Madras High Court
Commissioner Of Income-Tax vs Mineral Mining Company Pvt. Ltd. on 10 June, 1991
Equivalent citations: [1992]194ITR258(MAD)
JUDGMENT
Ratnam J.
1. The assessee is a private limited company carrying on business in prospecting mines and also working mines, besides amalgamating, manipulating and preparing for market, ores and other mineral substances of all kinds, having the calendar year as its year of account. The assessee had secured leases for the purpose of exploiting mines and minerals in the State of Madhya Pradesh, Andhra Pradesh, Karnataka and Tamil Nadu. On September 11, 1957, the assessee applied to the State of Bombay under the Mines and Minerals (Regulation and Development) Act, 1948, and the Rules thereunder, for the issue of a prospecting licence in respect of fluorspar in Survey No. 30 measuring about 1,733 acres within the revenue limits of the village of Amba Dungar in Baroda District, Gujarat, and obtained such a licence for one year, on August 27, 1962, as per the terms and conditions set out therein. Thereafter, pursuant to the prospecting licence so obtained which empowered the assessee to enter upon the lands, to search for, win or carry away fluorspar mineral, prospecting operations were carried out by the assessee and a prospecting report was also submitted to the Government as per the licence and the Mines and Minerals (Regulation and Development) Act and the Mineral Concession Rules, then in force. Even some time prior to the submission of the prospecting report, the assessee has made an application for the grant of a mining lease, but that application was rejected, which led to the preferring of a revision petition by the assessee to the Central Government. Meanwhile, the assessee had also filed Civil Suit No. 1552 of 1964 in the court of the Civil Judge (S. D.) at Baroda against the State of Gujarat for the grant of a minising lease to the assessee and for an interim injunction restraining the State of Gujarat from disturbing the possession of the assessee and obtained an order of interim injunction as well. While matters stood thus, the revision petition filed by the assessee to the Central Government against the order rejecting its application for the grant of a mining lease was also rejected and thereupon, the assessee invoked article 226 of the Constitution of India and prayed for, among others, the issue of an appropriate writ to quash the orders of rejection of the application made by the assessee for the grant of a mining lease to it and to grant such a lease in respect of the area in question of the assessee. To this writ petition, the Union of India, State of Gujarat and Gujarat Mineral Development Corporation Ltd. (hereinafter referred to as "the Corporation") were impleaded as parties, as, by that time, the Corporation had been granted a mining lease for the purpose of exploiting and working mines in respect of fluorspar in Survey No. 40 measuring 1,530 acres adjoining Survey No. 30, in respect of which the assessee was refused a mining lease. Subsequently, on November 12, 1969, an agreement was entered into between the Corporation and the assessee containing certain terms and conditions, which we shall notice in extenso later, and pursuant to that agreement, the assessee received a sum of Rs. 3,00,000 from the Corporation and withdrew Civil Suit No. 1552 of 1964, and the proceedings under article 226 of the Constitution of India in Special Civil Application No. 829 of 1965, vacated Survey No. 30, undertook not to launch any other litigation with respect to Survey No. 30 and further agreed to furnish to the Corporation the prospecting report, data and other information submitted by the assessee to the Government. In the return of income filed by the assessee for the assessment year 1970-71, in Part IV of the return, the assessee had claimed that the sum of Rs. 3,00,000 received by it from the Corporation was not taxable. In the letter dated September 2, 1970, the assessee stated that the amount of Rs. 3,00,000 represented a capital receipt and was not taxable and that, in any event, the receipt would be in the nature of a windfall. The Income-tax Officer completed the assessment by including the amount of Rs. 3,00,000 received by the assessee from the Corporation overruling the stand of the assessee that the amount was in the nature of a capital receipt or even a casual receipt. In the course of the assessment order, the Income-tax Officer referred to the facts and circumstances under which the assessee received the sum of Rs. 3,00,000 from the Corporation and found that the assessee received the sum of Rs. 3,00,000 from the Corporation in the course of its business and for withdrawing the court proceedings filed by the assessee against the Corporation and that no loss or damage had occurred to the assessee in mitigation of which the amount of Rs. 3,00,000 was demanded and paid and, therefore, the amount was not received for the loss of a capital asset, either tangible or intangible, nor as compensation for loss of any rights or advantages of a lasting or enduring character and not even for loss of any licence and was not a casual receipt as well. Aggrieved by this, the assessee preferred an appeal before the Appellate Assistant Commission and in an elaborate and carefully considered order, he found on a consideration of the facts and circumstances and the terms of the agreement dated November 12, 1969, that no capital asset or property was parted with by the assessee and that the receipt of the sum of Rs. 3,00,000 by the assessee, though in a lump sum, was on grounds of business expediency and, therefore, the receipt was only revenue in nature and not a capital receipt and was also not a casual receipt. In that view, the order of assessment