AHMADI J. - The assessee, the Gujarat Mineral Development Corporation Ltd., is a State owned limited company incorporated under the Companies Act, 1956. It is carrying on business of mineral development and development of mines, extraction of ores, etc., including the business of extraction of fluorspar. It secured from the Government of Gujarat a mining lease in respect of Survey No. 40 admeasuring, 1,530 acres situate in the revenue limits of village Amba Dungar, Taluka Chhota-Udepur, district Baroda. At the relevant point of time M/s. Mineral Mining Company, Madras, had a prospecting license for extracting fluorspar in respect of Survey No. 30 admeasuring about 1,733 acres situate adjacent to Survey No. 40 held by the assessee. The said Madras Company had applied on September 11, 1957, for a prospecting license in respect of Survey No. 30 under the Mines and Minerals Act, 1948. The Government of Gujarat granted to the said company a prospecting license on August 27, 1962. Thereafter, the said company made an application for the grant of a mining lease in respect of that survey number on June 6, 1963. While that application was pending, it prepared a prospecting report on November 9, 1963, and submitted it to the State Government in support of its claim for a mining lease. However, the Government of Gujarat, by its order dated March 4, 1964, rejected its application for the grant of a mining lease. The said order was challenged in revision but the Govt. of India rejected the revision application on May 26, 1965. As its application for the grant of a mining lease was thus rejected, the Madras company field a Civil Suit No, 1552 of 1964 in the Civil Court at Baroda and also field a writ petition, being Special Civil Application No. 829 of 1965, in this court. Certain interim orders were obtained in the said proceedings whereby the Govt. of Gujarat was restrained from giving the said survey number on lease to any other party. It appears that in the meantime the assessee had also applied for a mining lease in respect of Survey No. 30. The assessee-Corporation, therefore, with a view of to expanding its business and avoiding competition on the adjacent land and with a view to getting the required raw material for the desired number of years, agreed to pay a sum of Rs. 3 lakhs to the Madras company on the said company agreeing to give up its claim for a mining lease in respect of Survey No. 30. An agreement was executed in that behalf on November 12, 1969, annex. 'F'. After setting out the history leading to the institution of the suit and the writ petition by the Madras company, the agreement proceeds to recite as under :
'AND whereas the Corporation has spent considerable amount for mining and has also invested over Rs. 3 crores for erecting a beneficiation plant for the aforesaid mineral at the aforesaid area.
AND whereas 11.6 million tonnes of fluorspar deposits assessed by the geological survey of India under their report are spread over Survey Nos. 30 and 40, the beneficiation plant being put up by the Corporation could run for the desired number of years only when deposits of both the aforesaid Survey Nos. are made available to the Corporation. It is, therefore, advisable and necessary for the Corporation to obtain from the Govt. of Gujarat a mining lease of the aforesaid Survey No. 30 having vast quantities of the aforesaid mineral which the Corporation would not have unless the aforesaid suit and special civil application are finally disposed of which is likely to take considerable time a stated above.
AND whereas the Corporation in view of business expediency and in order to avoid competition on the adjoining area and with a view to get the required raw material for the desired number of years, the Corporation and the company entered into negotiations for settlement of the matter and thereby clearing the way of the Corporation in obtaining mining lease of the aforesaid Survey No. 30 from the Government of Gujarat.
AND whereas in consideration of the Corporation awarding andor paying a lump sum amount of Rs. 3,00,000 (rupees three lakhs only) to the company, the company has agreed to withdraw the aforesaid suit and aforesaid special civil application and to vacate the aforesaid Survey No. 30 and to furnish the copy of the prospecting report, data and other information to the Corporation.'
It was for the aforesaid reasons set out in the agreement that the assessee paid a sum of Rs. 3,00,000 to the Madras company on receipt whereof the latter withdrew the civil suit as well as the writ petition and vacated Survey No. 30 with a view to facilitating the assessee to obtain a mining lease in respect of that land. The assessee claimed deduction of the said amount of Rs. 3,00,000 as revenue expenditure in computing the total income for the assessment year 1970-71. The ITO, however, held that the said expenditure was of a capital nature and rejected the claim for deduction. In appeal the AAC also took the view that the expenditure in question was incurred with a view to persuading the Madras company to withdraw the pending litigation and further with a view to avoiding competition and since the benefit derived was of an enduring nature, the expenditure was rightly disallowed as it was in the nature of capital expenditure. The assessee carried the matter in appeal before the Income-tax Appellate Tribunal, Ahmedabad (Bench B), which relying on two decision of the Supreme Court in R.B. Seth Moolchand v. CIT : [1972]86ITR647(SC) and Mewar Sugar Mills Ltd. v. CIT : [1973]87ITR400(SC) held that, on the facts and in the circumstances of the case, it was clear that the expenditure was incurred to obtain an enduring benefit with a view to ultimately securing a mining lease in respect of Survey No. 30 and was, therefore, clearly in the nature of capital expenditure as held by the authorities below. It expressed its inability to accept the proposition that the impugned expenditure was incurred with a view to securing the required stock-in-trade. The assessee feeling aggrieved by the view taken by the authorities below, sought a reference and the Tribunal formulated the following two points for our determination :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to the deduction of Rs. 3 lakhs paid to M/s. Mineral Mining Co. Ltd. ?
(2) Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 3 lakhs paid to M/s. Mineral Mining Co. Ltd. was revenue expenditure or capital expenditure ?'
For reasons which we shall presently indicate, we are of the view that the impugned expenditure was in the nature of capital expenditure and, therefore, the view taken by the authorities below that the assessee was not entitle to deduction of the amount of Rs. 3 lakhs as revenue expenditure was correct. We are, therefore, of the opinion that question No. (1) must be answered in the affirmative and question No. (2) must be answered by stating that the impugned expenditure was in the nature of capital expenditure. In other words, both the questions must be answered in favour of the Revenue and against the assessee.
