Under v. Kirkend Coal Co. Reportedin (1970) 77 Itr 0530 Which Reads As Under

1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHANBENCH AT JAIPUR. D.B. Income Tax Appeal No.29/2003 Rajasthan State Mineral Development Corporation Vs.Dy. Commissioner of Income Tax, Jaipur DATE OF JUDGMENT ::: 14.12.2016 HON'BLE MR. JUSTICE K.S. JHAVERIHON'BLE MR. JUSTICE DINESH MEHTA Mr. Sanjay Jhanwar, for the appellant.Mr. Anuroop Singhi, for the respondent. ***** BY THE COURT:- (Per Hon'ble Jhaveri, J.) 1.By way of this appeal, the appellant has assailed thejudgment and order of the Tribunal whereby Tribunal hasallowed the appeal preferred by the department. 2.This court while admitting the appeal on 27.5.2003had framed following substantial question of law:- “Whether the recurring expenditure for removalof overburden and other related activities forextraction of existing minerals from mines underoperation is not allowable under Section 37(1) ofthe Act being revenue in nature and an integralpart of revenue generating activities andtherefore whether the learned Income TaxAppellate Tribunal's order in disallowing suchexpenditure of Rs.85.08 lacs by treating the sameas capital in nature is justified and correct?” 3.Counsel for the appellant contended that the expenditure which has been shown by the appellant wasrevenue expenditure. He further submits that the CIT(A)while giving detailed reasons has held in favour of theassessee and has discussed the complete factual matrix. After taking into consideration, the facts in favour of theassessee, it held that the expenditure are revenueexpenses. 4In this regard, the order of the Tribunal reads as under:- “On consideration of the facts of the case asdetailed by the A/R, it is seen that the amounthad been paid to the contractor to remove theover-burden consisting of earth, rocks, bushes,etc., covering the minerals in the mines area ofFluorspar Mines of Bhinmal, District Jalore. Sincethese mines were already in operation since1976, no new asset had been brought intoexistence as a result of the removal of the over-burden. Continuous process of removal of over-burden was to facilitate the continuous process ofthe mining in the area. Therefore, in this contextthe expenditure has to be regarded as revenue innature. This ground of appeal is thus allowed.” 5.Counsel for the appellant further contended that thetribunal has committed an error in reversing the view takenby CIT(A), in view of the decision of Supreme Court inCommissioner of Income Tax vs. Kirkend Coal Co. reportedin (1970) 77 ITR 0530 which reads as under:- The facts of this case lie within narrow compass.The assessee M/s. Kirkand Coal Co. is a firmcarrying on coal mining business. During theaccounting year ending on December 31, 1956,that company spent a sum of Rs. 21,911 forstowing operations. The department of Minesrequired the assessee to stow certain galleriesnear the pit-mouth as a condition precedent forworking the colliery during the accounting year.The assessee claimed that the said expenditurewas a, revenue expenditure coming within Section10(2)(xv) of the Act. The Income-tax Officer aswell as the Appellate Assistant Commissioneroverruled the contention of the assessee. Theyconsidered that expenditure as capital expenditure and hence not deductible as apermissible allowance. But on a further appeal,the Appellate Tribunal came to the conclusionthat: “Stowing is an operation carried out in theprocess of extraction of coal and unless it iscarried out extraction of coal is not possibleirrespective of the fact whether depillaring hasbeen done or not in this year. This expenditure,is, in our opinion, a revenue expenditure, as it isnecessary for the purpose of extraction of coal.” expenditure and hence not deductible as apermissible allowance. But on a further appeal,the Appellate Tribunal came to the conclusionthat: “Stowing is an operation carried out in theprocess of extraction of coal and unless it iscarried out extraction of coal is not possibleirrespective of the fact whether depillaring hasbeen done or not in this year. This expenditure,is, in our opinion, a revenue expenditure, as it isnecessary for the purpose of extraction of coal.” On the basis of that finding, it allowed theassessee's appeal and allowed the expenditure inquestion as a permissible deduction. The HighCourt has accepted the conclusion of the Tribunal.The finding of the Appellate Tribunal that stowingis an operation carried out in the process ofextraction of coal and unless it is carried out,extraction of coal is not possible irrespective ofthe fact whether depillaring has been done or notis a finding of fact. That finding was binding onthe High Court. It is equally binding on us. Inview of that finding, the High Court was justifiedin holding that the expenditure in dispute is arevenue expenditure. This Court had in various decisions laid down theprinciples to be applied in distinguishing revenueexpenditure from capital expenditure. In Bombay-Steam Navigation Co. v. Commr. of Incometax,BombayAIR 1965 SC 1201 this Court observed: “Whether a particular