Patna High Court
Commissioner Of Income-Tax And ... vs Indian Copper Corporation Ltd. on 23 January, 1986
Equivalent citations: [1986]161ITR327(PATNA)
JUDGMENT Nazir Ahmad, J.
1. Various statements of the cases have been submitted by the Income-tax Appellate Tribunal, Calcutta (hereinafter referred to as "the Tribunal"), in all the six taxation cases regarding various questions of law for the opinion of this court.
2. In Taxation Cases Nos. 185 and 186 of 1971, the Tribunal, E-Bench, Calcutta, has referred to the following questions of law under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), relating to the assessment year 1962-63 for the opinion of this court :
"1. Whether, on the facts and in the circumstances of the case, the amount representing 60% of the kyanite profits for the period February 1, 1955, to August 31, 1961, due under the compromise decree was allowable deduction in ascertaining the assessee's sprofits for the assessment year 1962-63?
2. Whether, on the facts and in the circumstances of the case, the claim of the assessee for initial depreciation under Section 32(1)(iv) in respect of buildings whose construction commenced before March 31, 1961, but was completed after March 31, 1961, was proper ?"
3. In Taxation Cases Nos. 205 and 206 of 1971, the Tribunal "E" Bench, Calcutta, has referred the following questions of law under Section 256(2) of the Act, relating to the assessment year 1962-63 for the opinion of this court :
"1. Whether, on the facts and in the circumstances of the case, the deletion of the addition made by the Income-tax Officer of Rs. 1,26,522 and Rs. 1,18,489 in respect of the estimated liability for mining lease, rent and royalty for the years 1959 and 1961 is legal and proper?
2. Whether, on the facts and in the circumstances of the case, the claim of Rs. 14,43,524 in respect of the internal development is a revenue expenditure ?
3. Whether, on the facts and in the circumstances of the case, the assessee is entitled to export profit rebate in respect of kyanite business for the assessment year in question ?"
4. In Taxation Cases Nos. 57 and 58 of 1972, the Tribunal, "A" Bench, Calcutta, has referred the following questions of law under Section 256(2) of the Act, relating to the assessment year 1963-64 for the opinion of this court :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal are justified in holding that the expenditure of Rs. 15,18,230 spent on account of internal development expenses is a revenue expenditure?
2. Whether, on the facts and in the circumstances of the case, the Tribunal are justified in allowing initial depreciation within the meaning of Section 32(1)(iv) of the Income-tax Act, 1961, and in holding that the Appellate Assistant Commissioner was correct even on giving direction in that regard ?"
5. It may be pointed out that in the statement of the case in Taxation Cases Nos. 57 and 58 of 1972, the questions have not been specifically pointed out at one place. The questions have been referred in view of the directions of this court under Section 256(2) of the Act and question No. 1 has been referred in paragraph 6 of the statement of the case without giving any question number and question No. 2 has been referred in paragraph 10 of the statement of the case without giving question number and so I have given the question number as it appears in the statement of the case for the sake of convenience of discussions.
6. From the aforesaid questions, it is evident that question No. 2 in Taxation Cases Nos. 185 and 186 of 1971 and question No. 2 as mentioned in paragraph 10 of the statement of the case in Taxation Cases Nos. 57 and 58 of 1972 are approximately similar and so I am taking up this common question in the two assessment years.
7. In Taxation Cases Nos. 57 and 58 of 1972 which relate to the assessment year 1963-64, the Tribunal has clearly pointed out in paragraphs 10 and 11 of the statement of the case at pages 101 and 102 that the question referred in paragraph 10, was referred in view of the direction of this court. In paragraph 11 at page 102, the Tribunal has specifically pointed out that in the application submitted under Section 256(2) of the Act, the Additional Commissioner of Income-tax, Bihar, Patna, has stated that the above question was specifically raised before the Tribunal but they failed to deal with it in their order dated October 21, 1971, whereby they rejected the first three questions. It has been stated by the Tribunal that the Tribunal dealt with that question separately in the statement of the case dated December 8, 1971, and referred the following question for the opinion of this court under Section 256(1) of the Act and the question referred for the assessment year 1963-64 was as follows :
"Whether, on the facts and in the circumstances of the case, the claim of the assessee for initial depreciation under Section 32(1)(iv) of the Income-tax Act, 1961, in respect of the buildings whose construction commenced before March 31, 1961, but was completed after March 31, 1961, was proper ?"
8. The aforesaid statement of the case was forwarded by the Tribunal in R.A. Nos. 300 and 301 of 1971-72 in I.T.A. Nos. 6973 and 6286 of 1968-69 relevant to the assessment year 1963-64.
9. The question referred as mentioned in paragraphs 11 and 12 of the statement of the case in Taxation Cases Nos. 57 and 58 of 1972, has also been disposed of by the judgment of this Bench dated August 30, 1984, in Taxation Cases Nos. 43 and 44 of 1972 (Addl. C1T v. Indian Copper Corpn. Ltd. [1985] 155 ITR 529). The records of Taxation Cases Nos. 43 and 44 of 1972 show that the statement of the case was submitted by the Tribunal, "A" Bench, Calcutta, in the matter of the assessment of the assessee, M/s. Indian Copper Corporation Limited Ghatshila, in R. A. Nos. 300 and 301 (Cal) of 1971-72 in I. T. A. Nos. 6973, and 6286 of 1968-69 relating to the assessment year 1963-64, referring the question, as mentioned in paragraph 11 of the statement of the case in the same R. A. Nos. 300 and 301 (Cal) of 1971-72, as it appears from Taxation Cases Nos. 57 and 58 of 1972. This Bench disposed of Taxation Cases Nos. 43 and 44 of 1972 and disposed of the question referred for the assessment year 1963-64 by the judgment dated August 30, 1984. I have perused the original records of this judgment which is also reported in the case of Addl. CIT v. Indian Copper Corporation Limited [1985] 155 ITR 529. For the detailed reasons mentioned in that judgment, we have held that Section 32(1)(iv) of the Act lays down that an assessee shall be entitled to depreciation of a building at a certain percentage in the case of any building which has been newly erected after March 31, 1961, where the building is used solely for the purpose of residence of the persons employed in the business and erection in Section 32(1)(iv) must relate only to the completion of the process of erection without any reference to the date of commencement and that in granting initial depreciation under Section 32(1)(iv) of the Act, the date of commencement of the erection of the buildings of the assessee is entirely irrelevant. Thus, in the assessment year 1963-64, the question has already been decided by this Bench on the basis of the reference under Section 256(1) of the Act made by the Tribunal before the question was called for by this court and was referred to this court in view of the direction of this court in paragraph 10 of the order. The question as framed by the High Court is not in proper form and that it should have been in the form as referred in paragraph 11 of the statement of the case at page 102 of the paper book. The same question has been referred as question No. 2 in Taxation Cases Nos. 185 and 186 of 1971.
10. However, it is necessary to look to the facts of the case in the assessment year 1962-63. As it appears from the assessment order in Taxation Cases Nos. 185 and 186 of 1971, the Income-tax Officer has mentioned at page 5 that depreciation has been considered separately as per calculation in different annexures. He has also deducted depreciation as per annexures at page 22 of the paper book. The annexures are not before us and so we have to look to the order of the Appellate Assistant Commissioner. The Appellate Assistant Commissioner, while discussing ground Nos. 18, 19 and 20 at page 36 of the paper book, has pointed out that these grounds are against disallowance of initial depreciation under Section 32(1)(iv) of the Act in respect of the buildings completed during the year. He has also pointed out that the grounds taken by the Income-tax Officer was that although the construction of the buildings was completed after March 31, 1961, the same had been started before that date and accordingly Section 32(1)(iv) of the Act did not apply. The Appellate Assistant Commissioner took the view that the Income-tax Officer was not correct. He has also pointed out that the section requires that the buildings must be erected after March 31, 1961, and not that the construction should also have started only after that date. The Appellate Assistant Commissioner, therefore, held that the initial depreciation is allowable and he directed the Income-tax Officer to make necessary modification in the assessment.
11. The Department appealed before the Tribunal for the assessment year 1962-63, vide annexure D. The Tribunal discussed the question of depreciation in paragraphs 27 and 28 of the order at page 48 of the paper book. It has been pointed out that the assessee claimed initial depreciation on the buildings completed after March 31, 1961, under Section 32(1)(iv) of the Act and that the Income-tax Officer disallowed it holding that the construction had started before March 31, 1961, and that the allowance was not available in the case and the Appellate Assistant Commissioner differed from this view holding that what was required to be seen was the date of erection or completion of erection and not initiation thereof. The Tribunal agreed with the Appellate Assistant Commissioner and held that the Income-tax Officer attempted to improve on the provision for which he has no authority and that the section gives such allowance to any building which has been newly erected after the 31st day of March, 1961, and so, the Income-tax Officer was not justified in reading any other requirement in the provision which does not appear there, and that the date when construction started is not material. The Tribunal, therefore, upheld the allowance of depreciation by the Appellate Assistant Commissioner.
12. As regards the assessment year 1963-64, which is covered by Taxation Cases Nos. 57 and 58 of 1972, the Income-tax Officer mentioned at page 7 in item No. 3 that the depreciation was allowed as per separate schedule. The Appellate Assistant Commissioner has pointed out at pages 21 and 22 of the paper book in Taxation Cases Nos. 57 and 58 of 1972 in paragraph 11 that the last objection is with regard to the non-allowance of initial depreciation under Section 32(1)(iv) of the Act, in respect of the new buildings completed during the previous year. He has also pointed out that there is no discussion in the assessment order for not entertaining the assessee's claim in this respect. He, therefore, directed the Income-tax Officer to examine the claim of the assessee and to find out as to which of the buildings newly erected during the previous year fall in the categories specified under the provisions of that section. He also directed the Income-tax Officer to allow initial depreciation at the rate of 20% of the actual cost of such buildings, without being meticulous as regards the date of commencement of the construction thereof, since the provisions of Section 32(1)(iv) of the Act appear to refer merely to the date of completion of the buildings, unlike the language in the second proviso to Section 23 of the Act, which refers to the date of commencement of the construction as well.