Even though the question whether a particular expenditure is capital or revenue expenditure frequently arises, no precise definition or universal text has been evolved by courts to determine its character and different tests have been applied from time to time in the backdrop of facts and circumstances of each individual case for determining the question posed before the court. It is impossible to evolve a strait jacket formula for determining whether a particular expenditure is capital expenditure or revenue expenditure because it is not possible to conceive of all the diverse situations in which expenditure is incurred by an assessee. In the book Advanced Accounting, Vol.2, by Yorston Smith Brown 6th Edn., the learned authors observation at p.324 as under :
'The distinction between capital and revenue expenditure is that the former is for property having a life duration extending over several accounting periods, whereas the latter is an expenditure for property which will be consumed within the current accounting period.'
Lord Dunedin in Vallambrosa Rubber Co. Ltd. v. Farmer [1910] 5 TC 529 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 statement was qualified by Lord Cave in Atherton v. British Insulated and Helsby Cables Ltd. [1926] AC 205; [1925] 10 TC 155 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 that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable, not to revenue, but to capital.'
The words 'enduring benefit of a trade' were explained to mean not 'everlasting', but, 'in the way capital endures' in Henrikesen v. Grafton Hotel Ltd. [1942] 234 TC 453; [1943] 11 ITR (Suppl.) 1. N. H. Bhagwati J. in Assam Bengal Cement Co. Ltd. v. CIT : [1955]27ITR34(SC) observed :
'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 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 bur 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 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.'
The second test of fixed and circulating capital was applied by Lord Haldane in John Smith and Son v. Moore [1921] 12 TC 266 in the following words (p. 282) :
'.... fixed capital as what the owner turns to profit by keeping it in his won possession, circulating capital as what he makes profit of by parting with it and letting it change masters.'
The Judicial Committee in Tata Hydro-Electric Agencies Ltd. v. CIT [1937] 5 ITR 202 observed :
'What is money wholly and exclusively laid out for the purposes of the trade is a question which must be determined upon the principle 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 companys working expenses; it is expenditure laid out as part of the process of profit earning ?'
In IRC v. Granite City Steamship Co. Ltd. [1927] 13 TC 1 Lord Sands characterised as capital an outlay made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment. That is why N. H. Bhagwati J. in the case of Assam Bengal Cement Co. Ltd.s case : [1955]27ITR34(SC) . observed :
'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.'
It becomes obvious from the aforesaid tests that if the expenditure is incurred with a view to bringing into existence an asset or an advantage for the enduring benefit of the trade, it would, unless the circumstances show otherwise, be in the nature of a capital expenditure. Where the expenditure is incurred for extension of a business or for a substantial replacement of the equipment, it would again be capital expenditure. If the expenditure is incurred with a view to acquiring a capital asset such expenditure would also be in the nature of capital expenditure. If any asset or advantage for the enduring benefit of the business is acquired or brought into existence, the amount spent, no matter from which source, would be in the nature of capital expenditure and not revenue expenditure. It is not necessary in all cases that the amount must be paid once and for all because in a given cases the payment may be spread over a period mutually agreed upon. The test is that if the expenditure is incurred in the direction of acquisition of a capital asset, or advantage for the enduring benefit of the business, such expenditure would be in the nature of capital expenditure even if it is not incurred once for all and is spread over a period mutually agreed upon. It would depend on the aim and object of the expenditure for if the expenditure is incurred for the acquisition of a capital asset. It would be in the nature of capital expenditure : but if, on the other hand, it is incurred for running the business or working it with a view to producing profits, it would be a revenue expenditure.
Bearing in mind the aforesaid test, it is necessary to inquire whether the expenditure incurred by the assessee for the twin objective of driving out a competitor and paying the way for the ultimate acquisition of a mining lease in respect of Survey No. 30 was in the direction of acquisition of a capital asset so as to be termed a capital expenditure or was merely with a view to enlarging its stock-in-trade, since the fluorspar deposits in Survey No. 40 were not considered enough to last over the required expenditure. In Kamakshya Narain Singh v. CIT [1943] 11 ITR 513, receipt and payments in connection with acquiring or disposing of leaseholds of mines or minerals were held to be on capital account. That is because they concerned an outlay of fixed capital and not circulating capital. Channell J. in Alianza Co. v. Bell [1904] 23 KB 666 held that the price paid for the purchase of mining rights is capital expenditure. In Mohanlal Hargovind v. CIT [1949] 17 ITR 473, the assessee, a bidi manufacturer, had entered into short-term contracts with the Government and other forest owners to pick up tendu leaves used to roll bidis from the forest. Under the contract the assessee had a right of entry into the forest for collecting the leaves and to coppice small tendu plants and to pollard tendu trees but he had no interest in the forest land as such. The Privy Council held that the contracts were for the purpose of securing supplies of tendu leaves for the business of the assessee. These contracts did not grant any interest in land or the trees to the assessee. It was in these special facts that the Privy Council came to the conclusion that the expenditure incurred in acquiring the raw material (tendu leaves) was in a business sense an expenditure on revenue account, and not on capital account, just as much if the tendu leaves had been bought in a shop. Referring to the decision in Alianza Companys case [1904] 2 KB 666, their Lordships observe that it was a case of a company whose object was treated as one to work and develop a bed containing a substance called cliche from which nitrates and iodine could be obtained by a process of manufacture. It was analogous to the purchase or leasing of a mine and was obviously capital expenditure. In other words, the decision and was obviously capital expenditure. In other words, the decision in Alianza Companys case was distinguished having regard to the object in acquiring the lease and the nature of the lease. The Court of Appeal in Stow Bardolph Gravel Co. Ltd. v. Poole : [1955]27ITR146(Cal) , was concerned with a company carrying on business of selling sand and gravel Co, Ltd. v. Poole [1954] 35 TC 459; [195] 27 ITR 146 was concerned with a company carrying on business of selling sand and gravel. It had purchased two unworked deposits and it claimed that the payment made by it for purchasing the said deposits should be deducted from its profits as being expenditure for acquiring its trading stock. Relying on the decision in Golden Horse Shoe (New) Ltd. v. Thurgood [1933] 18 TC 280 the court held that the company had acquired the capital asset and not a stock-in-trade because what was purchased was a part of the land itself, namely, the gravel in situ. In Gotan Lime Syndicate v. CIT : [1966]59ITR718(SC) the assessee-firm, which carried on the business of manufacturing time from limestone, had secured under a lease deed, the right to excavate limestone in certain areas. The lease was for a period of five years within option for renewal for another period of five years. Dead rent was to be charged at Rs. 10 per acre while royalty was to be charged at 1 as. 6. ps.per maund of lump lime and 1 as, per maund of limestone. The lessee was prohibited from carrying away any other minerals which might be found in the area and he was further obliged to allow other lessees of these minerals to go on the land and win them. It was held that in the absence of material to show that any part of the royalty had to be treated as premium and referable to the acquisition of the mining lease, the royalty payment. Including the dead rent, had relation only to the lime deposits to be got and had, therefore, to be treated as revenue expenditure. According to that decision, payment by way of royalty or dead rent was not direct payment for securing an enduring advantage. It was, therefore, thought that it had relation to the raw material to be obtained from the land in question. It is clear from this decision that if premium was required to be paid, it would have been considered to be a capital expenditure and not a revenue expenditure.