expenditure is revenueexpenditure incurred for the purpose of businessmust be determined on a consideration of all thefacts and circumstances, and by the application ofPrinciples of Commercial Trading. The questionmust be viewed in the larger context of businessnecessity or expediency. If the outgoing orexpenditure is so related to the carrying on orconduct of the business, that it may be regardedas an integral part of the profit-earning processand not for acquisition of an asset or a right of apermanent character, the possession of which is acondition of the carrying on of the business, theexpenditure may be regarded as revenueexpenditure.” Court held as under:- “Whether a particular expenditure is revenueexpenditure incurred for the purpose of businessmust be determined on a consideration of all thefacts and circumstances, and by the application ofPrinciples of Commercial Trading. The questionmust be viewed in the larger context of businessnecessity or expediency. If the outgoing orexpenditure is so related to the carrying on orconduct of the business, that it may be regardedas an integral part of the profit-earning processand not for acquisition of an asset or a right of apermanent character, the possession of which is acondition of the carrying on of the business, theexpenditure may be regarded as revenueexpenditure.” Court held as under:- When dealing with cases of this kind where thequestion is whether expenditure incurred by anassessee is capital or revenue expenditure, it isnecessary to bear in mind what Dixon, J. said inHallstrom's Property Limited v. FederalCommissioner of Taxation(1): "What is anoutgoing of capital and what is an outgoing onaccount of revenue depends on what theexpenditure is calculated to effect from apractical and business point of view rather thanupon the justice classification of the legal rights,if any, secured, employed or exhausted in theprocess." The question must be viewed in thelarger context of business necessity orexpediency. If the outgoing expenditure. is sorelated to the carrying on or the conduct of thebusiness that it may be regarded as an integralpart of the profit-earning process and not foracquisition of an asset or a right of a permanentcharacter, the possession of which is a conditionof the carrying on of the business, theexpenditure may be regarded as revenueexpenditure. See Bombay Steam Navigation Co.-(1953) Pvt. Ltd. v. Commissioner of Incometax(2) The same test was formulated' by LordClyde in Robert Addze & Son's Collieries Ltd. v.Inland Revenue(3) in these words: "Is it part ofthe company's working expenses, is itexpenditure laid out as part of the process ofprofit earning ? or, on the other hand, is it acapital outlay, is it expenditure necessary for theacquisition of property or of rights of permanentcharacter, the possession of which is a conditionof carrying on its trade at all ?" It is clear fromthe above discussion that the payment made bythe assessee for purchase of loom hours wasexpenditure laid out. as part of the process ofprofit- earning. It was, to use Lord Soumnar'swords, an outlay of a business "in order to carryit on and to earn a profit out of this expense asan expense of carrying it on." It was part of thecost of operating the profit earning apparatus andwas clearly in the nature of revenue expenditure. It was pointed out by Lord Radcliffe inCommissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. (supra) that "in consideringallocation of expenditure between the capital andincome accounts, it is almost unavoidable toargue from analogy." There are always casesfalling indisputably on one or the other side ofthe line and it is a familiar argument in tax courtsthat the case under review bears close analogy toa case falling on the right side of the line andmust therefore be decided in the same manner. Ifwe apply this method, the case closes to thepresent one that we can find is NchangaConsolidated Copper Mines case (supra). Thefacts of this case were that three companieswhich were engaged in the business of coppermining formed a group and consequent on asteep fall in- the price of copper in the worldmarket, this group decided voluntarily to cut itsproduction by 10 per cent which for the threecompanies together meant a cut of 27000 tonsfor the year in question. It was agreed betweenthe three companies that for the purpose ofgiving effect to this cut, company should ceaseproduction for one year and that the assessescompany and company R should undertakebetween them the whole group programme forthe year reduced by the overall cut of 27000 tonsand should pay compensation to company for theabandonment of its production for the year.Pursuant to this agreement the assessee paid tocompany 1,384,565 by way of its proportionateshare of the compensation and the questionarose whether this payment was in the nature ofcapital expenditure or revenue expenditure. ThePrivy Council, held that the compensation paid bythe assessee to company in consideration of thelatter agreeing to cease production for one yearwas in the nature of revenue expenditure andwas