The Commissioner Of Income Tax,Having Office At Aayakar Bhavan,Patto Plaza, Panaji, Goa. … v. Signed Judgment Is Pronounced By M.s. Sonak, J. As Per Clause (I) Ofrule 1 Of Chapter Xi Of Bombay High Court Appellate Side Rules As C.v

IN THE HIGH COURT OF BOMBAY AT GOA TAX APPEAL NO. 51 OF 2008 The Commissioner of Income Tax,having office at Aayakar Bhavan,Patto Plaza, Panaji, Goa. …. Appellant Versus Zuari Industries Ltd., having office atJaikisan Bhawan, Zuarinagar, Goa403 726.….Respondent *** Ms. Amira Razaq, Standing Counsel for the Appellant. Mr. Madhur Agarwal with Mr. P. Arolkar, Advocates for theRespondent. Coram:- M.S. SONAK &C.V. BHADANG, JJ. RESERVED ON: 22nd November, 2019PRONOUNCED ON: 2nd January, 2020 (Signed judgment is pronounced by M.S. Sonak, J. as per clause (i) ofRule 1 of Chapter XI of Bombay High Court Appellate Side Rules as C.V. Bhadang, J. is sitting at Mumbai.) JUDGMENT: (Per C.V. Bhadang, J.) On 23[rd] June 2008, this Appeal was Admitted on the following substantial questions of law: (I)Whether on the facts and in thecircumstances of the case the ITAT wasjustified in holding that interest ofRs.1,97,91,197/- paid on borrowings,circumstances of the case the ITAT wasjustified in holding that interest ofRs.1,97,91,197/- paid on borrowings, capitalized in the books of account forsetting up of Argon Gas Plant as a revenueexpenditure, even before putting the saidplant into operation ? (II)Whether on the facts and in thecircumstances of the case, the ITAT wasjustified in holding that the amount ofRs.7,09,10,000/- paid to Texmaco, asdeferred revenue expenditure allowing thepayment to be amortised for a period of 8years ?circumstances of the case, the ITAT wasjustified in holding that the amount ofRs.7,09,10,000/- paid to Texmaco, asdeferred revenue expenditure allowing thepayment to be amortised for a period of 8years ? 2.may be stated thus: Brief facts necessary for the disposal of the Appeal The respondent/assessee is a Company engaged in manufacture of fertilizers and cement. The respondent filedits return for the Assessment year 1995-96 on 2[nd] November1995, which was revised on 27[th] March 1997, declaring incomeof Rs.68,02,32,080/-. It appears that the case was selectedfor scrutiny and notices under Section 143(2) and 142(1) ofthe Income Tax Act (Act for short) were issued calling forvarious details, which were supplied by the respondent. TheAssessing Officer (AO) by an order dated 24.03.1998completed the assessment in the following terms: (i) The expenditure of Rs.2,01,000/- on foreign travelof the wives of the Directors of the Company was disallowed. (ii) Insofar as interest of Rs.1,97,91,197/- on the loanfor capital borrowed for setting up of Argon Gas Plant isconcerned, the assessee claimed the interest paid on suchborrowing as a revenue expenditure. The AO did not agreewith the claim and held that such interest on borrowed capitalis part of the actual cost as defined in Section 43(1)Explanation 8 of the Act. (iii)Insofar as payment of Rs.7,09,10,000/- to Texmacofor the purposes of having continuous supply of limestone asa raw material, the assessee claimed it as a revenueexpenditure. Here again, the AO did not agree with the claimas made and added back the said amount as capitalexpenditure. 3. Feeling aggrieved, the assessee filed an Appeal before the CIT (Appeals). The CIT (Appeals) by an orderdated 14[th] January 2003, confirmed the order of the AO on theissue of payment made to Texmaco as capital expenditure.However, the CIT(Appeals) allowed the expenditure incurredon the foreign travel as business expense and the interest on borrowings for setting up of Argon Gas Plant as revenueexpenditure. The assessee carried the matter in Appeal beforethe Income Tax Appellate Tribunal (ITAT), insofar as thetreatment of the payment made to Texmaco in Appeal No.27/PNJ/2003 is concerned. The Revenue challenged the orderin Appeal No. 38/PNJ/2003 against the issue of expenditure onforeign travel and interest on borrowings. 3. Feeling aggrieved, the assessee filed an Appeal before the CIT (Appeals). The CIT (Appeals) by an orderdated 14[th] January 2003, confirmed the order of the AO on theissue of payment made to Texmaco as capital expenditure.However, the CIT(Appeals) allowed the expenditure incurredon the foreign travel as business expense and the interest on borrowings for setting up of Argon Gas Plant as revenueexpenditure. The assessee carried the matter in Appeal beforethe Income Tax Appellate Tribunal (ITAT), insofar as thetreatment of the payment made to Texmaco in Appeal No.27/PNJ/2003 is concerned. The Revenue challenged the orderin Appeal No. 38/PNJ/2003 against the issue of expenditure onforeign travel and interest on borrowings. 