BIKANER GYPSUMS LTD. v. COMMISSIONER OF INCOME TAX, RAJASTHAN

The Judgment of the Court was delivered by

SINGH, J. This appeal is directed against the judgment and order of the High Court of Rajasthan dated 24.4.1975 answering the F question referred to it by the Income Tax Appellate Tribunal in the negative, in favour of the Revenue and against the assessee. The ques- tion referred to the High Court was as under:

"Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the payment of Rs.3 G lakhs to the Northern Railway was a revenue expenditure and was a deduction allowable under the Income Tax Act. 1961?"

The circumstances leading to the reference and the appeal was neces- sary to be stated. The Natural Science (India) Ltd. predecessor-in- H interest of the assessee acquired a lease from the Maharaja of the

BIKANER GYPSUMS v. C.I.T. (SINGH, J.] 317

erstwhile Bikaner State on September 29, 1948 for mining of gypsum for a period of 20 years over an area of 4.27 square miles at Jamsar. The lease was liable to be renewed after expiring of 20 years. The Natural Science (India) Ltd. by a deed of assignment dated December 11,. 1948 assigned the rights under the lease to the Bikaner Gypsums Ltd., a company wherein the State Government owned 45 per cent share. The Bikaner Gypsums Ltd. (hereinafter referred to as 'the assessee') carried on the business of mining gypsum in accordance with the terms of conditions stated in the lease. The as,essee entered into an agreement with Sindri Fertilizers, a Governm~nt of India Public Undertaking for the supply of gypsum of minimum of 83.5 per cent quality. Under the lease, the assessee was conferred the liberties and powers to enter upon the entire leased land and to search for win, c work, get, raise, convert and carry away the gypsum for its own benefits in the most economic, convenient and beneficial manner and to treat the same by calcination and other processes. Clause 2 of Part II of the lease authorised the lessee to sink, dig, drive, quarry, make, erect, maintain and use in the said lands any borings, pits, shafts, inclines, drifts, tunnels, trenches, levels, water-ways, airways and other works and to use, maintain, deepen or extend any existing works of the like nature in the demised land for the purpose of winning and mining of the mineral. Clause 3 granted liberty to erect, construction, maintain and use on or under the land any engines, machinery, plant, dressing, floors, furnaces, brick kilns, like kilns, plaster kilns etc. Clause 4 conferred liberty on the lessee to make roads and ways and E use existing roads and ways. Clause 7 granted liberty to the assessee to enter upon and use any part of parts of the surface of the said lands for the purpose of stacking, heaping or depositing thereon any produce of the mines or works carried on and any earth materials and substance

I 'dug or raised under the liberties and powers. Clause 8 conferred liberty on the lessee to enter upon and occupy auy of the surface lands within the demised lands other than such as are occupied by dwelling F

houses or farms and the offices, gardens and yards. Clause 9 conferred power on the lessee to acquire, take up and occupy such surface lands ih the demised lands as were then in the occupation of any body other than the Government on payment of compensation and rent to such occupiers, and if the lessee is unable to acquire such land from the G ' tenants and occupiers, the Government undertook to aequire such surface land for the lessee at the lessee's cost. Clause 15 of Part II <;onferred liberty and power on the lessee to do all things which may be necessary for winning, working getting the said minerals and also for calcining, smelting, manufacturing, converting and making merchantable. H

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Part 111 of the lease contained restrictions and conditions to the A exercise of the liberties and powers and privileges as contained in Part II of the lea£e. Clause 2 of Part Ill provided that the lessee ;hall not enter upon or occupy surface of any land in the occupation of any tenant or occupier without making reasonable compensation to such tenant or occupier. Clause 3 prescribed restriction on mining opera- B tion within 100 yards from any railway, reservoir, canal or other public works. It reads as urider:

