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PETITIONER: PINGLE INDUSTRIES LTD., SECUNDERABAD

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, HYDERABAD.

DATE OF JUDGMENT: 26/04/1960

BENCH: KAPUR, J.L. BENCH: KAPUR, J.L. DAS, S.K. HIDAYATULLAH, M.

CITATION:  1960 AIR  997            1960 SCR  (3) 669  CITATOR INFO :  R          1963 SC 683  (7,21,26,30)  R          1965 SC 360  (9)  D          1966 SC 798  (10,12)  RF         1968 SC 678  (2,4)  R          1969 SC 893  (9)  R          1971 SC1454  (9)  RF         1973 SC 637  (7)

ACT: Income   Tax-Business  Expenditure-Right to  extract  stones from quarries-Character of expenditure-Test, whether revenue or  capital  in nature-Hyderabad Income Tax  Act  (Hyderabad VIII Of 1357 F),S.  12(2)(xv)-Indian  Income  Tax  Act,   S. 10(2)(XV).

HEADNOTE: Under a quolnama the assessee company was granted  exclusive rights in the nature of a monopoly to extract Shahabad  Flag Stones  without  limit  to  quantity  or  measurement   from quarries  situated in six villages for a period of 12  years on  annual  payment  of Rs. 28,000 but  not  to  manufacture cement.   The  stones had to be extracted  methodically  and skilfully  before  they  could be  dressed  and  sold.   The assessee  company  paid  an initial sum  of  Rs.  96,000  as security and the balance of Rs. 20,000 was payable each year in monthly instalments of Rs. 1,666-10-8 each.  The payments were  to be made even if no stones were extracted  or  could not be extracted.  The question was whether the amounts paid were allowable as business expenditure under s. 12(2)(xv) of the Hyderabad Income Tax Act: Held  (Per  Kapur  and Hidayatullah, jj.   S.  K.  Das,  J., dissenting),  that under the quolnama the assessee  acquired by  his long term lease a right to win stones and the  lease conveyed to him a part of land.  The stones in situ were not his  stock-intrade in a business sense but a  capital  asset from which after extraction he converted the stones into his stock-in-trade.   The  payment though periodic in  fact  was neither  rent  nor  royalty  but  a  lump  sum  payment   in instalments  for  acquiring  a  capital  asset  of  enduring benefit  to  his trade.  The right acquired is to  a  source from  which  the  raw material was  to  be  extracted.   The

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expenditure  was  outgoings on capital account and  was  not allowable as deductions under S. 12(2)(XV) Of the  Hyderabad Income Tax Act. Per  S. K. Das, J.-That on its true construction the  trans- action was the sale of raw materials coupled with a  licence to the assessee to come on the land and remove the materials sold, the purchase price being paid partly in a lump sum and partly  in  monthly  instalments, that the  object  was  the procuring  of the stones for making flag stones and not  the acquisition  of  an enduring asset or  advantage,  that  the payments  made were the price of raw materials and that  the assessee  was therefore entitled to claim them  as  business expenditure  under s. 12(2)(xv) of the Hyderabad Income  Tax Act. Assam  Bengal  Cement Works Ltd. v. Commissioner  of  Income Tax, West Bengal, [1955] 1 S.C.R. 972, distinguished.

JUDGMENT: CIVIL APPELLATE, JURISDICTION: Civil Appeal No. 190 of 1955. 682 Appeal  from the judgment and order dated July 31, 1953,  of the  Hyderabad  High Court in Reference Case  No.  302/5  of 1951-52. N. A. Palkhivala and B. Ganapathy Iyer, for the appellants’ H.   N. Sanyal, Additional Solicitor-General of India, H.   J.  Umrigar  and D. Gupta, for  the  respondent. 1960.  April  26.  The Judgment of Kapur  and  Hidayatullah, JJ.,  was  delivered  by  Hidayatullah,  J.S.  K.  Das,  J., delivered a separate Judgment. S.K. DAS, J.-This is an appeal by the assessee with leave of the  High Court of Hyderabad granted under s. 66A(2) of  the Indian Income-tax Act, 1922. The  short  facts  are these.  The appellant  is  a  private limited  company  carrying on the business, inter  alia,  of sale  of  Shahabad  stones (flag stones)  which  had  to  be extracted  from  quarries, dressed and then sold.   For  the purpose of its business, the appellant took on contract  the right  to  excavate  stones from  certain  quarries  in  six villages in Tandur taluk for a period of twelve years  under a Quolnama dated 9th March, 1343F, from the then jagirdar of the  taluk,  named Nawab Mehdi Jung Bahadur.   The  contract provided that the jagirdar should be paid annually a sum  of Rs.  28,000 as consideration for extracting the stones  till the  end  of the contract period, as per  a  plan  prepared, within  the six villages specified therein.   The  appellant had  no right or interest in the land; nor did he  have  any other interest in the quarries apart from excavating  stones therefrom.   The  contract specifically  provided  that  the appellant,   called   the  contractor,  had  no   right   to manufacture cement from the stones; he had only the right to excavate  stones  from  the quarries till  the  end  of  the contract  period.   I may here quote some  of  the  relevant provisions   of   the  Quolnama  as  to   how   the   annual consideration of Rs. 28,000 was to be paid.  It said: "  1. The period of contract for excavating stones from  the quarries  of the villages noted above is for 12  years  from 1st Ardibehisht 1346 Fasli to the end of the Farwardi,  1358 Fasli  and the contractor will be given possession from  1st Ardibehisht 1346 Faisli. 683 2.   The annual contract amount would be Rs. 28,000. 3.   For the surety of the contract the sum of Rs. 96,000 0. S.  has been received and deposited in the treasury  of  the

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Jagir  towards  the  advance  and  earnest  money  and   the security, a receipt for the same has been issued separately. 4.The  remaining  annual balance sum of Rs.  20,000  may  be deposited in the Jagir Treasury by instalment every month of Rs.  1,667-10-8;  if  there be any  default  in  paying  the instalment regularly, interest at the rate of one rupee  per cent. per mensem will be charged to the contractor till  the full payment. There  was another lease or contract taken  from  Government for  a  period  of five years for which  the  appellant  was required to pay Rs. 9,000 per year in monthly instalments of Rs.  750.  That was also in respect of stone quarries.   The terms  of  the said contract with Government have  not  been printed  in  the paper book, presumably  because  they  were similar  in  nature  to those of the  Quolnama  referred  to above.  ,The Income-tax Appellate Tribunal found, and  there is  no  dispute  as to this, that under  the  aforesaid  two contracts  the  appellant had merely the  right  to  extract Shahabad stones.  The Tribunal said: "  Flag stones of required thickness are found in layers  in those mines or quarries.  Before one gets these flag  stones of  the  required thickness, one has also  to  extract  flag stones of greater thickness.  The assessee sells these  flag stones  both  of the usual thickness and  thickness  greater than usual one, after working on them, if necessary."  There was  no finding as to how deep the quarrying bad to be  done to extract the stones of required thickness. According to the appellant’s books of account, it paid  each year  of  account Rs. 37,000 as lease or contract  money  to extract the stones under the two contracts and it claimed an allowance  in  respect  thereof under s.  12(2)(xv)  of  the Hyderabad  Income-tax Act, corresponding to s. 10(2)(xv)  of the  Indian Income-tax Act, 1922.  The Tribunal stated  that the  Income-tax  Officer was under some  misapprehension  or error while examining the appellant’s books of account,  and held for the assessment year 1357F that the expenditure 684 of  Rs.  27,054  as  lease or  contract  money  was  capital expenditure,  in  respect  of which the  appellant  was  not entitled to claim any allowance under the relevant provision of  the Hyderabad Income-tax Act.  For the  assessment  year 1358F  he  similarly  held that the sum of  Rs.  28,158  was capital expenditure and not revenue expenditure.  There were two appeals to the Appellate Assistant Commissioner who also held  that the expenditure was capital  expenditure.   Then, there  was an appeal to the Income-tax  Appellate  Tribunal, Bombay.  The Accountant member of the Tribunal held that the payments in question stood on the same footing as  royalties and  dead  rent which are allowable as working  expenses  in cases of mines and quarries.  The President Of the  Tribunal expressed his finding thus: " In the present case, the assessee purchased his  stock-in- trade.  Instead of paying so much for so many cubit feet, he pays  a  lump sum every year.  Parties might as  well  agree that the so called lessee shall pay a sum of money bearing a proportion to the sales or quantum of material extracted  or a  lump sum for the purpose of convenience.   Because  these quarry  leases are called leases, the assessee does not  get an  asset of an enduring benefit.  In fact, I find that  the leases  are renewed from time to time.  The lease money  is, therefore,  in  my  opinion,  not  capital  expenditure  but revenue  expenditure and should be allowed in computing  the assessee’s income from the quarries." In  the  result,  the  Tribunal allowed  the  claim  of  the appellant that the payment of the two sums of Rs. 27,054 and