4.The ITAT by an order dated 25[th] September 2007,allowed the assessee's Appeal holding the payment made toTexmaco as deferred revenue expenditure thereby permittingthe assessee to amortise the amount for a period of eightyears. As regards the Revenue's Appeal, the ITAT relying onits earlier decision, directed the AO to delete the disallowance.As regards the issue of interest on borrowings, the ITATupheld the order of CIT (Appeals). Feeling aggrieved theRevenue is in Appeal. 5.As the substantial questions of law framed wouldshow that, we are only concerned about the issue of thetreatment of interest on borrowings for setting of the ArgonGas Plant and the payment made to Texmaco. 6.Insofar as the first question about the interest onborrowing for setting up of the Argon Gas Plant is concerned,it may not detain us for long, as the issue is covered by thedecision of the Hon'ble Supreme Court in the case of DeputyCommissioner of Income Tax Vs. Core Health Care Ltd.6[2008] 167 Taxman 206 (SC). In that case, the assesseeCompany was engaged in the business and sale of intravenoussolutions. During the assessment year under consideration,the assessee had installed new machinery and claimeddeduction of interest on the borrowings. The AO disallowed theamount on the ground that, during the year assessee hadinstalled the new machinery, production was not started. Thatorder was confirmed by the CIT (Appeals). The ITAT held thatthe amount could not be added as income, which order wasultimately confirmed by the Hon'ble Supreme Court. Beforethe Hon'ble Supreme Court following substantial question oflaw arose for determination: Whether interest paid in respect of borrowings oncapital assets not put to use in the concernedfinancial year can be permitted as allowablededuction under Section 36(1)(iii) of the IncomeTax Act 1961 ? 7.On behalf of the Revenue, reliance was placed onExplanation 8 to Section 43(1) of the Act, in order to claimthat the assessee was not entitled to claim deduction forinterest on the borrowings, particularly when the machineswere not put to use during the assessment year underconsideration. It was contended that the provisions of Section36(1)(iii) were required to be harmoniously construed withExplanation 8 to Section 43(1) of the Act regarding actualcost. According to the Revenue, the provisions of Section36(1)(iii) being general in nature had to give way to thespecial provisions contained in Explanation 8 to Section 43(1)of the Act. 8.The Hon'ble Supreme Court held that interest onmoney borrowed for the purposes of business, is a necessaryitem of expenditure. For allowing such deduction, threeconditions are required to be satisfied, namely, (i) the moneyi.e. capital must have been borrowed by the assessee (ii) itmust have been borrowed for the purposes of the businessand (iii) the assessee must have paid interest on the borrowedamount. It was inter alia held that what is germane iswhether the borrowing was for the purpose of the business. It 8.The Hon'ble Supreme Court held that interest onmoney borrowed for the purposes of business, is a necessaryitem of expenditure. For allowing such deduction, threeconditions are required to be satisfied, namely, (i) the moneyi.e. capital must have been borrowed by the assessee (ii) itmust have been borrowed for the purposes of the businessand (iii) the assessee must have paid interest on the borrowedamount. It was inter alia held that what is germane iswhether the borrowing was for the purpose of the business. It has been held that the legislature has made no distinction inSection 36(1)(iii) between capital borrowed for a revenuepurpose and capital borrowed for capital purpose. WhatSection 36(1) (iii) emphasizes is user of the capital and notthe asset which comes into existence as a result of theborrowed capital. It has been held that the Explanation 8 toSection 43(1) as well as the concept of actual cost has noapplication to Section 36(1)(iii) of the Act. It can thus be seen that once it is shown that the borrowing was for business purpose, the interest paid on suchborrowing would be an allowable deduction. Thus, noexception can be taken to the finding recorded by the ITAT onthe issue of interest on borrowings. The substantial questionof law framed at (I) is answered against the appellant and infavour of the assessee. 