In Pingle Industries Ltd. v. CIT : [1960]40ITR67(SC) the Supreme Court by majority (S.K. Das J., dissenting) held that where an assessee acquires by a long-term lease the right to win stones, in situ, he acquires a capital asset from which, after extraction, he can convert the stones into his stock-in-trade. In such a case if a lump sum payment is made for acquiring a capital asset of enduring benefit to his trade, such expenditure would be no capital account and would not be allowable deduction. That was a case where the assessee-company which carried on the business of selling Shahabad flag stones, obtained under a contract the right to extract stones from quarries for a period of 12 years on the annual payment of Rs. 28,000. To safeguard the payment 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 installments of Rs.1,666-10-8. The assessee had only the right to excavate stones and undertook not to manufacture cement and the owner undertook not to allow any other person to excavate stones in those areas. The question was, whether the amounts paid by the assessee to the owner was in the nature of capital expenditure or revenue expenditure allowable under s. 12(2)(xv) of the Hyderabad Income-tax Act, corresponding to s. 10(2)(xv) of the Indian I.T. Act, 1922. In the backdrop of these facts the Supreme Court, by majority, held that since the assessee acquired by him long-term lease the right to win stones, he had acquired a right in the land and, therefore, a capital asset, and the outgoing were, therefore, on capital account.
In R.B. Seth Moolchand Suganchand v. CIT : [1972]86ITR647(SC) relied upon by the Tribunal, the assessee-firm paid a sum of Rs. 1,53,800 to acquire a lease of certain areas of land bearing mica for a period of twenty years. Those areas had already been worked for fifteen years by other lessees. The question was, whether a proportionate part of the amount was allowable in the relevant years as business expenditure. It was held that the amount was paid for acquiring a right of an enduring nature to extract and remove the mica and bring it to the surface and, therefore, the expenditure incurred was capital expenditure and the proportionate part of the sum of Rs. 1,53,800 was not allowable as revenue expenditure. In that case the Supreme Court observed that in the case of mining lease, where minerals have to be won, extracted and brought to the surface, expenditure for acquiring the right over or in the land to win the minerals would be of a capital nature; but where the mineral has already been gotten and is on the surface, then the expenditure incurred for obtaining the right to acquired the raw material would be revenue expenditure laid out for the acquisition of stock-in-trade.
Strong reliance was placed by Mr. J.P. Shah on the decision of the Supreme Court in M.A. Jabbar v. CIT : [1968]68ITR493(SC) . That was case of an assessee, who was carrying on business of supplying lime and sand. He took a lease for a term of eleven months, whereby he obtained exclusive right and liberty to enter, occupy and use for quarrying purpose and to raise, render marketable, carry away, sell and dispose of sand within, or under or upon land constituting the bends of a river and certain nallahs specified in the lease. The lease money of Rs. 82,500 was paid by the appellant in two sums of Rs. 56,100 and Rs. 26,400 respectively. It was found as a fact that the contract was for removal of sand lying on the surface of the river beds, that all the sand that could be removed was lying on the surface, and that no exacvation or skillful extraction was to be performed on the land before obtaining it. It was, therefore, held having regard to the fact that the assessee acquired merely the right to remove the sand lying loose on the land and that too for a short period of eleven months only, he did not acquire any fixed or capital asset of an enduring nature by obtaining the lease. The Supreme Court, therefore, ruled that the expenditure was of a revenue nature. The Lordships observed that the fact the an interest in land s was also conveyed by the lease was not decisive of the question whether the money payable under the lease was capital expenditure or a revenue expenditure. The decisive factor is the object with which the lease is taken and the nature of the payment which is made when obtaining the lease. This decision was considered by the Supreme Court in R.B. Seth Moolchands case : [1972]86ITR647(SC) and it was observed that the right to take away sand from the surface of the river beds must be treated as if the sand was stock-in-trade in the same way as the right to pick tendu leaves was tested by the Privy Council in Mohanlal Hargovinds case [1949] 17 ITR 473. Their Lordships then laid down the following test (p. 651 of 86 ITR) :
'If we confine our attention to the mining leases, what appears to us to be an empirical test is that where minerals have to be won, extracted and brought to surface by mining operations, the expenditure incurred for acquiring such a right would be of a capital nature. But, where the mineral has already been gotten and is on the surface, then the expenditure incurred for obtaining the right to acquire the raw material, that is, the mineral, would be a revenue expenditure laid out for the acquisition of stock-in-trade.'