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Rs.  28,158  for  the  assessment  years  1357F  and   1358F respectively  was in its true nature a  revenue  expenditure rather than capital expenditure.  On being satisfied that  a question of law arose out of its order, the Tribunal  stated the following question for the decision of the High Court: "  Whether the lease money paid by the assessee  company  to Nawab  Mehdi  Jung  Bahadur and  to  Government  is  capital expenditure or revenue expenditure." The High Court answered the question against the  appellant. Hence the present appeal. 685 My  learned  brethren have come to the conclusion  that  the expenditure    in   question   was   capital    expenditure. Reluctantly and much to my regret I have come to a different conclusion,  and I proceed now to state the reasons  for  my conclusion as briefly as I can. It  is  not  disputed that if the  expenditure  was  capital expenditure,  then  the appellant was not  entitled  to  the benefit  of s. 12(2)(xv) of the Hyderabad Income-tax Act  in the  relevant years.  It is equally undisputed that  if  the expenditure  was  revenue expenditure,  then  the  appellant could claim an allowance in respect thereof.  Therefore,  it is unnecessary to read the provisions of s. 12(2)(xv) of the Hyderabad Income-tax Act or the corresponding provisions  of s. 10(2)(xv) of the Indian Income-tax Act, 1922. 1 plunge at once  in  medias  res  to a  consideration  of  the  crucial /question in this case: were the two payments in question of the nature of capital expenditure or revenue expenditure ? This distinction between capital and revenue, either on  the receipt  or expenditure side, is almost a perennial  problem in  Income-tax  law.  In general the  distinction  is  well- recognised and is based on certain principles which are easy of  application in some cases; but from time to  time  cases arise  which make the distinction difficult of  application. A  large  number of decisions were cited before us,  but  no infallible   criterion  of  universal  application   emerges therefrom  and each case must turn on its own facts,  though the  decisions are useful as illustrations and as  affording indication   of  the  kind  of  considerations   which   may relevantly  be borne in mind in approaching the problem.   I shall refer in this judgment to such decisions only as  have a bearing on the real controversy between the parties. In  view  of  the  submissions  made  before  us,  the  real controversy  in this case appears to me to be this : in  the context  of the terms of the contract between  the  parties, was  the  expenditure incurred intended to create  or  bring into  existence  an  asset  or  advantage  of  an   enduring character or was it intended to get only the  stock-in-trade or  the  raw  materials for the business ?  If  it  was  the former, then it was capital 89 686 expenditure; if latter, then revenue expenditure.  There  is no  doubt  that  receipts and  payments  in  connexion  with acquiring  or disposing of leaseholds of mines  or  minerals are  usually on capital account (Kamakshya Narain  Singh  v. Commissioner  of Income-tax (1)).  The reason why the  price paid  for  the  purchase  of  mining  rights  is  a  capital expenditure  as explained by Channel J., in Alianza  Co.  v. Bell (2) ,in the, following words: "In the ordinary case, the cost of the material worked up in a  manufactory is not a capital expendture; 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 lump sum

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down  secures  a  supply of the raw material  for  a  period extending over several years.............. If it is merely a manufacturing  business,  then  the  procuring  of  the  raw material  would not be a capital expenditure.  But if it  is like the working of a particular mine or bed of brick  earth and converting the stuff worked into a marketable commodity, then the money paid for the prime cost of the stuff so dealt with  is as much capital as the money sunk in the  machinery or buildings." Learned  counsel for the Department has strongly  relied  on these observations and has contended that the ,appellant had no manufacturing business in the present case and the  price he  paid  for  working  the quarries  was  as  much  capital expenditure  as money sunk in machinery or  buildings.   But this  contention ignores the absence of one  very  important circumstance  in this case.  The acquisition of a mine or  a mining right is an enduring asset, because it is not a  mere purchase of minerals but is ail acquisition of a source from which  flows the right to extract minerals; in other  words, the  acquisition  provides the means of  obtaining  the  raw material rather than the raw material itself ; therefore, it relates  to  fixed  capital, and in  a  business  sense  the acquiring  of a leasehold of a mine is not the  purchase  of raw materials only.  It is something more than that.  In the case before us except the stones, nothing else was acquired. Clauses 5 and 7 of the Quolnama said: (1) [1943] 11 I.T.R. 513. (2) [1904] 2 H. B. 666. 687 "  5. The contractor shall have no right to excavate  stones from  other  places of the Jagir Ilaqa except  the  villages specified  within  the prescribed period of  contract.   The Jagir  authorities  will  not  allow  any  other  person  to excavate  these stones within the jurisdiction  of  villages other than the villages specified above."     .....................................................     ...................................................... 7.The  contractor  shall have to excavate  stones  from  the quarries  as  per the plan.  In case he requires  a  further area  of land in the village for excavation of stones,  this will be done on his application four months in advance.  The contractor will have no right to manufacture cement from the stones in the villages noted above." In  view  of these clauses and the recital in  the  Quolnama that it was a quarry contract for excavating stones only, it is in my view not reasonable to hold that what the appellant acquired in the present case was the means of obtaining  raw material rather than the raw material itself. It is, I think, an accepted position now that the expression "  capital  expenditure " must normally be  construed  in  a business  sense  and  emphasis should  be  placed  upon  the business aspect of the transaction rather than on the purely legal and technical aspect.  It is not, therefore, necessary to determine whether the Quolnama in the present case was in law  a  lease,  or a license, or a license  coupled  with  a grant.   What  we  have to consider is  the  nature  of  the transaction from the business point of view, and it seems to me  that  having regard to the terms of  the  Quolnama,  the transaction in its true nature and quality was a sale of raw materials coupled with a license to the appellant to come on the  land and remove the materials sold; the purchase  price was  to be paid partly in a lump sum and partly  in  monthly instalments.  If that is the true nature of the transaction, there  is  no difficulty in answering the  question  raised. The  only answer then is that the payments in question  were