9.This takes us to the second substantial question oflaw as framed. In order to appreciate the rival contentions, it is necessary to note few more facts. A Company styled as“Texmaco” was having a cement Plant at Yerraguntala (AndhraPradesh). The cement Plant although, a sick industrial unit was in working condition and a going concern. Texmaco hadacquired mining rights from Government of Andhra Pradesh on14[th] May 1982 for a period of 20 years for mining of limestones as raw material over an area of 1,000 sq. kms. of land.Since the cement Plant had become sick, it was beingoperated by the respondent under a working arrangement andthe respondent was carrying on cement business effectivelyfrom 1[st] January 1994. The Plant was ultimately transferred tothe respondent on 7[th] February 1995 for a consideration, whichincludes the consideration of Rs.709.11 lakhs for purchase ofthe mining rights in order to ensure supply of raw material forits cement division. Accordingly a Memorandum ofUnderstanding (MoU) was signed between the parties on 28[th]October 1994. At the time the said rights were obtained bythe respondent, eight years of the mining lease wasremaining. The respondent claimed before the AO that thethe payment having been made for procurement of rawmaterial for its cement manufacturing business was allowableas revenue expenditure. The respondent therefore amortisedthe amount over eight years in its books of account. The AOrefused to accept the claim on the ground that the amountwas spent for obtaining an advantage of enduring nature and was thus a capital expenditure. The CIT (Appeals) hasconcurred with the finding of the AO. It was held that therespondent has spent the amount towards purchase of anenduring source being the right of winning and taking awaythe limestone deposits. It was held that payment was madeto buy “long lasting source of raw material, which would yieldsuch material for years to come”. It was further held thatthere is a clear difference between the price paid to buy rawmaterial and the price paid towards buying long lasting sourceof material and the former can be held as a revenueexpenditure, while the later has to be held as a capitalexpenditure. was thus a capital expenditure. The CIT (Appeals) hasconcurred with the finding of the AO. It was held that therespondent has spent the amount towards purchase of anenduring source being the right of winning and taking awaythe limestone deposits. It was held that payment was madeto buy “long lasting source of raw material, which would yieldsuch material for years to come”. It was further held thatthere is a clear difference between the price paid to buy rawmaterial and the price paid towards buying long lasting sourceof material and the former can be held as a revenueexpenditure, while the later has to be held as a capitalexpenditure. 10.The CIT (Appeals) placed reliance on the decision ofthe Hon'ble Supreme Court in the case of R.B. SethMoolchand Suganchand Vs. Commissioner of IncomeTax [1972] 86 ITR 647 (SC), which was found to besquarely applicable to the facts of the case. In fact, the CIT(Appeals) found “startling similarities” between the facts in thepresent case and the one obtaining in the case of R.B. SethMoolchand Suganchand. 11. The ITAT on the contrary found that the limestone quarries were not acquired by the respondent through thetransaction with Texmaco. It was found that the quarriescontinued to be owned by the Andhra Pradesh Government.The rights acquired by the respondent are only in substitutionof the rights of Texmaco for extracting limestone from thequarries. The ITAT found that “in that way the amount paid bythe assessee company was in the reserve of materialsnecessary for running its business”. The ITAT has noted thesubmissions made on behalf of the assessee in the case ofPingle Industries Ltd. Vs. Commissioner of Income Tax[1960] 40 ITR 67 (SC). This is what is held by the ITAT inpara 11 of its order: 11. We have duly considered the rival contentionsand gone through the records carefully. Theassessee company had paid a sum ofRs.7,09,10,000/- to M/s Texmaco in acquiring theright to extract limestone from the mines taken onlease by M/s Texmaco from the Government ofAndhra Pradesh. As rightly argued by the assessee,the limestone quarries were not acquired by theassessee through the deal. The limestone quarry isstill owned by the Government of Andhra Pradesh. The right acquired by the assessee company is tosubstitute M/s Texmaco and assume their right forthe purpose of extracting limestone from thequarries. In that way amount paid by the assesseecompany was in the reserve of materials necessaryfor running its business. In this context, theproposition made by late N.A. Palkiwala whilearguing in Pingle's case are very much relevant.That where an assessee made an outright purchaseof mines and quarries had partook the character ofcapital expenditure as what is acquired by theassessee is an asset. In a case where ownership isnot acquired but only interest in land is acquired,the nature of the expenditure depends upon the factthat for which purpose the right was acquired or theright is acquired. In a case where not even aninterest in land is acquired but only an arrangementis made for the supply of raw materials, theexpenditure will be in the nature of revenueexpenditure. Therefore, as the facts speak forthemselves, in the present case there is no reasonto hold the amount of Rs.7,09,10,000/- is notcapital expenditure in nature. 12.We have heard the learned Counsel for the parties.Perused record. 