M/S. Gotan Lime Syndicate v. Commissioner Of Income-Tax, Delhi And Rajasthan

M/S. GOTAN LIME SYNDICATE COMMISSIONER OF INCOME-TAX, DELHI AND RAJASTHAN. November 15, 1965 [K. SUBBA R.Ao, J. C. SHAH AND S. M. S!KR!, JJ.] Income-tax-Royalty paid for nzining lease-Capital or Revenue ex-penditure-Tests. The appellant was a registered firn1 carrying on the. business of manu-facturing lime from lime-stone. By an indenture dated March 4, 1949, it was granted by the Government of Rajasthan the right to excavate lime-stone in a certain area, subject to certain conditions. The lease expired on July 14, 1952. The lease was extended from time to time by the Government for short periods. While working out a new scheme for leasing out lime-stone quarrie.s the Government sanctioned the leasing out of 15 sq. miles of lime deposits to the appellant. Till the new lease was given effect to the appellant agreed to pay Rs. 96,000 per year to the Government as royalty. For each of the assessn1cnt years 1954-55, 1955-56 and 1956-57 the assessee' paid a sum of Rs. 96.000 to the Government and claimed it as a deduction against its profits for those years. The Income-tax Officer disallowed this expenditure as being of a capital nature. On reference the High Court also upheld that view. In appeal to the Supreme Court it was conlendcd on behalf of the appellant that under the Rajasthan Mineral Concession Rules and the arrangement with the Government the appellant did not get exclusive possession of the mines as such; what he got was a right to get lime for manufacturing and the payment had direct relation to the amount of lime removed by the appellant. HELD : Under the arrangement read with the Rajasthan Mineral Concession Rules, 1955. the assessee was certainly entitled to go upon the land and had some rights to build premises for the purpo'5e of mining the lime. But it ~'as also clear that the assessee could not carry a\vay any other mineral which might be found on the mine and further he was obliged to allow other lessees of other minerals to go on the land and win their minerals. [603 B-D] Thei royalty payment by the assessee in the present case was not a direct payment for securing an enduring advantage; it had relation to the raw material to be obtained. No material had been placed on the record to show that any part of the royalty must, in view of the circu1n-stances .of the case be treated as permium and be referable to the acquisi-tion of 'the mining lease. (605 E-G] The yearly payment of Rs. 96.000 must therefore be treated as re-venue expenditure. [605 HJ lf. R. Rorke Ltd. v. Co1nn1is:rioner of Inland Rerenue, 39 T.C. 194. Ogden v. Medway Cine111as Ltd., 18 T.C. 691 and Allenza Con1pany v. Bell. [1904] LR. 2 K.B. 666. relied on. Abdul Kayoom v. Conunissioner of !nco1ne-tax, 44 I.T.R. 689 and PinRI.'.! Industries Ltd. v. Con11nissio11er of Inco,11e-tax, 40 I.T.R. 67, distinguished. As.~ani Bengc1l Ce111ent Co. Ltd. v. Co111111issioner of lncon1e-tax, 27 I.T.k. .l4 and Bri1isf1 Insulated and He/shy Cables Ltd. v. Atherton, 10 T.C. 155, referred to . CIVIL APPELLATE JuRISDICT!ON : Civil Appeals Nos. 692 to 694 of 1964. Appeal from the judgment and order dated October 9, 1963 of the Rajasthan High Court in D. B. Civjl Income-tax Reference No. 73 of 1961. N. A. Palkhivala, T. A. Ramachandran and J. B. Dadachan-ji for the appellant. C. K. Daphtary, Attorney-General, S. T. Desai, R. Gana-pathy Iyer, R. N. Sachthey and B. R. G. K. Achar, for the res-pondent. A. V. Viswanatha Sastri, J. B. Dadachanji, for interveners Nos. 1 and 2. M. M. Tiwari, S. S. Khanduja and Ganpat Rai,. for Intervener No. 3. The Juugment of the Court was delivered by Sikri, J. These three appeals are directed against the judg-ment of the Ra jasthan High Court in a consolidated reference made to it by the Income Tax Appellate Tribunal, Bombay . Branch, under s. 66 (1) of the Indian Income Tax Act, 1922 (hereinafter referred to as the Act). The question referred to by the Appeilate Tribunal :s as follows : ரூ.96,000/- 597 CI/66-8 598 1955-56 18033 ਟਨ 37332 9 0 1956-57 18382 ਟਨ 37740 0 6 598 600 No. 3. "whether on the facts and in the circumotances of the case the sum of Rs. 96,000 paid by the assessee during each of the relevant acc~unting years was rightly allowed as a revenue deduction in computing the business profits of the assessee company." The reference arose out of the following facts : Tlie appel-lant, M/s Gotan Lime Syndicate, hereinafter referred to as the assessee, is a registered firm and carries on the bminess of manu-facturing lime from lime-stone. By an indenture dated March 4, 1949, the assessee was granted the right to excavate lime-stone in certain area at Gotan and Tunkaliyan, subject to certain condi-tions. It is not necessary to detail the conditions contained in this indenture except that the lease exp:red on July 14, 1952. The lease was extended from time to time by the Government L3 Sup. CI/66-8 SUPREME COURT REPORTS for short periods. The last letter dated December 17, 1952, A extending the lease was in the following terms : "In continuation to this office letter cited above, Government have been pleased to convey extension up to the 31st March, 1953, or till the finalisation of the proposals for leasing out the area whichever may be shorter, with the clear understanding that you will have to vacate the area, when you may be asked to do so, and will have no claim whatsoever over the area after it." By Jetter dated December 1, 1953, the Government intimated to the