It was, however, argued by Mr. J.P. Shah that in the year in which payment was made by the assessee to the Madras company, no capital asset was acquired and, therefore, the expenditure must be taken on revenue account. In support of this submission he placed strong reliance on the decision of the Supreme Court in Empire Jute Co. Ltd. v. CIT : [1980]124ITR1(SC) . However, before we consider the effect of this decision we may refer to the decision of the Supreme Court in CIT v. Coal Shipments P. Ltd. : [1971]82ITR902(SC) wherein the Supreme Court observed that where payment is made to ward off competition in business to a rival, it would constitute capital expenditure if the object of making that payment is to derive an advantage by eliminating the competition over some length of time; how long the period of contemplated advantage should be, in order to constitute enduring benefit, would depend on the circumstances, and the facts of each individual case.
The Punjab and Harayana High Court in Dalmia Dadri Cement Ltd. v. CIT was concerned with a case where the assessee had placed an order with a German company for the supply of a dryer plant for his cement manufacturing business and, as desired by the German firm, opened an irrevocable letter of credit for pound 32,000 in its favour. Sub-sequently on account of some difference regarding the specifications of the plant, the assessee requested the bankers to cancel the letter of credit but were told that the letter of credit could not be cancelled without the consent of the German firm which refused to release the letter of credit. Ultimately, a compromise was struck whereby the letter of credit was released on payment of pound 15,000 to the German firm. This amount was claimed by the assessee as revenue expenditure and was not a permissible deduction under s. 10(2)(xv) of the Indian I.T. Act, 1922. The High Court observed that the expenditure incurred for the acquisition of a plant was surely of a capital nature and could not be claimed as deduction on revenue account merely because the capital asset, namely, a dryer plant, was not acquired.
In State Trading Corporation of India Ltd. v. CIT : [1974]94ITR496(Delhi) the assessee, which had to abandon its proposal to construct a building as the land meant for the building was acquired by the Government, had yet to pay a sum of Rs. 10,000 as fees to certain architects for the preparation of the plan for construction of the proposed building. The capital asset, namely, the building, did not in fact come into existence. The amount was claimed by way of deduction as revenue expenditure but the claim was disallowed on the ground that the amount paid to the architects was on capital account since the expenditure was incurred for deriving a benefit of an enduring nature, the subsequent abounding of the building project notwithstanding.
It becomes clear from the aforesaid three decisions to which our attention was drawn that if expenditure is incurred to ward off competition with a view to deriving an advantage of an enduring nature, the expenditure incurred is on capital account and not on revenue account. So also, if expenditure is incurred with a view to acquiring a capital asset, such expenditure is incurred with a view to acquiring a capital asset, such expenditure is on capital account regardless of the fact whether the capital asset is ultimately acquired or not. These decision, therefore, clearly negative the contention which was urged by Mr. J. P. Shah, learned counsel for the assessee.
On the resume of the above case-law, the following tests emerge :
(1) When expenditure is incurred not only once and for all, and with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, ordinarily such expenditure is on capital account.
(2) Where the expenditure is incurred in the field of fixed capital, it is on capital account, but if it is a part of the circulating capital, it is on revenue account.
(3) If the expenditure is a part of the working expenses in ordinary commercial trading, it is not capital but revenue expenditure.
(4) If the expenditure is incurred for the initial outlay or for extension of business or substantial replacement of equipment, it is capital expenditure but if it is incurred for running the business or is laid out as part of the process of profit-making, it is revenue in character, and
(5) If expenditure is incurred for ensuring the regular supply of raw material, may be for periods extending over several years, it is on revenue account.
But before we apply these tests, we must deal with the submission of Mr. J.P. Shah, the learned counsel for the assessee, who venhemently contended before us that as pointed out by the Supreme Court in Empire Jute Companys case : [1980]124ITR1(SC) these tests are not conclusive and are found to have broken down. According to the learned counsel, the Supreme Court, therefore, sider tracked these tests and evolved a new test to the effect that in order that an expenditure can be said to have been incurred on capital account, it must be shown that a capital asset has come into existence otherwise, the expenditure must be taken to be of revenue nature. Bhagwati J., who spoke for the Supreme court, after reproducing the test laid down by Lord Cave in Athertons case [1926] AC 205 (HL), observed as under (p. 10 of 124 ITR) :
'This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 it would be misleading to suppose that in all cases, securing a benefit for the business would be, prima facie, capital expenditure, so long as the benefit is not so transitory as to have no endurance at all. There may be cases where expenditure, even if incurred for obtaining a advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessees trading operations or enabling the management and conduct of the assessees business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.'
These observations, in our opinion, do not say that the test evolved by Lord Cave cannot be applied even if the facts for its application are laid before the court. The Supreme Court has merely stated that the test of enduring benefit is not a conclusive test and ought not to be applied blindly and mechanically without regard to the particular facts and circumstances of the given case. It has at the same time stated that where the expenditure is in the capital field, the expenditure would be allowable on an application of this test. Therefore, the submission of Mr. Shah that the Supreme Court in the decision of Empire Jute Co. Ltd. : [1980]123ITR1(Delhi) sider tracked all the earlier tests and evolved a new test of universal application cannot be accepted. Dealing with the second test applied by Lord Haldane by drawing the distinction between fixed capital and circulating capital, the Supreme Court observed as under (p. 11 of 124 ITR) :
'But this test also sometimes breaks down because there are many formal expenditure which do not fall easily within these two categories and not infrequently, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nachanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 the line of demarcation is difficult to draw and leads to subtle distinctions between profit that is made out of assets and profit that is made upon assets or with assets. Moreover, there may be cases where expenditure, thought referable to or in connection with fixed capital, is nevertheless allowable as revenue expenditure. An illustrative example would be of expenditure incurred in preserving g or maintaining capital assets. This test is, therefore, clearly not one of universal application.'