13. In the assessment year 1963-64, the Department appealed before the Tribunal. The Tribunal discussed this issue in paragraph 13 at page 30 of the paper book. The Tribunal has pointed out that the same point was involved in the assessment year 1962-63 and the Tribunal had held that the date when the construction was started was not material. The Tribunal, therefore, following its order for the assessment year 1962-63, upheld the order of the Appellate Assistant Commissioner.
14. I have already pointed out above that this matter came before this Bench in Taxation Cases Nos. 43 and 44 of 1972 which was disposed of by this Bench on August 30, 1984. This decision is also reported in [1985] 155 ITR at page 529. In view of the findings in the assessment year 1963-64 that in granting initial depreciation under Section 32(1)(iv) of the Act, the date of commencement of the buildings of the assessee is entirely irrelevant and that the erection as per Section 32(1)(iv) must relate only to the completion of the process of erection without any reference to the date of commencement, it has to be held that the question as referred, must be answered in favour of the assessee and against the Revenue. Hence, question No. 2 relating to the assessment year 1962-63 in Taxation Cases Nos. 185 and 186 of 1971 and question No. 2 relating to the assessment year 1963-64 as referred in Taxation Cases Nos. 57 and 58 of 1972 have to be answered in favour of the assessee and against the Revenue.
15. Now, in Taxation Cases Nos. 185 and 186 of 1971, question No. 1 relates to the allowability of kyanite profits for the period from February 1, 1955, to August 31, 1961. As regards this question, certain facts have to be considered. The facts are to be found in the paper book of Taxation Cases Nos. 205 and 206 of 1971 from page 98 which is the order of the Tribunal, "B" Bench, Calcutta, marked as annexure D relating to the assessment year 1958-59. The facts have also been mentioned by the Income-tax Officer in Taxation Cases Nos. 185 and 186 of 1971 at pages 7 to 13 while dealing with kyanite profits. It appears from paragraph 2 of this order that the assessee is a public limited company carrying on business of mining of copper ore and kyanite and manufacture of copper and brass. Paragraph 3 at page 99 of the paper book shows that kyanite is a mineral containing aluminium silicates. It appears that there are rich deposits of this mineral especially in this part of Bihar which was formerly an Indian State, called as Kharswan. The assessee carried on prospecting operations since 1922 under prospecting licences granted by the then Ruler of Kharswan. The other details have been clearly mentioned at page 99 onwards, which are also to be found at pages 7 to 13 in Taxation Cases Nos. 185 and 186 of 1971. It appears that by a registered indenture dated November 15, 1926, the Ruler of Kharswan gave a mining lease over an area of 6 1/4 square miles. Part V, Clause 2 of the lease provided for royalty to the lessor at Re. 1 per ton. An additional royalty was payable at the rate of one anna per ton on the minerals so raised and despatched. The selling price of the minerals in the raw state in London exceeded £3. Clause 14 of the lease deed prohibited the lessee from direct or indirect financial arrangement with any third party without any written consent of the State Government. Part VIII, Clause 2, contemplated renewal of the ease. This clause provided that if the lessee shall be desirous of taking renewal of lease of the premises for a further term of thirty years from the expiration of the said term granted and on such desire shall prior to the expiration of such last mentioned term give to the lessor six calendar months' previous notice in writing and shall pay the rents and royalties reserved and observed and perform the several covenants and agreements contained in the original lease deed and on the part of the lessee to be observed and performed up to the expiration of the said term granted in the original lease deed, the lessor will upon the request and at the expense of the lessee execute and deliver to the lessee a renewed lease of the said premises for a further term of thirty years at such rent as shall be agreed upon by the parties but not exceeding twice the rent reserved by the original lease deed and at such royalty as may then be agreed upon between the parties but it will be upon the like terms and subject to the like covenants and agreement as mentioned in the original lease deed.
16. In exercise of this power to obtain renewal, the assessee gave notice on May 6, 1954, to the State in which Kharswan had merged on May 18, 1948, so that the Bihar Government was the successor of the lessor. In the notice, the assessee stated that it was desirous of taking the renewal for a further term of thirty years at twice the rent under the existing lease and at such royalty as might be agreed upon. This was followed by a reminder sent on May 31, 1954.
17. The assessee had entered into an agreement first with a firm known as Pawle & Berellick of London and later with M/s. Pawla and Berelock Silimanate Co. Ltd., a company incorporated in U. K. (hereinafter referred to as P. B. S. & Co. Ltd.), on various dates from time to time. The goods were being sold F. O. B., Calcutta, and also locally in India by P. B. S. & Co. Ltd.
18. The Ruler of Kharswan appears to have suspected that he was being denied the royalty due to him based on the London prices by such agreement. It was agreed in 1938 between the Ruler and the assessee that the additional royalty would be paid on the F. O. B. prices plus the freight to London and also on local sales. Regarding sales for foreign treatment, the royalty would be calculated on the average London price of the foreign sales made by F.B. S. & Co. Ltd. The additional royalty on this basis was being paid to and accepted up to 1932. Thereafter they were not accepted.
19. By letter dated June 17, 1954, the State Government complained that the assessee had committed various breaches, the details of which are to be found in paragraph 7 at pages 102 and 103 of the paper book in Taxation Cases Nos. 205 and 206 of 1971. It also appears that the lease though executed on November 15, 1926, was to be effective from February 1, 1925, for a period of thirty years and on May 18, 1948, the State of Kharswan merged in the State of Bihar. On June 17, 1954, the State of Bihar alleged that there were breaches of various clauses of the lease. There was forfeiture of the lease and the State of Bihar was entitled to enter upon the leasehold mines. This will be evident from pages 7 and 8 in Taxation Cases Nos. 185 and 186 of 1971.
20. The State Government then filed Title Suit No. 18 of 1954 in the court of the Subordinate Judge at Jamshedpur on September 23, 1954, and prayed for a declaration that the lease was for feited and that the State was entitled to re-enter and for khas possession of the lands by evicting the lessee and also for a decree for Rs. 43,78,777 odd by way of compensation. The said suit was also for a permanent injunction on the lessee from carrying on the mining operation in the said property and for injunction restraining the lessee from removing the stock of kyanite and also for costs. As the term of lease had expired on January 31, 1955, and the State of Bihar made a prayer for amendment of the plaint and the amendment was allowed by the court and in the plaint as amended, there was a prayer for declaration that upon expiry of the term of the lease, the State of Bihar was entitled to re-enter upon the property and that the possession by the assessee was that of a trespasser from February 1, 1955, the State of Bihar also claimed mesne profits to the extent of Rs. 20 lakhs odd for unauthorised occupation of the mines by the defendant from February 1, 1955, till the date of delivery of the possession.
21. The assessee issued notice on May 6, 1954, to the State of Bihar exercising option of renewal and demanding renewal of lease for a further term of thirty years. The assessee again issued a notice on September 24, 1954, under Section 60 of the Civil Procedure Code (hereinafter referred to as "the Code") to institute a suit (a) for a declaration that the State was not entitled to determine the lease dated November 15, 1926 ; (b) for an injunction restraining the State from re-entering the leasehold properties; and (c) for specific performance of the contract contained in the clause for renewal. The assessee filed Title Suit No. 1 of 1955 on January 17, 1955, in the court of the Subordinate Judge, Singhbhum, at Chaibasa.
22. Both the aforesaid suits were transferred on May 11, 1956, by order of the court to the court of the Subordinate Judge at Patna. After the suits were transferred, Title Suit No. 18 of 1954 filed by the State of Bihar was re-numbered as Title Suit No. 28 of 1955 and Title Suit No. 1 of 1955 filed by the assessee was re-numbered as Title Suit No. 27 of 1955. This will be evident from paragraph 9 at internal page 4 in the application relating to SCA No. 119 of 1959 filed in this court.
23. In the suit filed by the Bihar Government, the defence taken by the assessee was that there was no breach or violation of the lease terras and that the suit for declaration of forfeiture of the lease was not maintainable. The Bihar Government in its defence of the assessee's suit pleaded, inter alia, that there could be no specific performance of the clause for renewal, as the clause was vague and required agreement on future royalty and as the Mines and Minerals (Regulation & Development) Act (53 of 1948) rendered the renewal in favour of the assessee impossible.
24. In the suit filed by the Bihar Government, there was an application for appointment of a receiver pending the suit. The Subordinate Judge, Jamshedpur, directed appointment of a receiver. Against this order, the assessee filed an appeal before the High Court and there was a compromise on March 23, 1955, by which kyanite mined were to be stocked separately and accounts were to be opened in the Chartered Bank at Calcutta and the money so deposited was not to be withdrawn during the pendency of the suit and the assessee had to file a fortnightly statement of account before the trial court.
25. It further appears that the Subordinate Judge, Patna, to whom both the suits were transferred, decreed the assessee's suit on May 11, 1956, for specific performance and dismissed the Bihar Government's suit for declaration of forfeiture or termination of the lease. Thereafter, appeals were filed in the High Court by the State of Bihar, being First Appeals Nos. 443 and 444 of 1956. They were decided on February 14, 1959. This decision is reported in [1960] Bihar Law Journal Reports at page 105. The High Court dismissed Title Suit No. 27 of 1955 brought by the assessee and decreed Title Suit No. 28 of 1955 filed by the State of Bihar and it was ordered that the State of Bihar is entitled to decree of possession of the leasehold properties after expiry of the lease on January 31, 1955, after evicting the defendant from those properties. The High Court also held that the State of Bihar is also entitled to mesne profits from February 1, 1955, to the date of recovery of the possession, which was to be ascertained in the subsequent proceedings. It was also held that the State of Bihar is entitled to the difference in royalty on the basis of Part V, Clause 2 of the lease from May 18, 1948, till January 31, 1956. The High Court also allowed the advocate's fee of Rs. 20,000.
