c M.A. JABBAR COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH, HYDERABAD November 23, 1967 [J. C. SHAH, V. RAMASWAM! AND V. BHARGAVA, JJ.] lnconie-tax-Lease of land for renioving · sand-Provision for pay- n1ent of lease money-Tests for de!ermining whether capital or rcre11pe t'XP£'nditure.
The assessee was carrying: on the business of supplying lime anJ s~nd, and for the purpose of procuring sand, obtained a )ease of a river bed from the State Government. for a period of 11 months.
The lcasc- dccd provided, (a) for the payment of a large amount of lease moncY. ( h) that the lessee ( assessee) was to have an exclusive right to enter upon and occupy the. land and -to carry
away sand lvithin or under or upon the ]and, and (c) that if any mineral was discovered and the assessce intimated his intention not to work or failed to give any inti- mation to work it, it would be open to the Government to
suhle! the working of such newly discovered mineral. The assessee paid the lease money and in proceedings for assessment of income tax claimed it as a deduction on the basis that it was a, revenue expenditure.
The Income-tax Officer disaUowed the claim holding that it was capital expenditure. On appeal, the Appellate Assistant c():n1mis- sioner, after a pen;onal investigation, found that the contract· was for removal of_ sand lying on the surface of the land and that no excavation or skHful extraction was involved in the process, and 1beld, that no inte- rest in the land was conveyed to the J~ssee and that therefore the an1ount v.iaS dcductihle as revenue cxpl.!nditure.
The Appellate Tribunal confirrn- ·~d the order observing that the finding of fact given by the. Appellate Assistant .Commissioner was not challenged before the Tribunal. On reference, the High Court, relying .on the terms of the ]ease. reversed the finding of fact that the contract was for removal of sand lying on the .\"11rface of the ]and and that no excavation or skilful extraction was in .. valved, and held that the assessee had acquired a right in the land and that the amount was not deductible.
Jn appeal to this Court, HELD: (I) The clauses in the lease dee.d .. g1v1ng an exclusive 'right to– the assessee to enter upon an,d occupy the land, and re'ferring to the right of the Government to sublet the working of any newly discovered miheral. indicate that the assessee was the lessee and that an interest in Jand wa·s conveyed to him by the lease.
But that is not decisive of the question whether the money paid under the lease was a capital or a ·reve- nue expenditure. That question has to be decided on the facts of each case and the <lecisiv.z factors are the. object with which the lease was taken and the nature of: the payment wl:ich was made
when obtaining thi:: leas~. {416 C-E; 418 A] '(2) Jn spite of the rigcht given to the assessce to dig and. cxcavat~. the Appellate Assistant· Commissioner found as a fact that the sand was lying loose on the surfa(:e and that the contract \vas only for removal of LJSup.Cf168-I 2
·l l ~ thJt ;and. The finding was affirmed by the Appellate Tribunal and as no question was referred to the High Court that it was a findin~ based on n0 evidence, the High Court Y•as in error in not accepting it. There-
fore. (a) as the lease was for a short period, and consequently, the ex- penditure incurred by the as~csscc was -not related to the acquisilion of an a~.;;ct or of a right of an enduring nature or permanent ch;.iraclcr but merl!ly to ohtain his stock-in-trade in the form of sand;.an<l (h) as th~ expcnlliturc \\.'as incurred not for the reservation of a sol!rce "-hich had !<) ho excavated or skilfully workcc but for the specific object or enablin~ the ~bscsscc to remove sand lying loose on the surface of the laud. the C'.':.Pl!nJiture v:as dcductihlc as revenue expcndilurc. [417 D-E. G-H. 419 A-BJ
G-•1an Linu• Syndirntr v. CoJ11111iJsio11er of /11co111e-tax, Raiasthan and Dellri, 59 l.T.R. 718 and Bombar Steam Navigation Co. (1953) (P.) Ltd. v. CC1111111i~sioner of Jnco111e-tax, 56 l.T.R. 52. 59 foJlgwed. l\..T.M.T.M. Abu! Km·oou1 & Anr. v. Con1111is.(ioner of
lnco111e.fa:c. 44 l.T.R. 689, distinguished. CivtL APPELLATE JuRISDICTIO'.': Civil Appeals Nos. 2514 and 2515 of 1966. Appeals from the judgment and order dated March 4. 1965 c>f the Andina Pradesh High Co.urt in R. C. No. 15 of 1963. Y. V. Anjane,"11/u and A:1warullali Pasha. I. B. Dadachanji and 0. C. Mathur, for the appellant (in both the appeals). S. T. Desai, R. N. Sacluhey and S. P. Nayar, for the respon- dent (in both the appeals).
