Madras High Court
Sri Krishna Tiles And Potteries Madras ... vs Commissioner Of Income-Tax on 1 March, 1988
Equivalent citations: [1988]173ITR311(MAD)
Author: M. Srinivasan
Bench: M. Srinivasan
JUDGMENT M.N. Chandurkar, C.J.
1. The question which has been referred in this reference at the instance of the assessee is as follows :
"Whether, on the facts and in the circumstances of the case, Rs. 5 lakhs being the premium paid by the assessee to the owners of the land in connection with obtaining lease thereof for excavating clay therefrom for its business and the expenditure of Rs. 30,274 incurred in connection therewith were only capital expenditure and hence not allowable ?"
2. The assessee is a company carrying on the business of manufacture and sale of tiles and potteries. On September 10, 1970, the assessee company took on lease 3.75 acres and 5.03 acres of land in survey Nos. 440 and 441, respectively. It also took on lease certain other lands belonging to the same owners, A. R. Krishnamoorthy and A. R. Rajagopalan. These two owners are also directors of the assessee-company. The transaction of lease is evidenced by a registered document of lease. The period of the lease was 10 years. The assessee-company paid to the owners a sum of Rs. 5 lakhs which is expressly described in the lease deed as premium (salami). The lease deed provided for payment of royalty calculated at the rate of Rs. 12 per 100 cubic feet of clay extracted. The minimum royalty payable during the year was also stipulated at Rs. 60,000. The assessee had also agreed to defray all taxes, rates, cesses, quit rents and all other public charges including urban land tax. Clauses 6 to 9 of the lease agreement which are of some importance read as follows :
"6. The company is entitled to use the schedule lands for extracting clay up to the available depth.
7. The company is permitted to construct buildings or lay roads on the schedule lands after obtaining the written permission of the joint owners.
8. The building put up by the company, if any, as stated in clause 7 above, shall be dismantled and taken away by the lessee at the time of cessation of the lease.
9. The company is permitted to sublease the right hereby conferred after obtaining the written consent of the joint owners."
3. The document also provided that the assessee-company was at liberty to terminate the lease by giving three calendar months' notice in writing to the joint owners. On termination of the lease, the assessee-company was entitled to dismantle and remove any buildings put thereon by the company and hand over possession to the owner. There was a clause for renewal. The option of renewal was to be exercised by the company and the lease was to be renewed on terms to be mutually agreed upon.
4. In respect of the assessment year 1972-73, the assessee returned a loss of Rs. 4,89,254. The total business loss was disclosed at Rs. 6,10,098 and the loss returned was arrived at after setting off the income of Rs. 1,20,844 under the head "Other sources". In computing the business loss, the assessee had deducted the sum of Rs. 5 lakhs which was paid as premium for the lease as also a sum of Rs. 28,059 which was the expenditure by way of stamp charges and registration fee. A further sum of Rs. 2,215 being the legal expenses in connection with the lease was also sought to be deducted.
5. The Income-tax Officer held that the sum of Rs. 5,30,274 which was the total of the three items indicated above was of a capital nature as by the lease, the assessee had obtained an interest in the land demised. Accordingly, the Income-tax Officer determined the total income at Rs. 3,630 and directed the business loss of Rs. 1,83,505 to be carried forward. This view of the Income-tax Officer was upheld by the Appellate Assistant Commissioner relying on the decision of the Supreme Court in R. B. Seth Moolchand v. CIT [1972] 86 ITR 647.
6. In the appeal filed by the assessee before the Appellate Tribunal, the Tribunal also took the view that the assessee had obtained an interest in the land and an enduring advantage under the transaction and that the transaction could not be considered as a mere purchase of raw materials. The Tribunal held that the sum of Rs. 5 lakhs paid by the assessee was not rent and the expenditure incurred on registration fee, stamp charges and legal expenses could not be considered as revenue expenditure. Arising out of this order of the Tribunal, the question reproduced above has been referred to this court.
7. It has been vehemently argued on behalf of the assessee before us that the income-tax authority and the Tribunal were in error in holding that the lease in question created an interest in immovable property. According to learned counsel, clay was the stock-in-trade of the assessee and the purpose of the lease agreement was to acquire this stock-in-trade. It was sought to be argued that the facts of the present case are squarely covered by the Full Bench decision of the Lahore High Court in Benarsidas Jagannath, In re [1947] 15 ITR 185. According to learned counsel, the transaction must be construed as a mere licence to remove the earth or the clay which was the stock-in-trade of the assessee. Learned counsel contended that while considering the question as to whether any particular outgoing was in the nature of revenue expenditure or capital expenditure, the nature of the payment must be considered from the point of view of the assessee and not from the point of view of the recipient. This argument was obviously necessitated in view of the stand which was taken by the Revenue in respect of the said payment of Rs. 5 lakhs in the hands of the owners when it was contended in the assessment proceedings relating to the owners that the owners had borrowed the capital asset by granting a lease in favour of the assessee - company and that the assessee-company was, therefore, liable to payment of capital gains tax. This controversy was finally decided in the case of the owners of the leased lands in Krishnamurthy (A. R.) and Rajagopalan (A. R.) v. CIT [1982] 133 ITR 922, in which this court held that the lease dated September 10, 1970, amounted to transfer of an asset and that the cost of the leasehold right was capable of valuation and as such capital gains could be computed. We are not concerned with the details of that decision, but suffice it to say that this Bench considered the word "transfer" defined in section 2(47) of the Income-tax Act, 1961, as including the granting of a lease.
8. Mr. Rajan, on behalf of the Revenue, has contended that the amount of Rs. 5 lakhs paid to the owners of the land which is described as salami is essentially a payment to acquire a right in the land and that what is acquired by the assessee-company is a source of supply of the raw material, namely, clay. According to learned counsel, the right which is conveyed to the assessee-company by the document of lease which is for a period of 10 years must be construed as an enduring advantage in the form of a source of supply of raw material and reading the document of lease as a whole, it was clearly a transfer of interest in the land.