26. The assessee filed an application for leave to appeal to the Supreme Court against the aforesaid judgment and decree of the Patna High Court, which is numbered as SCA No. 119 of 1959. Having taken into account the disadvantage of continuing the dispute and the advantages from a compromise to the parties in public interest, the parties agreed to compromise the litigation and a final decree was passed in terms of the compromise on October 4, 1961. According to the terms of compromise, the State of Bihar agreed to grant the assessee with effect from September 1, 1961, a lease for mining of kyanite over an area of 6 1/4 sq. miles in accordance with the terms of the draft filed. It was also agreed that the claim of the State of Bihar against the assessee on account of the mesne profits and damages and costs shall be decreed for a sum of rupees one crore, but the decree shall stand satisfied, as mentioned in the proviso, if the assessee makes the following payments :
"(1) The kyanite gross profits will be the proceeds of all kyanite sales less all expenditure incurred in the mining, beneficiation, transport, handling and marketing of the ore as disclosed in the kyanite mine revenue account.
(2) One-third of the kyanite gross profits will be deducted therefrom for all indirect expenditure incurred by the Corporation relating to the kyanite business.
(3) From the remaining two-thirds, income-tax and super-tax at the rates current from time to time applicable to companies in accordance with the provisions of the Finance Act will be deducted and the balance will be the kyanite net profits.
(4) A further sum equivalent to 60% of the kyanite net profits as calculated in the previous sub-paragraph in respect of the profits of the period commencing from the 1st February, 1955, till the date of the execution of the new lease....."
27. It was further provided that the Corporation has assured the State of Bihar that it has no intention of exercising its right of surrender under the lease to be granted, but if the lease happens to be prematurely terminated by surrender, then payment of the amounts, as stipulated in the terms of compromise, relating to 60% of the kyanite net profit up to the whole year in which the lease is terminated shall operate as full satisfaction of the decree for rupees one crore to be passed. A decree was passed in terms of the compromise petition on October 4, 1961, and an appeal to the Supreme Court was not proceeded with.
28. On the aforesaid facts, findings have been given by various authorities relating to question No. 1 in Taxation Cases Nos. 185 and 186 of 1971, which I shall now take up. The Income-tax Officer in the assessment year 1962-63 has considered kyanite profit at pages 7 to 13 of the paper book in Taxation Cases Nos. 185 and 186 of 1971. The Income-tax Officer has pointed out that in the return, the assessee had claimed an exemption of kyanite profit from January 1, 1961, to August 31, 1961, on the same ground as per the earlier year's assessment. The profit from September 1, 1961, to December 31, 1961, was shown in the return. The Income-tax Officer found that in view of the compromise decree dated October 4, 1961, the assessee became a lessee of the kyamte mine from September 1, 1961, and as there was no other dispute pending, the assessee showed proportionate profit of kyanite for four months in the return and claimed exemption in respect of the profit for eight months up to August 31, 1961, for the same reasons as per last year. The Income-tax Officer held that the assessee's claim of exemption amounting to Rs. 31,82,809 cannot be accepted. The Income-tax Officer has given the details relating to the lease agreement and about the filing of the suits and about the compromise decree at pages 7 to 10 of the paper book. The Income-tax Officer has pointed out atpages 11 to 13 that it was argued that the compromise makes it abundantly clear that the company accepted the judgment of the Patna High Court, and so the assessee was in unauthorised occupation of the kyanite mines during the period from February 1, 1955, to August 31, 1961, the new lease having been executed with effect from September 1, 1961, and so the assessee was required to refund all profits made by it on working of the lease during the period of unauthorised occupation and the clause regarding payment of Rs. 1 crore merely quantifies the amount for the purpose of settlement and deals with the manner in which repayments were to be effected. On this basis, it was submitted on behalf of the assessee that the whole of the kyanite profits for the period from February 1, 1955, to August 31, 1961, should be excluded from the total income of the assessee relevant to the previous year in which such profits were included. The Income-tax Officer dealt only with the claim that the kyanite profits from January 1, 1961, to August 31, 1961, amounting to Rs. 32,82,809 should be excluded. The Income-tax Officer accepted the figure as given by the assessee to be correct. The Income-tax Officer took the view that the kyanite business was carried on by the assessee and by none else and that the income accrued or arose to the assessee. He also took the view that it is not possible to hold that the State Government carried on the business or that the assessee carried on the business on behalf of the State Government, and so the Income-tax Officer took the view that the assessee's claim for exclusion of kyanite profit is not tenable.
29. The assessee claimed that for the assessment year 1962-63, the kyamte profit is an allowable deduction in arriving at the total income assessable to tax for the assessment year 1962-63. The Income-tax Officer held that the kyanite profit in question had already been earned by the assessee and appropriated in its account and had also been enjoyed by way of distribution of dividend, etc. The Income-tax Officer has also taken the view that the assessee may not have to pay the entire sum of Rs. 1 crore at all and that the payment of this amount is contingent on the assessee desisting from terminating the lease prematurely by surrender before the expiry of the lease. The Income-tax Officer also held that the compromise decree does not, as contended by the assessee, wipe out the entire profits earned and enjoyed by the company-assessee during the period of unauthorised occupation of the mine. The Income-tax Officer, therefore, disallowed the assessee's claim of exemption of kyanite profit from January 1, 1961, to August 31, 1961, amounting to Rs. 32,82,809.
30. The assessee appealed before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner discussed the matter relating to kyanite profits at pages 26 to 33 of the paper book in Taxation Cases Nos. 185 and 186 of 1971, while dealing with grounds 1, 2, 3, and 4. The Appellate Assistant Commissioner agreed with the Income-tax Officer that the Income-tax Officer was justified in including the profits for the above period January 1, 1961, to August 31, 1961, in the assessee's hands. However, ground No. 4 was argued to the effect that the Income-tax Officer should have allowed the liability for payment to the State of Bihar in terms of the compromise decree passed in 1961. This was an alternative argument which was adduced in connection with the assessment year 1958-59 and in connection with the subsequent assessment years as well. The Appellate Assistant Commissioner has also pointed out that in the assessment order of the year 1958-59, the Income-tax Officer declined to deal with it as liability arose only in a subsequent year. It has also been pointed out that the assessee raised this ground in the assessment year 1962-63 also before the Income-tax Officer but the Income-tax Officer did not deal with it. The Appellate Assistant Commissioner discussed the terms of the compromise at pages 27 and 28 of the paper book, and then he pointed out that it appears that the assessee chose not to pay the decretal lump sum of Rs. 1 crore but to follow the alternative mode of payment which actually involves payments over a long period of 30 years and in the case of renewal of lease, over even a longer period. It was argued before the Appellate Assistant Commissioner on behalf of the assessee that whatever might have been the mode of discharging the liability, the entire liability accrued during the calendar year 1961 and since the assessee followed the mercantile system of accountancy, the entire accrued liability should be allowed to be set off against its income for the year. It was also argued that the liability was not for an expenditure of a capital nature since by discharging this liability, the assessee did not bring about any asset or benefit of enduring nature. It was also pointed out to the Appellate Assistant Commissioner on behalf of the assessee that the liability arose because of the judgment of the Patna High Court declaring the assessee to have been in unauthorised occupation of the mining area belonging to the State of Bihar and further declaring the assessee liable for payment of mesne profits to the State of Bihar and that this liability was, therefore, for discharging the obligation to pay the mesne profits and that the payment of mesne profits had nothing to do with the fresh lease that was granted by the State of Bihar. It was argued that granting of fresh lease was a separate contract independent and totally unconnected with the performance of the assessee's obligation to pay the mesne profits. It was also argued that the liability arose out of the carrying on of the assessee's business and that the liability for mesne profits arose from the act of unauthorised occupation. Reliance was placed on various decisions and it was argued that the liability for mesne profits created an overriding charge and so there was a diversion of the assessee's income to the extent of the liability accrued, and for this purpose reliance was placed on a decision of the Supreme Court in CIT v. Sitaldas Tirathdas [1961] 41 ITR 367. It was argued that the final decree of the High Court created an inescapable obligation or an overriding charge for the assessee, so that there was a diversion of income to the extent of the liability that accrued during the year.
31. The Appellate Assistant Commissioner accepted the position that as regards the equivalent of 60% of the kyanite net profit during the period of unauthorised occupation, there cannot be any doubt that the entire liability accrued during the year, i.e., as soon as the final decree was passed. He has also held that the mere fact that the liability could be discharged by making some periodical payments would not make any difference to the position that the entire liability accrued during the year and that under the mercantile system of accountancy, it should be accounted for during the year itself. It was also argued before the Appellate Assistant Commissioner on behalf of the assessee that even the condition that in the event of the assessee exercising the option to terminate the lease, the payments made till the date of termination would be considered by the State of Bihar as payments in full satisfaction of the mesne profits would not make any difference to the nature of the liability, for that would be merely a condition subsequent and could not by itself make the liability unascertained or unascertainable. The Appellate Assistant Commissioner did not accept this contention. However, the Appellate Assistant Commissioner held that a part of the total liability definitely accrued during this year and that the liability also arose out of the carrying on of the assessee's business and was incidental to it and the payments involved were not of capital nature for the reasons correctly stated by the assessee's representatives and they were also not in connection with any criminal prosecution launched against the assessee. The Appellate Assistant Commissioner, therefore, took the view that the liability should be deductible from the profits of the year. The Appellate Assistant Commissioner also held that this was an obligation of overriding charge created by the decree and made a diversion of the income. The Appellate Assistant Commissioner directed the Income-tax Officer to find out the exact liability in consultation with the assessee and to allow the same.