The Judgment of the Court was delivered by . Bhargava, J, The appellant assessee, who is an individual. carries on the business of supplying lime and sand. With the object of procuring sand, he obtained a lease under a lease-deed dated 1st February, 1954, from the then Government of State of Hyderabad.
The tcnns of this lease. which arc relevant for the purpose of deciding these appeals, will be indicated later. At this stage. it may be mentioned that. under this lease, tbc assessce wa:; required to pay a sum of Rs. 82,500/- as lease money to the Govemmenl.
The period of lease was from !st February. 1954 to 31st December, 1954. The assessee's acco1mt y~ar ends with the last day of September each year. The assessce paid a sum of Rs. 56, 100/- in respect of the account year ended 30ih Sep- tember, 1954 for the assessment year 1955-56, and another sum of Rs. 26,400/- for the account year ended 30th September, 1955 relevant to the assessment year I 956-57.
Both these payments were claimed by the assessee, in the proceedings for assessment to income-tax, as revenue expenditure. The Income-tax Officer held that, under the lease-deed, the assessec had secured a right to quarry sand from the river-bed, which was a right in the nature of a capital asset, so that these payments made to secure the right were capital expenditure. and disallowed their deduction as reve- c
II c JABBAR v. C.l.T. (Bhargava, J.) nue expenditure. The assessee appealed to the Appellate Assist- ant Commissioner. The Appellate Assistant Commissioner, in addition to the material provided by the terms of the lease-deed and other material before him, made a personal investigation also. Thereafter, in his appellate order, he recorded findings that the lease was a short-term contract for one year, that the contract was for removal of sand lying on the surface of the river-beds, within a specified period, and no excavation or skilfill extraction was involved in the process, and that no interest in the land was con- veyed to the lessee, and if the lessee discovered any minerals not specified in the deed, he was required to report that fact to the Director of Mines and obtain a prospecting !igence separately. On these facts, he held that what the assessee had secured under the lease-deed was only stock-in-trade of his business and not a capital asset, so that his claim that the payments made by him under the lease-deed to the Government were deductible as reve- nue expenditure was allowed.
Thereupon an appeal was brought before the Income-tax Appellate Tribunal by the Department. The Tribunal upheld the order of the Appellate Assistant Com- missioner. At the instance of the Department, the Tribunal then
referred the following question for opinion to the High Court :- "Whether, on the facts and in the· circumstances of the c2'e, the payments of Rs. 56,100 for the assessment year 1955-56 and Rs. 26,400 for the assessment year '
! 951i-57 made under the lease-deed dated 1-2-1954 were expenditure of revenue nature ?" The High Court answered the question in the negative, accepting the case of the Department, and thus upsecting the decision given by the Appellate Assistant Commissioner and the Tribunal. The assessee has now come up to this Court in appeal by certificate granted by the High Court.
Learned counsel appearing for the assessee first contended before us that an examination of the terms of the lease-deed would show that .no right at all in land was acquired by the assessee under the lease and that the only right which had been acquired was the right to remove sand lying on the land constitutinit the beds of the river and the nallahs specified in the deed and the ancillary right to enter the land for that purpose. It appears to us that, on the language of the lease-deed. this submission cannot be accepted.
The lease specifically mentions in para. 3 that. under it, the Government do hereby demise and grant unto the Lessee exclusive lease and liberty to enter, occupy, and use for quarrying purpose and to raise, render marketable, carry awav. ·sell and dispose of sand within or under or upon the Iand1 speCi- fied in this lease and for the period named therein.
Thus, there was a specific provision that the lessee was to have an exclusive right to.enter and occupy the land. Further, there was a provision ~16 ( 1968) 2 S.C.R. that, in case any mineral not specified in the lease was discovcrd in this land, the lessee was to report such discovery to the Director -0f Mines and Geology and could ob1ain either a
pro>pcc1ing licence or a mining lease in respect of it, but, if he intimated his intention of not working the newly discover~d mineral, or failed to give any intimation to work it within
the period of three months, it would be open to the Government to sublet the work- ing of such newly discovered mineral. This use of the word "sublet" in the deed indicates that, though the Government re- served to it the right to allow some other person to work the newly discovered mineral, that _person could only be admitted as a sub-lessee and, obviously, he would be the sub-lessee under the assessee.
