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PETITIONER: MEWAR SUGAR MILLS LTD., BHOPAL SAGAR

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, RAJASTHAN, JAIPUR

DATE OF JUDGMENT26/09/1972

BENCH: REDDY, P. JAGANMOHAN BENCH: REDDY, P. JAGANMOHAN HEGDE, K.S. DUA, I.D. KHANNA, HANS RAJ

CITATION:  1973 AIR 2326            1973 SCR  (2) 429  1973 SCC  (3) 143

ACT: Income  Tax  Act  (11 of 1922),  s.  10(2)  (xv)-Payment  in respect  of  monopoly rights and licence and in  respect  of royalty-Whether capital or revenue expenditure.

HEADNOTE: The grantee of a monopoly from the Government to manufacture sugar,  transferred his rights, with the permission  of  the Government,  to the appellant-company (assessee),  under  an agreement., Under the terms of the grant and the  agreement, the assessee was liable to pay royalty at Z% on the price of sugar  manufactured  by  the  assessee  and  this  rate  was revisable,  if  after  five  years,  it  was  found  to   be excessive;  but no other tax was to be charged on the  sugar manufactured.  The assessee had to pay to the transferor and to his nominee, every year 1 1/4% of the net profits of  its business, in lieu of the monopoly rights and licence. For the assessment years 1950-53, the assessee claimed that, (a)  The  ,amount paid to the transferor in respect  of  the monopoly  and  licence,  and (b) the  royalty  paid  to  the Government  in  respect  of  the  sugar  manufactured   were deductible  expenses  but the Department, Tribunal  and  the High Court, on reference, held against the assessee. Partly allowing the appeal to this Court, HELD : The payments in respect of the monopoly rights are of a  capital nature, but the royalties paid are of  a  revenue nature  deductible  under s., 10(2) (xv) of  the  Income-tax Act, 1922. [436B-C] None  of  the tests laid down in the various  decisions  for determining whether an expenditure incurred in bringing into existence  an  asset is of a capital or revenue  nature’  is either  exhaustive or universal, because, it is  not  always easy to determine whether a particular asset belongs to  one :category  or  the other; nor does it depend in any  way  on what may be the ,nature of the asset in fact or in law.  The determining  factor  depends largely on the  nature  of  the trade in which the asset is employed and the quality of  the payment therefore. [434C-D, F] In  the  present  case,  (1)  no  arguments  were  addressed regarding  payments  in  respect  of  monopoly  rights   and

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licence. [433 B] (2) As regards the royalty on the sugar manufactured (a) the words   no other tax will be charged’ suggest that what  was being charged, was intended to be a tax in some form and (b) the payment of the royalty is directly related to the  sugar manufactured  by  the appellant and is not for  securing  an enduring advantage.  Therefore, the expenditure is a revenue expenditure. [433E; 434F-G; 435E] Gotan  Lime Syndicate Y. Commissioner of I.T. 59 I.T.R.  718 and  Associated Stone Industries (Kotah) Ltd. v. C.I.T.,  82 I.T.R. 896. followed. 430 R.  B. seth moolchand Suganchand v. C.I.T., Delhi, C.A.  No, 2020 of 1972 decided on 19.9.1972, and Singareni  Collieries Co.  Ltd. v. Commissioner of I.T., 66 I.T.R.  553,  referred to. Assam  Bengal  Cement Co. Ltd. v. C.I.T.,  West  Bengal,  27 I.T.R. 34, explained.

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos.  1596  to 1598 of 1969. Appeals  by  certificate from the judgment and  order  dated November 27, 1967 of the Rajasthan High Court in  Income-tax Reference No. 29 of 1962.- S.   T.  Desai, A. K. Verma, J. B. Dadachanji, O. C.  Mathur and Ravinder Narain, for the appellant. S.   C.  Manchanda,  J. Ramamurthy, B. D. Sharma and  R.  N. Sachthey, for the respondent. The Judgment of the Court was delivered by JAGANMOHAN  REDDY,  J.  These  appeals  are  by  certificate against  the judgment of the Rajasthan High Court  answering the  questions  referred to it by the  Income-tax  Appellate Tribunal  under  S.  66(1)  of  the  Income-tax  Act,   1922 (hereinafter  referred to as the ’Act’ partly in  favour  of the   revenue  and  against  the  assessee.   The   assessee appellant  is a public company on which the  assessments  in dispute were levied for the years 1950-51, 1951-52 and 1952- 53, the corresponding previous years being the years  ending 31st  March  1950,  31st  March 1951  and  31st  March  1952 respectively.   It  appears from the statement of  the  case that the appellant carries on the business of sale of  sugar and  oil, that the manufacture of sugar was started in  1940 while  that of oil in 1942.  On April’ 5, 1932 the  Maharana of the Udaipur State, in exercise of his sovereign power  as a Ruler granted through the intervention of Pandit  Ramakant Malaviya  granted a licence for the manufacture of sugar  to Sri  Banarsiprasad Jhunjhunwala which was to be  a  monopoly enduring to his benefit for 32 years.  Clauses (2), (3)  and (5) of the terms of licence which are relevant are as  under :- "(2)  No permission will be granted to any other person  for starting  a sugar factory for a period of 32 years from  the date of this order. (3)  If they require land for sugarcane for this factory, it will  be  allotted out of the Khalsa uncultivated  land  not less  than 5000 and subject to a maximum of 30,000 acres  as may be available in the vicinity of Jaisamand.  Mr.  Banarsi Prasad  Jhunjhunwala will have to acquire 5000 acres  within two years of this order and the remaining should be acquired within 10  431 years  from the date of order if land near Jaisamund is  not