32. Before the Tribunal, the Department filed I.T.A. No. 6350 of 1966-67 relating to the assessment year 1962-63 and the assessee filed cross-objection No. 295 of 1966-67. The Tribunal considered the point in the Department's appeal in paragraphs 2 to 16 at pages 38 to 44 of the paper bookin Taxation Cases Nos. 185 and 186 of 1971. The first point was regarding the assessee's claim for deduction of the liability for payment to the State of Bihar. The Tribunal mentioned about the suit and the decree in paragraphs 2 to 5. Before the Tribunal, the only consideration related to the liability of 60% of the kyanite profits of the period from February 1, 1955, to August 31, 1961. It was argued on behalf of the Department that the amount is not allowable as a deduction as it was mesne profit for unauthorised and illegal occupation of the mines as a trespasser and as such an unlawful payment, and the amount was not paid for earning any profit of those years and that the payment is of a capital nature for acquiring the new lease. On behalf of the assessee, on the other hand, it was argued that the payment arose as a consequence of the profits having been earned and taxed and that there was no capital element in the payment and that the description of the amount as mesne profits or damages did not debar its allowance. The Tribunal held that there was no capital element in the payment and that the amount was not paid as a premium or salami for inducting the tenant into the property. The Tribunal also held that the liability to pay arose in the course of carrying on the business and that the assessee was working under a lease with a clause for renewal and bona fide believed that it had a right to the renewal and that the assessee's bona fides was established by the first court accepting its claim, although the claim did not succeed in the High Court. The assessee's claim was not a frivolous claim. The Tribunal also held that in compromising a bona fide dispute and as part of an arrangement for enabling the assessee to continue the business, the amount had to be paid. The Tribunal also held that if the assessee had not made the payment, the assessee would have had to close down a part of the business. The Tribunal also pointed out that the assessee was having an income of 20 to 25% of the total profits in the assessment years 1958-59 to 1961-62. The Tribunal took the view that the fact that the assessee got renewal of the lease as a result of the compromise is not relevant. The Tribunal also held that the payment was motivated by commercial considerations having regard to the large profits brought in by this part of the activity.
33. The Tribunal also considered Section 2(12) of the Code that the mesne profits was virtually a claim for damages and that the word "wrongful"
in Section 2(12) of the Code is not to be understood in the sense in which that word is used in the Indian Penal Code and that the description of the amount as "mesne profits" in the decree does not carry with it any sinister import of a shady or extra legal transaction.
34. It was also argued before the Tribunal that the assessee was a trespasser from February 1, 1955, after expiry of the term of the first lease and up to August 31, 1961, as the second lease was granted on September 1, 1961, and so the Tribunal took the view that a tenant having right of renewal cannot be described as a mere trespasser in the sense in which that term is popularly understood. The Tribunal, therefore, held that the payment made by the assessee arose in the context of the assessee being a trader and so the Tribunal held that the Appellate Assistant Commissioner rightly accepted the claim for deduction. The Tribunal agreed with the Appellate Assistant Commissioner in accepting that 60% of the kyanite profits payable to the State of Bihar has to be allowed relating to the period from February 1, 1955, to August 31, 1961.
35. On the aforesaid facts, Mr. B. P. Rajgarhia, on behalf of the Revenue, has submitted that the liability to pay 60% of the kyanite profits by the assessee to the State of Bihar for the period from February 1, 1955, to August 31, 1961, arose because of the renewal of the lease from September 1, 1961, and if the assessee spent this amount for getting the lease for thirty years from the State of Bihar, then the payment of the amount is capital in nature and it should not be allowed as a deduction. For this purpose, Mr. B. P. Rajgarhia relied on the case of R. B. Seth Moolchand Suganchand v. CIT [1972] 86 ITR 647, which is a decision by their Lordships of the Supreme Court. In this case, the assessee-firm paid the 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 question was whether a proportionate part of the amount was allowable and in the relevant year as business expenditure. In those circumstances, it was held that the amount was paid for acquiring a right of an enduring nature to extract and remove the mica and bring it to the surface and that the expenditure incurred was capital expenditure and the proportionate part of the sum of Rs. 1,53,800 was not allowable as revenue expenditure. Their Lordships of the Supreme Court also held that in the case of mining leases, where minerals are part of the land and have to be won, extracted and brought to the surface, the expenditure for acquiring the right over or in the land to win the minerals would be of a capital nature, but where the minerals has already been gotten and is on the surface, the expenditure incurred for obtaining the right to acquire raw materials, i.e., the mineral, would be revenue expenditure laid out for the acquisition of stock-in-trade. On this basis, Mr. B. P. Rajgarhia, on behalf of the Revenue, has submitted that the assessee agreed to pay 60% of the kyanite profit for acquiring the lease.
36. Mr. B. P. Rajgarhia, for the Revenue, has also relied on the case of Indian Copper Corporation Ltd. v. CIT [1977] 110 ITR 434, which is a decision of the Patna High Court. This decision relates to the assessee itself. In this case, the facts of the case relating to the lease in favour of the assessee from February 1, 1925, leading up to the filing of the suits and the appeals to the High Court and the details relating to the filing of the petition for leave to appeal to the Supreme Court and about the compromise of the litigation have also been mentioned. In this case, the assessee claimed the entire expenses which were incurred in the two suits as business expenditure eligible for deduction and, in those circumstances, it was held that the principle deducible from decided cases is that, where the expenditure laid out for the acquisition or improvement of a fixed capital asset is attributable to capital, it is a capital expenditure, but if it is incurred to protect the trade or business of the assessee, then it is a revenue expenditure. It was also held in this decision that in deciding whether a particular expenditure is capital or revenue in nature, what one has to see is whether the expenditure in question was incurred to create any new asset or was incurred for maintaining the business of the company, and that if it is the former, it is capital expenditure ; if it is the latter, it is revenue expenditure. It was also held in this decision that in the instant case, there were two types of litigation between the parties and in the suit which was filed by the State of Bihar, there might have been a question of preservation of business and protection of the assets of the assessee company, but in the litigation which cropped up as a result of the filing of the suit by the assessee company, there was no question of preservation of business or protection of the existing assets of the company and, in those circumstances, it was held that the Tribunal was justified in holding that there was a capital element in 50% of the litigation expenses referable to the suit filed by the company and so it was held that 50% of the litigation expenses was not an admissible deduction in computing the total income of the assessee. Thus, in this case, the matters for decision were not the same as before us.
37. Mr. B. P. Rajgarhia has submitted that 60% of the kyanite profits payable to the State Government was a capital expenditure for renewal of the new lease and so the entire amount was taxable.
38. On the other hand, Mr. K. N. Jain has submitted that 60% of the kyanite profit from February 1, 1955, to August 31, 1961, was allowable as deduction for the assessment year 1962-63 as the previous year for 1962-63 was 1961 in which calendar year the compromise was entered into. Mr. K. N. Jain has submitted that the new lease was executed on September 1, 1961, and so the payment relating to the past business carried on by the assessee cannot be said to be for acquisition of the lease. It was also submitted that the assessee follows mercantile system of accounting as has been admitted by the Income-tax Officer at page 1 of the paper book in Taxation Cases Nos. 185 and 186 of 1971 and as the compromise was entered into on October 4, 1961 in the calendar year 1961, the assessee incurred liability for the period from February 1, 1955, to August 31, 1961, during the calendar year 1961, and so the claim was allowable in the assessment year 1962-63. Mr. K. N. Jain has also submitted that the Tribunal had also held that the liability arose in the course of carrying on business and so it was allowable as revenue expenditure.
39. The Tribunal has given a finding of fact that the amount of mesne profits, damages and costs was calculated at Rs. 1 crore by the compromise decree dated October 4, 1961, and in lieu of the payment of Rs. 1 crore, it was settled that instead of this payment, the payment of 60% of the kyanite profit should be made. Thus it is evident that the amount related to the mesne profits, damages and costs relating to the period from February 1, 1955, to August 31, 1961, and the question of payment arose because the assessee had carried on business from February 1, 1955, to August 31, 1961. It cannot be doubted that, under such circumstances, the liability for payment of 60% of the kyanite profits for the period from February 1, 1955, to August 31, 1961, arose on account of carrying on of the business and it had nothing to do with the renewal of the lease.
40. Mr. K. N. Jain has relied on the case of Nonsuch Tea Estate Ltd. v. CIT [1975] 98 ITR 189 (SC). It shows that the company was following the mercantile system of accounting. In this decision, at pages 192 and 193, it has been pointed out that there is distinction between cash system of accounting and mercantile system of accounting and that the mercantile system of accountancy brings into credit what is due immediately it becomes legally due and before it is actually received ; and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed and that an assessee following the mercantile system of accountancy is not entitled to claim deduction until the liability for the sum for which deduction is claimed has accrued.
41. On this basis, Mr. K. N. Jain has submitted that the liability for payment of 60% of kyanite profit from February 1, 1955, to August 31, 1961, arose on October 4, 1961, when the compromise was entered into and the liability was for the business carried on by the assessee and not for acquisition of the lease from the State Government and so this has to be allowed as a business expenditure. I agree with the contention of Mr. K. N. Jain for the assessee and it is difficult to agree with the contention of Mr. B. P. Rajgarhia that the liability for payment of kyanite profits for the period February 1, 1955, to August 31, 1961, to the extent of 60% was for the purpose of acquiring the lease. Under such circumstances, the order of the Tribunal has to be upheld.
42. In view of my above findings, I hold that the amount representing 60% of the kyanite profits for the period February 1, 1955, to August 31, 1961, due under the compromise decree was allowable as deduction in ascertaining the assessee's profits for the assessment year 1962-63. Question No. 1 is, therefore, answered in favour of the assessee and against the Revenue.
43. In Taxation Cases Nos. 185 and 186 of 1971, only two questions were referred which have been disposed of.
44. Now let us take up Taxation Cases Nos. 205 and 206 of 1971. Question No. 1 relates to the amount of Rs. 1,26,522 and Rs. 1,10,489, in respect of the estimated liability for mining lease, rent and royalty. The Income-tax Officer has dealt with this matter at pages 6 and 7 of the paper book. He has pointed out that a provision was made for additional royalty reserve for the year 1959 amounting to Rs. 1,26,522. This liability was being disputed by the assessee but provision was still made. He has also pointed out that according to the terms of the mining lease, any dispute regarding the payment of royalty between the lessor of the lease and the assessee was to be referred to arbitration. The Income-tax Officer took the view that the provision made for 1959, at the time of assessment, falls beyond the limitation period of six years which is applicable to arbitration proceedings. The Income-tax Officer took the view that the lessor had not filed any suit against the assessee nor has the matter been referred to arbitration. He, therefore, held that the claim of the lessor for the year 1959 is barred by limitation. He, therefore, added back this amount of Rs. 1,26,522.
