised  land               and  accepted by the coal sales department  of               the  National Coal Board or, the sum of  pound               312  10s.  whichever  was  the  greater,  such               payment   to  be  made  by  calendar   monthly               instalments.   There is, of course,  no  doubt               that those rents or royalty payments would  be               allowable as deductions on revenue account." He had no doubt in his mind that rent and royalty  payments, would  be  deductible  as revenue  expenditure.   In  Pingle Industries  Ltd.  v.  Commissioner  of  Income  Tax(1)   the assessee  had  already been allowed payments of  royalty  as revenue  expenditure  and  the only  dispute  was  regarding lumpsum  payment.  In; Ogden v. Medway Cinemas,  Ltd.(2)  an annual  payment in respect of the goodwill of  the  business was  held to be an admissible deduction on the  ground  that "this  is  a revenue payment for the use  during  a  certain period  of certain valuable things and rights."  The  reason why royalty has to be allowed as revenue expenditure must be the relation which the royalty has to the raw-material which is  going to be excavated or extracted.  The more  you  take the  more  royalty you pay, and the minimum payment  or  the deadrent  also has the same characteristic, i.e., it  is  an advance payment in respect of certain amount of raw-material to be excavated.  We find that it is on this ground that the case  strongly  relied on by  the  learned  Attorney-General Abdul   Kayoom   v.  Commissioner  of   Income   Tax(3)   is distinguishable  because  payments  there  had  no  relation whatsoever to the amount of conchshells taken.  As  observed by Hidayatullah, J., in obtaining the lease, the  respondent obtained  a  speculative right to fish for chanks  which  it hoped  to obtain and which might be in large  quantities  or small,  according  to its luck The  respondent  changed  the nature  of  its business to fishing for  chanks  instead  of buying  them."  Hidayatullah,  J., then put the  case  in  a nutshell as follows                   "That   amount  was  paid  to  obtain   an               enduring  asset in the shape of  an  exclusive               right to Ash, and the payment was not  related               to  the  chanks, which it might or  might  not               have   brought   to  the   surface   in   this               speculative business. (1) 40 I. T. R. 67.

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(3) 44 I. T. R. 689. (2) 18 T. C. 691 605     The  case of Pingle Industries Ltd. v.  Commissioner  of Income Tax(1) is distinguishable because on the facts it was a lumpsum payment in instalments for acquiring capital asset of enduring benefit to his trade.      It  is not the law that in every case, if  an  enduring advantage  is obtained the expenditure for securing it  must be  treated  as capital expenditure, for as pointed  out  by Channell, J., in Allanza Company v. Bell(2) "in the ordinary case, the cost of the material worked up in a manufactory is not a capital expenditure; it is a current expenditure,  and does  not  become a capital expenditure merely  because  the material  is provided by something like a forward  contract, under  which  a  person for the payment of  a  lumpsum  down secures a supply of the raw material for a period  extending over several years." This illustration shows that it is  not in every case that an expenditure in respect of an advantage of  an enduring nature is capital expenditure.   The  reason underlying  the  illustration is that the payments  made  to enter  into  a  forward contract have relation  to  the  raw material   eventually   to  be  obtained.    Viscount   Cave acknowledged  that  in  certain  cases  an  expenditure  for obtaining   an  enduring  advantage  need  not  be   capital expenditure  for  he inserted the words "in the  absence  of special  circumstances  leading to an  opposite  conclusion" within brackets.       We  are  of the opinion that in the present  case  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 how 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.       Therefore, on the facts of this case we must hold 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.  We, therefore, hold that  the  yearly payment of Rs. 96,000/- should (1) 40 I. T. R. 67. (2) (1904) L. R. 2 K. B. 666 at p. 673. 606 be  treated  as revenue expenditure and the  answer  to  the question referred to the High Court must be in favour of the assessee.      In the result 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.                                       Appeals allowed. 607