allowable as a deduction in computing thetaxable income of the assessee. Lord Radcliffedelivering the opinion of the Privy Councilobserved that the assessee's arrangement withcompanies R and "out of which the expenditurearose, made it a cost incidental to the productionand sale of the output of the mine" and as suchits true analogy with an operating cost. Thepayment compensation represented expenditureincurred by the assessee for enabling it toproduce more goods despite the cut of 10 percent and it was plainly part of the cost ofperforming the income-earning operation. Thisdecision bears a very close analogy to the present case and if payment made by theassessee company to company for acquiring anadvantage by way of entitlement to producemore goods notwithstanding the cut of 80percent was regarded by the Privy Council asrevenue expenditure, a fortiori; expenditureincurred by the assessee in the present case forpurchase of loom hours so as to enable theassessee to work the profit making apparatus fora longer number of hours and produce moregoods than what the assessee would otherwisebe entitled to do, must be held to be of revenuecharacter. 6.Counsel for the appellant also relied the judgment ofSupreme Court in Empire Jute Co. Ltd. vs. Commissioner ofIncome Tax (supra) in para no. 6 & 7. 6.1In case of Bikaner Gypsums Ltd. vs. Commissioner ofIncome Tax reported in (1991) 187 ITR 0039, it has beenheld as under:- 6.Counsel for the appellant also relied the judgment ofSupreme Court in Empire Jute Co. Ltd. vs. Commissioner ofIncome Tax (supra) in para no. 6 & 7. 6.1In case of Bikaner Gypsums Ltd. vs. Commissioner ofIncome Tax reported in (1991) 187 ITR 0039, it has beenheld as under:- The question whether a particular expenditureincurred by the assessee is of Capital or Revenuenature is a vexed question which has alwayspresented difficulty before the Courts. There area number of decisions of this Court and othercourts formulating tests for distinguishing thecapital from revenue expenditure. But the testsso laid down are not exhaustive and it is notpossible to reconcile the reasons given in all ofthem, as each decision is rounded on its ownfacts and circumstances. Since, in the instantcase the facts are clear, it is not necessary toconsider each and every case in detail or toanalyse the tests laid down in various decisions.However, before we consider the facts andcircumstances of the case, it is necessary to referto some of the leading cases laying downguidelines for deter- mining the question. InAssam Bengal Cement Co. Ltd. v. TheCommissioner of Income Tax, West Bengal,[1955] 1 SCR 972,'this Court observed that inthe great diversity of human affairs and thecomplicated nature of business operation, it isdifficult to lay down a test which would apply to all situations. One has, therefore, to apply thecriteria from the business point of view in orderto determine whether on fair appreciation of thewhole situation the expenditure incurred for aparticular matter is of the nature of capitalexpenditure or a revenue expenditure. The Courtlaid down a simple test for determining thenature of the expenditure. It observed: Whether payments made by an assessee forremoval of any restriction or obstacle to itsbusiness would be in the nature of capital orrevenue expenditure, has been considered bycourts. In Commissioner of Inland Revenue v.Carron Company, [1966-69] 45 Tax Cases 13 theassessee carried on the business of iron founderswhich was incorporated by a Charter granted to itin 1773. By passage of time many of its featureshad become archaic and unsuited to modernconditions and the company's commercialperformance was suffering a progressive decline.The Charter of the company placed restriction onthe company's borrowing powers and it placedrestriction on voting rights of certain members.The company decided to petition for asupplementary Charter providing for the vestingof the management in Board of Directors and forthe removal of the limitation on company'sborrowing powers and restrictions on the issueand transfer of shares. The company's petitionwas contested by dissenting share-holders incourt. The company settled the litigation underwhich it had to pay the cost of legal action andbuy out the holdings of the dissenting share-holders and in pursuance thereof asupplementary Charter was granted. Inassessment proceedings, the company claimeddeduction of payments made by it towards thecost of obtaining the Charter, the amounts paidto the dissenting share- holders and expensed inthe action. The Special Commissioner held thatthe company was entitled to the deductions. Onappeal the House of Lords held that since theobject of the new Charter was to removeobstacle to profitable trading, and theengagement of a competent Manager and theremoval of restrictions on borrowing facilitatedthe day-to-day trading operation of the company,the expenditure was on income account. TheHouse of Lords considered the test laid down byLord Cave L.C. in British Insulated Company's case and held that the payments made by thecompany, were for the purpose of