"Clause 3: No mining operations or working shall be car- ried on or permitted to be carried on by the lessee in or under the said lands at or to any point within a distance of 100 yards from any railway, reservoir, canal or other :oublic c works or any buildings or inhabited site shown on the plan hereto annexed except with the previous permission in writing of the Minister, or some officer authorised by him in that behalf or otherwise then in accordance with such instructions, restrictions and conditions either general or D special which may be attached to such permission. The said distance of 100 yards shall be measured in the case of a Railway Reservoir or canal horizontally from the outer of the bank or of outer edge of the cutting as the case may be and in the case of a building horizontally from the plinth thereof." E The above clause had been incorporated in the lease to protect the railway track and railway station which was situate within the area demised to the lessee. Clause 5 of Part VIII of the agreement stated as under:

F "Clause 5: If any underground or mineral rights in any lands or mines covered and leased to the lessee in accor- I dance with the provisions of those presents be claimed by any 'Jagirdar' 'Pattedar', 'Talukdar', tenant or other person then and in all such cases the Government shall upon notice from the lessee forthwith put the lessee in possession of all G such lands and mines free of all costs and charges to the lessee and any compensation required to be paid to any such "Jagirdar", 'Pattedar', 'Talukdar', tenant or other person claiming to have any underground or mineral rights shall be paid by the Government." ,'

H I The assessee company exclusively carried on the mining of

BIKANER GYPSUMS v. C.I.T. [SINGH, J.] 319

gypsum in the entire area demised to it. The Railway authorities extended the railway area by laying down fresh track, providing for railway siding. The Railways further ~onstructed quarters in the lease area without the permission of the assessee company. The assessee company filed a suit in civil court for ejecting the Railway from the encroached area but it failed in the suit. The assessee company, there- upon, approached the Government of Rajasthan which had 45 per cent share of it and the Railway Board for negotiation to remove the Railway Station and track enabling the assessee to carry out the min- ing operation under the land occupied by the Railways {hereinafter referred to as the 'Railway Area'). Since, on research and survey the assessee company found that under the Railway Area a high quality of gypsum was available, which was required as raw material by the Sindri Fertilizers. All the four parties namely, Sindri Fertilizers, c Government of Rajasthan, Railway Board and the assessee company negotiated the matter and ultimately the Railway Board agreed to shift the railway station, trak and yards to another place or area offered by the assessee. Under the agreement the Railway authorities agreed to shift the station and all its establishments to the alternative site offered by the assessee company and it was further agreed and all the four parties, Sindri Fertilizers, Government of Rajasthan, Indian Railway and the assessee company shall equally bear the total expenses of Rs. 12 lakhs incurred by the Railways in shifting the railway station, yards and the quarters. Pursuant to the agreement, the assessee company paid a sum of Rs.3 lakhs as its share to the Northern Railway towards the cost of shifting of the Railway Station and other constructions. In addition to that the assessee company further paid a sum of Rs. 7 ,300 to the Railways as compensation for the surface rights of the leased land. On the shifting of the Railway track and Station the assessee carried out mining in the erstwhile Railway Area and it raised gypsum to the extent of 6,30,390 tons and supplied the same to Sindri F Fertilizers.

The assessee company claimed deduction of Rs.3 lakhs paid to the Northern Railway for the shifting of the Railway Station for the assessment year 1964-65. The Income-Tax Officer rejected the asses- see's claim on the ground that it was a capital expenditure. On appeal by G the assessee, the Appellate Assistant Commissioner confirmed the order of the Income-Tax Officer. On further appeal by the assessee the Income Tax Appellate Tribunal held that the payment of Rs.3 lakhs by the assessee company was not a capital expenditure, instead it was a revenue expenditure. On an application made by the Revenue the Income Tax Appellate Tribunal (hereinafter referred to as 'the H