12.We have heard the learned Counsel for the parties.Perused record. 13.It is submitted by Ms. Razaq, the learned Counselfor the appellant that the respondent has acquired miningrights held by Texmaco for ensuring uninterrupted supply ofraw material which is a benefit of an enduring nature. It issubmitted that over and above the consideration paid foracquiring the lease hold rights, the respondent was alsopaying the royalty to the government of Andhra Pradesh. It issubmitted that the case is squarely covered by the decision inthe case of R.B. Seth Moolchand Suganchand. It is submittedthat the reliance placed by the ITAT on the decision in the caseof Pingle Industries Ltd. is misplaced. It is submitted that theonly reasoning articulated by the ITAT while upsetting theconcurrent finding of the AO and the CIT (Appeals) is ascontained in para 11 of the order, which is cryptic. It issubmitted that except observing that the “facts speak forthemselves,” there are no material reasons recorded by theITAT, while disagreeing with the finding recorded by the AOand the CIT (Appeals). On behalf of the appellant, reliance isplaced on the following decisions. i.Gotan Lime Syndicate Vs. Commissioner ofIncome Tax [1966] 59 ITR 718 (SC).Income Tax [1966] 59 ITR 718 (SC). ii.Pingle Industries Ltd. Vs. Commissioner ofIncome Tax [1960] 40 ITR 67 (SC).Income Tax [1960] 40 ITR 67 (SC). iii.Aditya Minerals (P) Ltd. Vs. Commissionerof Income Tax [1999] 106 Taxman 337(SC).of Income Tax [1999] 106 Taxman 337(SC). iv.R.B. Seth Moolchand Suganchand Vs.Commissioner of Income Tax [1972] 86ITR 647 (SC).Commissioner of Income Tax [1972] 86ITR 647 (SC). v.Union of India & Others Vs. M/s PlayworldElectronics Pvt. Ltd. & Another (1989) 3SCC 181.Electronics Pvt. Ltd. & Another (1989) 3SCC 181. 14. Mr. Agrawal, the learned Counsel for the respondent has submitted that the respondent has only purchased rightsto mine the mineral, namely, the limestone and there is nopurchase or transfer of leasehold rights. It is submitted thateven assuming that it was a benefit of an enduring nature, itwas essentially an expenditure on revenue account forobtaining raw material. It is submitted that the substance ofthe transaction has to be looked into while determiningwhether the expenditure is on revenue or capital account. Itis submitted that looked from commercial view, it wasessentially to acquire raw material and thus, has rightly been held to be on a revenue account. It is submitted that the reliance placed by the AO and the CIT (Appeals) on thedecision in the case of R.B. Seth Moolchand Suganchand ismisplaced. On behalf of the respondent, reliance is placed onthe following decisions: i.Commissioner of Income Tax, BombayCity-I Vs. Associated Cement CompaniesLtd. [1988] 172 ITR 257. City-I Vs. Associated Cement CompaniesLtd. [1988] 172 ITR 257. ii.National Organic Chemical Industries Ltd.Vs. Commissioner of Income Tax [1993] 69Taxman 160 (Bombay).Vs. Commissioner of Income Tax [1993] 69Taxman 160 (Bombay). iii.Pingle Industries Ltd. Vs. Commissioner ofIncome Tax, Hyderabad [1960] 40 ITR 67Income Tax, Hyderabad [1960] 40 ITR 67 iv.Commissioner of income Tax Vs. MadrasAuto Service (P) Ltd. [1998] 233 ITR 468Auto Service (P) Ltd. [1998] 233 ITR 468 15. We have considered the rival submissions made. The material facts are not in dispute. It is undisputed thatTexmaco, which was a concern in the manufacture of cementwas holding a lease from Andhra Pradesh Government formining of limestone from vast tract of land. Texmaco hadbecome a sick unit and a reference was pending before theBoard for Industrial and Financial Reconstruction (BIFR) under iii.Pingle Industries Ltd. Vs. Commissioner ofIncome Tax, Hyderabad [1960] 40 ITR 67Income Tax, Hyderabad [1960] 40 ITR 67 iv.Commissioner of income Tax Vs. MadrasAuto Service (P) Ltd. [1998] 233 ITR 468Auto Service (P) Ltd. [1998] 233 ITR 468 15. We have considered the rival submissions made. The material facts are not in dispute. It is undisputed thatTexmaco, which was a concern in the manufacture of cementwas holding a lease from Andhra Pradesh Government formining of limestone from vast tract of land. Texmaco hadbecome a sick unit and a reference was pending before theBoard for Industrial and Financial Reconstruction (BIFR) under Section 15 of the Sick Industrial Companies (SpecialProvisions) Act, 1985 and a scheme was sanctioned underSection 18(4) of the said Act on 06.08.1993 for itsrehabilitation. However, the same could not be implemented.On Texmaco's suggestion, a revised proposal for itsrehabilitation by transfer of the cement Plant to therespondent, which is a group company of Texmaco, wasmooted. As an interim arrangement, prior to proposedtransfer of the Cement Division under an agreement dated 5[th]January 1994 between Texmaco and the respondent, it wasinter alia agreed that the respondent shall run and operate theCement Plant at Yeraguntala, Andhra Pradesh for a period ofthree years from 1[st] January 1994 and thus, it was therespondent which was operating the cement Plant under theinterim arrangement. The parties have accordingly enteredinto a Memorandum of Understanding (MoU) on 28[th] October1994. The Plant was ultimately transferred to the respondenton 7[th] February 1995. The consideration for the transfer of thecement division includes Rs.709.11 lakhs for takeover of lease,which Texmaco had with the Andhra Pradesh Government,which the respondent claimed to be incurred on revenueaccount. 