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found suitable for cultivation of sugarcane, some other land if available in some other Pargana of Mawar may be allotted. This land will be given without Nazrana with full  ownership right (Bapi) on the condition that it will not be  alienated without sanction of Durbar.  No land revenue will be charged for  first  five years from the date of  acquisition.  After that  full  land revenue will be charged the  rate  of  land revenue  will be refixed according to settlement  rules  and likewise  will  be done in future  according  to  settlement rules......  (5) Royalty will be charged on price of goods  manufactured in  the  factory.  If after five years the  rate  be,  found excessive  for  the  running  of  the  factory,  it  can  be considered  then.  On sugar manufactured in the  factory  on other tax will be charged." After the grant of this monopoly, Malaviya and  Jhunjhunwala floated a limited company called the "Mewar Industries Ltd." This  company  then took steps to set up a  factory,  obtain requisite machinery and install it.  After completion of the factory  production  could  not be  started  on  account  of financial  difficulties.   Thereafter, the  Government  gave notice  to the company on March 19, 1936 that if it did  not start  the business, the permission granted to it  would  be granted  to other parties for the manufacture of sugar.   In view  of  this notice, the, said Malaviya  and  Jhunjhunwala arranged   for  Bansidhar  Dhandania  and  Lokenath   Prasad Dhandania  (hereinafter  referred  to  for  convenience   as ’Dhandanias’) to acquire from the company all the rights and assets  held by it for the unexpired period of 28 years  and to run the business in consideration of the payment of 10 %/ of the net profits of the business.  On November 15, 1936 an agreement was entered into between the said Dhandhanias  and Jhunjhunwala  whereby  the rights of monopoly  available  to Jhunjhunwala  and  Malaviya were transferred  to  Dhandania. The  inter se arrangement under the agreement which  is  set out in the statement of the case is not really material  for the  purpose of this case and is therefore not  referred  to here.   It  may  however be mentioned  that  the  Government permitted  this  arrangement  after  which  the   Dhandanias floated  a  new  company known as  Mewar  Sugar  Mills  Ltd. (hereinafter  called  the appellant) and on March  11,  1940 Jhunjhunwala  transferred  to the sugar company  his  rights under  an agreement.  It is not relevant to set out all  the clauses of the agreement except to notice that under one  of the clauses it was provided that the transferee shall               "until  the expiry of the period mentioned  in               the said licence and monopoly or in the  event               of  the period thereof being extended  whether               in  the name, of the company or otherwise,  so               long as the monopoly               432               rights  and licence, continue to be in  force,               under such extension, pay and continue to  pay               to  each of the transferor and to his  nominee               the  said Pandit Ramakant Malaviya yearly  and               every  year 1 1/4 per centum  respectively  of               the net profits of the business of the company               to be ascertained from the audited accounts of               the  company,  provided  however  the   profit               payable to the. transferor and the said Pandit               Ramakant Malaviya shall be in respect of  such               business  only  as are provided  in  the  said               monopoly and licences." By and under the said arrangement the appellant was carrying on  the business of sugar manufacture and during  the  years