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revenue expenditure. 688 I  now  refer  to four decisions which in  my  opinion  come closest to the controversy before us. (1) In re: Benarsi Das Jagannath  (1);  (2)  Mohanlal Hargovind  of  Jubbulpore  v. Commissioner  of Income-tax, C. P. and Berar, Nagpur  (2)  ; (3) Abdul Kayoom v. Commissioner of Income-tax, Madras (3  ) and  (4) Stow Bardolph Gravel Co.  Ltd. v. Poole  (Inspector of Taxes) (4).  The first is a decision of the Full Bench of the  Lahore High Court, the second, a decision of the  Privy Council,  the  third, a decision of the Full  Bench  of  the Madras  High Court and the last a decision of the  Court  of Appeal  in England.  The facts in Benarsi Das Jagannath  (1) were these.  The assessee, who was a manufacturer of bricks, obtained certain lands on leases for the purpose of  digging out earth for the manufacture of bricks.  Under the deeds he had  the right to dig earth up to three to three and a  half feet.   He had no interest left in the lands as soon as  the earth  was dug out and removed.  The periods of  the  leases varied  from  six  months to three  years.   The  Income-tax authorities  and  the  Appellate  Tribunal  held  that   the consideration  paid  by the assessee to the  owners  of  the lands  was  a capital expenditure and was therefore  not  an allowable deduction under s. 10(2)(xv) of the Indian Income- tax Act.  It was held by the Full Bench that the main object of   the   agreement  was  the  procuring   of   earth   for manufacturing bricks and not the acquisition of an advantage of a permanent nature or of an enduring character, that  the payments  made were the price of raw material and  that  the assessee  was therefore entitled to claim them  as  business expenditure under s. 10(2)(xv).  It was worthy of note  that this  decision  was approved by this Court in  Assam  Bengal Cement  Co. Ltd. v. Commissioner of Income-tax, West  Bengal (5).   Bhagwati, J., delivering the judgment of  this  Court said: "  This synthesis attempted by the Full Bench of the  Lahore High Court truly enunciates the principles which emerge from the authorities.  In cases where the expenditure is made for the initial outlay or for (1)   [1946] I.L.R. 27 Lah. 307. (3)  I.L.R. [1953] Mad. 1133. (2)   [1949] L.R. 76 I.A. 235. (4)  [1955] 27 I.T.R. 146. (5)   [1955] 1 S.C.R. 972. 689 extension of a. business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A  capital  asset  of the business  is  either  acquired  or extended or substantially replaced and that outlay  whatever be  its source whether it is drawn from the capital  or  the income of the concern is certainly in the nature of  capital expenditure.     The   question,   however,    arises    for consideration  where  expenditure  is  incurred  while   the business  is  going  on  and  is  not  incurred  either  for extension of the business or for the substantial replacement of its equipment.  Such expenditure can be looked at  either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure  is incurred.   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 of any asset or advantage but for running the business or working it with a view to produce the profits it

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is  a revenue expenditure.  If any such asset  or  advantage for the enduring benefit of the business is thus acquired or brought  into existence it would be immaterial  whether  the source  of the payment was the capital or the income of  the concern or whether the payment was made once and for all  or was   made  periodically.   The  aim  and  object   of   the expenditure would determine the character of the expenditure whether   it   is  a  capital  expenditure  or   a   revenue expenditure.  The source or the manner of the payment  would then be of no consequence.  It is only in those cases  where this  test  is of no avail that one may go to  the  test  of fixed  or  circulating  capital  and  consider  whether  the expenditure  incurred was part of the fixed capital  of  the business or part of its circulating capital.  If it was part of  the  fixed capital of the business it would  be  of  the nature  of  capital expenditure and if it was  part  of  its circulating  capital  it would be of the nature  of  revenue expenditure.   These tests are thus mutually  exclusive  and have  to be applied to the facts of each particular case  in the manner above indicated.  It has been rightly 690 observed  that in the great diversity of human  affairs  and the   complicated  nature  of  business  operations  it   is difficult  to  lay  down a test which  would  apply  to  all situations.   One has therefore got to apply these  criteria one after the other from the business point of view and come to  the  conclusion whether on a fair  appreciation  of  the whole  situation  the expenditure incurred in  a  particular case  is  of the nature of capital  expenditure  or  revenue expenditure  in  which  latter  event only  it  would  be  a deductible allowance under section 10(2)(xv) of the  Income- tax Act.  The question has all along been considered to be a question  of  fact  to  be  determined  by  the   Income-tax authorities  on an application of the broad principles  laid down  above  and  the Courts of  law  would  not  ordinarily interfere  with  such  findings of fact if  they  have  been arrived at on a proper application of those principles.  " I  do  not read these observations as merely  indicating  an approval of certain general principles, but not  necessarily an  approval of the actual decision in Benarsidas  Jagannath (1).   In cases of this nature it is the application of  the principles   to   the  facts  of  a  case   which   presents difficulties, and I do not think that this Court would  have made  the observations it made, unless it was approving  the actual decision in Benarsidas Jagannath (1) in so far as  it applied the general principles to the facts of that case.  I see no significant distinction between that case and the one before  us.   In  both  cases, what  was  acquired  was  raw material-earth  in one case and stone in the  other-and  the payments made were the price of the raw material.  The  only distinction  pointed out is the difference in the period  of the   contracts;   that  is  a  relevant  factor   but   not determinative  of the problem before us.  Even in  our  case the  contract  in favour of Government was  for  five  years only.   Surely, it cannot be argued that three years in  one case  and  five  years  in  the  other  will  make  all  the difference.   I think that the real test is, in the  context of the controversy before us, what was acquired-au  enduring asset  or  advantage,  or  raw  materials  for  running  the business  ? Judged by that test the present case  stands  on the same footing as the case of Benarsidas Jagannath (1) (1)  (1946) I.L.R. 27 Lah. 307, 691 In  Mohanlal  Hargovind  (1)  the  facts  were  these.   The assessees  carried  on business at several places  as  manu-

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factures  and  vendors of country made cigarettes  known  as bidis.  These cigarettes were composed of tobacco rolled  in leaves of a tree known as tendu leaves, which were  obtained by  the  assessees by entering into a number of  short  term contracts  with the Government and other owners of  forests. Under the contracts, in consideration of certain sum payable by  instalments,  the assessees were granted  the  exclusive right  to  pick  and carry away the tendu  leaves  from  the forest  area  described.   The  assessees  were  allowed  to coppice small tendu plants a few months in advance to obtain good  leaves  and  to pollard tendu trees a  few  months  in advance to obtain better and bigger leaves.  The picking  of the  leaves however had to start at once or  practically  at once  and  to  proceed  continuously.   The  Privy   Council distinguished  Alianza  Co. v. Bell (2) and  overruling  the decision in Income-tax Appellate Tribunal v. Haji  Sabumiyan Haji Sirajuddin (3) held that the expenditure was to  secure raw material and was allowable as being on revenue  account. Lord Greene delivering the judgment of the Board said: "  It  appears to their Lordships that there has  been  some misapprehension  as to the true nature of  these  agreements and they wish to state at once what in their opinion is  and what is not the effect of them.  They are merely examples of many similar contracts entered into by the appellants wholly and  exclusively  for the purpose of  their  business,  that purpose  being  to supply themselves with one  of  the,  raw materials of that business.  The contracts grant no interest in  land and no interest in the trees or plants  themselves. They are simply and solely contracts giving to the  grantees the  right to pick and carry away leaves, which, of  course, implies   the  right  to  appropriate  them  as  their   own property." " In the present case the trees were not acquired: nor  were the  leaves acquired until the appellants had  reduced  them into their own possession and ownership by picking them.  If the tendu leaves had been stored (1) (1949) L.R. 76 I.A. 235.     (2) [1904] 2 K.B. 666. (3) [1946] 14 I.T.R. 447. 692 in  a  merchant’s godown and the appellants had  bought  the right  to  go and fetch them and so reduce them  into  their possession  and  ownership  it  could  scarcely  have   been suggested  that the purchase price was capital  expenditure. Their  Lordships  see no ground in principle or  reason  for differentiating the present case from that supposed.  " I   also   see  no  ground  in  principle  or   reason   for differentiating  the  present  case from  that  of  Mohanlal Hargovind (1). In  K.  T.  M.  T. M. Abdul  Kayoom  and  Hussain  Sahib  v. Commissioner of Income-tax, Madras (2 ) a Full Bench of  the Madras High Court dissenting from its earlier decisions held that  rent paid by a dealer in chank under an  agreement  in the form of a ,lease" with the Government under which he had an  exclusive right " to fish for, take and carry  away  all the  chank  shells  in the sea off the coast  line  "  of  a certain district, was allowable as revenue expenditure.   It was  further held there that it made no  difference  whether what was acquired was raw material for a manufacturing busi- ness or stock-in-trade which was intended to be sold without being subjected to any manufacturing process.  This decision is the subject of Civil Appeal No. 64 of 1956 which has been heard along with this appeal.  I do not see how the  present case  can  be  distinguished from the  Madras  case  without holding that the Madras decision was incorrect. Last, I come to Stow Bardolph Gravel Co. Ltd.(3) That was  a