These terms do indicate that an interest in land was also conveyed by the lease; but that is, in our opinion, not decisive of the question whether the money payable under the lease was a capital expenditure or a revenue expenditure.
As an example, if a shop is taken on rent by a person to run his .business and he pays monthly or annual rent, he certainly acquires an interest in the building and the land on which it stands as a lessee, but no one will contend that the payment of rent would be an exi;~nditure of a capital nature and not revenue c~peadi- 1ure.
The decisive factor is the object with which the lease is taken and the nature of lhe payment which is being mad~ when <Jbtaining the lease. In the present case, there arc a number of factors which lead to 1hc conclusion that the expenditure incurred by the asscssec in obtaining the lease was revenue expenditure for the purnose of obtaining stock-in-trade and not capital eJ(pcnditure,
The first point is :hat the lease was for a very short period of 11 months only. Consequently, it is clear that the assessee did nol obtain any capital asset of an enduring na1ure by obtaining this lea~e. Then the second circumstance is that the sole right
which wa~ acquired by him under the lease-deed was to take away the sand lying on the leased land. No doubt, the document mentioned that he was entitled to raise, render marketabl~. carry away, ~el! and dispose of the sand within or under or upon the land specified in this lease; bu1 there was a clear finding of fact r~corded by the Appellate Assistant Commissioner and affirmed by the Tribu- nal that all the sand that could be removed was lyiug on the surface and there Wa"!i no question of raising, digging or excavating for the sand before obtaining it.
No operations were, therefore, to be pcrfom1ed on the land itself. It appears that the High Court, in giving its decision against the asscssee, fell into an error in not accepting the finding of fact that the sand was lying loose on the surface and the contract was only for removal of that sand and, instead, recording for itself a different finding.
In its appel- late order, the Tribunal mentioned 1he findings of fact recorded II c II c JABBAR v. C.I.T. (Bhargava, J.) by the Appellate Assistant Commissioner and added : "It is to be noted that the findings of fact given by the Appellate Assistant Commissioner as quoted from this order above have not at all been challenged before us in these appeals."
The findings of fact, to which this sentence referred, inch,ided the :(inding recorded by the Appellate Assistant Commissioner that it was a contra.ct f()t removal of sand lying o.n the surface .of ·the ri>(er-beds \vithin a specified period and nP excavation or skilfuf extraction was in'lol- v~d. . No,; dpubt, thlii finding of fact was partiall:f based on t~e personal· mvestigation made by the Appella~ Assistant Commis- sioner._ and this investigation was made, as held by the High Court. about six years after the lease contract had been entered into. The High Court was of the view that it was difficult to see how, after . a lapse of six years, the ternis of the lease deed could be varied, altered or clarified so. as to confer' any benefit on . the lessee, and that the lease-deed contained absoluteJy·hb reference to the accumulation of s~n.d as-'the 'result of floods, its lying loose on the surface and th~ Jessee being allowed to remove the sand rt1erely from the surface without digging underneath.
In examin- ing this question of fact, it is clear that the High Court exceeded its- jlll'isdiction. The finding of fact recorded by the Appellate ·Assistant Commissioner had been affirmed by the Tribunal and no question was referred to the High Court that it was a finding which was based on no evidence.
Whether the evidence on which the finding was accepted by the Tribunal was good or bad did not fall for consideration_ by the High Court. The finding being binding on. the High Court, that Court should have pro- ceeded on the basis that these facts did exist and should have examined the legal position on that premise.
This circumstance that the sand was lying loose and merely required removal with- out. any excavation or digging makes it clear tllat what the assessee was taking under the lease for the purpose of his business was the right to remove that sand and· that he was not acquiring. the ijlnd or any other rights in the land for any other purpose. Then, there is the additional fact that the lease was for a very short period· of 11 · months.
On these facts, the conclusion was irresistible that, in agreeing to pay this large sum of Rs. 82,500/- the assessee was bargaining for the right to remove the sand lying loose. on the land within that short period of 11 months to the extent to which he could do so.
He did not acquire any fixed or capital asset of an enduring nature by obtaining this lease and all he had in view was to have the. right to obtain his stock-in- trade in the form of sand.
During the course of arguments before us, a number of cases .vere brought to our notice which related to quarrying leases of various types in India and in England. We do not consider it
necessary to refer to those cases, because the question whether a SllrRDIE COURT REPORTS (1968j 2 S.C.R. particular expenditure is of a capital nature or i~ a revenue expenditure has always to be decided on the special facts of each case.