45. The Income-tax Officer also considered the provision for royalty for the year 1960. He has pointed out that during the year under review the assessee had debited a sum of Rs. 2,80,000 as royalty in the profit and loss account for the year 1961, whereas the assessee had actually paid a sum of Rs. 1,69,511 as royalty for the year under review. The Income-tax Officer, therefore, held that the assessee made a provision for a sum of Rs. 1,10,489. The Income-tax Officer also mentioned that since 1941, the assessee is making a provision for copper royalty, according to the terms of the settlement in the lease, as computed by the lessor on the basis of 5% copper profit but the assessee is paying the royalty according to their own basis. The Income-tax Officer took the view that the excess provision made in the earlier years were later on added back to the profit as the assessee was not required to pay the excess provision. The Income-tax Officer took the view that there is no reason why excess provision for royalty should be made in this year also. Accordingly, the Income-tax Officer added back the excess provision for copper royalty mining at Rs. 1,10,489. There is some confusion relating to the additional provision for copper royalty with respect to the amount of Rs. 1,10,489. In the heading, the Income-tax Officer has mentioned that he is considering additional provision for copper royalty for the year 1960, but in the discussion portion, he has pointed out that the amount has been debited in the profit and loss account in the year 1961. It is not clear whether the provision for copper royalty is for the year 1960 or for the calendar year 1961. On appeal before the the Appellate Assistant Commissioner, the Appellate Assistant Commissioner considered grounds Nos. 23 and 24 at page 41 of the paper book. He has also mentioned that these grounds are against the disallowance of the provision for additional copper royalty for 1959 and 1961. He, for the reasons discussed in his order for 1958-59 and for further reasons stated in his order for 1961-62, held that the disallowance was not justified. He, therefore, deleted the additions of Rs. 1,26,522 and Rs. 1,10,489.
46. The Appellate Assistant Commissioner in the assessment year 1958-59, vide annexure B-1, at pages 59-60 of the paper book, has pointed out that ground No. 6 relates to the addition of the estimated liability in respect of the mining lease and royalty relating to the years 1952, 1953, 1954 and 1955. He has also pointed out that the assessee had been writing back to the profit of each year estimated liability relating to the 7th year preceding the year as the enforcement of the liability for such year became barred by limitation. This procedure had also been recognised by the Income-tax Officer in the subsequent years. The Appellate Assistant Commissioner also pointed out that the assessee had already written back the liability for 1951 but the Income-tax Officer added back also the liabilities relating to the years 1950 to 1955 on the ground that at the time when the assessment was being made in 1963, the limitation applied to such liability also. The Appellate Assistant Commissioner held that the Income-tax Officer had been clearly wrong in doing so and that the point that was to be seen was as to what is the position in the accounting year when the accounts were made up and not what could have happened in a subsequent year, and that the income for a particular year to be charged to tax cannot vary according to the time taken by Income-tax Officer in completing the assessment. In that year, the Appellate Assistant Commissioner deleted the addition of Rs. 1,86,884, Those grounds have been given by the Appellate Assistant Commissioner in the assessment year 1958-59.
47. Against the order of the Appellate Assistant Commissioner deleting the addition, the Department filed I.T.A. No. 6350 of 1966-67 and a Cross Objection No. 295 of 1966-67 and I.T.A. No. 6791 of 1966-67 was filed by the assessee. Both the appeals and the cross-objection were disposed of by a consolidated order by the Tribunal, vide annexure C. The Tribunal discussed this point at page 91 in paragraph 29. The Tribunal has also pointed out that the assessee provided in the accounts the sums of Rs. 1,26,522 and Rs. 1,10,489 during the calendar years 1959 and 1961, respectively. The Tribunal has pointed out that in the order for assessment year 1958-59, in paragraphs 48 to 50, the nature of these estimated liabilities was considered. The Tribunal has also pointed out that the assessee had been making the provision on the basis of the data taken into account by a representative of the State of Kharswan, the original lessor of the mines. The amounts were brought back into the profit and loss account at the end of 6th year on the footing that the recovery thereof became time-barred thereafter. The Tribunal found that this practice has been going on since 1952-53. The Tribunal has also pointed out that in the orders for the earlier years, they have held that there is no reason for making any departure from what has been adopted as a uniform procedure in respect of the additional provision. The Tribunal also took the view that the assessee being a company, there is no scope for saving tax on such amounts, as the amounts are more or less uniformly taxed in one year or the other. The Tribunal, therefore, confirmed the deletion made by the Appellate Assistant Commissioner. As the Tribunal has referred to its order for the assessment year 1958-59, we have to look to the order of the Tribunal for the assessment year 1958-59, which is annexureD. The Tribunal has discussed this issue at pages 130 to 132 in paragraphs 48 to 52. The Tribunal has pointed out that since 1941, the assessee was providing in its books some estimated liability to cover the royalty payable as there was dispute between the lessor and the lessee about the method of computation of royalty. The Tribunal also found that as on December 31, 1961, the provision since 1941 totalling to Rs. 2,05,806-12-0 the yearly provision which added up to this figure is given in the letter of the assessee's business manager to the Income-tax Officer. It appears that those provisions are based on a formula adopted by a representative of the Ruler in a draft report about the royalties computation made in 1945 after looking into accrual for 1941 to 1943. The Tribunal's order also shows that the Income-tax Officer in the assessment year 1952-53, as agreed to by the assessee, added back the provision from 1941 to 1945 totalling Rs. 78,979. The assessee on its part agreed to bring into computation of income the amount reserved in the 6th year working backwards. The assessments thereafter proceeded on this basis and the six-year period was taken as it was considered that the claim beyond this period would be barred. It appears that in the assessment for 1958-59, the assessee added back Rs. 35, 144. 0n this footing, the Income-tax Officer added a further sum of Rs. 1,86,684 being the provision for 1952 to 1955 which had got time-barred at the time the assessment was completed and the Appellate Assistant Commissioner held that the income for a particular year to be charged cannot vary according to the time taken by the Income-tax Officer in computing the assessment and the Tribunal held that the addition in so far as it is based solely on the delay in making the assessment cannot be sustained and the Tribunal upheld the order of the Appellate Assistant Commissioner.
48. Mr. B. P. Rajgarhia, on behalf of the Revenue, has submitted that the assessee follows the mercantile system of accounting but the estimated liability is always in excess and that it cannot be said that it should be added back after six years, as the accrued liability has to be a definite amount and that there should be a reasoned basis for estimation and that there is no basis for adding back time-barred liability after six years.
49. On the other hand, Mr. K. N. Jain has submitted that in view of the dispute between the lessor and the lessee, certain basis was formed and, on that basis, the estimated liability was made in the accounts as the assessee was following the mercantile system of accounting and the assessee after expiry of six years added back the excess amount as income and that this system is being followed from the assessment year 1951-52, and so the same method should be followed and that the Income-tax Officer is not entitled to differ from the method of accounting followed by the assessee regularly. Mr. K. N. Jain has also submitted that the Department has also accepted the position that the excess estimated liability should be added back after expiry of six years and even this year the Income-tax Officer accepted the position that it should be added after six years but he held that six years should be taken on the date of assessment. Mr. K. N. Jain referred to the provision of Section 145 of the Act which lays down that income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall be computed in accordance with the method of accounting regularly employed by the assessee. On this basis, he submitted that the assessee was following this method of accounting since long which was also accepted by the Department and so there should not be any disturbance in this method of accounting.
50. Mr. K. N. Jain has fairly conceded before us that after the lease deed was executed on October 4, 1961, for the calendar year 1961, the assessee cannot follow this method of accounting as the amount of royalty is now ascertained and fixed and so there will be no question of estimated liability. However, he has submitted that the method followed in the past of adding the income after expiry of six years has to be followed as regards the calendar years 1959 and 1960. For this purpose, he has relied on the case of Balapur Vibhag Jungle Kamdar Mandali Limited v. CIT [1982] 135 ITR 91 (Guj) which clearly shows that the Income-tax Officer has to act according to the settled accounting practice for the earlier years which the assessee had followed and which the Revenue had accepted year after year.
51. Mr. B. P. Rajgarhia has referred to the case of CIT v. Swadeshi Cotton and Flour Mills Private Limited [1964] 53 ITR 134 (SC), which is a decision of their Lordships of the Supreme Court. In this case, the assessee paid a sum of Rs. 1,08,325-9-3 by way of profit and bonus to its employees for the calendar year 1947 in terms of an award made on January 13, 1949, under the Industrial Disputes Act. It debited the amount in its profit and loss account for the year 1948, but in fact paid it to the employees in the calendar year 1949. In those circumstances, it was held by their Lordships of the Supreme Court that it was only in 1949 that the claim to profit bonus was settled by an award of the Industrial Tribunal and the only year to which the liability under the award could be properly attributed was 1949 and that, therefore, the sum of Rs. 1,08,325-9-3 had to be deducted in the calendar year 1949 relevant to the assessment year 1950-51. It was also held in this decision that an employer who follows the mercantile system of accounting incurs a liability towards profit bonus only when the claim made is settled amicably or by industrial adjudication. This decision is not helpful in the present case on the point whether a particular accounting system which is followed by an assessee in the past can be disturbed by the Income-tax Officer and he can find out a different system of accounting.