16.The AO has considered the issue in details and hasheld that the amount was spent for acquiring a benefit ofenduring nature and was thus on capital account. The CIT(Appeals) has concurred with the finding of the AO. Whiledoing so, the AO and CIT (Appeals) have relied on the decisionof the Hon'ble Supreme Court in the case of R.B. SethMoolchand Suganchand. As noticed earlier, the only reasoningarticulated by the ITAT to differ is to be found in para 11 of theorder. A bare perusal of the same would show that the ITAThas not even adverted to the decision in the case R.B. SethMoolchand Suganchand. The ITAT has referred to the“propositions made by Mr. Palkhiwala, while arguing the caseof Pingle Industries Ltd.”, which the ITAT has found to berelevant. The ITAT has then found that the quarries were notacquired by the respondent and same continued to be ownedby the Andhra Pradesh Government. Lastly, the ITAT hasfound that the payment was made by the assessee to“substitute” itself in the place of Texmaco and to assume theirrights for the purpose of extracting limestone from thequarries. The ITAT has found that no interest having beenacquired or created in the land and only an arrangement being made for the supply of raw material, the expenditure will be inthe nature of revenue expenditure. made for the supply of raw material, the expenditure will be inthe nature of revenue expenditure. 17.In order to appreciate the rival submissions, it isnecessary to refer to the decision in the case of R.B. SethMoolchand Suganchand and Pingle Industries Ltd. in somedetails. In R.B. Seth Moolchand Suganchand, the assesseewas granted a lease of certain areas for mining of Mica fortwenty years. The mines were earlier worked out by othercompanies for a period of fifteen years. The question waswhether the expenditure for acquiring the leasehold rightswere on revenue or a capital account. The Hon'ble SupremeCourt held that the lease was a long term lease and itconferred right to excavate mica, that is to remove it, grade itand pay royalty to the government in accordance with thequality of mica extracted and thus, was a revenueexpenditure. On behalf of the assessee it was contended thatthe expenditure was for getting a specific quantity of mica inthe mines which was assessee's stock in trade. On behalf ofthe Revenue, it was contended that the amount of lease was acapital expenditure in as much as the pillars of mica (before itis mined) cannot be said to be stock in trade. Accepting the claim made on behalf of the Revenue, the expenditure washeld to be capital expenditure. 18.We find that the facts obtaining in the case of R.B.Seth Moolchand Suganchand have a close resemblance, withthe facts herein, as rightly found by the CIT (Appeals) and thesaid decision would be applicable on all fours to the presentcase. 19.Coming to the case of Pingle Industries Ltd., it issignificant to note that the said case has been considered bythe Hon'ble Supreme Court in the case of R.B. Seth MoolchandSuganchand. Incidentally, Pingle Industries Ltd. was also acase of mining where the assessee had obtained a lease forexcavating shahabadi stones for a period of twelve years forwhich an annual payment was agreed upon. The Court aftertaking a survey of several Indian and English cases fordetermining what is a capital expenditure and what is arevenue expenditure by a majority judgment held that theassessee by its long term lease, had acquired leasehold rightsto win stones and that the stones “in situ” were not its stock intrade in a business sense, but a capital asset from which after extraction it converted the stones into its stock in trade. TheHon'ble Supreme Court noted its earlier decision in the case ofAbdul Kayoom Vs. Commissioner of Income Tax [1962]44 ITR 689, in which it has been held that what is decisive is(i) the nature of the business (ii) the nature of the expenditure(iii) the nature of the right acquired and (iv) their relationinterse and this is the only key to resolve the issue in the lightof the general principles governing such cases. It can thus be seen that the nature of the right acquired may be one of the criteria, however, it alone is notdecisive. We find that what has weighed with ITAT ispredominantly the nature of the right. Even here, we areunable to agree with the proposition that there is no creationof any right or interest in the land. This is because by transferof rights of Texmaco, the respondent is authorized to mine andto win the mineral from the mines, remove it and use it as araw material in its cement Plant. 