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case  in  which it was held that sums paid by  a  dealer  in gravel  as consideration for the right to excavate and  take away  deposits  of gravel represented  capital  expenditure. The  decision rested on the fact that the subject matter  of the  agreement consisted of a deposit of gravel living  some feet beneath the surface of the land and requiring to be won from  the  land  by  a process of  excavation.   I  find  it difficult  to reconcile this decision with the  decision  in Benarsidas  Jagannath  (4) and Abdul Kayoom (2) in  both  of which  also excavation or exploration was necessary  to  win the raw material.  If, as I hold, the decision in Benarsidas Jagannath (4) was approved by this Court then we (1) (1949) L.R. 76 I.A. 235.  (2) I.L.R. [1953] Mad. 1133. (3) [1955] 27 I.T.R. 146.  (4) (1946) I.L.R. 27 Lah. 307. 693 must  accept that decision as correct in preference  to  the decision of the Court of Appeal in England.  I may point out here  what  Evershed,  M.  R., said in  the  course  of  his judgment in that case: "  The Commissioners for the General Purpose of  the  Income Tax  were  of opinion that these claims to  make  deductions were not admissible, but Harman, J., was of opinion that the deductions  were  admissible.   I  have  myself  reached   a different conclusion from that reached by Harman, J., and  I have  reached  it, I confess, with some  slight  feeling  of regret  and  misgiving on two grounds: first,  I  think  the result  bears a little hardly on the taxpayers  for  reasons which will, I think, emerge without any necessity for empha- sis as I recite the facts; second, I am not for my own  part satisfied  that  if  close investigation were  made  of  the method whereby the taxpayers and others in the same line  of business  carry on their businesses, it might  not  emerge-I say no more than that-that the Commissioners would find as a fact, notwithstanding the apparent legal consequences of the agreement to which I have referred, there was here in  truth such  a  taking  possession  of the  deposit  of  gravel  in question that it could sensibly for tax purposes and rightly and  fairly  be said that once the consideration  money  had been  paid under the agreement the deposit was in truth  the stock-in-trade  of  the  taxpayer.   However,  I  have  felt compelled to say that there is no finding of fact to support such  a  conclusion,  nor  indeed is  there  before  us  any evidence  sufficient to warrant it.  It is in that  respect, "apprehend, that I find myself at variance with Harman, J."     ..................................................... "If  the  facts  were as the judge  intimated,  the  General Commissioners might find, and might justifiably find, that a case such as this is not really distinguishable as a  matter of  law and common sense from a sale of loose objects  lying on  the surface of the ground, such as windfalls from  apple trees, or even from cases like those I have mentioned, which are concerned with crops or leaves growing on trees.  But my difficulty  is  that I can find no  justification  for  that conclusion in the material before us." 90 694 In   view   of  these  observations  I   have   considerable hesitation, and I say this with great respect, in  accepting the  decision  as a decision on a general question  of  law. The decision proceeded on the findings of the  Commissioners and  on  the  basis that there were  no  materials  for  the conclusion  reached  by  Harman, J. If  we  proceed  on  the findings  of  the Tribunal in the present  case,  there  are enough  materials to support the finding that the  appellant acquired  nothing but raw materials by the  transactions  in

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question. I  find nothing in the decision in Stow Bardolph Gravel  Co. Ltd.  (1)  which  need lead me to the  conclusion  that  the decisions  in Benarsidas Jagannath (2) and Abdul Kayoom  (3) were wrong and require reconsideration.  If I may again  say so  with  great  respect, the learned Master  of  the  Rolls distinguished   the  Privy  Council  decision  in   Mohanlal Hargovind  (4)  by  saying that  decision  rested  upon  the particular circumstances of the case and upon the fact  that the Board was able to say that from the moment the  contract was  entered  into and before the leaves had  actually  been picked,  the tendu leaves were part of the raw  material  of the  appellant.  He added that he could not say the same  of sand  and  gravel, which were part of the earth  itself  and which  could only become part of the stock-in-trade  of  the gravel  merchant’s business when it had, in the true  sense, been  won, been excavated and been taken into their  posses- sion.   I  do  not,  however, think  that  the  decision  in Mohanlal  Hargovind (4) proceeded on the basis suggested  by the learned Master of the Rolls.  In clear and express terms Lord  Greene said: "nor were the leaves acquired  until  the appellant  reduced them into their possession and  ownership by picking them." This shows that the decision of the  Privy Council did not proceed on the ground alleged, namely,  that even before the leaves had actually, been picked, they  were part of the raw material of the appellant of that case.  The decision  proceeded  on the footing that the  leaves  became part  of  the  raw  material when  they  were  reduced  into possession and ownership by picking (1)  [1955] 27 I.T.R. 146. (3)  [1953] 24 I.T.R. 116. (2)  (1946) I.L.R. 27 Lah. 307. (4)  (1949) L.R. 76 I.A. 235. 695          3  S.C.R.    SUPREME COURT REPORTS them.   If that is the correct ratio of  Mohanlal  Hargovind (1), then where is the distinction between that case and the case  of  the gravel merchant in Stow, Bardolph  Gravel  Co. Ltd. (2) and the stone merchant in the present case ? In  my opinion there is none. In  the result and for the reasons given above, I hold  that the  expenditure in question was on revenue account and  the appellant  was  entitled to the allowance he  claimed.   The answer  given  by the High Court was wrong  and  the  appeal should be allowed with costs. HIDAYATULLAH,   J.-This  is  an  assessee’s  appeal   on   a certificate of the High Court granted under s. 66A(2) of the Indian Income-tax Act. Pingle Industries Ltd. (hereinafter called the assessee)  is a  private  limited Company which carries  on,  among  other businesses, the business of extracting stones from quarries, which, after dressing, it sells as flag stones.  In the year 1343  Fasli,  the assessee obtained from  Nawab  Mehdi  Jung Bahadur  of  Hyderabad  the right  to  extract  stones  from certain  quarries belonging to the Nawab.  A quolnama  (con. tract)  was executed, and it has been produced in the  case. Under  this quolnama, the assessee was granted the right  to extract stones from quarries situated in six named  villages for  a  period  of 12 years (1346 Fasli to  1358  Fasli)  on annual  payment  of Rs. 28,000.  To  safeguard  payment  Rs. 96,000  representing  a part of the annual payments  at  Rs. 8,000  per  year were paid in advance as security,  and  the balance  of  Rs.  20,000 was payable each  year  in  monthly instalments of Rs. 1,666-10-8 each.  In default of  punctual payment of these instalments, interest at Re.1 per cent  was to  be charged.  Some other conditions of the  quolnama  may

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also be briefly mentioned here.  The assessee undertook  not to  manufacture cement and also to be ,responsible  for  the payment  of  the  money  in spite  of  "  any  celestial  or terrestrial  or unexpected calamity or unforeseen  event  ", while the Nawab on his part undertook not to allow any other person  to excavate stones in the area of the six  villages. It  was  agreed that in case of default of  instalment,  the contract (1) (1949) L.R. 76 I.A. 235.  (2) [1955] 27 I T.R. 146. 696 would  be  re-auctioned  after One  month’s  notice  to  the contractor,  who would be responsible for any shortfall  but would not have the benefit of any extra amount. The  assessee was assessed in the Fasli years 1357 and  1358 for  the  account  years 1356 and 1357  Fasli.   It  claimed deduction respectively of Rs. 27,054 and Rs. 28,159 paid  to the Nawab in those years, as expenditure under s.  12(2)(xv) of  the Hyderabad Income-tax Act, which is the same  as  the corresponding  pro. vision under the Indian Income-tax  Act. The  claim  for  deduction was  refused  by  the  Income-tax Officer, who held that the amount in each year represented a capital  expenditure though the whole sum was being paid  in instalments.   The assessee appealed against the two  orders of  assessment to the Appellate Officer of  Income-tax,  and questioned  this  decision.   The  appeals  involved   other matters  also,  with which we are not  now  concerned.   The appeals  were dismissed.  The assessee appealed  further  to the  Income-tax Appellate Tribunal, Bombay, and  raised  the same  contention.   The  Appellate  Tribunal  accepted   the appeals.  Different reasons were given by the President  and the Accountant Member.  According to the latter, the payment of  these sums was similar to the payment of  royalties  and dead rent which is allowable as working expense in the  case of  mines and quarries.  The President relied upon  Mohantal Hargovind  v. Commissioner of Income-tax (1), and held  that the payments represented the purchase of the  stock-in-trade of the assessee, and that the leases did not create an asset of an enduring character. The  Commissioner  of Income-tax, Hyderabad  Division,  then asked  for  a  reference of the case to the  High  Court  at Hyderabad, and the Appellate Tribunal referred the following question  of law under s. 66(1) of the Hyderabad  Income-tax Act: "  Whether the lease-money paid by the assessee  Company  to Nawab  Mehdi  Jung  Bahadur and  to  Government  is  capital expenditure or revenue expenditure." The  reference to Government in the question arises in  this way.  It appears that there was yet another (1)  (1949) L.R. 76 I.A. 235. 697 lease which was taken from Government for 5 year. and  under which the assessee was required to pay Rs. 9,000 per year in instalments  of Rs. 750 per month.  It does not appear  that the terms of this lease were ascertained and the amount does not figure in the order of assessment, though apparently  it was  assumed that what applied to the payment to  the  Nawab held  equally good in regard to the payment  to  Government. In  any event, the books of the assessed kept in  mercantile system showed both the sums each year as lease money. The High Court of Hyderabad after an examination of  several decisions  rendered  in India and the United  Kingdom,  held that the payments in each year of account were of a  capital nature, and that no deduction could be given under s.  12(2) (xv)  of  the Hyderabad Income-tax Act.  The  assessee  then applied,  and obtained the certificate as stated,  and  this

