Income Tax Appellate Tribunal - Jaipur
Rajasthan State Mines And Minerals Ltd. vs Deputy Commissioner on 29 October, 1993
Equivalent citations: [1994]49ITD418(JP)
ORDER
M.A.A. Khan, Judicial Member
1. This is an appeal by an assessee from the order of the CIT(A), Rajasthan-I, Jaipur, dated 3-3-1993 for A.Y. 1990-91.
2. The appeal raises the following two points :-
(i) Addition of Rs. 6,69,028 :
At the time of hearing, no arguments were advanced in respect to the above ground. We gather that the issue in the ground was not pressed before the learned CIT(A), as the order passed by the Assessing Officer in respect thereto had been subsequently rectified under Section 154 of the I.T. Act, 1961 ('the Act'). Under these circumstances, the above ground is dismissed as having not been present before us.
(ii) Addition of Rs. 6 crores : Rajasthan State Mines & Minerals Ltd., the assessee, is a Govt. of Rajasthan undertaking having its Regd. Office at Jaipur mines at Udaipur. The business activity (sic) consists of carrying on the prospecting (sic) and it mainly deals in rock phosphate.
3. It appears that some times prior to 31 -3-1988, the State Govt. proposed to undertake prospecting or mining operations of rock phosphate at Jhamar Kotda Mines (JKM) near village Jhamar, Distt. Udaipur, Rajasthan. The State Govt., therefore, entered into some contract with the assessee. company to undertake the prospecting or mining operations at JKM. The assessee-company, accordingly worked as a Contractor to the State Govt. till March 31, 1988. The assessee-company used to take out rock phosphate from the mines and get its remuneration from the State Govt. It appears that with a view to achieve the overall objective of the scientific and economic development and exploitation of Jhamar Kotda rock phosphate, the assessee-company got prepared through its consultants a Definitive Feasibility Report (DFR). This DFR formed the basis of formulating the Jhamar Kotda Integrated Project (JIP) by the State Govt. The JIP incorporated, inter alia, removal of substantially large quantities of both high grade and low grade rock phosphate ore, and simultaneous beneficiation of low grade ore through a plant with a total estimated cost of Rs. 205.80 crores. After having considered the JIP in sufficient detail, the State Govt. decided to execute the said project through the assessee-company, on the following terms and conditions :
(i) That RSMML would ensure the involvement of outside agencies in the removal of overburden, to the maximum extent but not less than 50 per cent.
(ii) That the State Govt.'s participation in the project would be limited to Rs. 30 crores, to be provided by way of equity capital to RSMML.
(iii) The RSMML would ensure an annual payment of Rs. 6 crores to the State Govt., over the life of the project. For this purpose suitable clauses would be incorporated within the mining lease for Jhamar Kotda to be granted by the State Govt. in favour of RSMML effective from 1-4-1988 or a separate agreement will be signed between Govt. and RSMML.
(iv) That RSMML would procure suitable quantum of institutional finance for funding the project.
(v) That RSMML would take suitable steps for obtaining the lease for the Jhamar Kotda rock phosphate deposit and would therefore, execute this project as a lessee of the State Govt.
In pursuance of the aforesaid decisions, the State Govt. vide its letter dated 1-3-1988 authorised the assessee to take all steps necessary for execution of the JIP with effect from 1-4-1988. By the said letter the State Govt. also granted permission to the assessee-company to continue exploitation of rock phosphate till a lease with the conditions as mentioned above was granted to it. The assessee-company, accordingly, applied for grant of a mining lease as per provisions of the Mines and Minerals (Regulation and Development) Act, 1957 (1957 Act) and the rules made thereunder the Mineral Concession Rules, 1960.
4. When assessee's application for grant of the mining lease was still pending consideration by the State Govt., the State Govt. accorded working permission in favour of the assessee-company to work 1370.37 htrs. area for mineral rock phosphate at JKM. This working permission was accorded with the condition that after the order for the execution of the lease was issued, the normal lease deed would be deemed to have come into force with effect from 1-4-1988, the date from which the area had been handed over to the assessee-company. By its letter dated 30th Dec, 1989 the following special condition was made a part of the working permission as well as of the lease deed to be executed subsequently :
In consideration of concessions and privileges granted by the Govt of Rajasthan, the assessee shall pay special lease money of Rs. 7.5 crores for the first year and thereafter Rs. 6 crores per annum for the lease period in addition to royalty/dead rent/land tax.
5. In the said letter it was clarified that the order given thereunder be treated as a working permission with effect from 1 -4-1988 in lieu of mining lease till a formal lease deed was executed.