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1950-51, 1951-52 and 1952-53 it paid to the State Government in  respect of sugar Rs. 72,394, Rs. 15,724 and  Rs.  50,455 and in respect of oil Rs. 24,729, Rs. 18,168 and Rs.  13,909 respectively.  It also paid to Jhunjhunwala and Malaviya for the  year  1950-51 Rs. 3,072 and for the  year  1952-53  Rs. 2,613  in  lieu of the monopoly rights and licences  at  the stipulated  amount of 4 per cent. The assessee claimed  that the  amounts paid in respect of the monopoly and licence  as also  those paid to the Government inrespect of the  royalty for  sugar and oil were deductible expenses but the  Income- tax Officer disallowed them holding that the expenditure  in respect  of the said amounts were of a capital  nature.   In appeal  the Appellate Assistant Commissioner  confirmed  the order  of  the  Income-tax Officer.  Against  this  order  a further appeal was filed to the Tribunal which was rejected. On an application by the assessee under S. 66(1) of the Act, the following question was referred to the High Court "Whether  on  a  proper construction  of  Annexure  ’A’  and Annexure  ’E’  the sums paid to the respective  parties  are allowable as expenditure under the provisions of S. 10 ( 1 ) or 10 (2) (xv) ?" It  may here be mentioned that Annexure ’A’ referred  to  in the  question  is  the  grant  while  Annexure  ’E’  is  the agreement between Jhunjhunwala and the appellant.  The  High Court,  as  already  stated, answered  the  question  partly against the assessee holding that "on a proper  construction of the Annexures ’A’ and ’E’ the sum paid by the assessee to the  State Government as royalty on the sale of oil and  its products  is an allowable deduction under the provisions  of S.  10(1) or 10(2) (xv) of the Act but the payment  made  by the  assessee to the transferor and his nominee in terms  of the  agreement  or the royalty paid by the assessee  to  the State  Government  in respect of sugar is not  an  allowable deduct-ion" under the aforementioned provisions of the Act.  433 The  appeal raises two controversies the one relates to  the deduction  of  the  payments  made  by  the appellant  for monopoly  rights and the other concerns the payment  to  the State, of the royalty on the price of sugar manufactured  by the company.  The learned advocate for the appellant  having regard  to the view of the law taken by the, High Court  has not  pressed  the question in so far as it  relates  to  the disallowance of payments made, by the assessee in respect of the monopoly rights.  The only other question which survives is,  the finding of the High Court that the payment of  2  % royalty on the price of sugar manufactured by the  appellant is  relatable to monopoly rights and is an expenditure of  a capital  nature.  Is the finding sustainable in law is  what has  to be determined.  According to clause (5) the rate  of 2%  could be revised if after five years it was found to  be excessive  for  the  running of the  factory.   This  clause certainly has no relationship with any payment referable, to the  monopoly  conferred under cl. (2) of  the  grant.   The advantages  which Jhunjhunwala obtained under cls.  (3)  and (4)  of  the grant which right has been transferred  to  the appellant are advantages and facilities which any Government with  progressive economic policy would grant  to  encourage the  setting  up of nascent industries in the State  in  any region of the State.  In our view the High Court has neither properly appreciated nor correctly interpreted the grant and the  agreement  referred  to  in  the  question.   While  it recognised that the words "no other tax will be charged"  in cl. (5) suggest that what was being charged was intended to, be  a tax in some form it seems to have been influenced  by the grant conferring important benefits to the grantee  such

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as giving of agricultural land on favourable terms, charging water  rates at a concession, exemption of customs duty  for the period of the grant and the, benefit of monopoly  rights by undertaking not to grant permission for 32 years from the date  of the grant to any persons to start a sugar  factory. Referring  to the several advantages set out above the  High Court observed               ,"Thus  on  consideration of the  grant  as  a               whole,  we are unable to hold that 2 per  cent               royalty on the production of sugar was only by               way of tax.  It was an overall payment for the               enjoyment  of the monopoly rights as  well  as               for  immunities from taxation.  The nature  of               payment was hybrid in character.  A royalty of               this  kind therefore could, taken as a  whole,               be  regarded as a consideration for the  grant               of  benefits  to  the  grantee  by  the  State               Government.............. In the present  case,               it cannot be gainsaid that the acquisition  of               monopoly rights in the trade was an  advantage               of enduring benefit and, therefore, taken as a               whole,  the  payment of two per  cent  royalty               could be regarded               434               as  capital expenditure and  was  consequently               not an allowable deduction under S. 10 of  the               Act."               The passage extracted above shows a  confusion               of  the principles applicable for  determining               what is an expenditure of a capital nature and               that  which  is a revenue  expenditure.   This               Court  in  a  recent decision in  R.  B.  Seth               Moolchand  Suganchand v. C.I.T.,  Delhi(1)  to               which two of us were a party (Jaganmohan Reddy               and  Khanna, JJ.)- pointed out the  difficulty               which  the Judges are confronted with  in  the               application of the principles and criteria for               determining  the  nature  of  the  expenditure               incurred  in bringing into existence an  asset               or  advantage for the enduring benefit of  the               trade, in which context several cases of  this               Court  and the English Courts  were  examined.               It is unnecessary to traverse the same  ground               again,  except to say that none of  the  tests               laid  down  in  any of  the  cases  is  either               exhaustive  or  universal because  it  is  not               always easy to determine whether a  particular               asset belongs to one category or the other nor               does  it depend in any way on what may be  the               nature  of the asset in fact or in law.   None               of  the  tests  suggested  in  decided   cases               affords  a strict rule of guidance.   In  that               case it was observed :               "The principles enunciated for determining the               nature of the expenditure have been sought  to               be applied to different situations arising  on               the facts of each case, but the difficulty  in               matching     them     with     the     seeming               irreconcilability are perhaps explicable  only               on  the ground that the determination  in  any               particular case is dependent on the  character               of  the lease or agreement, the nature of  the               asset,  the purpose for which the  expenditure               was  incurred and such other factors  as-,  in               the facts and circumstances of that case would