was affirmed and the appeal was dismissed. On further appeal by the assessee before the Tribunal, it took the view that the receipt of Rs. 3,00,000 by the assessee was attributable to the withdrawal of the court proceedings by the assessee, surrender of possession of the property by the assessee in Survey No. 30, an undertaking given by the assessee not to launch any litigation in respect of Survey No. 30 resulting in the purchase of peace by the Corporation and the handing over of the prospecting report by the assessee and, therefore, no part of the receipt by the assessee was revenue in nature. Considering the question whether the receipt of Rs. 3,00,000 by the assessee was casual in nature, the Tribunal found that the assessee could not have anticipated the entering into of the agreement dated November 12, 1969, at the time when the suit and the writ proceedings were instituted and, therefore, the receipt of Rs. 3,00,000 by the assessee, if not capital in character, would be exempt, as casual in nature. That is how, under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), at the instance of the Revenue, the following questions of law have been referred to this court, for its opinion :
"1. Whether, on the facts and the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 3 lakhs received by the assessee from the Gujarat Mineral Development Corporation was a capital receipt and not a revenue receipt which was liable to tax ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in giving the alternative finding that if the receipt of Rs. 3 lakhs was not a capital receipt, it was a casual receipt not liable to tax ?"
2. Learned counsel for the Revenue submitted that the receipt of the amount by the assessee had its origin in the agreement entered into between the assessee and the Corporation which was intimately and directly linked up with the business activities of the assessee and was an incident of the trading operations of the assessee and not relatable to the loss of any enduring asset or affecting the trading structure of the assessee in any manner and should be regarded as in the nature of adjustments made by the assessee in the ordinary course of business and, therefore, it would not constitute a capital receipt. Strong reliance in this connection was placed by learned counsel for the Revenue in the decisions in CIT v. Rai Bahadur Jairam Valji , Kettlewell Bullen and Co. Ltd. v. CIT and CIT v. Lakshminarayana Mining Co. [1987] 165 ITR 326 (Kar). On the other hand, learned counsel for the assessee contended that the agreement had been entered into between the assessee and the Corporation for a specific purpose, viz., the avoidance of competition from the assessee in the matter of exploitation of fluorspar, and a receipt in that connection by the assessee cannot have the characteristics of a revenue receipt, arising out of trading transactions. Learned counsel further contended that the prospecting report would be in the nature of plant and that would be a capital asset and, therefore, at least a portion of the amount received by the assessee would partake of the character of capital receipt and the proportion of the revenue and capital receipt should be worked out. Reliance in support of these contentions was placed by learned counsel on the decisions in CIT v. Saraswathi Publicities , Scientific Engineering House P. Ltd. v. CIT and CIT v. Best and Co. (P.) Ltd. .
3. This reference has again raised the question whether a particular item of receipt by the assessee is capital or revenue in nature. A solution to that question has always been invariably regarded as presenting difficulties, though decisions of the Supreme Court as well as of other High Courts generally lay down tests to distinguish a capital receipt from a revenue receipt. Despite those tests, the decisions had also administered a gentle, but effective caution that the tests are by no means exhaustive and that it is also not easy to reconcile the reasons given in the several decisions. Even so, uniformly, emphasis had been laid in all the decisions that the character of the receipt will have to be decided on the facts and circumstances of each case, not by the application of any rigid test, but deriving support from the several aspects arising out of the whole lot of circumstances and the ultimate answer would depend upon a proper appreciation of the guiding features with reference to the particular facts and circumstances. Courts have also been cautioned that no solution can be sought for a problem like this by the application of any single test as infallible, but that the approach to finding a solution should be on an appraisal of the true perspective of all relevant facts and also the inter-relation of the facts on the question propounded. We, therefore, proceed to consider briefly the facts and circumstances under which the assessee received the sum of Rs. 30,00,000 from the Corporation. The business of the assessee, as could be gathered from paragraph 2 of the order of the Tribunal, is to acquire, work mines, to carry on the business of mining and to acquire mine workings and minings grounds and lands, to search for ores and minerals and mine over lands and for doing the work of prospecting for and mining minerals. It is thus seen that the business of the assessee is prospecting for and exploiting minerals of whatever description or kind they may be. It is only in furtherance of the business activities of the assessee that, for the first time, it ventured to prospect and exploit minerals in the State of Gujarat, though it had already obtained mineral concessions for its business purposes in the States of Madhya Pradesh, Andhra Pradesh, Karnataka and Tamil Nadu. The assessee had applied for and obtained only a prospecting