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Chintalapudi Ranganayakulu and Another Vs. Commissioner of Income-tax, Andhra Pradesh. - Court Judgment

SooperKanoon Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 11 of 1961
Reported in[1964]51ITR276(AP)
AppellantChintalapudi Ranganayakulu and Another
RespondentCommissioner of Income-tax, Andhra Pradesh.
Excerpt:
- - at page 33 of the report, the learned chief justice stated that :but in the case of an acquisition of mining rights under an agreement like the agreements in question, it is impossible to say that there is a sale of so much mica. ' it cannot be denied that in cases of mining leases for a short duration like in the present case, no part of the amount spent which is a capital expenditure under the income-tax act remains to the assessee after the termination of the period of the lease......one thousand five hundred only) in the presence of the district collector, krishna, during the lease period. it is also agreed that in case the mining lease is rejected by the government on any ground, the first party will return the amounts taken to the second party....(7) the mining operations shall be conducted by the second party only during the period when there will be no crops. it is also agreed that in case the mining operations were to be conducted during the period when there are crops, the second party shall pay to the first party such crop compensation mutually agreed to by both the parties and obtain receipt therefor before the mining operations are commenced.(8) every year, after mining, the lands shall be handed over after proper levelling of the grounds. otherwise,.....
Judgment:

CHANDRASEKHARA SASTRY J. - This is a reference under section 66 (1) of the Indian Income-tax Act, 1922. The assessee is a firm engaged in the business of extracting iron ore and selling it. This case relates to the assessment year 1956-57, the corresponding accounting year being the 1st January, 1955, to 31st December, 1955. The assessee entered into lease agreements with ten different land-owners in respect of ten plots of land. One of the leases was for a period of one year, two for two years and the remaining seven from three years each. The assessee made two lump sum payments of Rs. 10,980 for the right to enter upon the land and extract the iron ore after carrying on mining operations and Rs. 4,246 as crop compensation for not delivering back the land for cultivation during the season to the landowners. The assessee also paid a further sum of Rs. 1,775 as brokerage to persons who negotiated the said lease agreements. All these payments were made during the accounting year and these were claimed by the assessee as revenue expenditure. But this claim is disallowed by the department and also by the Income-tax Appellate Tribunal, Hyderabad Bench, which referred the following question to the High Court :

'Whether, on the facts and in the circumstances of the case, the payments of Rs. 10,980, Rs. 4,246 and Rs. 1,775 or any of them were allowable as a revenue expenditure under section 10 (2) (xv) ?'

The relevant clauses in one of the lease agreements are as follows :

'(2). It is agreed by the first party to lease out their dry land mentioned in the schedule below for extracting, digging, mining and quarrying of iron ore known as kakirayi and also for transporting the same for a period of two years, to the second party. The lease amount agreed to is Rs. 2,500 (Rupees two thousand five hundred only), Rs. 1,000 (Rupees one thousand only) payable as advanced and the balance of Rs. 1,500 (Rupees one thousand five hundred only) in the presence of the District Collector, Krishna, during the lease period. It is also agreed that in case the mining lease is rejected by the Government on any ground, the first party will return the amounts taken to the second party....

(7) The mining operations shall be conducted by the second party only during the period when there will be no crops. It is also agreed that in case the mining operations were to be conducted during the period when there are crops, the second party shall pay to the first party such crop compensation mutually agreed to by both the parties and obtain receipt therefor before the mining operations are commenced.

(8) Every year, after mining, the lands shall be handed over after proper levelling of the grounds. Otherwise, the second party should pay crop compensation to the first party. If the land is not properly levelled after mining, necessary compensation should be paid to the first party.'

It is clear from clause 2 of this agreement that the amount of Rs. 2,500 paid by the assessee to the owner of the land is for obtaining the lease of the land for a period of two years for extracting, digging, mining and quarrying of iron ore from the land. Clause 7 of the agreement provided that the assessee should carry on the mining operations only during the period when there would be no crops. But if the assessee were to carry on the mining operations during the period when there are crops, the assessee was bound to pay compensation for the loss of crops to the owner of the land. Clause 8 provided that the lands shall be handed over to the owner after proper levelling of the grounds every year after mining and, in default, the assessee was bound to pay compensation to the owner. It is obviously as per these two clauses 7 and 8 that the assessee paid Rs. 4,246 to the owners of the lands. The amount of Rs. 1,775 was paid the assessee as brokerage for obtaining the leases.