6. Thus with effect from 1-4-1988, the assessee-company took out the rock phosphate and sold the same of its own for which the assessee-company paid annual rent of Rs. 6 crores to the State Govt. in addition to the royalty as per rules.
7. For the assessment year under consideration, for which the previous year ended on 31-12-1990, the assessee-company returned nil income and claimed a deduction of Rs. 6 crores under the head "lease money". The DC (Assessment) took the view that deduction of Rs. 6 crores could not be allowed to the assessee as revenue expenditure. In this behalf, he mainly relied upon the decision of the Supreme Court in the case of R.B. Seth Moolchand Suganchand v. CIT [1972] 86 ITR 647. The DC (Asst.) was of the opinion that the lease granted to the assessee in the instant case was for the life term of the project and that the area given on lease was quite vast. He was further of the view that the raw-material had been excavated and extracted after removal of the over-burden and had also been processed for beneficiation. He was further of the opinion that the lease money had to be paid in addition to the royalty and dead rent regarding which a separate deduction had been claimed by the assessee and that the extent of the investment in the project exceeded Rs. 200 crores. He was finally of the opinion that the assessee-company had paid the lease money of Rs. 6 crores in order to obtain benefits of enduring nature. Besides the case of R.B. Seth Moolchand Suganchand (supra) wherein the Supreme Court has considered the decisions of Pingle Industries Ltd. v. CIT [I960] 40 ITR 67 and Mohanlal Hargovind v. CIT[ 1949] 17 ITR 473 (PC) the DC (Asst.) also referred in support of his view points in certain other cases, namely CIT v. Southern India Mining, 17 ITR 193 (sic), Madhya Pradesh Industries Ltd. v. C/T[1959] 37 ITR 342 (Bom.), N. Peersahibv. C/T[1964] 54 ITR 68 (Mys.), CIT v. Ramlal & Sons [1965] 57 ITR 742 (Raj.) (FB) and Aditya Minerals (P.) Ltd. v. CIT [1987] 167 ITR 774 (AP). The assessee-company approached the Commissioner (Appeals).
8. The CIT(A) held that the DC (Assessment) had rightly relied upon the decisions mentioned above. He further held that the Supreme Court decision in M.A. Jabbarv. CIT [1968] 68 ITR 493, which had been relied upon before him on behalf of the assessee was a distinguishable one on facts as the said decision had been passed on the basis of the terms of the lease deed while in the present case, there was no such agreement of lease deed executed between the assessee-company and the Govt. He further held that the case of Mohanlal Hargovind (supra) was also distinguishable on the ground that the expenditure in that case was treated as revenue expenditure because it was held that the contract granted no interest in the lands, trees, plants themselves. Regarding the decision of the Supreme Court in R.B. Seth Moolchand Suganchand's case (supra), the CIT(A) held that the said case was fully applicable to the case of the assessee. The CIT(A) ultimately came to the conclusion that the expenditure of Rs. 6 crores had rightly been treated as capital expenditure by the DC (Asst.).
9. The learned counsel for the assessee vehemently urged that the CIT(A) has recorded some what contradictory findings. It was pointed out that the CIT(A) had held that the Supreme Court decision in M.A. Jabbar's case (supra) was distinguishable, because the said decision was passed on the basis of the terms of the lease deed, while in the present case, there was no such agreement or lease deed executed between the assessee-company and the State Govt. and the payment was being made simply on the basis of order dated 1-3-1988. But at the same time, the learned CIT(A) also held that the decision of the Supreme Court in R.B. Seth Moolchand. Suganchand's case (supra( was fully applicable to the case of the assessee. The learned counsel further submitted that in the instant case what had been granted to the assessee was simply a temporary licence to excavate rock phosphate from a particular area and in lieu of the aforesaid licence, the assessee had agreed to pay, and in fact, paid the amount of Rs. 6 crores in addition to the royalty as per law. It was submitted that there was no agreement of whatsoever nature between the assessee-company and the State Govt. and that as per permission granted by the State Govt., the assessee-company can simply excavate rock phosphate only and no other minerals. It was also submitted that no time limit had been mentioned about the validity of the working permission granted to the assessee-company to excavate rock phosphate and that the assessee-company had also paid no premium for obtaining the said permission. The learned counsel took us through the various provisions of 1957 Act and the Mineral Concession Rules, 1960 and submitted that no lease has ever been granted to the assessee-company as per provisions of 1957 Act and the rules made thereunder and, therefore, in the absence of any agreement, the orders of the State Govt. dated 1-3-1988 and 31-12-1989 granting working permission to the assessee does not create any right of whatsoever nature in its favour and the annual payment of Rs. 6 crores was nothing but part of royalty payable to Govt. of Rajasthan. The learned counsel thus submitted that the expenditure in question was allowable as a revenue expenditure as by no stretch of imagination the said expenditure can be claimed to be of capital nature. In support of his arguments, the learned counsel relied upon the following decisions:
Gotan Lime Syndicate v. CIT [1966] 59 ITR 718 (SC), Travancore Sugars & Chemicals Ltd.v. CJT[1966]62 ITR 566(SC),M.A. Jabbar's case(supra), Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC), CIT v. Associated Stone Industries (Kotah) Ltd. [1981] 130 ITR 868 (Raj.), Shanker Dass Sethi & Sons v. CIT [1986] 157 ITR 770 (Delhi) and Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC).