20.Coming back to the case of R.B. Seth MoolchandSuganchand this is what is held: The determining factor will depend largely on thenature of the trade in which the asset is employed. It can thus be seen that the nature of the right acquired may be one of the criteria, however, it alone is notdecisive. We find that what has weighed with ITAT ispredominantly the nature of the right. Even here, we areunable to agree with the proposition that there is no creationof any right or interest in the land. This is because by transferof rights of Texmaco, the respondent is authorized to mine andto win the mineral from the mines, remove it and use it as araw material in its cement Plant. 20.Coming back to the case of R.B. Seth MoolchandSuganchand this is what is held: The determining factor will depend largely on thenature of the trade in which the asset is employed. The several cases which do not deal with the miningleases but are concerned with different assets are oflittle help in the same way as in Mohanlal HargovindVs. Commissioner of Income Tax [1949] 17 ITR 473(PC) cases relating to the purchase or leasing ofmining quarries, deposits of brick earth wereconsidered not to be of assistance by the PrivyCouncil in case of a contract for collecting andremoving tendu leaves. The principles enunciated fordetermining the nature of the expenditure have,been sought to be applied to different situationsarising on the facts of each case, but the difficulty inmatching them with the seeming irreconcilability areperhaps explicable only on the ground that thedetermination in any particular case is dependent onthe character of the lease or agreement, the natureof the asset, the purpose for which the expenditurewas incurred and such other factors as in the factsand circumstances of that case would indicate. If weconfine our attention to the mining leases, whatappears to us to be an empirical test is that whereminerals have to be won, extracted and brought tosurface by mining operations, the expenditureincurred for acquiring such a right would be of acapital nature. But where the mineral has alreadybeen gotten and is on the surface, then theexpenditure incurred for obtaining the right toacquire the raw material, that is, the mineral, wouldbe a revenue expenditure laid out for the acquisition --of stockintrade. (Emphasis supplied) 21.The Hon'ble Supreme Court further went on to holdas under: An expenditure incurred for acquiring a right to takeaway sand from the surface of river beds has beentreated as if the sand was stock-in-trade-M.A.Jabbar Vs. Commissioner of Income Tax [1968] 68ITR 493, in the same way as tendu leaves havebeen treated by the Privy Council in MohanlalHargovind'scase. In the former case, Bhargava, J.indicated a number of factors which led to theconclusion that the expenditure incurred by theassessee in obtaining the lease was revenueexpenditure for the purpose of obtaining stock-in-trade and not capital expenditure which were: (1)that the lease was for a very short period of 11months only; (2) that the sole right which wasacquired by the assessee under the lease deed wasto take away the sand lying on the surface of theleased land where no question of raising, digging orexcavating for the sand before obtaining it wasinvolved. In other words, no operation had to beperformed on the land itself and “is not a casewhere the gravel is in any true sense” as pointedout in Golden Horse Shoe (New) Ltd.'s case “was won from the soil .... it is merely shovelled upwhere it lies”. Thus insofar as a case of mining lease is concerned , the empirical test as held by the Hon'ble SupremeCourt is that where the mineral has already been gotten and islying on the surface (unlike in the present case), it would be arevenue expenditure. However, where the mineral has to beremoved, brought to the surface and then used, it cannot beregarded as a stock in trade and thus the expenditure madewill be an expenditure on a capital account. won from the soil .... it is merely shovelled upwhere it lies”. Thus insofar as a case of mining lease is concerned , the empirical test as held by the Hon'ble SupremeCourt is that where the mineral has already been gotten and islying on the surface (unlike in the present case), it would be arevenue expenditure. However, where the mineral has to beremoved, brought to the surface and then used, it cannot beregarded as a stock in trade and thus the expenditure madewill be an expenditure on a capital account. 