These observations do not lay down, as argued by Mr. J.P. Shah for the assessee, that the said test evolved by Lord Haldane is outdated and cannot be applied even if the facts of given case attract its application.
At this stage we may also refer to the observation of N.H. Bhagwati J.in Assam Bengal Cement Co.s case : [1955]27ITR34(SC) where he pointed out that this test can be applied only if the test evolved by Lord Cace is not attracted. The learned judge, speaking for the Supreme Court stated (p. 45) :
'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 morally exclusive and above indicated.... One has therefore got to apply these criteria one after the other form the business point of view and come to the conclusion whether on 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.'
It would, therefore, appeal from the above observations of the Supreme Court that the test of fixed capital or circulating capital could be invoked only if the test of acquisition of an asset or an advantage for the enduring benefit of a trade, has no application to the facts of a given case. In the Empire Jute Companys case : [1980]124ITR1(SC) the Supreme Court has not stated that these tests are no more relevant and that an expenditure would be on revenue account even if it was incurred for the acquisition of a capital asset or advantage of an enduring nature if the assessees fixed capital remains untouched, meaning thereby, remains unargumented. It must be remembered that their Lordships and come to the conclusion that the allotment of loom hours, under the working time agreement, to different mills constituted not a right conferred but merely a contractual restriction on the right of every mill to work its looms to their full capacity, and purchase of loom hours by a mill had, therefore, the effect of relaxing the restriction on the operation of looms to the extent of the number of working house per week transferred to it, so that the transferee-mill could work it looms hours no new asset was created and there was no addition to or expansion of the profit-making apparatus of the assessee. In other words, acquisition of additional loom hours did not add to the fixed capital of the assessee, the permanent structure of which the income was the product or fruit, remained the same, that is, unenlarged. It is the special facts of that case that the Supreme Court came to the conclusion that the profit-making apparatus of the assessee remained untouched and unaltered; there was no enlargement of the permanent structure and what the assessee acquired was merely an advantage in the nature of relaxation of restriction on working hours imposed by the working time agreement so that it could operate its profit-earning structure for a longer number of hours. It was in the backdrop of these facts that the Supreme Court came to the conclusion that the payment made for the acquisition of additional loom hours could not be said to be in the direction of acquiring a capital asset because no capital asset was in fact acquired as the profit-making apparatus of the assessee was not enlarged and, therefore, the expenditure must be taken to be on revenue account. That, however, does not mean that even if an expenditure is made with a view to acquiring a capital asset or an advantage of an enduring nature and the case falls directly within the test laid down by Lord Cave and there are no circumstances pointing to the contrary, the expenditure would still be on revenue account if no fixed asset or advantage for the enduring benefit of trade is ultimately acquired. We are, therefore, of the view that the decision of the Supreme Court does not go so far as to say that the tests evolved by the courts earlier are not relevant and in order that an expenditure could be branded as on capital account, the Revenue must show that the assessee has acquired a fixed asset or an advantage of an enduring nature by the expenditure so incurred.
The next case to which our attention was drawn by Mr. J. P. Shah the learned advocate for the assessee, is the decision of a Division Bench of this court in CIT v. Gujarat Mineral Development Corporation : [1981]132ITR377(Guj) . In that case the assessee, who was the assessee before us, paid a sum of Rs. 20.40 lakhs to the Gujarat Electricity Board being 50 per cent. of the total amount spent by the G.E.B. for laying electric cables and electric supply transmission lines, etc., for the beneficiation plant of the assessee to enable it to separate waste material from useful material. The lines, cables and transmission lines were to be the property of the G.E.B. In the accounting years 1967-68, the assessee had shown in its books of account an amount of Rs. 19,00,000 as having been paid by way of advance to the G.E.B. and in subsequent years one seventh of the total amount of Rs. 20.46 lakhs as revenue expenditure for the assessment year 1969-70. The Tribunal held that the expenditure did not relate to the year under appeal and in any event it was a capital expenditure. The High Court relying on the decision of the Supreme Court in Empire Jute Companys case : [1980]124ITR1(SC) held that even though the electric supply lines were laid at the instance of the assessee by the G.E.B. and even though the assessee contributed 50 per cent, of the cost for laying such lines, the cables, lines and transmission lines remained the property of the G.E.B. under the agreement and, therefore, the expenditure could not be said to have been incurred by the assessee for acquisition of a capital asset. This is how the Division Bench approached the question (p.388 of 132 ITR) :
'Applying the test laid down by the Supreme Court in Empire Jute Co.s case : [1980]124ITR1(SC) to the facts before us, it is clear that even if securing electric supply for a period of seven years and longer, if the agreement to supply is not terminated by the Electricity Board, is a benefit of an enduring nature, if the advantage consisted in facilitating the assessees trading operations and enable the assessee to conduct its business more efficiently and more profitably, then, the expenditure would still be on revenue account and not on capital account. The peculiar feature in this case is that the amount was spent for securing electric supply for the beneficiation plant which was intended to enable the assessee-company to carry on its business more efficiently and more profitably. It was a business which was being previously carried on by the assessee-company, namely, of extracting fluorspar ore and selling it but in order to enable it to carry on that business to be installed and the electric cables and supply lines were laid for that beneficiation plant as has been pointed out by the Tribunal in its order. Once the purpose of the beneficiation plant is properly understood, it is obvious that the advantage consisted merely in facilitating the conduct of the assessees business and enabling the assessee to carry on its business more efficiently or nor profitably, but the capital, in the sense of the block capital, was remaining untouched by the expenditure of this amount of Rs. 20.46 lakhs. Hence, in the commercial sense, it was not an advantage in the capital field. Since it left the fixed capital of the assessee employed for the main business of mining untouched and the advantage was not in the capital field, it could not be said to be an expenditure of a capital nature.'