52. In view of my above discussions, I hold that in the calendar years 1959 and 1960, the method of accounting adopted by the assessee has to be followed. However, it cannot be doubted that in the calendar year 1961, the commission was ascertained after a fresh lease deed was executed from September 1, 1961, in view of the compromise decree dated October 4, 1961. However, a confusion appears to have been created by the order of the Income-tax Officer. As regards the royalty reserve for the calendar year 1959, it has to be held that the system which was being followed by the assessee in the past, should be followed in this year and under such circumstances, I hold that the deletion of the amount of Rs. 1,26,522 by the Appellate Assistant Commissioner and the Tribunal was justified. The confusion is for the additional provision for copper royalty for the year 1960. The Income-tax Officer at page 6 of the paper book in Taxation Cases Nos. 205 and 206 of 1971, has pointed out in the heading portion that he is dealing with the additional provision for copper royalty for the year 1950. He has pointed out that it is found that during the year under review, the assessee has debited a sum of Rs. 2,80,000 as royalty in the profit and loss account for the year 1961 whereas the assessee has actually paid a sum of Rs. 1,69,511 as royalty for the year under review. He has also pointed out that the assessee made a provision for the sum of Rs. 1,10,489 and that since 1941, the assessee is making a provision for copper royalty, according to the settlement terms or their lease, as computed by the lessor on the basis of 5% copper profits, but the assessee is paying the royalty according to its own basis. He also found that the excess provisions made in the earlier years were later on added back to the profit as the assessee was not required to pay the excess provision ultimately. On this basis, he held that there is no reason why the excess provision for royalty should be made in this year also. He, therefore, added back the excess provision for copper mining royalty at Rs. 1,10,489. Thus the order of the Income-tax Officer is not clear whether the amount of Rs. 1,10,489 related to the additional provision for the calendar year 1960 or it related to the calendar year 1961. The Appellate Assistant Commissioner at page 41 of the paper book while dealing with grounds Nos. 23 and 24 pointed out that these related to the disallowance of the provision for additional copper royalty for 1959 and 1961 and so he deleted these additions. The Tribunal also at page 91 of the paper book discussed in paragraph 29 of its order, the estimated liabilities during the calendar years 1959 and 1961 and confirmed the order of the Appellate Assistant Commissioner deleting the additions. In question No. 1 also in Taxation Cases Nos. 205 and 206 of 1971, it has been specifically mentioned that the estimated liability related to the years 1959 and 1961.
53. Mr. K. N. Jain has fairly conceded that if the addition related to 1961, then the amount is ascertained in view of the compromise decree dated October 4, 1961, and the execution of the fresh lease deed by the State of Bihar and so, for the calendar year 1961, there will be no question of estimated liability. However, if it relates to the calendar year 1960, then it has to be held that the method of accounting followed by the assessee has to be maintained for the calendar year 1960 but not for the calendar year 1961.
54. In view of my discussions above, I hold that the deletion of Rs. 1,26,522 relating to the estimated liability for mining lease royalty for the year 1959 was justified. However, as a doubt has been created by the order of the Income-tax Officer by mentioning in the heading portion that the additional provision for copper royalty is for the year 1960 but he has mentioned in the discussion portion that it relates to the calendar year 1961, so the question relating to the deletion of Rs. 1,10,489 for the calendar year 1961 is left to be re-decided by the Tribunal. If the Tribunal finds that the additional provision for copper royalty is for the calendar year 1960, then the deletion of Rs. 1,10,489 will be maintained by the Tribunal. But if the additional provision for copper royalty relates to the calendar year 1961, then the deletion cannot be sustained and the Income-tax Officer's order adding back the amount of Rs. 1,10,489 has to be maintained. The Tribunal will re-decide the matters in view of the directions given above.
55. The next question relates to the internal development expenses. Question No. 2 in Taxation Cases Nos. 205 and 206 of 1971 raises the question whether the claim of Rs. 14,43,524 in respect of internal development is a revenue expenditure. Question No. 1 in Taxation Cases Nos. 57 and 58 of 1972 is a similar question and is to the effect as to whether the Tribunal was justified in holding that the expenditure of Rs. 15,18,230 spent on account of internal development expenses is a revenue expenditure. Thus, both the cases raise a question whether the internal development expenses are revenue expenditure or not.
56. Let us first take up Taxation Cases Nos. 205 and 206 of 1971. The Income-tax Officer has discussed the internal development expenses at pages 17 to 20 in paragraph 11. The Income-tax Officer has pointed out that on a scrutiny of accounts, it was found that the assessee had debited a sum of Rs. 14,43,524 under the head "Development expenditure written off". He had also pointed out that these mining development expenses were incurred for three mines, namely, Mosaboni, Badia and Surda for Rs. 9,05,659, Rs. 57,288 and Rs. 4,80,577, respectively, totalling Rs. 14,43,524. The Income-tax Officer has also given a break up of these expenses which relate to salary and wages including bonus, power and fuel, consumption of stores and spare parts, and repairs to plant and machinery. The Income-tax Officer asked the assessee to explain as to why the expenses should not be treated as capital expenditure. The assessee pleaded that these expenses cannot be treated as capital, as they are recurring expenses. The assessee claimed before the Income-tax Officer in a written explanation dated December 4, 1964, that the development expenses written off relate to the expenditure on internal development by the process of which ore is extracted. The assessee also claimed that all exploratory development, capital development, prospecting and development expenditure are capitalised year after year, and that once the ore reserves are located by exploratory and prospecting development, they are left there and when ore is extracted from such proven reserves, the expenditure incurred is debited to the internal development and is written off every year. The assessee also pleaded that as ore is extracted by incurring such expenditure, it is definitely an item of revenue expenditure and that this expenditure is separately shown in the assessee's account. The assessee also pleaded that it obtains more than 12% in the production of ore by incurring such expenditure. The Income-tax Officer took the view that simply because the expenditure is required to be incurred from year to year, it cannot be said to be of a revenue nature. He took the view that capital expenditure is a thing that is going to be spent once for all and income expenditure is a thing which is going to recur every year, and it is not and was not intended to be a decisive test in every case. The Income-tax Officer held that the expenditure on a scheme which increases the value of a capital asset should be capital expenditure. The Income-tax Officer also found that about Rs. 1,09,92,837 has been spent for the purpose of extraction of ore which includes Rs. 14,43,524 in the form of development expenditure. The Income-tax Officer also took the view that the assessee's contention that the expenditure has been incurred for the extraction of ore is not correct and that the expenditure is like that of working of a particular mine or bed and converting the stuff worked into a marketable commodity and naturally the money paid for the prime cost of the stuff so dealt with is capital as the money sunk in a machinery or in a plant. He also took the view that by making development and by incurring expenditure, the assessee will have some enduring benefits. The Income-tax Officer, therefore, held that the expenditure of Rs. 14,43,524 is a capital expenditure and he disallowed the claim of the assessee that it was revenue expenditure.
57. The assessee appealed before the Appellate Assistant Commissioner. Unfortunately, the aforesaid matter has not been discussed anywhere in the order of the Appellate Assistant Commissioner for the assessment year 1962-63. At pages 39 and 40, different matters have been discussed while discussing grounds Nos. 16 and 17. It appears that in the copy of the judgment, a portion relating to the amount of Rs. 14,43,524 has been left out. The Tribunal's order for the assessment year 1962-63 is annexure C. The Tribunal has discussed at page 80 in paragraph 18, the details of internal development expenses amounting to Rs. 14,43,524. The Tribunal relied for holding it as revenue expenditure on its decision in the earlier year. The Tribunal discussed this matter in the assessment year 1960-61, vide annexure E, at page 136. The Tribunal inspected the mines and has discussed the entire matter at pages 138 to 144 of the paper book in Taxation Cases Nos. 205 and 206 of 1971. The local inspection of the mines was made by the Tribunal on November 13, 1970, in the presence of both the parties. The Tribunal found that the work is being carried on at several levels and that the vertical difference between each level is about 123 ft. The Tribunal members went down by the main shaft up to level 18 and then they went up by incline shaft up to levels 14 and 15. The Tribunal members were shown the difference between the granite rock surrounding the ore-bearing rock and the ore-bearing rock and in the latter, veins of copper were often distinctly discernible even visually. The method of exploiting the ore was explained to the Members of the Tribunal starting from the stage of the tunnel leading from the base of the main shaft and progressing along the plane of working. The Tribunal members took about 2\ hours in visiting the above areas. The Tribunal has also mentioned that during the discussion, it was clarified that what is generally known as "stopping" is the second stage of mass extraction or production of ore, and that this is the stage subsequent to what is termed by the assessee as internal development. The Tribunal has pointed out that during the second stage usually the orebody lying between tunnels of internal development is extracted. The Tribunal has also pointed out that in prospecting, diamond drilling by bringing up small ore samples would indicate only the presence of ore, and even after pitting and trenching at times during prospecting and exploratory operation, a degree of tunnelling had to be done to establish the continuity of the ore. This tunnelling which was for the purpose of delineating or defining the ore-body accurately was stated to be considered as a part of exploratory development. The Tribunal members went into the question that if two tunneling operations were on occasions similar, then a classification could be made between exploratory expenses and internal development expenses on tunnelling. It was pointed out to the members of the Tribunal that even at the stage when the work was being carried out different code job numbers were assigned to the different types of work and tunnelling expenses were classed as internal development and given appropriate job numbers only after the work of delineating or defining the ore-body had been done. The Tribunal looked into the accounts along with the representatives of the parties also and saw the job number work-book of internal development which is classed in the job-book under reserve work and has been assigned separate job numbers. The Tribunal has pointed out that the analysis of this expenditure into further sub-head could also be had from the ledger, etc. The Tribunal also found that the expenditure is classified as "internal development" or otherwise, on the basis of job numbers allotted at the time the work is carried on and not on the basis of any subsequent adjustment by way of journal entries.
58. The Tribunal also ascertained during the inspection whether tunnels can in appropriate contingencies be considered as part of shaft, and that the shaft is a vertical tunnel or tunnel at an incline and that at different levels, some extent of tunnelling horizontally to provide inlet and outlet into the shaft, as also to provide space to operational shaft to work the lift for giving space for men and material to go into and out of the shafts, etc., is necessary and that some amount of masonry work also went into some tunnels which are of more permanent nature than others. The Tribunal ultimately gave its finding in paragraph 10 after the local inspection. The Tribunal has specifically pointed out that in the case of mining, expenditure up to the stage when ore bed is determined including the existence of reserve is capital expenditure. Thereafter, the expenditure being in the nature of actual mining charges will have to be taken as Revenue. The Tribunal has also pointed out that it is true that some passages, so as to give some elbow rooms to operate, comes into existence after the ore body is contracted and mining is above and that the said passages serve the purpose of transporting the mining ore. The Tribunal has also pointed out that if one looks in these areas, it will be seen that in making these accompanying operations, the emphasis was not in providing any permanent and long-term passages, but to get the ore body cut and that the whole activity is intended only to get the ore out of the mine and a large amount of ore is also obtained in these operations. The Tribunal has also held that there is no long-term value also to the other passages which radiate from or to the main shaft. The Tribunal, therefore, held that the expenditure claimed by the assessee was rightly allowed as deduction originally and could not be properly disallowed.