22.In the case of Pingle Industries Ltd., the Hon'bleSupreme Court has noted the submission made on behalf ofthe assessee that all cases of mines and quarries fall intofollowing three classes: In the case of Pingle Industries Ltd., the Hon'ble i.in which mines and quarries are purchasedoutrightoutright ii.in which ownership is not aquired but onlyan interest in land and an interest in land and iii.in which there is not even an interest inland but there is an arrangement inpraesenti and de futuro to ensure supply ofraw material. land but there is an arrangement inpraesenti and de futuro to ensure supply ofraw material. 23. The contention was that barring the first category, the other two categories exclude a case of the expenditurebeing considered as a capital expenditure. The furthercontention was that the case fell under the third categorywhich incidentally is also the contention on behalf of theassessee in the present case. 24.On behalf of the assessee, reliance was sought tobe placed on the decision of the judicial committee in the caseof Mohanlal Hargovind Vs. Commissioner of Income Tax[1949] 17 ITR 473 (PC), in which there was an agreement topurchase tendu leaves as raw material for manufacture ofbidis. The argument to substitute sand and gravel for tenduleaves was not accepted. The Judicial committee held thus: On behalf of the assessee, reliance was sought to “But I cannot say the same of the sand and gravel,part of the earth itself, which was the subject of thecontract in the present case and which I think couldonly become part of the stock-in-trade of thisgravel merchants' business when it had, in the truesense, been won, been excavated and been takeninto their possession.” 25. The Hon'ble Supreme Court in the case of Pingle Industries Ltd. expressed its concurrence with the view asexpressed. The following observations in the context of what isheld in the case of Mohanlal Hargovind's case are apposite. “We are in entire agreement that such a distinctionis not only palpable but also sensible. The presentcase is a fortiori. Here, the stones are not lying onthe surface but are part of a quarry from which theyhave to be extracted methodically and skillfullybefore they can be dressed and sold. These depositsare extensive, and the work of the assessee carrieshim deep under the earth. Such a deposit cannot bedescribed as the stock-in-trade of the assessee, butstones detached and won can only be so described.” 26.Thus, we find that the reliance placed by the ITATon certain submissions advanced on behalf of the assessee inthe case of Pingle Industries Ltd. is entirely misplaced. We findthat the ITAT has failed to appreciate that in fact, in that case,a similar contention on behalf of the assessee as in thepresent case was negatived. 27. We would now propose to make a brief reference to the other decisions cited on behalf of the parties. 26.Thus, we find that the reliance placed by the ITATon certain submissions advanced on behalf of the assessee inthe case of Pingle Industries Ltd. is entirely misplaced. We findthat the ITAT has failed to appreciate that in fact, in that case,a similar contention on behalf of the assessee as in thepresent case was negatived. 27. We would now propose to make a brief reference to the other decisions cited on behalf of the parties. 28.In the case of Gotan Lime Syndicate, the assesseewhich was a registered firm was carrying on the business ofmanufacture of lime from limestone. The government hadsanctioned leasing out of a certain area of lime deposits infavour of the assessee on an agreement to pay royalty ofRs.96,000/- per annum. The question was whether it was acapital or a revenue expenditure. The Hon'ble Supreme Courtfound that in that case there was annual payment of royalty ordead rent and no lumpsum payment was ever settled or paid.In such circumstances, it was found that the payment was nota direct payment for securing an enduring advantage, but hada relation to the raw material to be obtained. It is significantto note that the case of Pingle Industries Ltd. was cited onbehalf of the Revenue. The Hon'ble Supreme Court found thatthe said case is distinguishable on the ground that in the caseof Pingle Industries Ltd., there was a lumpsum payment foracquiring a capital asset of enduring benefit to his trade. It isnecessary to emphasize that in the present case also, there isa lumpsum payment for acquiring an advantage of anenduring nature. 29.In the case of Aditya Minerals (P) Ltd.,the Hon'bleSupreme Court finding an apparent conflict in the decision inthe case of Pingle Industies Ltd. and Gotan Lime Syndicate'scase had referred the issue to a larger bench. The matter wasplaced before a constitution bench. The constitution benchfound that there was material difference in the facts asobtaining in the case of Pingle Industies Ltd. and Gotan LimeSyndicate. In the case of Aditya Minerals (P) Ltd., on facts, itwas found that the case involved payment of rent for the landthat was leased. The rent was payable at the rate of Rs.35/-per acre per month. The assessee was required to pay therent in advance, for the entire period of the lease which wasfifteen years. The advance deposit so made was adjustableagainst rent of each month and it carried no interest. In suchcircumstances, on facts, it was held that the case was on parwith the case of Pingle Industries Ltd. and the assessee'sAppeal was dismissed. 