licence in respect of Survey No. 30, but it had failed in its attempt to secure a lease for the exploitation of minerals in that Survey number. Such failure on the part of the assessee had led to the institution of a civil suit and also the filing of a writ petition by the assessee. The situation in which the Corporation found itself may now be adverted to. It had obtained a mining lease in respect of Survey No. 40 and had also constructed a factory for the purpose of working the mine and had erected a beneficiation plant. It then realised that fluorspar mineral was found in Survey No. 30, for which the assessee had been issued a prospecting licence and that the beneficiation plant erected by it could be profitably and more advantageously run for the desired number of years, only if the deposits in Survey Nos. 30 and 40 were both exploited and it was, therefore, necessary for the Corporation, from the point of view of its business activities, to secure Survey No. 30 also for its exploitation. It is in the context of this background that the terms of the agreement entered into between the assessee and the Corporation have to be carefully considered. Under clause 1, the Corporation had agreed to pay the assessee a lump sum of Rs. 3,00,000 and the assessee had agreed to withdraw the civil suit and the writ petition with reference to Survey No. 30. By clause 2, the assessee had agreed to vacate Survey No. 30 to pave the way for the Corporation in obtaining a mining lease and the assessee had also agreed to extend its co-operation to the Corporation for that purpose. The assessee, by clause 3, agreed not to start, either directly or indirectly, any other litigation in respect of Survey No. 30. Under clause 4 of the agreement, the assessee had agreed to furnish the Corporation a copy of the prospecting report, data and all other information submitted to the Government with respect to the prospecting operations of the assessee. At the time when the agreement between the assessee and the Corporation was entered into containing the terms referred to earlier, the assessee had not obtained any right whatever to work or win the fluorspar in Survey No. 30. The assessee, pursuant to the prospecting licence earlier granted for a period of one year, came into possession of Survey No. 30 and though the period of the prospecting licence had expired, the assessee appears to have continued to remain in possession, taking advantage of the order of interim injunction passed by the court in the civil suit instituted by the assessee. Thus, at the time when the agreement between the assessee and the Corporation was entered into, the assessee had no rights whatever in Survey No. 30. The Corporation which had secured a mining lease with reference to Survey No. 40 was anxious to extend its activities of exploitation of fluorspar in Survey No. 30 also. In other words, the Corporation as well as the assessee had, at the time of entering into the agreement, not succeeded in obtaining any rights over Survey No. 30 for purposes of mining fluorspar mineral therein. It was in that situation that the agreement had been entered into and, in the context of that situation in which the Corporation and the assessee found themselves, it is obvious that the parties to the agreement had merely adjusted their rights under its terms, in the ordinary course of their respective businesses. The agreement having thus originated, it follows that it formed part of the business activity for the assessee and not something outside it. It is true that the assessee had been unsuccessful in obtaining a lease with reference to Survey No. 30, but all the steps taken by the assessee in that regard were intimately, directly and also inextricably bound with the business activities of the assessee. In other words, though for want of a lease in respect of Survey No. 30, the assessee could not be regarded as being engaged in the business of mining or exploiting fluorspar, yet, all the steps taken by the assessee in that regard could be regarded as steps which led to that business and intimately bound with the business activities of the assessee. It has already been noticed that the assessee had not acquired any right or interest in Survey No. 30 and in that sense, the assessee had not acquired any asset and, therefore, the amount paid by the Corporation to the assessee cannot be regarded as compensation in respect of loss of an enduring asset. Further, the assessee had already obtained licences to work mines in Madhya Pradesh, Andhra Pradesh, Karnataka and Tamil Nadu and the parting with possession of Survey No. 30 by the assessee did not in any manner affect the trading structure of the assessee. To put it differently, the assessee was free to carry on its business activities, released from the steps taken by it to secure a lease in respect of Survey No. 30, as part of its business activity. When we consider the question as to what is it that had been parted with by the assessee in lieu of money or money's worth, we find that it is not for loss of any enduring capital asset; nor has it affected the assessee in its trading structure. Nor can the receipt by the assessee be regarded as payment for expenses thrown away by it, for, it is seen from the proceedings of the authorities below that the assessee has not been able to substantiate the incurring of any expenditure. Thus, on a consideration of the circumstances under which the agreement had been entered into between the assessee and the corporation and its terms, it is clear that the agreement had been entered into in the ordinary course of business and is the source of payment and the payment is by way of compensation for the injury to the trading operations of the assessee with reference to Survey No. 30.