59. The Tribunal had made the local inspection only to find out whether internal development expenses were rightly allowed originally whereby in the original assessment it was held to be a revenue expenditure, as will be evident from paragraphs 3 and 4 of annexure E, and the Tribunal held that the internal development expenses were rightly allowed in the assessment year 1960-61.
60. In view of the facts as mentioned by the Tribunal in the assessment year 1960-61, vide annexure E, the development expenses of Rs. 14,43,524 were rightly treated as revenue expenditure by the Tribunal.
61. Now let us take up question No. 1, as mentioned in paragraph 6 of the statement of the case in Taxation Cases Nos. 57 and 58 of 1972. This relates to internal development expenses of Rs. 15,18,239. The Income-tax Officer at page 6 in paragraph 14 of the assessment order for the assessment year 1963-64 treated these internal development expenses as capital in view of the assessment for the assessment year 1962-63. He, therefore, held that it cannot be allowed as revenue expenditure. The Appellate Assistant Commissioner at pages 17 and 18 in paragraph 8 considered this amount of Rs. 15,18,239 relating to the internal development expenses. The Appellate Assistant Commissioner pointed out that the Appellate Assistant Commissioner in the assessment years 1961-92 and 1962-63 treated the expenditure as revenue expenditure by order dated June 7, 1966. Following those decisions, the Appellate Assistant Commissioner held that the amount of Rs. 15,18,239 was revenue expenditure and should not have been disallowed. This clearly goes to show that in the assessment year 1962-63, the Appellate Assistant Commissioner had passed his order relating to the amount of Rs. 14,43,524 but that portion has been omitted while furnishing the copy of the order. The Tribunal also considered it at pages 28 and 29 in paragraph 10. The Tribunal has pointed out that although the amount of Rs. 15,18,239 relating to internal development expenses was treated as capital by the Income-tax Officer, the same was allowed by the Appellate Assistant Commissioner as a revenue expenditure. The Tribunal has pointed out that this very point had also come for consideration in the assessment year 1960-61 in ITA No. 6348 of 1966-67 and the Tribunal had found that this was only a part of the expenditure of mining ore and hence it is a revenue expenditure and the Tribunal, therefore, held that this was rightly allowed by the Appellate Assistant Commissioner.
62. Thus, on the aforesaid facts, it cannot be doubted that the Tribunal considered the facts of the case and then held that the internal development expenses relate to extracting of ore by temporary tunnels at the ore beds and the temporary tunnels leading to the ore from main shaft are for the purpose of extracting ore and these operations have no long-term value. The Tribunal has held that the expenditure on shafts has been capitalised. The Tribunal has also pointed out that there are some permanent tunnels and the expenses on such tunnels have been capitalised.
63. Now considering the above aspects of the matter, let us look to the various decisions on which reliance has been placed before us by the parties.
64. Mr. B.P. Rajgarhia, on behalf of the Revenue, has relied on the case Coltness Iron Company v. Black (Surveyor of Taxes) [1881] 1 TC 287 (HL). In this case, it was held that the cost of sinking new pits is an expenditure and investment of capital, and so cannot form a deduction from the annual profits of the concern. It appears that the general question was whether the expenses of sinking shafts for the purpose of getting at the minerals underground is an expenditure of capital or is to be treated like wages expended in working out the minerals themselves, and it was held that the expenses on such operations are capital in nature. It was also held in this decision that the case is obviously quite different from that which was put in argument in reference to stirring the soil for the purpose of getting at stone lying near the surface, in which practically the whole operation is that of cutting the stone and where you have no expenditure which you can fairly distinguish from ordinary expenditure. It has also been held in this decision that if a man who has taken a lease of minerals has sunk several shafts down to the minerals, he gets a direct return from that capital expenditure.
65. Mr. B. P. Rajgarhia has also relied on the case of Hughes (H. M. Inspector of Taxes) v. British Burmah Petroleum Co. Ltd., [1932] 17 TC 286 (KB). In this case, the respondent company which carried on the business of oil producing and refining had for many years bought oil from an Indian oil company. By an agreement in 1928, the oil company agreed to sell to the respondent company (a) its plant, equipment, casing, tanks, pipelines, etc., and (b) all oil won on and after October 1, 1928, from its existing wells. The expressed consideration for the unwon oil was £ 70,000 which was stated to have been calculated by reference to the estimated production of the wells. The consideration was satisfied by the issue to the oil company of shares in the respondent company. A sum of £ 70,000 was placed to crude oil suspense account in the books of the respondent company to represent the oil purchased, and, as oil was produced, a sum equal to two rupees per barrel was transferred from that account to the company's revenue account to represent the actual purchase of oil and at July 31, 1929, £ 19,826 had been so transferred.
66. The respondent company contended that in principle the sum of £ 70,000 was an admissible deduction in computing its profits for income-tax purposes and claimed a deduction in computing its profits for the year ended July 31, 1929, of the sum of £ 19,896 representing, as it contended, the cost of stock actually purchased in that year, and in those circumstances it was held that the £ 70,000 was a capital expenditure and that no part of it was admissible as a deduction. This decision is not helpful in the present case in view of the special findings of the Tribunal.
67. Mr. B. P. Rajgarhia has also relied on the case of H. J. Rorke Ltd. v. IRC [1962] 44 ITR 394 (Ch D). In this case, a company which carried on the business of open cast coal mining entered into an agreement dated December 16, 1967, with a land owner, whereby certain land was let to the company for one year on payment of a royalty for every ton of coal won from the land, the company covenanting to restore the surface of the land on the completion of the open-cast mining operations. The company further agreed to pay to the lessor £ 250 for the right to enter upon the land demised and a further sum of £ 250 as compensation for the diminution in value of the land and the destruction of land drains, etc. In 1958, the company made two further agreements with land owners in substantially the same terms. The payments for the right of entry and for diminution in value of the land provided for in all the three agreements were a normal and recurrent incident in the trade of open cast coal mining as carried on by the company and others in the industry, and, in those circumstances, it was held in the Chancery Division that no distinction could be drawn between the payments for the right of entry and the payments for diminution in value, and that since the company in making the payments were not buying circulating capital, i.e., coal, but were acquiring rights which enabled them to obtain circulating capital, the whole of the payments were marked as being of a capital nature, and notwithstanding that the transactions were transient and recurrent, fell to be disregarded in computing the profits or gains of the company for profits tax purposes. This decision also is not helpful in the present case where the Tribunal has given specific findings relating to the internal development expenses.
68. On the other hand, Mr. K. N. Jain relied on the case of CIT v. Kirkend Coal Co. [1970] 77 ITR 530, which is a decision of the Supreme Court. In this case, the question was whether the amount spent by the respondent, which carried on the business of coal mining, for stowing operations was allowable as business expenditure. The Tribunal found as a fact that stowing was an operation carried out in the process of extraction of coal and unless it was carried out, extraction of coal was not possible irrespective of whether depillaring had been done or not, and, in those circumstances, their Lordships of the Supreme Court held that the expenditure incurred by the respondent in stowing operations was a revenue expenditure allowable as a deduction under Section 10(2J(xv) of the Indian Income-tax Act, 1922. In this decision, their Lordships of the Supreme Court have also clearly pointed out that whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading and that the question must be viewed in the larger context of business necessity or expediency. It has also been observed in this decision that 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 possession of which is a condition of the carrying on of the business, the expenditure may be regarded as a revenue expenditure. This decision is applicable to the facts of the present case before us.
69. The Tribunal has pointed out at pages 138 to 144 of the paper book in Taxation Cases Nos. 205 and 206 of 1971, that the assessee has capitalised the expenditure relating to construction of shafts and the expenditure relating to construction of permanent tunnels. The Tribunal has also pointed out that the internal development expenditure is claimed where ore bed is found out and temporary tunnels are created for the purpose of carrying ore through temporary tunnels to the shafts. In view of the findings of the Tribunal on facts, it has to be held that the internal development expenses of Rs. 14,43,524 for the assessment year 1962-63 and the internal development expenses of Rs. 15,18,239 for the assessment year 1963-64, were rightly allowed as revenue expenditure by the Tribunal.
70. In view of my discussions above, question No. 2 in Taxation Cases Nos. 205 and 206 of 1971 and question No. 1 as mentioned in paragraph 6 of the statement of the case in Taxation Cases Nos. 57 and 58 of 1972 have to be answered in favour of the assessee and against the Revenue.
71. Now we have to consider question No. 3 in the statement of the case relating to Taxation Cases Nos. 205 and 206 of 1971. Question No. 3, as referred by the Tribunal, is as follows :
"3. Whether, on the facts and in the circumstances of the case, the assessee is entitled to export profit rebate in respect of the kyanite business for the assessment year in question ?"