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appeal has been filed. The arguments in the case involved the interpretation of the quolnama  as to the right conveyed there and the  nature  of the  payments  with reference to the provision  of  the  law under  which the deduction was claimed.  That section  reads as follows: " 12 (1).  The tax shall be payable by an assessee under the head  profits and gains of business, profession or  vocation in  respect  of  the  profits and  gains  of  any  business, profession or vocation carried or by him. (2)  Such  profits or gains shall be computed  after  making the following allowances, namely:-      ...................................................... (XV)  Any  expenditure (not being in the nature  of  capital expenditure  or personal expenses of the assessee) laid  out or  expended wholly and exclusively for the purpose of  such business, profession or vocation." While  the Appellate Tribunal looked to the  periodicity  of the  payments, the High Court held that the amount  payable- was  Rs.  3,36,000 divided into annual  and  redivided  into monthly  instalments.   The  Tribunal  also  considered  the payments as of the nature of rent or royalty or as price for raw materials.  The High 698 court,  on  the other hand, disagreed, and  held  that  here being  no manufacturing business, the money  expended  could not  be regarded as price of raw materials or even  as  rent but as spent to acquire a capital asset of enduring  benefit to  the  assessee.   The High  court  referred  to  numerous decisions  in  which  the  question  whether  a  receipt  or expenditure  is  on  capital or  revenue  account  has  been considered in India and the United Kingdom.  Before us also, many of them were again cited as illustrating, if not laying down, certain general principles.  We shall refer to some of the  leading  cases later, but we may say at  once  that  no conclusive tests have been laid down which can apply to  all the cases.  The facts of one case differ so much from  those of  another  that the enquiry is often  somewhat  fruitless. If, however, the distinguishing features are not lost  sight of, the decided cases do afford a guide for the solution  of the problem in hand. The  arguments  of Mr. Palkhivala for the  assessee  may  be shortly stated.  He contends that the quolnama is a  licence and not a lease, because it creates no interest in land  and no  premium  is payable for the right, but what is  paid  is periodic  compensation corresponding to rent.   He  contends that   the  payments  can  only  be  regarded  as   periodic compensation  or periodic royalty or licence fees  and  thus revenue  in character.  He further argues that even if  held to  be a lump sum payment broken up into instalments, it  is still  allowable  as expenditure because it  represents  the price for the acquisition of raw materials, viewed from  the business  angle.  According to him, all cases of  mines  and quarries fall into three classes which are: (i)  in which mines and quarries are purchased outright; (ii)in which ownership is not acquired but only an  interest in land; and (iii)  in  which there is not even an interest in  land  but there is an arrangement in praesent and de futuro to  ensure supply of raw materials. He contends that this being evidently not a case within  the first  category,  it  matters not which  of  the  other  two categories  it belongs to, because in his  submission,  both the remaining categories exclude a case 699

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of capital expenditure.  He, however, seems inclined to  put his case in the third category. The   learned  Additional  Solicitor-General  on  his   side enumerates the tests which determine whether an  expenditure bears  a  capital or revenue character.  According  to  him, decided  cases show that capital expenditure  is  ordinarily once  and  for  all and not of  a  periodic  character,  but contends that even a single sum chopped up into  instalments is  not a payment of a periodic character.  He submits  that capital  expenditure is one which brings into  existence  an enduring  advantage, which, he maintains, is the case  here, because  the  money  was  spent on  the  initiation  of  the business  and to obtain a permanent source of raw  materials and not only the materials. The quolnama shows that the agreement was for 12 years.  The assessee paid an initial sum of Rs. 96,000 a,% security  for the  whole contract.  He was required to pay Rs. 28,000  per year.  The security which was given was being diminished  at the rate of Rs. 8,000 per year.  It was a guarantee against. failure  to  pay the monthly instalments, but there  was  no condition that the short payments were to be debited to  it. It  was  rather a guarantee for the overall payment  and  to reimburse the jagir for any loss occasioned by a  re-auction of  the lease after default by the assessee.   Further,  the payments were to be made even if no stones were extracted or could  not be extracted due to force majeure.  There was  no limit  to  the quantity to be extracted.  There was  also  a condition that none but the assessee was allowed to work the quarries,  which means that the right was exclusive  and  in the nature of a monopoly.  The payment, though divided  into instalments of Rs. 1,666-10-8 per month, was really one  for the  entire  lease and of Rs. 3,36,000.   Nothing,  however, turns upon it.  It is pertinent to say that the assessee  in its petition for leave to appeal to this Court filed in  the High Court, viewed the amount as being Rs. 3,36,000  divided into various parts.  This is what it said: "  Under  the  terms  of the said  lease,  the  Company  was required  to pay a sum of H. S. Rs. 28,000 per annum to  the lessor.  The total amount payable for 700 the  entire period amounted to IRS. 3,36,000 out of which  a sum  of Rs. 96,000 was paid at the time of the execution  of the lease deed and the balance of Rs. 2,40,000 was agreed to be paid at the rate of Rs. 20,000 per annum in twelve years. It  was  also agreed that this sum of Rs. 20,000  per  annum should  be paid in equal instalments of Rs. 1,66-10-8  every month.  On the expiry of the period of lease, it was renewed for  a further period of five years and seven months  at  an annual rent of Rs. 35,000." These being, the terms of the lease, the question is whether the payments in the account years can be regarded as capital or revenue expenditure. The question whether an expenditure is capital or revenue in character  is  one  of common  occurrence.   Its  frequency, however,  has  not served to elucidate the  tests  with  any degree  of  certainty  and precision.   It  has  now  become customary  to  start with two propositions which  appear  to have  been  received without much argument.  The  first  was laid  down  in Vallambrosa Rubber Co. Ltd.  v.  Farmer  (1), where  Lord Dunedin observed that "in a rough way" it was  " not  a  bad  criterion of what  is  capital  expenditure  as against  what  is  income expenditure to  say  that  capital expenditure  is a thing that is going to be spent  once  and for all and income expenditure is a thing which is going  to recur  every year ". This proposition was further  qualified