320 SUPREME COURT REPORTS [1990] Supp. 2 S.C.R,

Tribunal') referred the question as aforesaid to the High Court under A s. 256 of the Income Tax Act, 1961. The High Court held that since on ' payment of Rs.3 lakhs to the Railway the assessee acquired a new asset . which was attributable to capital of enduring nature, the sum of Rs. 3 lakhs was a capital expenditure and it could not be a revenue expendi- ture. On these findings the High Court answered the question in the B negative in favour of the Revenue against the assessee and it set aside the order of the Tribunal by the impugned order. ·

Learned counsel for the appellant contended that since the entire i area had been leased out to the assessee for carrying out mining opera- l tions, the assessee had right to win, the minerals which lay under the Railway Area as that land had also been demised- to the assessee. c Since, the existence of railway station, building and yard obstructed the mining operations, the assessee paid the amount of Rs.3 lakhs for removal of the same with a view to carry on its business profitably. The assessee did not acquire any new asset, instead, it merely spent money in removing the obstruction to facilitate the mining in a profitable j'.) manner. On the other hand, learned counsel for the Revenue urged that in view of the restriction imposed by Clause 3 of Part Ill of the lease, the assessee had no right to the surface of the land occupied by the Railways. The assessee acquired that right by paying Rs.3 lakhs which resulted into an enduring benefit to it. It was a capital expendi- ture. Both the counsel referred to a number of decisions in support of E their submissions. • The question whether a particular expenditure incurred by the ~ assessee is of Capital or Revenue nature is a vexed question which has always presented difficulty before the Courts. There are a number of ~ decisions of this Court and other courts formulating tests for distin- F guishing the capital from revenue expenditure. But the tests so laid down are not exhaustive and it is not possible to reconcile the reasons given in all of them, as each decision is founded on its own facts and circumstances. Since, in the instant case the facts are clear, it is not necessary to consider each and every case in detail or to analyse the tests laid down in various decisions. However, before we consider the facts and circumstances of the case, it is necessary to refer to some of the leading cases laying down guidelines for determining the question. In Assam Bengal Cement Co. Ltd. v. The Commissioner of Income Tax, West Bengal, [1955] 1 SCR 972,-this Court observed that° in the great diversity of human affairs and the complicated nature of business operation, it is difficult to lay down a test which would apply to all situations. One has, therefore, to apply the criteria from the business

BIKANER GYPSUMS v. C.I.T. !SINGH, J.l 321

point of view in order to determine whether on. fair appreciation of the whole situation the expenditure incurred for a particular matter is of the nature of capital expenditure or a revenue expenditure. The Court laid down a simple test for determining the nature of the expenditure. It observed: ·

"If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of . the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce. the profits it is a revenue expenditure. If any such asset or advantage for the endur- c ing benefit of the business is thu.s acquired or brought into .existence it would be.immateriai whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or. was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a tevenue expenditure.,.

In K. T.M. T.M. Abdul Kayoom and Another v. Commissioner of Income Tax, [ 1962] 44 ITR 589, this Court after considering a number of English and Indian authorities held that each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire .,-. aspect. The Court observed that what is decisive ·is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue in the light of the general principles, which are followed in such cases. In that case the assesse.e claimed deduction of Rs.6, 111 paid by it to the Government as lease money for the.grant of exclusive rights, liberty and authority to fish and carry away all chank shells in the sea off the coast line of a certain area specified in the lease for a period of three years. The Court held that the amount of Rs.6, 111 was · paid to obtain an enduring benefit in the shape 9f an exclusive right to fish; the payment was not related to the chanks, instead it was an amount spent in acquiring an asset from wh.ich it may collect its stock- in-trade. It was, therefore, an expenditure of a capital nature.