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             indicate." The  determining factor, therefore, will depend  largely  on the  nature of the trade in which the asset is employed  and the quality of the payment therefrom.  It appears to us that on  the  facts of each case it will have  to  be  determined whether a particular expenditure is a capital expenditure or a  revenue  expenditure.  In this case the payment  made  is directly related to the sugar manufactured by the appellant. The decision in Assam Bengal,, Cement Co.  Ltd., v.  C.I.T., West  Bengal  (2 ) which has been relied upon  by  the  High Court and the Tribunal has in our view been misapplied.   In that case the question was, whether in computing the profits of the appellant the sum of Rs. 5,000 and Rs. 35,000 paid to the  lessor by the appellant could be deducted under  S.  10 (2)  (xv) of the Act.  This payment was in addition  to  the rents  and  royalties, which were agreed to be paid  by  the lessee and was (1)  Civil  Appeal No. 2020/1972 decided on 19th  September. 1972. (2)  27 I.T.R. 34.  435 payable  for  obtaining a right to acquire an  asset  of  an enduring  nature  which had necessarily to be  incurred  for initiation  of the business or trading activity.   Bhagwati, J. speaking for this Court observed at page 45               " If the expenditure is made for acquiring  or               bringing into existence an asset or  advantage               for the enduring benefit of the business it is               properly attributable to capital and is of the               nature  of  capital expenditure.   If  on  the other  hand it is made not for the purpose  of               bringing  into existence any such  asset  (or)               advantage  but  for running  the  business  or               working it with a view to produce the  profits               it is a revenue expenditure." In  Gotan  Lime Syndicate v. Commr. of I.T.(1) which  was  a case  dealing with the amount of dead rent payable per  acre and  the amount of royalty payable for a maund of lump  lime and per maund of limestone, it was held that in the  absence of  material to show that any part of the royalty had to  be treated  as premium and referable to the acquisition of  the mining lease, the royalty payment, including the dead  rent, had  relation only to the, lime deposits to be got, and  had therefore  to  be  treated as  a  revenue  expenditure;  and although the appellant did derive an advantage-assuming that advantage  was to last at least for a period of five  years- there  was  only an annual payment of royalty or  dead  rent which  was  not a direct payment for  securing  an  enduring advantage  but  was  relatable to the  raw  material  to  be obtained.   It  was further emphasised that the  reason  why royalty  has  to be allowed as revenue  expenditure  is  the relation  which it has to the raw materials to be  excavated or  extracted; that the more you take the more  royalty  you pay  and that the minimum payment or the dead rent also  has the  same characteristic i.e., it is an advance  payment  in respect of a certain amount of raw material to be excavated. In  a  similar case dealt with by the  Andhra  Pradesh  High Court in Singareni Collieries C. Ltd. v. Commr. of I. T. (2) to  which one of :us (Jaganmohan Reddy, C. J.) was  a  party dead  rent  payable  under the lease  was  characterised  as having a direct relation to the working of the coal from the mine  and so it was a revenue expenditure.  In another  case Associated  Stone  Industries (Kotah) Ltd. v.  C.I.T.(3)  to which  one  of us (Hegde, J.) was a party, the  royalty  was payable  at a certain rate or rates on the  stone  excavated

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and an additional royalty was leviable at a certain rate  on polished stone.  On these facts it was held that the  nature of  the  payment was no different from that of  the  minimum royalty paid and the excess royalty was not paid for getting some additional capital asset or (1) 59 I.T.R. 718.         (2) 66 I.T.R. 553. (3)  82 I.T..R. 896. 436 even  an  enduring  benefit but was paid  on  the  basis  of commercial expediency not of a capital expenditure. A  consideration  of all these cases certainly  support  the contention   of  the  appellant  that  on  the   facts   and circumstances  of  this, the expenditure incurred  i.e.,  2% royalty on the sugar manufactured, is a revenue expenditure. Our  answer  to  the  question therefore  is  that  the  two payments  in  respect of the monopoly rights for  the  years 1950-51  and 1952-53 are of capital nature while those  paid for   royalty   for  the  three   assessment   years   under consideration  are of a revenue nature deductible  under  s. 10(2) (xv) of the Act.  With these answers in favour of  the assesses, the appeal is partly allowed with costs. V.P.S. Appeal partly allowed. 437