It is thus obvious from the above observations that the court came to the conclusion that the expenditure was on revenue account because it was of the opinion that the expenditure was not incurred for the expansion of the assessees beneficiation plant or for augmenting it s capital asset but merely for faciliating the conduct of its business with a view to earning larger profits. It was in these peculiar facts coupled with the fact that under the agreement the cables, lines and transmission lines were tot remain the property of G.E.B, that the court came to the conclusion that the expenditure was incurred on revenue account. It is also necessary to bear in mind that even on behalf of the Revenue it was not contended that the amount was spent for acquisition of a capital asset. Therefore, it was not disputed by the Revenue that the amount was spent by the assessee not for the acquisition of any capital asset and since the company was already extracting fluorspar ore and selling it even before this facility was extended to its beneficiation plant, it was held that the additional facility was merely to augment the profits of the assessee and was not in the direction of acquisition of a capital asset. In our opinion, therefore, that decision turns on its own facts.
The facts of this case clearly show that the expenditure of Rs. 3 lakhs was incurred for the twin purpose of avoiding competition and clearing the way for securing a mining lease in respect of Survey No. 30 from the Government of Gujarat. The Madras company held a prospecting license in respect of Survey No. 30 and it had already obtained a prospecting report and had applied for a mining lease on September 11, 1957, in respect of that land from the State Government under the Mines and Mineral (Regulation and Development) Act, 1948. The said company had carried out prospecting operations under the prospecting license granted to it and had got prepared a prospecting report dated November 9, 1963, as required by the Mines and Minerals (Regulation and Development) Act, 1957, and the Mineral Company succeeds in obtaining a mining lease in respect of the adjacent land bearing Survey No. 30, it might have to fact stiff competition. With a view to avoiding competition and with a view to securing the mining lease in respect of Survey No. 30, the assessee paid a sum of Rs. 3 lakhs to the Madras company on receipt whereof the said company agreed to withdraw the pending suit as well as the writ petition and further agreed to furnish a copy of the prospecting report, data and other information to the assessee. Now, s. 11(1) of the Mines and Minerals (Regulation and Development) Act, 1957, lays down that where a prospecting license has been granted in respect of any land, the licensee shall have a preferential right for obtaining a mining lease in respect of that land over any other person provided that the State Govt. is satisfied that the licensee has not committed any breach of the terms and conditions of the prospecting license and is otherwise a fit person or being granted the mining lease. On a plain reading of this sub-section it is clear that the Madras company which had secured a prospecting license had a preferential right for obtaining a mining lease in respect of that land bearing Survey No. 30. The Madras company was refused a mining lease by the State Govt. and its revision application was rejected by the Central Government and, therefore, it had taken legal proceedings challenging the said refusal. Those proceedings would have taken a number of years for final disposal and could have ended in favour of the Madras company. The assessee, therefore, thought that unless the Madras company is driven out of the field, its endeavor to secure a mining lease in respect of Survey No. 30 would not materialise for a number of years. It was, therefore, for the purpose of acquisition of the mining lease in respect of Survey No. 30 that the assessee decided to pay a sum of Rs. 3 lakhs to the Madras company to drive away a competitor having a preferential right to a mining lease. In the course of the hearing of this reference we inquired of Mr. J.P. Shah, the learned advocate for the assessee, if the assessee had ultimately succeeded in obtaining a mining lease. He fairly placed before e us the original copy of the indenture of March 31, 1971, whereby the assessee had secured a mining lease in respect of Survey No. 30. By consent of parties a copy of this agreement has been taken on record to complete the factual data. It would appear from this lease deed that the assessee-company had been given a right to extract fluorspar from Survey No. 30 and the duration of the lease is twenty years with a renewal clause. We have, therefore, no hesitation in coming to the conclusion that the amount of Rs. 3 lakhs was spent by the assessee in the direction of acquisition of a capital asset, namely, a mining lease from the state Government. It was a lump sum payment made once and for all to the Madras company which held a prospecting license and the prospecting report in respect of survey No. 30. The payment was made with a view to achieving the twin objectives of driving away a keen competitor and clearing the ground for the ultimate acquisition of a mining lease in respect of the survey number. Therefore, the expenditure was incurred by the assessee with a view to acquiring a capital asset, namely, a mining lease of a sufficiently long duration. In fact, in course of time the assessee did acquire a mining lease as is clear from a copy of the lease dated March 31, 1971, which gives the assessee the right to extract fluorspar from Survey No. 30 also for a duration of twenty years, which period could be extended by the invocation of the renewal clause. Once an expenditure is incurred in the direction of acquisition of capital asset, that expenditure is on capital account and the character of that expenditure would not undergo a change merely because the assessee did not succeed in acquiring the capital asset for which the expenditure was initially made. If the expenditure is on capital account, it is of no consequence whether ultimately the assessee succeeds or fails in acquiring the capital asset. We do not read the decision of the Supreme Court in Empire Jute Companys case : [1980]124ITR1(SC) as laying down a universal test that if capital asset is not ultimately acquired, the expenditure initially incurred for acquisition of that capital asset would be on revenue account. We are, therefore, of the opinion that in the facts and circumstances of the present case, since the expenditure was incurred with twin objective of driving out a competitor and clearing the way for the acquisition of a capital asset, namely, mining lease, and the capital asset was ultimately acquired. The expenditure incurred was on capital account and not on revenue account. It is well settled that if under the terms of the mining lease, minerals have to be won, extracted and brought to surface by mining operations the expenditure incurred for acquisition of such a right would be of a capital nature but where the mineral is already the right to acquire the raw material would be a revenue expenditure laid out for the acquisition of stock-in-trade. In the present case under the terms of the mining lease, fluorspar has to be won, extracted and brought to surface by mining lease, fluorspar has to be won, extracted and brought to surface by mining lease, fluorspar has to be won, extract and brought to surface by mining operations, and, therefore, it cannot be said that the expenditure was incurred for obtaining the right to acquire the raw material, namely, fluorspar, for the acquisition of stock-in-trade and must, therefore, be taken as spent on revenue account. We are, therefore, of the opinion that having regard to the facts of the present case, the expenditure of Rs. 3 lakhs was clearly for acquisition of a capital asset and could not, therefore, be taken on revenue account. We are, therefore, in agreement with the view expressed by the Tribunal on this count.