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by  Lord  Cave in Atherton v. British Insulated  and  Helsby Cables Ltd. (2) in the following words: "  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 there is very good reason (in the absence of special circumstances leading  to  the opposite conclusion) for treating  such  an expenditure as properly attributable, not to revenue, but to capital." The words " enduring benefit of a trade " have been  further explained  as  meaning not " everlasting ", but in  the  way capital endures ", see Du Pareq, L. J., in (1) (1910) S.T.C.  529. (2) [1926] A.C. 205, 213 701 Henriksen  v.  Grafton Hotel Ltd. (1) and  Rowlatt,  J.,  in Anglo-Persian oil Co. v. Dale (2). Another test propounded by Viscount Haldane in John Smith  & Son  v.  Moore  (3) is to  distinguish,  as  economists  do, between fixed and circulating capital.  This appears to have appealed  to  Lord Hanworth, M. R.,, in  Golden  Horse  Shoe (New) Ltd. v. Thurgood (4); but in Van Den Berghs Limited v. Clark  (5), Lord Macmillan observed that he did not find  it very  helpful.   Often enough, where the  character  of  the expenditure shows that what has resulted is something  which is  to  be  used in the way of business,  the  test  may  be useful;  but in cases close to the dividing line,  the  test seems useless. A third test was laid down by the Judicial Committee in Tata Hydro-Electric  Agencies  Ltd., Bombay  v.  Commissioner  of Income-tax   (6).   There,  it  was  stated  that   if   the expenditure  was  part of the working expenses  in  ordinary commercial  trading  it was not capital  but  revenue.   The Judicial Committee observed: "What  is  money  wholly and exclusively laid  out  for  the purposes  of  the  trade’  is  a  question  which  must   be determined  upon  the  principles  of  ordinary   commercial trading.   It  is necessary, accordingly, to attend  to  the true  nature  of  the expenditure, and to  ask  oneself  the question, is it a part of the company’s working expenses; is it  expenditure  laid out as part of the process  of  profit earning ? " In  addition  to these three tests, the last  of  which  was applied   again  by  the  Judicial  Committee  in   Mohanlat Hargovind’s  case (7), there are some  supplementary  tests, which  have  frequently  been alluded  to.   Lord  Sands  in Commissioners  of Inland Revenue v. Granite  City  Steamship Co.  Ltd.  charaeterised as capital an outlay made  for  the initiation  of a business, for extension of a  business,  or for  a substantial replacement of equipment.  In that  case, there  was  extensive  damage to a ship,  and  repairs  were necessary  to resume trading, such expense being held to  be capital expend- (1)  (1942)  24 T.C. 453, 462, C A.(2) (1931) 16  T.C.  253, 262. (3) [1920] 12 T.C. 266, 282.(4) (1933) 18 T.C. 280, 298. (5) (1935) 19 T.C 390.(6) (1937) L.R. 64 I.A. 215. (7) (1949) L.R. 76 I.A. 235.(8) (1927) 13 T.C. 1. 14. 91 702 iture.  The questions which Lord Clyde posed in Robert Addie &   Sons   Collieries  Ltd.  v.  Commissioners   of   Inland Revenue(1), namely: "  Is  it  part of the Company’s  working  expenses,  is  it expenditure  laid  out  as part of  the  process  of  profit

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earning ?-or, on the other hand, is it capital outlay, is it expenditure necessary for the acquisition of property or  of rights of a permanent character, the possession of which  is a condition of carrying on its trade at all ? " influenced the Privy Council in Tata Hydro-Electric Agencies Ltd., Bombay v. Commissioner of Income-tax (2) (at p.  209), and the latter part of the question is the test laid down by Lord Sands, to which we have referred. There  is  then  the test whether  by  the  expenditure  the taxpayer was ensuring supplies of raw material or purchasing them.  This test is adverted to by Channell, J., in  Alianza Co.  Ltd. v. Bell (3 ) and approved by the House  of  Lords. Says Channell, J.: "  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 lump sum secures a  supply  of  the  raw material for a period extending over several years......  If it is merely a manufacturing business, then the procuring of the raw material would not be a capital expenditure.  But if it is like the working of a particular mine, or bed of brick earth and converting the stuff into a marketable  commodity, then the money paid for the prime cost of the stuff so dealt with is just as much capital as the money sunk in  machinery or buildings." The  application  of this proposition finds  an  example  in Mohanlal  Hargovind’s case (4), where tendu leaves were  the subject of expenditure.  The firm in that case had paid  for purchasing  a  right to collect tendu  leaves  from  forest, which right included the right of (1)  (1924) 8 T.C. 671, 676. (3)  (1910) 5 T.C. 60. (2)  (1937) L.R. 64 I.A. 215. (4)  (1949) L.R. 76 I.A. 235. 703 entry and coppicing and pollarding.  No right in the land or the  trees  and  plants  was  conveyed,  and  the   Judicial Committee laid emphasis on the nature of the business of the firm,  and equated the expenditure to one for acquiring  the raw materials for the manufacturing business. The  cases  to which we have referred and many more  of  the High Courts in India where the principles were applied  with the exception of the one last cited, were all considered  by this Court in Assam Bengal Cement Co.  Ltd. v.  Commissioner of Income-tax(6).  In that case, Bhagwati, J., referred to a decision  of the Punjab High Court in Benarsidas  Jagannath, In  re (2), where Mahajan, J. (as he then  was),  summarised the position and the various tests.  This Court quoted  with approval this summary, and observe at p. 45: "  In  cases where the expenditure is made for  the  initial outlay  or  for  extension of a business  or  a  substantial replacement  of the equipment, there is no doubt that it  is capital  expenditure.   A capital asset of the  business  is either  acquired or extended or substantially  replaced  and that outlay whatever be its source whether it is drawn  from the capital or the income of the concern is certainly in the nature of capital expenditure.  The question however  arises for  consideration where expenditure is incurred  while  the business  is  going  on  and  is  not  incurred  either  for extension of the business or for the substantial replacement of its equipment.  Such expenditure can be looked at  either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure  is

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incurred.   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.  If any such asset  or advantage for the enduring benefit of the business is (1) [1935] 1.S.C.R. 972. (2) (1046) I.L.R. 27 Lah. 307. 704 thus  acquired  or  brought  into  existence  it  would   be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once  and  for all or was made periodically.   The  aim  and object  of the expenditure would determine the character  of the  expenditure  whether it is a capital expenditure  or  a revenue  expenditure.   The  source or  the  manner  of  the payment  would  then be of no consequence.  It  is  only  in those  cases where this test is of no avail that one may  go to  the  test of fixed or circulating capital  and  consider whether  the  expenditure  incurred was part  of  the  fixed capital of the business or part of its circulating  capital. If it was part of the fixed capital of the business it would be  of the nature of capital expenditure and if it was  part of  its  circulating capital it would be of  the  nature  of revenue   expenditure.   These  tests  are   thus   mutually exclusive  and  have  to be applied to  the  facts  of  each particular case in the manner above indicated." Learned counsel in the present case rested his case upon the decision  of the Punjab High Court in Benarsidas  case  (1), and  stated  that  after its approval  by  this  Court,  the expenditure  here  could  not  but be  held  as  on  capital account.   He relied strongly also upon the decision of  the Judicial  Committee  in  Mohanlal  Hargovind’s  case  (2  ). Reference was made to other decisions, which we will briefly notice later. In Benarsidas case (1), the person sought to be assessed was a  manufacturer  of bricks.  He obtained certain  lands  for digging  out  earth for his manufacture.   Under  the  deeds which  gave him this right, he could dig up to a depth of  3 feet.  to 31 feet.  He had no interest in the land,  and  as soon as the earth was removed, his right was at an end.   It was held in that case that the main object of the agreements was  the  procuring  of earth as raw materials  and  by  the expenditure  the-lessee had not acquired any advantage of  a permanent  or  enduring character.  It is,  however,  to  be noticed that the duration of the leases was from six  months to three years.  The Full Bench referred to (1) (1946) I.L.R. 27 Lah. 307. (2) (1994) L.R. 76 I.A. 235. 705 some  other  leases  in which the  duration  was  longer,and observed: " There are other agreements which are not before us and  it seems  that  the items mentioned in  the  question  referred relate  to  those agreements as well.  We do  not  know  the nature  of the agreements, but the question can be  answered by  saying  that  expenses  incurred  during  the  year   of assessment  for purchase of earth on basis of agreements  of the  nature  mentioned in the case of Benarsidas or  of  the nature  like Exhibit T. E. are admissible deductions,  while sums  spent  for obtaining leases for a  substantially  long period  varying  from 10 to 20 years cannot be  held  to  be