30.We now propose to make a brief reference to thecases cited on behalf of the respondent. 31.In the case of Associated Cement Industries Ltd.,the Company was running a cement factory at Shahabad. Thefactory premises were included in the municipal area. Atripartite agreement was entered into between thegovernment, the municipality and the Company whereby theCompany had undertaken to supply water to the municipalityand provide water pipeline, to supply electricity for streetlighting and to put up a transmission line for laying of themain road from the factory to the railway station, inconsideration of which the Company got exemption frompaying tax for a period of fifteen years. As per the termsagreed, the pipeline was eventually to become the property ofthe municipality. It was in these circumstances held that theamount spent for providing the pipeline was a revenueexpenditure as the advantage secured, namely, the exemptionfrom paying municipal taxes for a period of fifteen years wasonly in the field of revenue. We find that the case is clearlydistinguishable on facts. 32.In the case National Organic Chemical IndustriesLtd., the assessee Company was in the business ofmanufacturing of chemicals. The company constructed a jetty 32.In the case National Organic Chemical IndustriesLtd., the assessee Company was in the business ofmanufacturing of chemicals. The company constructed a jetty under a licence granted by the government for the purpose ofhandling chemicals manufactured by it. Under the terms ofthe agreement the jetty was always to belong to thegovernment. The assessee was however given preferentialrights to use the jetty without payment of any charges for aperiod of three years after which it was required to pay fees inthe discretion of the government. This Court found that theexpenditure was incurred to obtain commercial advantage andto facilitate trading and thus, was a revenue expenditure. Thecase is distinguishable on facts as the expenditure wasincurred to obtain advantage in the field of revenue, namely,to save fees for the use of the jetty and to have a commercialadvantage of the preferential use of the same. What issignificant is that the jetty was to belong to the government.We are unable to see as to how the case can come to the aidof the assessee in the present case. 33.Lastly, in the case of Madras Auto Services (P) Ltd.,the assessee had taken premises on lease for a period of thirtynine years. The lease premises were eventually demolishedand a new building was constructed by the assessee at itsexpense which as per the terms agreed, belonged to the lessor. The assessee got the user of the building at aconcessional rent. The question was whether the amountspent on the construction of the building was deductible as arevenue expenditure. It was held that by spending theamount on the construction of the building, the assessee didnot acquire any capital asset in as much as the buildingbelonged to the lessor. The only advantage the assessee gotwas of a concessional rent which was for obtaining a businessadvantage and was thus a revenue expenditure. The case inour opinion turned on its own facts. 34.We find that the reliance placed by the ITAT oncertain submissions made on behalf of the assessee in thecase of Pingle Industries Ltd. is misplaced. We also find thatthe ITAT could not have held that because the mine continuedto belong to the Government (in fact the mineral rights wouldalways belong to the Government) and the observation thatthe facts speak for themselves are insufficient to interfere withthe concurrent finding of fact properly recorded by the AO andthe CIT (Appeals). We find that the respondent had obtaineda long term captive source of the raw material by purchase ofright from Texmaco. However, at the same time the raw material was required to be won, gotten and brought to thesurface and as such, cannot be said to be a stock in trade asheld by the Hon'ble Supreme Court in the case of R.B. SethMoolchand Suganchand. Consequently, the substantialquestion of law framed at serial no. II is answered in thenegative and in favour of the appellant. The Appeal is partlyallowed. The impugned order passed by the ITAT on theaforesaid issue no. (II), is hereby set aside. The order passedby the AO on the aforesaid issue, as confirmed by the CIT(Appeals) is hereby restored. In the circumstances, thereshall be no order as to costs. C. V. BHADANG, J. M. S. SONAK, J. EV