4. We may now briefly refer to the decisions relied on by counsel on both sides. In CIT v. Rai Bahadur Jairam Valji , the Supreme Court stated that whether a receipt is capital or revenue cannot be decided by the application of any single test as infallible or any single criterion as decisive and the question must ultimately depend upon the facts of their particular case and the authorities bearing on the question are valuable only as indicating the matters to be taken into account in reaching a decision. In that case, it was pointed out that, generally, payments made in settlement of rights under a trading contract are trading receipts and are assessable. We have earlier pointed out how the Corporation and the assessee had, by the agreement entered into, settled their rights, in pursuit of their respective business activities and applying the decision of the Supreme Court, the receipt by the assessee would only be in the nature of a revenue receipt. In Kettlewell Bullen and Co. Ltd. v. CIT , the nature of the receipt by the assessee, to relinquish the managing agency, came to be considered. There also, it has been pointed out by the Supreme Court that, if the payment is made to compensate a person for cancellation of a contract not affecting the trading structure of his business nor depriving him of a source of income, the termination of the contract is a normal incident of the business and such cancellation leaves him free to carry on his trade and the receipt is revenue, but, where by the cancellation of an agency, the trading structure of the assessee is impaired or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement is normally a capital receipt. Even applying the aforesaid guidelines to ascertain the precise nature of the receipt by the assessee in this case, it is seen that the assessee had not been compensated by the Corporation either for the impairment of the trading structure of the assessee or for loss of a source of income to the assessee. CIT v. Lakshminarayana Mining Co. [1987] 165 ITR 326 (Kar), dealt with a case of transfer of a mining lease by the assessee and the nature of the receipt in the hands of the assessee. The Income-tax Officer as well as the Appellate Assistant Commissioner held that the receipts were of a revenue nature. But the Tribunal found that the receipt was a premium and in the nature of a capital receipt. On a reference, the Karnataka High Court pointed out that the receipt of consideration for the transfer of lease by the assessee constituted a revenue receipt, for, even after the transfer of that particular mining lease, the assessee had worked other mining leases which meant that it had not impaired its mining business at all. Earlier, we had pointed out how, in spite of the inability of the assessee to secure a mining lease in respect of Survey No. 30, its business activities had not in any manner been impaired or affected and, on the principle of the aforesaid decision, it follows that the receipt by the assessee in this case would only be a revenue receipt and not a capital receipt. The decision in CIT v. Saraswathi Publicities , relied on by the learned counsel for the assessee, is not really helpful. That decision proceeded to determine the nature of the receipt attributable to a restrictive covenant not to represent nor otherwise do business in film shorts and any sort of advertisement on the cinema screens for two companies. What we find on the basis of the terms of the agreement in the present case is that the assessee had not, in any manner agreed by a restrictive covenant, not to carry on any prospecting or mining operations in the State of Gujarat. Under clause 3 of the agreement, the assessee had agreed not to launch any litigation with respect to Survey No. 30 and this cannot be construed to be a restrictive covenant, as ordinarily and normally understood, with reference to the carrying on of business activities. We are, therefore, of the view that the decision in CIT v. Saraswati Publicities cannot be of any assistance to the assessee.