removing ofdisability of the company trading operation whichprejudiced its operation. This was achievedwithout acquisition of any tangible or intangibleasset or without creation of any new branch oftrading activity. From a commercial and businesspoint of view nothing in the nature of additionalfixed capital was thereby achieved. The Courtpointed out that there is a sharp distinctionbetween the removal of a disability on one handpayment for which is a revenue payment, andthe bringing into existence of an advantage,payment for which may be a capital payment.Since, in the case before the Court, the Companyhad made payments for removal of disabilitieswhich confined their business under the out ofdate Charter of 1773, the expenditure was onrevenue account. In Empire Jute Company v. C.I.T, [1980] 124 ITR I, this Court held thatexpenditure made by an assessee for thepurpose of removing the restriction on thenumber of working hours with a view to increaseits profits, was in the nature of revenueexpenditure. The Court observed that if theadvantage consists merely in facilitating theassessee's trading operations of enabling themanagement and conduct of the assessee'sbusiness to be carried on more efficiently ormore profitably while leaving he fixed capitaluntouched, the expenditure would be on revenueaccount even though the advantage may endurefor an indefinite future. We agree with the viewtaken in the aforesaid two decisions. In ouropinion where the assessee has an existing rightto carry on a business, any expenditure made byit during the course of business for the purposeof removal of any restriction or obstruction ordisability would be on revenue account, providedthe expenditure does not acquire any capitalasset. Payments made for removal of restriction,obstruction or disability may result in acquiringbenefits to the business, but that by itself wouldnot acquire any capital asset. In considering the cases of mining business thenature of the lease the purpose for whichexpenditure is made, its relation to the carryingon of the business in a profitable manner shouldbe considered. In the instant case existence ofRailway Station, yard and buildings on thesurface of the demised land operated as an obstruction to the assessee's business of mining.The Railway Authorities agreed to shift theRailway establishment to facilitate the assesseeto carry on his business in a profitable mannerand for the purposes the assessee paid a sum ofRs.3 lakhs towards the cost of shifting theRailway construction. The payment made by theassessee was for removal of disability andobstacle and it did not bring into existence anyadvantage of an enduring nature. The Tribunalrightly allowed the expenditure on revenueaccount. The High Court in our opinion failed toappreciate the true nature of the expenditure. 6.2In case of Pingle Industries Ltd. vs. Commissioner of Income Tax reported in (1960) 40 ITR 0067, it has beenobserved as under:- Applying the above test to the present case, it isobvious that the monthly payments of Rs. 1,666-10-8 did not represent the lease amount for amonth. This was a case in which the assesseebad acquired an asset of an enduring characterfor which he had to put his hand in his pocket fora very large sum indeed. He paid Rs. 96,000down, but for the rest he asked for easy terms.The amount paid every month was not in anysense a payment for acquisition of the right frommonth to month. It was really the entire sumchopped into small payments for hisconvenience. Nor can the amount be describedas a business expense, because the outgoingsevery month were not to be taken as spent overpurchase of stones but in discharge of the entireliability to the jagir. Applying the above test to the present case, it isobvious that the monthly payments of Rs. 1,666-10-8 did not represent the lease amount for amonth. This was a case in which the assesseebad acquired an asset of an enduring characterfor which he had to put his hand in his pocket fora very large sum indeed. He paid Rs. 96,000down, but for the rest he asked for easy terms.The amount paid every month was not in anysense a payment for acquisition of the right frommonth to month. It was really the entire sumchopped into small payments for hisconvenience. Nor can the amount be describedas a business expense, because the outgoingsevery month were not to be taken as spent overpurchase of stones but in discharge of the entireliability to the jagir. Some of the cases to which we were referredmay now be briefly noted. Hakim Ram Prasad, Inre (1) was a case of renting of a cinemaprojector for 10 years. The amount paid wasthus hire for the machine. 