72. This question requires modification, as it is not disputed that the assessee is entitled to export profit rebate, and so this question is a meaningless one. However, before refraining this question, it is necessary to refer to the facts of the case. The Income-tax Officer at page 27 of the paper book in Taxation Cases Nos. 205 and 206 of 1,971 has pointed out that the assessee has claimed rebate on kyanite exports profit of Rs. 41,16,471 under Section 2(5) of the Finance (No. 2) Act, 1962. The assessee company also gave details of computation. The Income-tax Officer found that it is not possible to verify correctly the profit earned by the assessee company by export of kyanite ex-India as no separate books of account are maintained for this particular item. The Income-tax Officer found that on a total turnover of Rs. 4,67,99,947, the assessee has shown a net profit of Rs. 1,62,95,507 before charging depreciation and development rebate. The Income-tax Officer found that both the sale proceeds and the net profit includes sales and profits of kyanite. He has also pointed out that the assessee on total sale of kyanite amounting to Rs. 88,16,196 has shown net profit amounting to Rs. 45,54,354 out of which Rs. 41,16,471 has been shown as profit on account of export ex-India on sales of Rs. 62,03,214 and the balance of Rs. 4,47,883 has been shown as profit on account of sales in India. The Income-tax Officer calculated that the average profit on sale of kyanite comes to 67% while the overall profit comes roughly to 35%. The Income-tax Officer took the view that when no separate books of accounts are maintained by the assessee, it is not possible to determine the actual qualifying income on which rebate under Section 2(5) of the Finance (No. 2) Act, 1962, can be allowed. The Income-tax Officer, therefore, proceeded to determine the profit on export of kyanite under Rule 2(3) of the Income-tax (Determination of Export Profits) Rules, 1962 (hereinafter referred to as "the Rules"), proportionately on the basis of turnover, which came to Rs. 2,28,000. The Income-tax Officer also found that the assessee had been allowed depreciation and development rebate amounting to Rs. 24,70,105 on total profit from business amounting to Rs. 1,72,15,411. So, the Income-tax Officer calculated the proportionate depreciation and development rebate on account of profit on export of kyanite ex-India at Rs. 32,800. He, therefore, ordered that this amount of Rs. 32,800 will be deducted from the profit of export arid that rebate under Section 2(5) of the Finance (No. 2) Act, 1962, will be allowed only on Rs. 1,95,200.
73. On appeal before the Appellate Assistant Commissioner against the aforesaid order of the Income-tax Officer, the Appellate Assistant Commissioner declined to interfere with the order of the Income-tax Officer and he held that the computation under Rule 2(3) of the Rules was in order. This will be evident from the order of the Appellate Assistant Commissioner at page 42 of the paper book dealing with ground No. 30 in Taxation Cases Nos. 205 and 206 of 1971.
74. The Tribunal considered this claim at pages 95 to 97 in paragraphs 38 to 41 of Taxation Cases Nos. 205 and 206 of 1971. The Tribunal has pointed out that under Section 2(5)(i) of the Finance (No. 2) Act, 1962, any assessee being an Indian company whose total income included profits and gains derived from the export of goods is entitled to a deduction from income-tax and super-tax of an amount equal to the income-tax and super-tax calculated respectively at 1/10th of the average rate of income-tax and average rate of super-tax on such export profits and gains included in the total income. In order to determine the export profits, rules have been framed and under Rule 2(3) of the Rules, where in the opinion of the Income-tax Officer the profits and gains on such exports cannot be ascertained, the amount of such qualifying income (income from such exports) shall be taken as a fraction of the amount of profits and gains of the whole business of which such exports form a part and included in the total income as reduced by the aggregate of any amount on which income-tax and super-tax are not payable. The Tribunal took the view that the fraction is to be determined by taking a proportion of the value of such export turnover to the total turnover. The Tribunal has also pointed out that in the present case, the Income-tax Officer computed the proportionate profits on export at Rs. 2,28,000 based on the ratio of the turnover of the exported items to the total turnover, and the assessee disputed the computation as made by the Income-tax Officer before the Appellate Assistant Commissioner, but the AAC did not accept the contention of the assessee. According to the assessee before the Tribunal, the whole business of which such exports form a part, should be taken as comprehending only kyanite business as such. According to the assessee, kyanite profits are being separately computed for the purpose of assessment and it is unreasonable to take the entire turnover as such. The departmental representative submitted before the Tribunal that there are no separate books for the kyanite activity and that the only course open to the Income-tax Officer was to take the whole turnover and compare it with the kyanite export turnover and arrive at the proportion accordingly. The Tribunal agreed with the contention of the assessee. The Tribunal pointed out that the Income-tax Officer has discussed the assessee's claim regarding kyanite profits separately. He has not said in such discussion that kyanite profits were not properly computed. The Tribunal found that the dispute regarding its exclusion was discussed on the basis of the principles and the figures as such were never in dispute. In those circumstances, the Tribunal held that the Income-tax Officer was not correct in saying that kyanite profits as such cannot be separately computed. The Tribunal, therefore, held that kyanite profits were determinable separately and so there is justification for the assessee to require that the proportion of the turnover is to be restricted to that part of the activity. The Tribunal took an instance of a composite mill manufacturing textiles and jute goods and worked out the profits separately for textiles and jute goods. The Tribunal held that if it exported only part of the jute goods manufactured, it could well claim that the turnover of jute as a whole should form the basis of computation and not the combined turnover of jute and textiles and that the same position would be applicable in the case of the assessee and so the Tribunal directed the Income-tax Officer to go into the computation on the basis as found by the Tribunal.
75. From the aforesaid facts, it is evident that it is not in dispute that the assessee is entitled to export profit rebate in respect of the kyanite business for the assessment year in question, i.e., 1962-63. The actual dispute between the parties was with respect to the method of computation of export profit and rebate profit.
76. Re-framing of question No. 3 is necessary to arrive at the real dispute between the parties, Mr. B. P. Rajgarhia submitted the re-framing of the question as follows :
"Whether, on the facts and in the circumstances of the case, the computation of qualifying income for deduction should be taken as a fraction of the profits and gains of the whole business in terms of Rule 2, Sub-rule (3), of the Income-tax (Determination of Export Profits) Rules, 1962, or it should be as ordered by the Tribunal ?"
77. The aforesaid question as suggested by Mr. B. P. Rajgarhia is not a proper question and hence a slight modification in question No. 3 will serve the purpose. I, therefore, re-frame question No. 3 as follows :
"3. Whether, on the facts and in the circumstances of the case, the assessee is entitled to export profit rebate in respect of the kyanite business for the assessment year 1962-63 in the manner as computed by the Income-tax Officer or in the manner as computed by the Tribunal ?"
78. Mr. B. P. Rajgarhia has supported the order of the Income-tax Officer whereas Mr. K. N. Jain has supported the order of the Tribunal,
79. It appears that before the Tribunal, the assessee's only contention was that the whole business of which such exports form a part should be taken as comprehending only kyanite business as such, and according to the assessee, the kyanite profits are being separately computed for the purposes of assessment and it is unreasonable to take the entire turnover as such, and that the departmental representative argued before the Tribunal that there are no separate books for the kyanite activities and that the only course open to the Income-tax Officer was to take the whole turnover and compare it with the kyanite export turnover and arrive at the proportion accordingly. The Tribunal has held that the case should be considered only in relation to the total sales of kyanite and the profits of kyanite exports and that its total turnover should not be taken into consideration.
80. It appears from Section 2(5)(i) of the Finance (No. 2) Act, 1962 (Act 20 of 1962), that rebate has to be allowed as laid down in this section. According to 2(5)(ii), the Central Board of Revenue may make rules for computing the amount of such profits and gains. It was in view of this provision that the Income-tax (Determination of Export Profits) Rules, 1962 (hereinafter referred to as "the Rules"), were framed by the Central Board of Revenue. Rule 2(3) of the Rules lays down that where in the opinion of the Income-tax Officer the profits and gains on such exports cannot be ascertained, the amount of qualifying income shall be taken as a fraction of such profits and gains of the whole business of which such exports form a part and included in the total income, the fraction being proportional to the value of the turnover on such exports in relation to the total turnover of the business of which such exports form a part. In view of Rule 2(3) of the Rules, the Tribunal has taken the view that it is only total kyanite business, the total profit in the kyanite business, the total export of kyanite business and the profit on the export of kyanite business have to be taken into consideration for calculating the export profit rebate. The Income-tax Officer has clearly pointed out at page 27 of the paper book of Taxation Cases Nos. 205 and 206 of 1971 that the assessee on total sale of kyanite amounting to Rs. 68,16,190 has shown net profit amounting to Rs. 45,54,354 out of which Rs. 41,16,471 has been shown as profit on account of export ex-India on sales of Rs. 62,03,214 and the balance of Rs. 4,47,883 has been shown as profit on account of sales in India. Thus, it is evident that the total sales of kyanite business and also the total export relating to kyanite business has been shown as well as the total profit on kyanite business and the profit on sales outside India are available from the assessment order of the Income-tax Officer at page 27 of the paper book of Taxation Cases Nos. 205 and 206 of 1971.
81. The only mistake the Income-tax Officer has committed was that he also considered the total turnover of Rs. 4,67,99,947 on which net profit of Rs. 1,62,95,507 was shown before charging depreciation and development rebate. The Tribunal has taken the view at pages 95 to 97 of the paper book of Taxation Cases Nos. 205 and 206 of 1971 that the total sales under Rule 2(3) of the Rules relate only to the total export sales and not total sales relating to other commodities as well. The Tribunal has clearly pointed out that the total sales of kyanite business and the profit relating to the total sales of kyanite business, total export sales and the total profit on export sales of kyanite business have only to be considered for application of Rule 2(3) of the Rules. The Tribunal directed the Income-tax Officer to go into computation on the basis of its line of reasoning. I, therefore, hold that the Tribunal has given correct basis and that the Income-tax Officer was not justified in computing the export profit rebate in the manner as computed by him and that the computation should be in the manner as computed by the Tribunal. Question No. 3 as reframed is accordingly answered in favour of the assesses and against the Department.
82. In view of my discussions above, both the questions referred in Taxation Cases Nos. 185 and 186 of 1971 are answered in favour of the assessee and against the Revenue, question No. 1 relating to the amount of Rs. 1,26,522 and question No. 2 and question No. 3 as reframed are answered in favour of the assessee and against the Revenue in Taxation Cases Nos. 205 and 206 of 1971. However, in regard to question No. 1 relating to the amount of Rs. 1,10,489 in Taxation Cases Nos. 205 and 206 of 1971, the matter has to be redecided by the Tribunal in the light of the direction given in paragraph 52 of this judgment. Both the questions in Taxation Cases Nos. 57 and 58 of 1972 are decided in favour of the assessee and against the Revenue. However, in view of the peculiar circumstances of the case, the parties will bear their own costs. Let a copy of this judgment be forwarded to the Tribunal in terms of Section 260 of the Act.
Uday Sinha, J.
83. I agree.