In Bombay Steam Navigation Co. Pvt. Ltd. v. Commissioner of Income Tax, Bombay, [ 1965] l SCR 770, the assessee purchased the H

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assets of another Company tor purposes of carrying on passenger and ferry services, it paid part of the consideration leaving the balance unpaid. Under the agreement of sale the assessee had to pay interest on the unpaid balance of money. The assessee claimed deduction of the amount of interest paid by it under the contract "of purchase from its income. The court held that the claim for deduction of amount of interest as revenue expenditure was not admissible. The Court observed that while considering the question the Court should con- sider the nature and ordinary course of busin~ss and the object for which the expenditure is incurred. If the outgoing or expenditure 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 permanent character, the posses- c sion of which is a condition for the carrying on of the buisness, the expenditure may be regarded as revenue expenditure. But, on the facts of the case, the Court held tltat the assessee's claim was not admissi- ble, as the expenditure was related to the acquisition of an asset or a right of a permanent character, the possession of which was a condi- D tion for carrying the business. • The High Court has ·relied upon the decision of this Court in R. B. Seth Moo/chand Suganchand v. Commissioner of Income Tax, New Delhi, (1972] 86 !TR 647, in rejecting the assessee's contention. In Suganchand's case .the assessee was carrying on a mining business, E he had paid a sum of Rs.1,53,800 to acquire lease of certain areas of land bearing mica for a period of 20 years. Those areas had already been worked for 15 years by other lessees. The assessee had paid a sum

F of Rs.3,200 as fee for a licence for prospecting for emerald for a period of one year. In addition to the fee, the assessee had to pay royalty on the emerald excavated and sold. The assessee claimed the expenditure of Rs.3,200 paid by it as fee to the Government for prospecting licence - as revenue expenditure. The assessee further claimed that the appropriate part of Rs. 1,53,800 paid by it as lease money was allow-· able as revenue expenditure. The Court held that while considering the question in relation to the mining leases an empirical test is that where minerals have to be won, extracted and brought to surface by G mining operations, the expenditure incurred for acquiring such a right · would be of a capital nature. But, where the mineral has already been gotten artd is on the surface, then the expenditure incurred for obtain- ing the'tight to acquire the raw material would be a revenue expendi- ture. The Court held that since the payment of tender money was for acquisition of capital asset, the same could not pe treated as a revenue .• H expenditure. As regards the claim relating to the prospecting licence 4

BIKANER GYPSUMS v. C.I.T. [SINGH, J.J 323

fee of Rs.3,200 the Court held that since the licence was for prospect- A ing only and as the assessee had not started working a mine, the payment was made to the Government with the object of initiating the business. The Court held that even though the amount of prospecting licence fee was for a period of one year, it did not make any difference • as the fee was paid to obtain a licence to investigate, search and find the mineral with the object o_f conducting the business, extracting ore B from the earth necessary for initiating the business. The facts in.valved in that case are totally different from the instant case. The assessee in the instant case never claimed any deduction with regard to the licence fee or royalty paid by it, instead, the claim relates to the amount spent on the removal of a restriction which obstructed the carrying of the business of mining within a particular area in respect of which the assessee had already acquired mining rights. The payment of Rs.3 C lakhs for shifting of the Railway track and Railway Station was not made for initiating the business of mining operations or for acquiring any right, instead the payment was made to remove obstruction to facilitate the business of mining. The principles laid down in Sugan- chand's case do not apply to the instant case. D

In British Insulated and He/sby Cables Ltd. v. Atherton, [1926] AC 205, Lord Cave laid dowh a test which has almost universely been accepted. Lord Cave observed:

·· ... when an expenditure is made, not only once and for E all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special cir- cumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue out to capital." F

This dictum has been followed and approval by this Court in the cases of Assam Bengal Cement Co. Ltd. (supra); Abdul Kayoom (supra) and Seth Suganchai:zd (supra) and sever\' other decisions of this Court. But, the test laid down by Lord Cave has been explained in a number of cases which show that the tests for considering the expenditure for G the purposes of bringing into existence, as an asset or an advantage for the enduring benefit of a trade is not always true and perhaps Lord Cave himself had in mind that the test of enduring benefit of a trade would be a good test in the absence of special circumstances leading to an opposite conclusion. Therefore, the test laid down by Lord Cave was not a conclusive one as Lord Cave himself did not regard his test H