'In Commissioner ofIncome-tax v. Globe Theatres Ltd. (2) theassessee advanced Rs. 10,000 to a company forthe construction of a cinema house which wasnever built. Since the amount was not salami orpremium but only advance rent, it was held-deduct- ible. Commissioner of Incometax v.Kolhia Hirdagarh Co. Ltd. (3) was a case ofcommission on every ton of coal raised, and it was held to be revenue expenditure. These casesare entirely different, and can be of no authorityfor payments, such as we have. Reliance was also placed upon Parmanand HaveliRam In re (4), Nand Lal Bhoj Raj, In re (5) and-Commissioner of Incometax v. Tika Ram & Sons(6). In the first two, expenditure to acquire landsbearing certain salts in the earth, which could beconverted into potassium nitrate, sodiumchloride or saltpetre, was regarded as revenueexpenditure. They follow the line of reasoningwhich the same Court adopted in the Full Benchcase of Benarsidas (7), which we haveconsidered in detail earlier. They involvedshortterm contracts, and in the Full Bench case itwas stated that the case of long-term leases wason a different footing, though, in our opinion, thedecisive factors in such cases will be the natureof the acquisition and the reason for thepayment. Cases on the other side-of the linewhere payments were regarded as capital-expenditure are Commissioner of Incometax v.Chengalroya Mudaliar(8) and Chengalvaroya-Chettiar v. Commissioner of Incometax(9).There the expenditure was for a lease forexcavation of lime shells. Since the leaseconferred exclusive privilege and a new businessregarded not as the right to win shells. All these cases turned on different facts, and it isnot necessary to decide which of them in thespecial circumstances were correctly decided.This enquiry will hardly help in the solution of thecase in hand. We are, however, satisfied that inthis case the assessee acquired by his long-termlease a right to win stones, and the leasesconveyed to him a part of land. The stones insitu were not his stock-in-trade in a businesssense but a capital asset from which afterextraction he converted the stones into his stock-in-trade. The payment, though periodic in fact,was neither rent nor royalty but a lump paymentin instalments for acquiring a capital asset ofenduring benefit to his trade. In this view of thematter, the High Court was right in treating theoutgoings as on capital account.” 7.Counsel for the respondent has supported thejudgment of the Tribunal and contended that the view taken by the Tribunal is just and proper and that in earlierjudgment for the same assessee, for the relevant year1991-92 & 1992-93, their expenses were allowed. 8.We have heard counsel for the parties. 9.Taking into consideration the observations which aremade by this court in earlier judgment of the same assesseein para no. 11 & 13 holding as under:- 7.Counsel for the respondent has supported thejudgment of the Tribunal and contended that the view taken by the Tribunal is just and proper and that in earlierjudgment for the same assessee, for the relevant year1991-92 & 1992-93, their expenses were allowed. 8.We have heard counsel for the parties. 9.Taking into consideration the observations which aremade by this court in earlier judgment of the same assesseein para no. 11 & 13 holding as under:- He relied upon the decision of Hon'ble SupremeCourt in the case of Alembic Chemical WorksCo. Ltd. vs. Commissioner of Income Tax,reported in(1989) 177 ITR 0377 andEmpireJute Co. Ltd. vs. Commissioner of IncomeTax, reported in (1980) 124 ITR 0001andcontended that under mercantile system, theexpenses were shown in the year 1992-93 andeven while assessment order was passed for theyear 1991-92, the assessee was made clear thathe is accepting the liability and he furthercontended that he will not make payment whichwas made by the State Government for theexpenditure incurred for the survey which isbeing done. Therefore, the Corporation had noother option to make payment which has nocapital value. Taking into consideration the fact initially theCorporation has not accepted the liability,therefore, the observations which are made bythe Tribunal for the year 1991-92 were in thepeculiar facts where the liability was notaccepted but subsequently for the year 1992-93,the Corporation has accepted the liability whichwas shown in the books of account and in view ofthe matter additions made by the tribunal for therelevant year would not be applicable in thechanged circumstances. Since, they accepted theliability, the resolution which is sought to bepassed on 28.8.1992 was administrativeformality but for the Income-tax purpose it isshown in the books of account mercantilesystem, therefore, though the point raised by Mr.Singhi is remained an academic issue but factsand law in mercantile system which is debited forthe relevant year i.e. 1992-93. 10.It is thus very clear that the survey expenses arealmost identical and hence required to be allowed asrevenue expenses. 11.In view of the observations made by the SupremeCourt in the Judgment of Empire Jute Co. Ltd. vs.Commissioner of Income Tax (Supra), we are of the opinionthat the expenses which gives fruitful result require to bedone according to the necessity of relevant time anddevelopment with the nature of expenses. 12.In that view of the matter, it cannot be capitalexpenses and is to be considered as revenue expenses. 13.Therefore, the issue is answered in favour of theassessee and against the department. 14.The appeal stands allowed. (Dinesh Mehta), J. (K.S. Jhaveri), J. Brijesh61.