It is contended by Mr. Ranganathachari, the learned counsel for the assessee, that these amounts, which were expended by the assessee, were really an expenditure, not being in the nature of capital expenditure, laid out or expended wholly and exclusively for the purpose of the assessees business. He contended that the transactions really amounted to the purchase of iron ore and not the transfer of any interest in the land itself. In support of this contention, the Full Bench decision of the Punjab High Court in Benarsidas Jagannath, In re and the decision of the Privy Council in Mohanlal Hargovind v. Commissioner of Income-tax are relied upon. In the former case, the assessee, in the course of his business, took a plot of land on lease either of short or moderate duration for excavating a specified quantity of earth from a certain area of land during a period of six months to three years in order to produce bricks expeditiously and economically. The Full Bench held that the transactions amounted to the mere purchase of unloosened earth from the land and to no more and that the amount spent therefor by the assessee was revenue expenditure. In the latter case, the assessee carried on business at several places as manufacturers and vendors of country made cigarettes known as bidis. These cigarettes were composed of tobacco rolled in leaves known as tendu leaves, which were obtained by the assessee by entering into a number of short term contracts with the Government and other owners of forests. Under the contracts, in consideration of a certain sum payable in instalments, the assessee were granted the exclusive right to pick and carry away the tendu leaves from the forest area described. The Privy Council held that :

'The contracts were entered into by the assessee wholly and exclusively for the purpose of supplying themselves with one of the raw materials of their business, that they granted no interest in land, or in the trees or plants, that under them it was the tendu leaves and nothing but the tendu leaves that were acquired, that the right to pick the leaves or to go on to the land for the purpose were merely ancillary to the real purpose of the contracts and if not expressed would be implied by law in the sale of a growing crop, and that, therefore, the expenditure incurred in acquiring the raw material was in a business sense an expenditure on revenue account and not on capital account, just as much as if the tendu leaves had been bought in a shop.'

At the same time, the Privy Council pointed out that the cases relating to the purchase or leasing of mines, quarries, deposits of brick earth, land with standing timber, etc., referred to in the judgment of the High Court under appeal and relied upon in the argument before the Board do not appear to be of assistance.

On the other hand, the point appears to be concluded by the decisions of the Supreme Court in Pingle Industries Ltd. v. Commissioner of Income-tax and K. T. M. T. M. Abdul Kayoom v. Commissioner of Income-tax. In the former case, the assessee company, which carried on the business of selling Shahabad flag stones, obtained from a jagirdar under a contract the right to extract stones from quarries situated in six named villages for a period of 12 years on the annual payment of Rs. 28,000. Under the contract, a sum of Rs. 96,000 was paid in advance as security of which Rs. 8,000 was to be adjusted annually against Rs. 28,000 and the balance of Rs. 20,000 was payable in monthly instalments of Rs. 1,666-10-8. The assessee had only the right to excavate stones. There was also a similar lease taken from the Government for a period of five years under which the assessee had to pay Rs. 9,000 per year in monthly instalments of Rs. 750 each. The question was whether the amounts paid by the assessee to the jagirdar and the Government each year were revenue expenditure allowable under section 10 (2) (xii) of the Hyderabad Income-tax Act corresponding to section 10 (2) (xv) of the Indian Income-tax Act, 1922. It was held by the majority consisting of Kapur and Hidayatullah JJ. that :

'..... the assessee acquired by his long-term lease the 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 stock-in-trade. The payment in instalments for acquiring a capital asset of enduring benefit to his trade. The amounts were outgoings on capital account and were not allowable deductions.'