Director of Mines and Geology, Rajasthan, Udaipur, that the C Government had adopted a new policy for leasing out lime-stone quarries. The proposal was to divide the lime-stone quarries in Jodhpur Division in blocks of 5 sq. miles each and the dead rent was to be charged at Rs. 10/- per acre while royalty was to be charged at Re. -/1/- per md. of lime-stone. It was further con-templated that the period of lease will be for five years with D option to renewal for another five years, and the minimum area to be granted to each party would be 10 sq. miles and maximum 30 sq. miles and the other terms and conditions would be gener-ally the same as were in practice in such cases. But as it was necessary to give legal form to these proposals, the Director of Mines and Geology was directed to frame rules on the lines of E the Mineral Concession Rules. It appears that on October 4, 1954, the Government sanctioned the leasing out of 15 sq. miles of lime deposits to the assessee. The Government in this letter further stated as follows : "2. As regards the payment of arrears by Mis Gotan Lime Syndicate for the period between 30-7-52, and the date the new lease is given effect to, it has been decided that they may pay @ Rs. 96,000/-(Rupees Ninety six thousand) per year which ha& also been agreed to by them before the Chief Minister (Industries) on the basis of dead rent nnder the new proposals for 15 sq. miles at Rs. 10/- per acre. 3. Lease agreement may be got executed by them at an early date and the arrears recovered. 4. The new rules may be incorporated m the Mines Mineral Concession Rules for Rajasthan." It further appears that the assessee never executed any lease but continued to work the lime deposits and the payments to be A made were finalised by letter dated November 30, 1959 from the Mining Engineer, Jodhpur, to the assesee. The Mining Engineer stated in this letter as follows : "On checking the figures of export of lime stone, limekali and lime kachra for the settlement of royalty, B the figures of royalty amount payable in the following years is as under :- At the end of each financial year the accrued royalty amount is far less actually and as such as per agreement D royalty payable is Rs. 96,000 I· in all the years above written. The royalty for each of these years was settled after the end of each year i.e. in the subsequent year." At this stage it would be convenient to mention the !erms on E which the assessee remained in possession. It is common ground that these terms are contained in the Jodhpur Division Vindhyan Lime-stone Mining Leases Rules, 1954, and the Rajasthan Minor Mineral Concession Rules, 1955. These rules were made · in exercise of the powers conferred by r. 4 of the Central Mineral Concession Rules, 1949. In the Jodhpur Division \rindhyan F Lime-stone Mining Leases Rules, 1954, "Mining lease" was defined to mean "a lease to mine, quarry, bore, dig, search for, win, work and carry away lime-stone". Under these rules the assessee had to make an application for a mining lease in res· ponse to a Notification issued by Director of Mines and Geology, Rajasthan, inviting applications in respect of a lime-stone deposit. G Rules 13 provided that the lease shall be in respect of plots com-prising of 5 sq. miles each. The applicant had to deposit secu-rity equal to one-fourth of the annual dead rent of the Iea1e in cash or Goverrunent bonds, for due observance of the terms and conditions of the lease. The lessee was entitled tO transfer his lease or any right, title or interest therein, to a person holding a H certificate of approval on payment of a fee, subject to the pre-vious sanction of the Director of Mines and Geology, and sub-ject to some other conditions. Rule 18 prescribed a period of · 600 five years for a lease and the lease was renewable at the option of the assessee for a further period of five years. Rule 19 pres-cribed the conditions which had to be inserted in the lease. The following conditions are relevant : ( l) the lessee shall not encroach upon cultivable land Bapi holdings within the leased area, unless otherwise after B obtaining pennission of Director of Mines and Geology; (2) the lessee shall perform a minimum development work .as instructed from time to time by the Di:ector of Mines and Geology, whose instructions in this respect and in maintaining standards of lime products, and arranging an adequate supply of the same in the market at reasonable price shall be binding upon the lessee; ( 3) On expiry or sooner determination of lease the lessee shall remove all stock of lime-stone or its products and movable property within six months from the date of expiry of the lease and shall pay the reyalty on the stock within this poriod. There D was a proviso to this c0!1dition to the effoct that the Rajasthan Government would be fr~e to lease out the deposits afresh to any person on expiry of the tenure of the lease, and the lessee shall hand over the quarry to the new lessee in a workable condition. Rule 31 of the Rajasthan Minor Mineral Concession Rules, 1955, prescribed inter ab'a the following conditions : ( i) The lessee shall pay the royalty on minerals despatched from the leased area at the rate specified in the First Schedule to these rules. (ii) The lessee shall pay for the surLce area used by him for the purpose of mining, surface rent at such rate not exceeding the land revenue as may be specified by the Governinent in such case. (iii) The lessee shall also pay, for every year, such yearly 600