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as a conclusive one and he recognised that special circumstances might very well lead to an opposite conclusion. ' c In Gotan Lime Syndicate v. C.I. T., Rajasthan & Delhi, [1966] 59 ITR 718, 'the assessee which carried on the business of manufacturing lime from limestone, was granted the right to excavate limestone in certain areas under a lease. Under the lease the assessee had to pay royalty of Rs.96,000 per annum. The assessee claimed the payment of Rs.96,000 to the Government as a revenue expenditure. This Court after considering its earlier decision in Abdul Kayoom 's case (supra) and also the decision of Lord Cave in British Insulated (supra), held that the royalty paid by the assessee has to be allowed as revenue expenditure as it had relation to the raw materials to be excavated and c extracted; The Court observed that the royalty payment including the dead rent had relation to the lime deposits. The Court observed although the assessee did derive an advantage and further even though the advantage lasted at least for a period of five years there was no payment made once for all. No lump sum payment was ever settled, D. instead, only an annual royalty and dead rent was paid. The Court held that the royalty was not a direct payment for securing an enduring benefit,' instead it had relation to the raw materials to be obtained. In • this decision expenditure for securing an advantage which was to last at least for a period of five years was not treated to have enduring benefit. In M.A. Jabbar v. C.I. T. Andhra Pradesh, Hyderabad, [1968] E 2 SCR 413, the assessee was carrying on the business of supplying lime and sand, and for the purposes of acquiring sand he had obtained a lease of a river bed from the State Government for a period of 11 months. ,Under the lease he had to pay large amount of lease money for the grant of an exclusive right to carry away sand within, under or upon the land. The assessee in proceedings for assessment of in come- F tax claimed deduction with regard to the amount paid as lease money. The Court held that the expenditure incurred by the assessee was not related to the acquisition of an asset or a right of permanent character instead the expenditure was for a specific object of enabling the asses-

G see to remove the sand lying on the surface of the land which was stock-in-trade of the business, therefore, the expenditure was a revenue expenditure. - Whether payments made by an assessee for removal of any rest- riction or obstacle to its business would be in the nature of capital or revenue expenditure, has been considered by courts. In Commissioner of Inland Revenue v. Carron Company, [1966-69] 45 Tax Cases 13 the assessee carried on the business of iron founders, which was incor-

BIKANER GYPSUMS v. C.l.T. (SINGH, J.l 325

porated by a Charter granted to it in 1773. By passage of time many of its features had become archaic and unsuited to modern conditions and the· company's commercial. performance was suffering a progressive decline. The Charter of the company placed restriction on the com- pany's borrowing powers and it placed restriction on voting rights of certain members. The company decided to petition for a supplemen- tary Charter providing for the vesting of the management in Board of B Directors and for the removal of the limitation on company's borrow- ing powers and restrictions on the issue and transfer of shares. The company's petition was contested by dissenting share-holders in court. The company settled the litigation under which it had to pay the cost of legal action and buy out the holdings .of the dissenting share-holders and in pursuance thereof a supplementary Charter was granted. In assessment proceedings, the company claimed deduction of payments c made by it towards the cost of obtaining the Charter, the amounts paid to the dissenting share-holders and expensed in the action. The Special Commissioner held that the company was entitled to the deductions. On appeal the House of Lords held that since the object of the new Charter was to remove obstacle to profitable trading, and the engage- D ment of a competent Manager and the removal of restrictions on bor- rowing facilitated the day-to-day trading operation of the company, the expenditure was on income account. The House of Lords con- sidered the test laid down by Lord Cave L.C. in British Insulated Company's case and held that the payments made by the company, were for the purpose of removing of disability of the company trading operation which pre judicea its operation. This was achieved without acquisition of any tangible or intangible asset or without creation of any new branch of trading activity. From a commercial and business point of view nothing in the nature of additional fixed capital was thereby achieved. The Court pointed out that there is a sharp distinc- tion between the removal of a disability on one hand payment for which is a revenue payment, and the bringing into existence of an advantage, payment for which may be a capital payment. Since, in the case before the Court, the Company had made payments for removal of disabilities which confined their business under the out of date Charter of 1773, the expenditure was on revenue account. In Empire Jute Company v. C./. T, [ 1980] 124 !TR 1, this Court held that expendi- G ture made by an assessee for the purpose of removing the restriction on the number of working hours with a view to increase its profits, was in the nature of revenue expenditure. The Court observed that if the advantage consists merely in facilitating the assessee's trading opera- tions of enabling the management and conduct of the assessee's busi- ness to be carried on more efficiently or more profitably while leaving H