10. On the other hand, the learned Sr. D/R relied upon the orders of the I.T. authorities and further submitted that the area given on lease to the assessee was quite vast and the raw-material had been excavated and extracted after removal of the over-burden. It was further submitted that the raw-material was also required to be processed for beneficiation and the same was of low grade and the extent of investment in the project was considerably high. It was submitted that by incurring the expenditure of Rs. 6 crores, the assessee had obtained benefits of enduring nature and, therefore, the same has rightly been treated as capital expenditure.
11. After having given our due consideration, to the submissions advanced before us, and on going through the relevant provisions of law as also the cited cases, we are clearly of the opinion that the expenditure in question is required to be treated as revenue expenditure on the facts and in the circumstances of the case.
12. In order to understand the nature of the expenditure, it is necessary first to determine as to whether a lease was granted to the assessee in the instant case or whether the assessee-company worked as a licensee to take out the rock phosphate from mine. The regulation of mines and the development of minerals is under the control of the Central Govt. as has been declared in Section 2 of the 1957 Act. Prospecting or mining operations in any area can be undertaken by a person under licence or a lease. The terms and conditions of such prospecting licence or mining lease are regulated by the provisions of the 1957 Act. In fact, entry No. 54 of List I of Sch. I of the Constitution of India clearly contemplates that the Central Govt. shall have the control over the regulation of mines and development of minerals in any area. The Phosphatic ore is included in the First Schedule to the 1957 Act and, therefore, the mining lease in respect of the said ore would be governed by the provisions of the said Act. Section 8 of the said Act provides that the period for which the mining lease may be granted shall not exceed 20 years and the renewal thereof would be subject to the approval of the Central Govt. Therefore, there cannot be a lease for the life of a project (JIL in the instant case) even though a State Govt. may desire to grant such a lease.
13. The procedure for granting mining lease is governed by the Mineral Concession Rules, 1960. Rule 22 of the said Rules provides that an application for the grant of mining lease in respect of land in which the minerals vests in the Govt. shall be made to the State Govt. in Form I through such officer or authority as the State Govt. may specify in that behalf. Rule 31 says that where on an application for the grant of a mining lease an order has been made for the grant of such lease, a lease deed in Form 'K' or in a form as applicable thereto as circumstances of each case may require shall be executed within 6 months of the said order or within such further period as the State Govt. may allow in this behalf and if no such lease is executed within the said period due to any default on the part of the applicant, the State Govt. may revoke the order granting the lease and in that event, the application fee shall be forfeited to the Govt. Sub-Rule (3) of Rule 31 further provides that the date of the commencement of the period for which a mining lease is granted shall be the date on which the deed is executed under Sub-Rule (1). The lease to be executed in accordance with the provisions of 1957 Act read with Rule 31 of the Mineral Concession Rules, 1960 is a lease granted by the President of India and, therefore, it has to be in strict compliance with the provisions of Article 299 of the Constitution of India. It is well settled that the provisions of Article 299 of the Constitution of India are mandatory in character (State of West Bengal v. B.K. Mondal & Sons AIR 1962 SC 779, New Marine Coal Co. (P.) Ltd. v. Union of India MR 1964 SC 152). The relevant contract, as required by Article 299 of the Constitution of India must be executed by a person duly authorised by the President or the Governor, as the case may be. A failure to comply with the requirements of Article 299 would not create binding or enforceable contract as there would be no valid contract between the State Govt. and the person concerned. Such a contract which has been made in contravention of Article 299(1) would be absolutely void, not capable of being rectified by the Govt. It is thus clear that even if there is a lease in a given case, but if it is found that such lease has not been executed in accordance with the provisions contained in Article 299 of the Constitution of India, such a lease would be quite ineffective and no enforceable contract would come into existence. In this context it may be observed that a label which the parties might put upon a transaction is never decisive of the very nature of such transaction and that the substance of the transaction shall have to be examined. Even where a mining lease is executed by an Officer of the Mining Deptt. who is not duly authorised by President of India or Governor of the State, such a lease would be void and not binding on the Govt. (Vide State of Appellant v. Roopa AIR 1966 Raj. 101 and State of Rajasthan v. Raghunath Singh AIR 1974 Raj. 4). It is thus clear that a lease in order to be valid and effective as per provisions of 1957 Act and the rules framed thereunder must be a lease executed in accordance with and in compliance of the provisions of Article 299 of the Constitution of India. It is particularly so for the obvious reason that as defined in Section 105 of the Transfer of Property Act, a lease is a transfer of right to enjoy the property in consideration of a price paid or promised.