We may, however, make a reference to the decision of this Court in Goran Lime S,vndicate v. Commissioner of Income-tax. Rajastluui and Delhi('). In that case also, Rule 13 of the Rajasthan Minor Mineral Conces,ion Rules, 1955, which
was applicable, provided that tile lease shall be in respect of plots comprising of 5 square miles each. The lessee was even entitled to transfer his lease or ;my right, title or interest therein to a person holding a certificate of approval on payment of a fee, sub- ject to the previous sanction of the Director of Mines and Geology, and subject to some other conditions.
Rule prescribed a period of 5 years for a lease and the lease was renewable at the option of the assessee for a further period of five years. Even on these facts, this Court held that the lessee in that case, in obtaining the lease and paying lease money, had not incurred an expenditure of a capital nature, and was entitled to claim that the lease money paid by him was a revenue expenditure. In tha• case also, thus, fhe lease was in respect of plots, so that interest in land was conveyed, but the Court, on considering the ubject of the lease and the manner in which the rights under it were to be exercised, came to the finding that no capital expenditure was involved and &hat the only right acquired was the right to obtain raw material from the leased land.
The payment was not for ~ecuring an enduring advantage. In the case before us, the facts are much stronger in favour of the assessee. The period of lease is shorter and the only object of the lease is \o remove sand lyin2 loose on the surface, without exercising any other right on the I~nd included in the lease.
lo Bombay Steam Navigation Co. ( 1953) Private Ltd. v .• Commissioner of Income-tax, Bombay('), this Court explianed the principle of determining the nature of an expenditure. The
Court held :- "Whether a particular expenditure is revenue ex- penditure incurred for the purpose of business must be determined on a consideration of all facts and cir- cumstances, and by the application of principles of com-
mercial trading. The question must be viewed in the larger context of business necessity or expediency. If the oU'tgoing or expendiure is so related to the carrying on or conduct of the business. that it may be regarded
as an integral part of the profit-earning process and not · for acquisition of an asset or a right of a pem1anent character, the possession of which is a condition of the (!) S9 l.T.R. 718.
(2l S6 l.T.R. S2. S9. c c .JAHBAR r. C.l.T. (Bharga\'a, 1.) carrying on of the business, the expenditure may be' regarded as revenue expenditure··. Clearly, in the present case, the expenditure incurred by the assessee was not related to the acquisition of an asset or a right of a permanent character.
It was for the specific object of enabling the assessee to remove sand lying loose on the surface which was the stock-in-trade of the business of the assessee, so that the expen-. diture has to be regarded as revenue expenditure.
Counsel appearing for the Department relied on a decision of this Court in K. T. M. T. M. Abdul Kayoom and Another v. Commissioner of Income-tax('). The majority judgment in that case shows that the assessee, which was carrying on business in "conch" shells locally known as "chanks", took on lease the ex- clusive right, liberty and authority
to take and carry away all chanks found in the sea for a period of three years ending on June 30, 1947, along a specified portion of the coast. The consideration of Rs. 6,111 per year was payable in advance. It was held on the facts of that case that "this expenditure was of the nature of capital expenditure and not revenue expenditure." On. the face of it, the distinguishing feature was that, in that case, the lessee had to obtain fish from the.sea and, consequently, had to operate in the waters of the sea itself, and that was the main reason why the Court held against the assessee.
This difference is clearly brought out in the judgment of the majority where it was held:-. "This is not a case of so much clay or so much salt- petre or a dump of tailings or leaves on the trees in a
forest. The two modes in which the respondent did the business furnish adequate distinguishing characteristics. Here is an agreement to re$erve a source, where the respondent hoped to find shells which,
when found. became its stock-in-trade but which, in situ, were no more the firm's than a shell in the deepest part of the ocean beyond the reach of its divers and nets. The expenses of Jishing shells were its current expenses as
also the expenses incurred over the purchase of shells from the divers. But to say that the payment of lease money for reserving an exclusive right to fish for chanks was on a par with payments. of the other character is
to err." It is clear that, in the present case, there is no such reservation of an exclusive right in respect of any land. . In fact, the first sentence in the quotation above is clearly applicable to the pre- sent case if, for the word "clay", the word "sand" is substituted. ('I) 441.T.R: 689, 707.
~20 [1968] 2 S C.R, The present is a case where sand lying loose on the surface of the land .is to be removed and the whole object of the lease was to obtain t.he right to the sand which was to be the stock-in-trade of ti1c '"scsscc.
The appeals arc, consociuently, allowed. with costs, the order of the High Court is set aside and the question referred i, answered in the affirmative. Appeals allowed.