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valid  deductions  if they amount to an  acquisition  of  an asset of an enduring advantage to the lessee." It  appears that the Full Bench was persuaded to  this  view from  two  considerations.   The first  was  that  what  was acquired  was earth with no interest in land, and the  other was the short term of the leases. The approval given to Benarsidas case (1) by this Court does not  extend beyond the summary of the tests settled  in  it, and  the tests have to be applied to the facts of each  case in  the  manner  indicated by this Court.   But  the  actual decision  was not before this Court, and cannot be  said  to have been approved.  The agreements in the present case  are long-term contracts.  They give the right to extract  stones in  six  villages,  without  any  limit  by  measurement  or quantity.   They give the right exclusively to quarry for  a number of years.  This case is thus very different on facts. Further,  the  duration  of the right which  seems  to  have weighed  with  the Full Bench in the Punjab High  Court  has little  to do with the character of the expenditure even  if it be a relevant factor to consider.  In Henriksen’s case(2) the  right was only for 3 years, but monopoly  value  having been  paid  for  it, the result was a capital  asset  of  an enduring character. In Mohanlal Hargovind’s case (3), the person assessed was  a bidi manufacturer who had obtained short-term (1) (1946) I.L.R. 27 Lah. 307.  (2) (1942) 24 T.C. 453, 462, C.A. (3) (1949) L.R. 76 I.A. 235. 706 contracts with Government and other forest owners to  obtain tendu  leaves  from the forests.  These  tendu  leaves  with tobacco  are  used to roll into cigarettes.   The  contracts gave a right of entry into forests to collect the leaves and also  to coppice the plants and to pollard the tendu  trees, but  beyond  this gave no interest in  land.   The  Judicial Committee held that these contracts were in a business sense for the purpose of securing supplies to the manufacturers of one  of the raw materials of his business.  They granted  no interest in land or the plants or trees.  The small right of cultivation and the exclusive nature of the grant were of no significance.   Then,  the Judicial  Committee  observed  as follows: "  Cases  relating  to the purchase  or  leasing  of  mines, quarries,  deposits  of  brick earth,  land  with  standing- timber,  etc.  do  not appear to their Lordships  to  be  of assistance." The  Board distinguished Alianza Co. Ltd. v. Bell which  was said to be a case analogous to purchase or leasing of a mine and  Kauri  Timber Company’s case (2), which was a  case  of acquisition  of  land  or of standing timber  which  was  an interest  in land.  In either case, it was a capital  asset. Their Lordships finally observed: " In the present case the trees were not acquired; nor  were the  leaves acquired until the appellants had  reduced  them into  their  own possession and ownership by  picking  them. The two cases can, in their Lordships’ opinion, in no  sense be  regarded  as comparable.  If the tendu leaves  had  been stored in a merchant’s godown and the appellants had  bought the  right  to go and fetch them and so  reduce.  them  into their  possession and ownership it could scarcely have  been suggested  that the purchase price was capital  expenditure. Their  Lordships  see no ground in principle or  reason  for differentiating the present case from that supposed." It  is  to be noticed that the Privy Council  case  was  not applied but distinguished by the Court of Appeal in  England

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in Stow Bardolph Gravel Co. Ltd. V.  Poole (3). (1)  (1910) 5 T.C. 60. (2) [1913] A.C. 771.       (3) [1954] 35 T.C. 459. 707 In that ease, the Company was doing the business of  selling sand and gravel.  It purchased two unworked deposits, and it claimed that the payment should be deducted from its profits as  being expenditure for acquiring its trading  stock.   It was  held that the Company had acquired a capital asset  and not  a stock-in-trade.  Harman, J., before whom  the  appeal came  from the decision of the General  Commissioners,  said that  the case was indistinguishable from the  Golden  Horse Shoe  case  (1),  where the tailings were  regarded  as  the stock-in-trade of the taxpayer.  He observed : "  Now, it is said here that the opposite conclusion  should be  reached, and I think in substance the reason is  because this gravel had never been raked off the soil upon which  it was  lying.   There is no question, in any  true  sense,  of extracting gravel; there is no process, as I understand  it, gone  through here.  It is not even suggested that a  riddle or  sieve is used; you merely dig it up or rake it up  where it  lies, put it on the lorry and sell it wherever you  can. It  is  said what was bought was a mere right to go  on  the place  and  win the gravel, but, in effect,  in  the  Golden Horse Shoe case (1) what was bought was the licence to go on the land and take away the tailings, and ’myself think  that it  is  a distinction without difference  to  suggest  that, because  nobody  had  ever applied a  rake  to  this  gravel before, it should be treated as capital, whereas if somebody had raked it into little heaps before the contract was  made then  its  purchase  would constitute a  different  form  of adventure.  It is the same situation; it is no more and-,.no less attached to the land." In  dealing with this case on appeal, Lord Evershed,  M.  R. (then Sir Raymond Evershed), felt that the case was a little hard upon the taxpayer, and further that it might, if proper enquiry bad been made, have been possible to hold that after the  price was paid, the sand and gravel become,  in  truth, the  stock-in-trade  of  the taxpayer.   Taking  the  facts, however,  as  found, he held that what was purchased  was  a part of the (1)  (1933) 18 T.C. 280, 298. 708 land itself, namely, the gravel in situ.  He held that there was a distinction between the purchase of a growing crop  or leaves  and  the  purchase of gravel.   Lord  Evershed  then analysed the agreement, and observed as follows: " I think that, once it has to be conceded that there was no sale of the gravel in the way the Judge said there was, then it must follow that what was here acquired was the means  of getting  the gravel by excavating and making it part of  the stock-in-trade." Reference  was then made by him to cases in which  what  was purchased or taken on lease was land or an interest in land, and  Mohanlal Hargovid’s case (1) was distinguished  on  the ground  that  in that case it was possible to say  of  tendu leaves  that  they  were acquired as the  raw  material  for manufacture.   The  argument  of  Mr.  Magnus  in  the  case described  as ail attempt to substitute sand and gravel  for tendu leaves was not accepted, Lord Evershed observing: " But I cannot say the same of the sand and gravel, part  of the earth itself, which was the subject of the contract here in  question  and which I think only could  sensibly  become part  of  the  stock-in-trade  of  this  gravel   merchants’ business  when it had in the true sense been won,  had  been

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excavated  and been taken into their possession." We  are in entire agreement that such a distinction  is  not only  palpable  but also sensible.  The present  case  is  a fortiori.  Here, the stones are not lying on the surface but are  part of a quarry from which they have to  be  extracted methodically  and skilfully before they can be  dressed  and sold.   These  deposits are extensive, and the work  of  the assessee  carries him deep under the earth.  Such a  deposit cannot  be described as the stock-in-trade of the  assessee, but stones detached and won can only be so described. Before  we deal with the other cases, we wish to  state  the distinguishing features of the cases already mentioned,  and which  have not often been viewed together.  In the  Alianza case (2), the sale was not of the caliche as such but of the right to win it from a (1) (1949) L.R. 76 I.A. 235. (2) (1910) 5 T.C. 60, 709 deposit  thereof, and it was treated as an expenditure of  a capital  nature.  In the Stow Bardolph case(,), the  finding was that sand and gravel had to be won, and it was held that they  could not be treated as stock-in-trade till they  were actually won.  The doubt expressed by Lord Evershed was that if the taking of sand and gravel involved merely taking them up and putting them into trucks, the finding could have been otherwise.   Harman, J., made this distinction, but in  view of  the  finding, the Court of Appeal came  to  a  different conclusion.  Indeed, Harman, J., himself would have  decided differently  if there was, in any true sense, a question  of extracting  gravel.   He, therefore, thought that  the  case resembled  the  Golden  Horse  Shoe case  (2)  where  the  " tailings  " were bargained for and paid for, and became  the stock-in-trade  of the tax-payer.  In  Mohanlal  Hargovind’s case (3), there being no interest in land or trees or plants and  the right of cultivation and the exclusiveness  of  the right to the leaves being insignificant, the contracts  were treated as leading to acquisition of the raw materials.  The leaves  on trees were treated as equal to leaves in a  shop. It  was on this ground that case was distinguished from  the Kauri Timber Company case (4), in which land and interest in land  in  the shape of standing timber were  involved.   The case  in Hood-Barrs v. Commissioners of Inland  Revenue  (5) was  similar  to the last cited.  In the present  case,  the assessee  acquired a right to extract stones and  his  lease included  not  only  the stones on the top  but  also  those buried  out  of sight under Tons of other stones,  which  he could only reach after extracting those above.  This case is thus  within  the  rule of those cases in  which  the  right acquired is to a source from which the raw materials are  to be extracted.  The doubt expressed by Lord Evershed does not apply  to  the  facts here, because  the  reasons  given  by Harman, J., cannot be made applicable at all. In Kamakshya Narain Singh v. Commissioner of  Income-tax(6), the  case involved payment of certain annual sums by way  of salami for mining rights, and (1)   [1955] 27 I.T.R. 146. (3)  [1949] 17 I.T R. 473. (5)  [1958] 34 I.T.R. 238. (2)   (1933) 18 T.C. 280. (4)  [1913] A.C. 771. (6)   [1943] 11 I.T.R. 513.  P.C. 710 these were regarded as capital income.  There were also  two other  payments,  namely,  royalty  on  coal  raised  and  a provision  for minimum royalty.  These were regarded as  not capital receipts but as assessable income.  In dealing  with