14. In the instant case it is the undisputed position that prior to 1-4-1988, the assessee had been working as a mining contractor of the State Govt. and receiving its remunerations for the services rendered by it. It was on 1-3-1988 that the State Govt. had taken the decision to execute JIP through the assessee-company and for that purpose, the State Govt. had authorised the assessee-company to take all steps necessary for the execution of the said JIP with effect from 1-4-1988. By its letter dated 1-3-1988, the State Govt. had accorded permission to the assessee-company to continue exploitation of rock phosphate till the lease with the conditions enumerated in the said letter was granted to the assessee-company. By its letter dated 30-12-1989, the State Govt. had further added an additional condition which was to form a part of the working permission granted vide letter dated 1-3-1988. The additional or special condition, which has been reproduced above, provided that in consideration of concessions and privileges granted by the State Govt., the assessee shall pay special lease money of Rs. 7.5 crores for the first year and thereafter Rs. 6 crores per annum for the lease period in addition to royalty, dead rent and land tax. It is noteworthy that in this special condition, the State Govt. had clearly stated that it was in consideration of concessions and privileges that a lease has been decided to be granted to the assessee-company. A close reading of both these letters clearly suggests that the working permission had been granted to the assessee-company to continue exploitation of rock phosphate sold till the lease deed with the conditions as enumerated in letters dated 1-3-1988 and 30-12-1989 was executed. It is the common case of the parties that no lease deed as required by the provisions of the 1957 Act read with the rules framed thereunder has been executed in between the parties in accordance with and in compliance of the provisions of Article 299 of the Constitution of India. The assessee-company still continues to exploit rock phosphate from Jhamar Kotda Mines by virtue of the permission granted to it by the State Govt. vide letter dated 1-3-1988 and in consideration of the concessions and privileges granted to it by the State Govt. by the aforesaid letters, it paid a sum of Rs. 7.5 crores for the first year and Rs. 6 crores for the year under consideration. It was also not disputed before us at the time of hearing that the special lease money (as is the name given to the annual rental for the concessions and privileges granted by the State Govt. to the assessee-company) of Rs. 7.5 crores paid by the assessee-company to the State Govt. for the first year was allowed on revenue head by the I.T. Deptt. It is clear that the relationship between the State Govt. and the assessee-company was certainly not that of a lessor and lessee as the term 'has been' used in the relevant, provisions of the 1957 Act.
15. Here the question necessarily arises is as to what is then the relationship between the parties in the absence of a lease deed required to be issued as per provisions of the 1957 Act and the Mineral Concession Rules, 1960. In this behalf, it would be useful to refer to the provisions contained in Rule 75 of the Mineral Concession Rules, 1960 which runs as under :
75. Prospecting or mining operation by State Governments.(1) Where a State Govt. proposes to undertake prospecting or mining operations of any mineral, it shall issue a notification in the Official Gazette giving details of the area and the period for which such operations are proposed to be undertaken.
(2) Where a prospecting of mining operations is undertaken by a person on the basis of a contract or sub-contract or on any other basis with the State Govt., every such person shall be deemed to be (a) licensee, or as the case may be, a lessee for the purposes of these rules and shall accordingly be subject to all its provisions and the provisions of the Mineral Conservation & Development Rules, 1958.
It may be appreciated that Rule 75 visualises such a situation. Sub-Rule (2) of Rule 75 provides that where a prospecting of mining operations is undertaken by a person on the basis of a contract of sub-contract or on any other basis with the State Govt. every such person shall be deemed to be a licensee or, as the case may be, a "lessee" for the purposes of these rules. In the absence of execution of a lease deed, the assessee-company is not certainly the lessee as has been held above by us. If the letters of the State Govt. dated 1-3-1988 and 30-12-1989 being the consequences of unilateral acts of the State Govt. do not partake the character of a contract between the parties, the assessee, who had been extracting the rock phosphate during the year under consideration on the basis of the working permission granted to it by the State Govt. vide letter dated 1-3-1988, shall be deemed to be a 'licensee' under Sub-Rule (2) of Rule 75 of the Mineral Concession Rules, 1960. We, therefore, hold that during the year under consideration, the assessee had been exploiting the rock phosphate from the Jhamar Kotda rock phosphate deposit as a licensee of the State Govt.