5. We now proceed to consider whether the provision in the agreement under clause 4 to furnish to the Corporation a copy of the prospecting report obtained by the assessee, would be in the nature of a plant or tool, so as to enable the assessee to contend that the receipt by the assessee comprised both revenue and capital receipt and should be apportioned. We have carefully gone through the prospecting report which forms annexure 'D' to the stated case and we are unable to share the view taken by the Tribunal that it constitutes a blue-print for commencing mining operations. We find that the report which was only in the nature of a preliminary prospecting report submitted to the Government, pursuant to the prospecting licence, for the purpose of enabling the assessee and the Government to ascertain the availability of minerals in the area and to apply for and grant a licence cannot form the basis of the actual business activities of exploitation of minerals, either by the Corporation or even by the assessee. We also find from the report that only after undertaking drilling and pitting operations and completing them, a complete and comprehensive idea could be gathered regarding the mineral potentiality of the tract and, therefore, the report cannot be considered to be either a plant or a tool In any even, the prospecting preliminary report, which is neither complete nor comprehensive, cannot be regarded as technical know-how on the basis of which it can be stated that the assessee had parted with a capital asset for consideration. We also find that the prospecting report had been obtained with a view to justify the making of an application by the assessee for the grant of a mining lease in its favour. We are, therefore, unable to accept the contention of learned counsel for the assessee that the prospecting report would be a capital asset in the nature of a plant or a tool. We may also observe that, in the decision relied on by learned counsel for the assessee reported in Scientific Engineering House P. Ltd. v. CIT , it had been found that the supply of documents was to enable the assessee to undertake its trading activities of manufacturing theodolites and microscopes and the documents performed a vital function in the manufacture of those instruments and that the assessee commenced its manufacturing activities on the basis of the documents. On a consideration of the contents of the prospecting report in this case, it cannot be regarded as technical know-how at all with the help of which the business or trading activity of mining operations could be commenced. We are, therefore, of the view that the decision in Scientific Engineering House P. Ltd. v. CIT does not assist the assessee in any manner. In the view we have taken about the nature of the prospecting report, there is no question of apportionment of the receipt by the assessee into capital receipt and revenue receipt respectively and the reliance placed upon the decision in CIT v. Best and Co. (P.) Ltd. , is of no avail to the assessee. Thus, on a consideration of the facts, the terms of the agreement and the application of the guiding principles to the facts, we have no hesitation in holding that the receipt by the assessee was in the nature of a revenue receipt liable to be assessed to tax.
6. That takes us on to a consideration of the second question referred, viz., whether the receipt by the assessee was or was not a casual receipt. We have earlier pointed out that the receipt had its origin in the agreement which came into being in furtherance of the business activities of the assessee. The assessee, in the course of carrying on its trading activities, had ventured into the State of Gujarat and had sought for and obtained initially a prospecting licence, though it had failed to obtain a mining lease as such from the concerned authorities. It was in the context of the pendency of the proceedings initiated by the assessee for securing the mining lease, the agreement between the Corporation and the assessee was entered into and, under the terms of the agreement, the assessee had agreed, on receipt of the amount of Rs. 3,00,000 from the Corporation, to withdraw the pending court proceedings and also not to launch any fresh proceedings. The provisions so made in the agreement clearly spell out that the assessee, as a prudent business house, thought fit to put an end to the steps taken by it in the matter of securing a mining lease by withdrawing the proceedings and that too on receipt of consideration from the Corporation and this was achieved by the process of the assessee and the Corporation entering into an agreement after considerable negotiations, deliberations and thought. In other words, there was nothing casual or unexpected about either the entering into of the agreement between the assessee and the Corporation or even the withdrawal of the court proceedings initiated earlier by the assessee with reference to Survey No. 30. We do not see any scope whatever, on the available materials, for holding that the receipt of the amount of Rs. 3,00,000 by the assessee was in the nature of a casual receipt. We may refer to K. Ramaswami Gounder v. CIT [1987] 163 ITR 94 (Mad), relied on by the Revenue, where, with reference to section 10(3) of the Act, it was pointed out that it refers to receipts which are of a casual and non-recurring nature as a category of income to be excluded, unless they are (i) capital gains; (ii) receipts arising from business or the exercise of a profession or occupation; or (iii) receipt by way of addition to the remuneration of any employee. In this case, inasmuch as we have earlier held that the amount received by the assessee arose from out of its pursuit of business activities, there is no question of the receipt being regarded as of a casual and non-recurring nature, exempt under section 10(3) of the Act. Reliance placed by learned counsel for the assessee on the decision in CIT v. Dr. P. N. Beh , does not advance the case of the assessee. In that case, the assessee was obliged to be away from this country to attend an International Congress as an official delegate and during his temporary absence, he was able, without any design or plan, to find two foreign caretakers who paid the assessee Rs. 3,000. That receipt was held to be fortuitous and exceptional. We do not see how that decision would support the argument that the receipt by the assessee in this case was of a casual nature, especially when it had been earlier found that the receipt arose out of the agreement which had been arrived at between the assessee and the Corporation after considerable negotiations, deliberations and thought even as per the terms of the agreement and in that sense, the receipt by the assessee was not on account of any chance or without design or motivation. We, therefore, hold that the view taken by the Tribunal that the receipt by the assessee was a casual receipt not liable to tax is not correct. We, therefore, answer the questions referred to us in the negative and in favour of the Revenue. There will be no order as to costs in this reference.