Before the Supreme Court, it was argued on behalf of the assessee that the case was similar to the one in Benarsidas Jagannath, In re, which was approved by the Supreme Court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax. But it was pointed out by Hidayatullah J. at page 87 of the report that :

'The approval given to Benarsidas case 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.'

In K. T. M. T. M. Abdul Kayoom v. Commissioner of Income-tax, the second case referred to above, the assessee firm which carried on business in the purchase and sale of conch (chank) shells took on lease from the Government 'the exclusive right, liberty and authority to fish for and to take and carry away all chank shells' in the sea off the coast line of a certain area specified in the lease, for a period of three years on a consideration of a yearly rent of Rs. 6,111. The assessee claimed that, in computing its annual income from the sale of chanks, it was entitled to deduct the yearly rent of Rs. 6,111 paid to the Government as business expenditure under section 10 (2) (xv) of the Income-tax Act. The Supreme Court again held by a majority that :

'... the amount of Rs. 6,111 paid by the assessee was an amount paid to obtain an enduring asset in the shape of an exclusive right to fish; the payment was not related to the chanks, which it might or might not bring to the surface; it was not an amount spent in acquiring its stock-in-trade but for acquiring an asset from which it may collect its stock-in-trade. It was therefore an expenditure of a capital nature, and though it was incurred for the purposes of the assessees business, it was not allowable under section 10 (2) (xv).'

It is argued by Mr. Ranganathachari, the learned counsel for the assessee, that, in the present case, lease are for very short periods, they being one lease for one year, two leases for two years and seven leases for three and that it cannot be said that the amounts claimed as deductions were paid for acquiring any asset of an enduring benefit for the business of the firm. But this contention cannot be accepted in view of what is stated by Hidayatullah J. in Pingle Industries Ltd. v. Commissioner of Income-tax, at page 87, that the duration of the right which seems to have weighed with the Full Bench of the Punjab High Court in Benarsidas Jagannath, In re has little to do with the character of the expenditure even if it be a relevant factor to consider. It was pointed out that in Henriksens case, the right was only for three years, but monopoly value having been paid for it, the result was a capital asset of an enduring character.

Mr. Kondaiah, the learned counsel for the department, relied also on the decision of the Madras High court in Commissioner of Income-tax v. Siddareddy Venkatasubba Reddy and Bros. In that case, the assessee, who were carrying on the business of winning mica and selling it after refinement, entered into certain agreements under which in consideration of payment of sums of money in instalments they were granted the mining rights in different plots of land for periods varying from five to nine years. It was held that the money expended for the acquisition of such rights was capital expenditure and was therefore not allowable under section 10 (2) (xv) of the Act. Rajamannar C.J., in delivering the judgment of the High Court, reviewed several decisions of the English and Indian courts. At page 33 of the report, the learned Chief Justice stated that :

'But in the case of an acquisition of mining rights under an agreement like the agreements in question, it is impossible to say that there is a sale of so much mica. The wining of mica depends upon many uncertain factors. The mine may prove disappointing in that it may not yield much mica. It will be opposed to common sense to say that an acquisition of rights to win mica is a sale of mica as raw material. On the facts of this case, it is abundantly clear that there is no manufacturing business and there is no sale of any raw material. The assessee carries on the business of winning and selling mica and for the business acquires mining rights in various places. Money expended for the acquisition of such rights must be held to be capital expenditure.'

These observations apply to the facts of the present case. The lease agreements in question in the case before us do not represent the sale of iron ore as such; but the assessee obtained only a right to extract iron ore from the land in question for specified periods. It must be held that the amount of Rs. 10,980 paid by the assessee under the lease agreements is not allowable as a revenue expenditure under section 10 (2) (xv) of the Income-tax Act.

The sum of Rs. 1,775 paid as brokerage to persons, who negotiated the said lease agreements, also stands on the same footing as it also forms part of the amounts spent for obtaining the capital asset and therefore is not allowable as a revenue expenditure.