16. The relationship between the parties having been found as that of a licensor and licensee, now there arises the question as to what is the nature of the expenditure incurred by the assessee in consideration of 'concessions and privileges' granted to it by the State Govt. under letters dated 1-3-1988 and 30-12-1989. There is no dispute over the fact that in the abovementioned letters and as also in its accounts, the payment of Rs. 6 crores has been mentioned as special lease money. But as was held by the Supreme Court in the case of B.M. Lall v. Dunlop Rubber Co. AIR 1968 SC 169 a label which the parties put upon a transaction is never decisive of the true character of the transaction and to determine its true character, the substance of the transaction is required to be considered. Therefore, the nomenclature given by the parties would not affect its true character. We have already found that the relationship between the parties was that of a licensor and licensee. With this finding, we hold that whatever was paid by the assessee-company in the year under consideration in consideration of the concession and privileges granted to it by the State Govt. for taking out rock phosphate from the Jhamar Kotda rock phosphate deposit was in reality a licence fee and not a lease money. The assessee had not acquired any right over or in the land in question and what it was allowed to do by the State Govt. was to enter the land having the rock phosphate deposit as a licensee. The very character of such payment, namely, that it was payable on yearly basis and as consideration of the concessions and privileges granted by the State Govt. to the assessee-company suggests that it was neither in the nature of Salami or premium nor was it intended to be made only once for all. It was a recurring expenditure payable year after year till alease containing all the terms and conditions was executed. The payment was to bring into existence no asset or advantage of enduring benefit to the assessee who was having no right over or in the land. The concession granted to the assessee was for a temporary period till the execution of the lease deed and that could have been terminated by the State Govt. at any time. It cannot to be lost sight of that the assessee had already been working on and winning the mines as a mining contractor of the State Govt. The mines had thus been already won. The annual payment of Rs. 6 crores was not to be made towards removing the overburden but for the price of the minerals to be taken out by the assessee-company. The amount of Rs. 6 crores was, therefore, on the face of it towards the price of obtaining the raw material or stock-in trade by the assessee. Such facts clearly attract the principles laid down in the cases of CIT v. N. Changa Consolidated Copper Mines Ltd. [1965] 58 ITR 241 (PC), Mohanlal Hargovind (supra) and Empire Jute Co. Ltd. (supra).
17. In the case of R.B. Seth Moolchand Suganchand, on which reliance was placed upon by both the parties, the assessee-firm had paid a sum of Rs. 1,53,800 to acquire the 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 in the relevant year as business expenditure. The Tribunal had held that Mica had to be extracted from the mines, though the earlier working out the mines had made it easier to perform the operation. It was on such facts that it was 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, expenditure for acquiring the right over or in the land to win the minerals would be of capital nature. But where the mineral has already been gotten and is on the surface, expenditure incurred for obtaining the right to acquire the raw-material, i.e., the mineral would be revenue expenditure laid out for the acquisition of stock-in-trade. It may be noted that it was a case wherein a lease for a period of 20 years had been granted to the assessee-firm. Similar was the position in other cases relied upon by the I.T. authorities. But in the instant case, we have found that no lease had ever been executed and that the relationship between the assessee-company and the State Govt. was that of a licensee and licensor. That apart, in the instant case, the assessee-company, in its earlier capacity as a mining contractor for the State Govt. had already won the mines. What the State Govt. had granted to the assessee-company in the instant case was to take rock phosphate from the Jhamar Kotda rock phosphate deposit, in consideration of annual payment of Rs. 6 crores. The assessee-company, was thus to obtain stock-in-trade for a consideration of yearly licence fee of Rs. 6 crores. That amount was not paid by the assessee-company for acquiring a right of enduring nature to extract and remove the rock phosphate for a specified period. The fees paid by it was towards obtaining the licence or in other words, "the concessions and privileges for" taking out the raw-material which was the stock-in-trade for the assessee-company. We are, therefore, clearly of the view that the expenditure incurred in the instant case was a revenue expenditure and should have been allowed to the assessee-company accordingly. In arriving at that conclusion, we have considered the cases relied upon on behalf of the parties. We accordingly direct the Assessing Officer to allow the sum of Rs. 6 crores as business expenditure to the assessee.
18. In the result the appeal is partly allowed.