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the  nature of the working of a mine,  certain  observations were  made.  It was contended that the payments amounted  to conversion  of a capital asset into cash.  The argument  was repelled by the Judicial Committee in these words: These  are  periodical payments, to be made  by  the  lessee under  his covenants in consideration of the benefits  which he is granted by the lessor.  What these benefits may be  is shown  by  the extract from the lease  quoted  above,  which illustrates how inadequate and fallacious it is to  envisage the  royalties  as merely the price of the  actual  tons  of coal.   The tonnage royalty is indeed payable when the  coal or  coke  is gotten and despatched; but that is  merely  the last   stage.    As  preliminary  and  ancillary   to   that culminating act, liberties #are granted to enter on the land and  search,  to  dig and sink pits, to  erect  engines  and machinery, coke ovens, furnaces and form railways and roads. All  these and the like liberties show how fallacious it  is to  treat the lease as merely one for the acquisition  of  a certain  number  of  tons of coal, or  the  agreed  item  of royalty  as  merely  the price of each  ton  of  coal.   The contract is in truth much more complex.  The royalty is  ’in substance a rent; it is the compensation which the  occupier pays  the landlord for that species of occupation which  the contract  between  them allows’ to quote the words  of  Lord Denman  in R. v. Westbrook (1).  He was referring to  leases of coal mines, clay pits and slate quarries.  He added  that in all these the occupation was only valuable by the removal of  portions  of the soil.  It is true that he  was  dealing with  occupation  from  the point of  view  of  rating,  but compensation  has  the same meaning in  its  application  to matters of taxation such as are involved in this case." Thus, the contention of the learned counsel for the assessee that we should treat this quolnama as merely (1)  (1875) 10 Q.B. 178 711 showing a licence and not a lease creating interest in  land is  not correct.  A lease to take out sand was described  in Kanjee and Moolji Bros. v. Shanmugam Pillai (1) as amounting to a transfer of interest in immovable property and also so, in  connection  with the Registration Act  in  Secretary  of State  for India v. Kuchwar Lime and Stone Co. (2).   It  is thus clear that what the assessee acquired was land, a  part of which in the shape of stones he was to appropriate  under the covenants.  He was not purchasing stones, and the  price paid could not in any sense be referable to stones as stock- in-trade.  The stones extracted might have become his stock- in-trade, but the stones in situ were not so. Nor  do  we agree that the periodicity of payments  has  any significance.  As was pointed out by Lord Greene, M. R.,  in Henriksen’s case (3) : "If  the  sum  payable  is not  in  the  nature  of  revenue expenditure,  it  cannot be made so by permitting it  to  be paid  in annual instalments.  These payments by  instalments in respect of monopoly value have not the annual quality  of the payments for the grant of the annual excise licence, but are  of  a  different character  altogether......  Here  the Appellants were minded to acquire as asset in the shape of a licence for a term of years." The  learned  Master  of the Rolls  added  that  the  annual payments gave " a false appearance of periodicity ". Applying  the above test to the present case, it is  obvious that  the  monthly  payments  of  Rs.  1,666-10-8  did   not represent the lease amount for a month.  This was a case  in which  the  assessee bad acquired an asset  of  an  enduring character for which he had to put his hand in his pocket for

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a  very large sum indeed.  He paid Rs. 96,000 down, but  for the  rest  he asked for easy terms.  The amount  paid  every month was not in any sense a payment for acquisition of  the right  from  month to month.  It was really the  entire  sum chopped  into small payments for his convenience.   Nor  can the  amount be described as a business expense, because  the outgoings  every  month were not (1)  (1933) I.L.R. 56 Mad. 169. (2) (1937) L.R. 65 I.A.  45, 5, (3)  (1942) 24 T.C. 453.462, C.A, 712 to  be  taken  as  spent over  purchase  of  stones  but  in discharge of the entire liability to the jagir. Some  of  the  cases to which we were referred  may  now  be briefly  noted.  Hakim Ram Prasad, In re (1) was a  case  of renting of a cinema projector for 10 years.  The amount paid was thus hire for the machine.     ’In    Commissioner    of Income-tax v. Globe Theatres  Ltd. (2) the assessee advanced Rs. 10,000 to a company  for  the construction of  a  cinema house  which  was  never built.  Since the  amount  was  not salami or premium but only advance rent, it was held deduct- ible.   Commissioner of Income-tax v. Kolhia  Hirdagarh  Co. Ltd.  (3)  was  a case of commission on every  ton  of  coal raised,  and it was held to be revenue  expenditure.   These cases are entirely different, and can be of no authority for payments, such as we have. Reliance  was  also placed upon Parmanand Haveli Ram  In  re (4),  Nand  Lal  Bhoj Raj, In re  (5)  and  Commissioner  of Income-tax  v.  Tika  Ram & Sons (6).   In  the  first  two, expenditure  to acquire lands bearing certain salts  in  the earth,  which  could be converted  into  potassium  nitrate, sodium  chloride  or  saltpetre,  was  regarded  as  revenue expenditure.   They follow the line of reasoning  which  the same Court adopted in the Full Bench case of Benarsidas (7), which  we have considered in detail earlier.  They  involved shortterm  contracts,  and  in the Full Bench  case  it  was stated that the case of long-term leases was on a  different footing,  though,  in our opinion, the decisive  factors  in such  cases  will be the nature of the acquisition  and  the reason for the payment.  Cases on the other side-of the line where  payments  were regarded as  capital  expenditure  are Commissioner  of Income-tax v. Chengalroya Mudaliar (8)  and Chengalvaroya  Chettiar v. Commissioner of  Income-tax  (9). There the expenditure was for a lease for excavation of lime shells.  Since the lease conferred exclusive privilege and a new business regarded not as the right to win shells. (1)  [1936] 4 I.T.R. 104. (3)  (1949) 17 I.T.R. 545. (5)  [1946] 14 I.T.R. 181. (7)  [1947] 15 I.T.R. 185. (2)  [1950] 18 I.T.R. 403. (4)  [1945] 13 I.T.R. 157. (6)   [1937] 5 I.T.R. 544. (8)   [1935] I.L.R. 58 Mad. 1. (9)   [1937] 5 I.T.R. 70. 713 All  these  cases turned on different facts, and it  is  not necessary   to   decide  which  of  them  in   the   special circumstances  were  correctly decided.  This  enquiry  will hardly  help in the solution of the case in hand.   We  are, however,  satisfied that in this case the assessee  acquired by his long-term lease a right to win stones, and the leases conveyed to him a part of land.  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

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stock-in-trade.   The payment, though periodic in fact,  was 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 High Court was right in treating the outgoings as on capital account. In the result, the appeal fails, and will be dismissed  with costs. BY  COURT: In accordance with the majority judgment  of  the Court, the appeal is dismissed with costs.                                          Appeal dismissed.