There remains the amount of Rs. 4,246 paid by the assessee which is described as crop compensation for not delivering back the land for cultivation during the season to the land-owners. At first this item appears to stand on a different footing from the other two items. But, on further consideration, it is clear that this item also cannot be allowed as a revenue expenditure. Clause 7 of the lease agreement referred to in the beginning of this judgment provided that the mining operations shall be conducted by the second party only during the period when there will be no crops and that in case the mining operations were to be conducted during the period when there are crops, the second party shall pay to the first party such crop compensation mutually agreed to by both the parties. Clause 8 provided that every year, after mining, the lands shall be handed over after proper levelling of the grounds and that otherwise, the second party should pay crop compensation to the first party and that if the land is not properly levelled after mining, necessary compensation should be paid to the first party. It is clear from these two clauses that the lessee, who is the assessee, had no right under the agreement to conduct mining operations during the period when there are crops on the land and that if the assessee does conduct mining operations during the period when there are crops, the assessee shall pay compensation to the land-owners. In substance, the amount paid to the land-owners as crop compensation is the amount paid by the assessee as the price for carrying on mining operations even during the period when there are crops on the land, i.e., it was the money expended for the acquisition of the mining rights for that period also and must be held to be capital expenditure not allowable under section 10 (2) (xv) of the Income-tax Act. This result appears to follow from the reasoning in the decision in Robert Addie & Sons Collieries Ltd. v. Commissioners of Inland Revenue. In that case, under the terms of a mineral lease, a colliery company was obliged to restore to an arable state all ground occupied by it or damaged by its workings, or, at its option, to pay the lessor for all such ground not so restored, at the rate of thirty years purchase of the agricultural value thereof. In the exercise of its option, the company paid the lessor a sum of Pound 6,104 as representing the value of the damaged lands. It was held by the Court of Sessions (Scotland), First Division, presided over by the Lord President (Clyde) that such payment was in the nature of capital expenditure and was not therefore a proper deduction in computing the companys liability to income-tax. After stating that 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, the Lord President Clyde posed the following questions :

'...... is it a part of the companys working expenses -is it expenditure laid out as part of the process of profit-earning - or, on the other hand, is it a 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 ?'

Finally, the Lord President held that neither the expense of restoration, nor the compensation payable failing restoration, appear to fall within working expenses and that they are capital that they are capital charges. Therefore, the answer to the question is that the payments of Rs. 10,980, Rs. 4,246 and Rs. 1,775 are not allowable as a revenue expenditure under section 10 (2) (xv) of the Act. The question is answered against the assessee.

But the observations of Lord Sands in Robert Addie & Sons Collieries Ltd. v. Commissioner of Inland Revenue, at page 678, may be referred to. They are as follows :

'I agree that in accordance with income-tax legislation the payment here in question must be held to be a capital one, and not deductible in a question of income-tax. There is no doubt a certain anomaly in the principle of capital charge as applied to income-tax in the case of wasting investments. If we take a long tract of time, such as the life of the mine, so much profits are made from first to last; but in estimating the real beneficial amount of these profits a payment such as that here made undoubtedly falls to be deducted. There is no capital in the end corresponding with this outlay. The money has been expended and consumed as an incident of carrying on the mine. In all mining undertakings of which the life is temporary - and that is the case of most mining undertakings - the annual dividends are really partly profit or interest, and partly a return of capital. But income-tax legislation does not recognise any discrimination. Whether it is capital returned or truly income, it falls under the assessment to income-tax.'

It cannot be denied that in cases of mining leases for a short duration like in the present case, no part of the amount spent which is a capital expenditure under the Income-tax Act remains to the assessee after the termination of the period of the lease. It means the whole amount was spent for the purpose of obtaining the iron ore to be subsequently sold by the assessee and was in substance spent in its entirety for obtaining the raw materials. It may be unjust to bring it under the heading of capital expenditure; but, at the same time, it has been held by the highest authority in England and India that expenditure is only a capital expenditure and not a revenue expenditure. In fact, no case of a mining lease has been cited before us by the learned counsel for the assessee in the present case wherein it was held that an amount expended for obtaining a mining lease has ever been held to be a revenue expenditure. But this is a matter for the Union Parliament to rectify. We make no order as to costs.


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