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the fixed capital untouched, the expenditure would be on revenue account even though the advantage may endure for an indefinite future. We agree with the view taken in the aforesaid two decisions. In our opinion where the assessee has an existing right to carry on a business, any expenditure made by it during the course of business for the purpose of removal of any restriction or obstruction or disability would be on revenue account, provided the expenditure does not acquire any capital asset. Payments made for removal of restriction, obstruction or disability may result in acquiring benefits to the busi- ness, but that by itself would not acquire any capital asset.

In the instant case the assessee had been granted mining lease in respect of 4.27 square miles at Jamsar under which he had right to c sink, dig, drive, quarry and extract mineral i.e. the gypsum and in that process he had right to dig the surface of the entire money, licence fee and other charges for securing the right of mining in respect of the entire area of 4.27 square miles including the right to the minerals under the Railway Area. The High Court has held that on payment cf D Rs.3 lakhs, the assessee acquired capital asset of an enduring nature. The High Court failed to appreciate that Clause 3 was only restrictive in nature it did not destroy the assessee's right to the minerals found under the Railway Area. The restriction operated as an obstacle to the assessee 's right to carry on business in a profitable manner. The assesse paid a sum of Rs.3 lakhs towards the cost of removal of the obstructions which enabled the assessee. to carry on its business of mining in an area which had already been leased out to it for that purpose. There was, therefore, no acquisition of any capital asset. There is no dispute that the assessec completed mining operations on the released land (Railway Area) within a period of 2 years, in the circumstances the High Court's view that the benefit acquired by the assessee on the payment of the disputed amount was a benefit of an enduring nature is not sustainable in law. As already observed, there may be circumstances where exPenditure, even if incurred for obtain- ing advantage of enduring benefit may not amount to acquisition of asset. The facts of each case have to be borne in mind in considering the question having regard to the nature of bu,iness its requirement and the nature of the advantage in commercial sense.

In considering the cases of mining business the nature of the lease the purpose for which expenditure is made, its relation to the carrying on of the business in a profitable manner should be consi- dered. In the instant case existence of Railway Station, yard and build- 1-1 ings on the surface of the demised land operated as an obstruction to

BIKANER GYPSUMS v. C.I.T. [SINGH. l.J 327

the assessee's business of mining. The Railway Authorities agreed to shift the Railway establishment to facilitate the assessee to carry on his business in a profitable manner and for the purposes the assessee paid a sum of Rs.3 lakhs towards the cost of shifting the Railway construc- tion. The payment made by the assessee was for removal of disability and obstacle and it did not bring into existence any advantage of an enduring nature. The Tribunal rightly allowed the expenditure on revenue account. The High Court in our opinion failed to appreciate the true nature of the expenditure.

We are, therefore, of the opinion that the High Court committed error in interfering with the findings recorded by the Income Tax Appellate Tribunal. We, accordingly, allow the appeal, set aside the order of the High Court and restore the order of the Tribunal. The appellant is entitled to its costs.

N.V.K. Appeal allowed.