That brings us to the next question. In the assessment year 1970-71, the assessee incurred an expenditure of Rs. 64,503 for the construction of a small bridge over river Narmada for facilitating the laying of water pipes to the assessees beneficiation plant. Due to heavy floods the approach bridge which was under construction was washed away and the assessee wrote off the expenditure and claimed it as a deduction. The ITO disallowed it on the ground that it was a capital loss. The AAC in appeal agreed with the view of the ITO. It was contended before the Tribunal that the said amount must be allowed under s. 28(1) of the I.T. Act, 1961, because it reduced the real income of the assessee. Alternatively it was submitted that it should be allowed as a short-term capital loss because of the extinguishment of the capital asset. That submission was negatived by the Tribunal since no consideration was received by the assessee on the extinguishment of the capital asset. In taking that view the Tribunal followed the decision of this court in CIT v.R.M. Amin : [1971]82ITR194(Guj) . The Tribunal also rejected the claim of allowance of balancing loss or terminal allowance in view of Expln. (ii) to s. 34(2) of the Act.
Similarly, for the assessment year 1971-72 the assessee-company wrote off a sum of Rs. 7,19400 which, inter alia, included a sum of Rs. 2,26,496 for the cost of the approach bridge washed away during the floods. The claim was rejected by the ITO on the ground that it could never be allowed as a revenue deduction nor could it be allowed as terminal loss under s. 32(1) of the Act. This view was confirmed in appeal by the AAC. Before the Tribunal the very same contentions were raised as in respect of the claim of Rs. 64,503 in the assessment year 1970-71. The Tribunal rejected those contentions on the very same grounds.
At the request of the assessee the Tribunal formulated the following two points for our opinion :
'(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in not allowing the loss of Rs. 64,503 for A.Y. 1970-71 and Rs. 2,26,496 for A.Y. 1971-72 due to the washing away of the approach bride u/s. 28 and/or as short-term capital loss and/or as a terminal loss u/s. 32(1) of the Act ?
(4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in disallowing the expenditure of Rs. 20,40,000 for A.Y. 1970-71 and Rs. 2,92,285 for A.Y. 1971-72 spent for getting the use of electrical power from Gujarat Electricity Board ?'
For reasons which we shall presently state, both the aforesaid questions must be answered in the affirmative, that is, in favour of the Revenue and against the assessee.
Mr. J.P. Shah, the learned counsel for the assessee did not press his contention based on the language of s. 32(1)(iii) of the Act as the capital asset was not put to sue and was washed away on both the occasions when it was only partly complete. It is, therefore, required to consideration under s. 32(1)(iii) of the Act. So also, Mr. Shah did not press his claim for deduction under s. 37(1) of the Act. We are, therefore, required to consider whether the assessee was entitled to deduction of the expenditure incurred for the construction of the bridges under s. 28(1) or s. 45 read with s. 2(47) of the Act. Section 28(i) on which reliance was placed provides that the profits and gains of any business or profession carried on by the assessee at any time during the previous year shall be chargeable to income-tax under the head 'Profits and gains of business or profession'. In order to determine the profits and gains of any business it was urged by the learned counsel for the assessee that all expenditure incurred by the assessee in the course of business must be deducted and the real income of the assessee must be brought to tax. In Badridas Daga v. CIT : [1958]34ITR10(SC) the Supreme Court while considering s. 10(1) of the Indian I.T. Act, 1922, stated that in computing the profits of business, loss must be deducted. The loss for which a deduction is claimed must be one that springs directly from the carrying on of the business and is incidental thereto and not any loss sustained by the assessee even if it has some connection with his business. If such loss is established, the assessee must be allowed deduction even though an express provision in that behalf is not engrafted in s. 10 of the Indian I.T. Act, 1922.
Again in CIT v. Nainital Bank Ltd. : [1965]55ITR707(SC) the Supreme Court observed that under s. 10(1) of the Indian I.T. Act, 1922, the trading loss of a business is deductible in computing the profit earned by the business. Of course, the loss must be incurred in carrying out the operation of the business and must be incidental to the operation. Whether loss is incidental to the operation of business or not is again a question to be decided on the facts of each case having regard to the nature of the operation and the risk involved in carrying it out.
It was, therefore, submitted by Mr. Shah that in computing the profit of the assessee under s. 28(i) of the Act, the business loss it suffered on two occasions when the approach bridges were washed away by floods must be deducted to ascertain the real income of the assessee which could be brought to tax. We are afraid we cannot accede to this submission made by the learned counsel for the assessee for the simple reason that the amount spent by the assessee for the construction of approach bridge for laying the pipelines to its beneficiation plant was expenditure on capital account and could only be treated as a capital loss and not a business loss. In Dalmia Dadri Cement Ltd.s case the High Court after coming to the conclusion that the expenditure incurred by way of advance payment to the German firm was on capital account observed (p.306) :
'The expenditure for the acquisition of a plant is surely of a capital nature and any loss suffered in that transaction would naturally be of a capital nature.'
The Tribunal also came to the conclusion that the expenditure incurred for the construction of a bridge for laying of pipes was in the capital field and, therefore, the loss incurred by the assessee on the bridge having been washed away on both the occasions could only be termed as capital loss and not business loss or revenue loss and, therefore, could not be deducted under s. 28(i) of the Act. We are in agreement with this view of the Tribunal and, therefore, we answer the point against the assessee.
The next question which we must consider is, whether the said loss could be termed to be a short term capital loss as urged by Mr. J.P. Shah for the assessee. Section 45 of the Act provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in ss. 53, 54,54-B, 54-D and 54-R be chargeable to income-tax under the head 'Capital gains', and shall be deemed to be the income of the previous year in which the transfer took place. Section 2(47) defines the term 'transfer' thus :
'Transfer, in relation to a capital asset, includes the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law.'
According to Mr. J.P. Shah since the rights of the assessee-company in the capital asset were extinguished on both the occasions when the bridge was washed away, there was a transfer of the capital within the meaning of s. 2(47) of the Act. To buttress his argument he invited our attention to a decision of this court in CIT v.Vania Silk Mills (P.) Ltd. : [1977]107ITR300(Guj) which was a case of damage of the assessees machinery along with its own machinery and on settlement of the insurance claim, it received certain amount out of which it paid a sum of Rs. 6,32,533 to the assessee on account of the destruction of its machinery. The difference between the actual cost of the machinery and its written down value worked out to Rs. 2,62,781 and in the assessment proceedings for the assessment year 1967-68 the assessee returned the said amount as profit chargeable to tax. The ITO also subjected to tax the additional amount of Rs. 3,50,792 being the difference between the original cost and the amount received from the mills as capital gains chargeable under s. 45 of the Act. The assessees contention that the question of capital gain did not arise since no transfer of capital asset was effected was negatived. In appeal the Tribunal set aside the order holding, inter alia, that unless the transfer of a capital asset is effected by an assessee, section 45 would not be attracted. This court held that s. 45 provides that any profits or gains arising from the transfer of a capital asset shall be chargeable to income-tax under the head 'Capital gains'. Section 2(47) provides that 'transfer' in relation to a capital asset, includes, the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law. It was, therefore, held that since the language chosen was of the widest amplitude, the expression 'the extinguishment of any rights therein' would cover every possible transaction which results in the destruction, annihilation, extinction, termination, cessation cessation or cancellation, by satisfaction or otherwise, of all or any of the bundle of rights - qualitative or quantitative -which the assessee has in a capital asset, whether such asset is corporeal or incorporeal. Mr. J.P. Shah, therefore, submitted that in the present case since the assessees rights in the capital asset, namely, the partly constructed bridges were extinguished on both the occasions when the bridge was washed away by floods, there was an extinguishment of the bundle of rights which the assessee had in the said capital asset and hence there was a 'transfer' within the meaning of s. 2(47) of the Act. Assuming that the said contention of Mr. J.P. Shah is well founded, having regard to the language of s.48 of the Act, there must be consideration for the transfer and, in the absence of any consideration, s. 45 would not be attracted.
In CIT v. R. M. Amin : [1971]82ITR194(Guj) the assessee held shares of the aggregate fact value of shillings 1,92,000, that is, Rs. 1,28,000. The said company went into voluntary liquidation. The assets of the company were sold by the liquidator and after payment of taxes and liabilities, the assessee became entitled to receive shillings 4,68,489, equal to Rs. 3,12,326 in respect of the 192 shares held by him. The assessee thus obtained an excess amount of Rs. 1,84,326 over the aggregate face value of the said 192 shares. The question arose whether the assessee was liable to capital gains under s. 45 read with s. 2(47) of the Act. This court came to the conclusion that there was no 'transfer' of capital asset within the meaning of s. 45 of read with s. 2(47) of the Act when the assessee received shillings 4,68,489 equal to Rs. 3,12,326 on final distribution of the net assets of the company. According to the learned judges constituting the Division Bench of this court, when a shareholder receives moneys representing his share on distribution of the net assets of the company in liquidation, he receives such moneys in satisfaction of the right which belongs to him by virtue of his holding the shares and not by way of consideration for the extinguishment of his right or right in the shares. It is not the extinguishment of his rights in the shares for which consideration is received by him; it is rather because moneys representing his share in the distribution are received and by that his rights in the shares are extinguished. Therefore, according to the said decision, the transfer that is contemplated by s, 45 read with s. 2(47) is a transfer as a result of which consideration is received by the assessee or has accrued to the assessee. Substituting the words 'extinguishment of any rights in the capital asset' for the words 'transfer of the capital asset' the transaction, in order to attract the charge of capital gains, must, it was observed, be such that consideration is received by the assessee or accrues to him as a result of the extinguishment of the rights in the capital asset. This decision was followed in the case of Vania Silk Mills : [1977]107ITR300(Guj) also. The decision in R.M. Amins case : [1971]82ITR194(Guj) was carried to the Supreme Court, vide : [1977]106ITR368(SC) and the Supreme Court, without entering into the question whether existence of consideration must be established to attract the provisions of s. 45 of the Act, held that there was no transfer within the meaning of s. 2(47) of the Act. Therefore, so far as we are concerned, in view of the decision in R.M. Amins case which was followed in the case of Vania Silk Mills, we must hold that in the absence of consideration, section 45 would not attracted and hence deduction by way of short-term capital loss is not available to the assessee. We must, therefore, answer this contention also against the assessee and in favour of the Revenue.
So far as the expenditure of Rs. 20,40,000 is concerned, the same has been allowed as revenue expenditure by the decision of this court in CIT v. Gujarat Mineral Development Corporation : [1981]132ITR377(Guj) in the assessment year 1969-70. There can, therefore, be no question of allowing deduction for the said amount or any part thereof in the assessment year 1970-71 or 1971-72. The said claim was, therefore, rightly disallowed by the Tribunal.
For the above reasons we answer the reference accordingly with costs.