9. Learned counsel has brought to our notice several decisions in support of his contention that a lump sum paid in order to secure a right under a lease deed must be construed as capital expenditure. Apart from other authorities to which we shall presently refer, he has relied on the observations of the House of Lords and particularly the judgment of Lord Reid in Regent Oil Co. Ltd. v. Strick (Inspector of Taxes) [1969] 73 ITR 301, where the learned Law Lord had observed as follows (p. 329) :
"Premiums paid for leases have always been regarded as capital but we were not referred to any case where a premium had been paid for a very short lease - say two or three years, and I do not wish to decide whether even in such a case a premium would necessarily be treated as a capital outlay."
10. Now, the question as to whether a particular outgoing is capital or revenue in character can never be decided by any set formula or test and whatever tests have been settled by decisions of courts have to be applied and read in the light of the circumstances as they appear in each case. Therefore, notwithstanding several tests which have been set out by different courts, the question as to whether any particular outgoing is capital or revenue in nature is still debated vehemently when an occasion to decide such question arises. As observed by Lord Upjohn in Regent Oil Co. Ltd.'s case [1969] 73 ITR 301 "no part of our law of taxation presents such almost insoluble conundrums as the decision whether a receipt or outgoing is capital or income for tax purposes. " The learned Law Lord then observed with reference to the income-tax law in England as follows (p. 345) :
"Parliament, wisely, has never given any general statutory guidance in this matter. It has been content to leave the determination of these difficult matters to the common sense of the Tribunals and judges before whom these matters are brought."
11. The normal common sense approach to such a problem, set out by Dixon J. in Hallstroms Proprietary Ltd. v. Federal Commissioner of Taxation [1946] 72 CLR 634, was quoted with approval by Lord Wilberforce in the Regent Oil Co.'s case [1969] 73 ITR 301. The observations of Dixon J. were as follows (at p. 349) :
"What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process."
12. In another judgment which has been described as classic, Dixon J. referred to three matters which are required to be considered in Sun Newspapers Ltd. v. Federal Commissioner of Taxation [1938] 61 CLR 337. These three matters were :
" (a) the character of the advantage sought, and in this its lasting qualities may play a part,
(b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head, recurrence may play its part, and
(c) the means adopted to obtain it; that is, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with payment or by making a final provision or payment so as to secure future use or enjoyment."
13. In so far as courts in India are concerned, the law has been laid down initially in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 in which the Supreme Court approved the principles laid down by the Full Bench in Benarsidas Jagannath's case [1947] 15 ITR 185, which was relied upon heavily on behalf of the assessee. In Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34, the Supreme Court observed that a capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or income of the concern is certainly in the nature of capital expenditure. It was pointed that if the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. It was pointed out that the aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. At the same time, it was pointed out that "in the great diversity of human affairs and the complicated nature of business operations, it is difficult to lay down a test which would apply to all situations."
14. The same question was again considered in great detail in Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1, where it was observed as follows (headnote) :
"What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case."
15. In the case of what kind of a lease, a benefit can be said to be of an enduring character, was adverted to by Lord Wilberforce in the Regent Oil Co. Ltd.'s case [1969] 73 ITR 301, in the light of the dictum of Dixon J. in Sun. Newspapers Ltd. v. Federal Commissioner of Taxation [1938] 61 CLR 337. At p. 352 of the report (Regent Oil Co. Ltd.'s case [1969] 73 ITR 301) Lord Wilberforce observed as follows :
"As Dixon J., said in Sun Newspapers Ltd. v. Federal Commissioner of Taxation [1938] 61 CLR 337, 363, when considering the nature of the advantage sought, 'its lasting qualities may play a part'. In English law, the term most commonly employed in this part of the argument is 'enduring' - ever since Viscount Cave L. C. in Atherton's case [l926] AC 205, 213, spoke, without intending to lay down a test, of 'the enduring benefit of a trade'. It might be enough to decide this case in favour of the Revenue to say that in relation to an 'asset' of so concrete a charac ter as a lease, or as a lease accompanied by a sub-lease, at any rate when the term of the lease amounts to five years or more, the test of durability is satisfied......"
16. In our view, it would be fair, in the light of the above observation, to treat a lease for a period of five years or more as having resulted in an advantage of an enduring character to the lessee. We would, therefore, proceed on the footing that, if there is a lease which confers certain rights or an advantage, then if the lease is for a period of five years or more, the test of an enduring benefit must be said to be satisfied.
17. The important question which, however, requires to be decided is, whether by the lease deed in question there is a transfer of leasehoId interest or it can be considered as a mere licence to carry away earth as contended on behalf of the assessee on the strength of the decision of the Lahore High Court in Benarsidas Jagannath's case [1947] 15 ITR 185. It would be advantageous to determine first the nature of the rights which vested in the lessees which is undoubtedly described as lease-cum-licence. But, as is well-established, the legal effect of a document cannot be controlled by the description of the document. We must, therefore, ascertain the nature of the rights which are conveyed by the lease in the light of the recitals in the lease deed. There is enough indication in the terms of the document to show that it is a lease as contemplated by section 105 of the Transfer of Property Act. Section 105 of the Transfer of Property Act defines lease as follows :
"A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions, to the transferor by the transferee, who accepts the transfer on such terms."
"The transferor is called the lessor, the transferee is called the lessee, the price is called the premium, and the money, share, service or other thing to be so rendered is called the rent."
18. A lease, therefore, is a transfer of a right to enjoy property. In the instant case, the exclusive possession of the property which is to be exploited by the assessee-company is handed over to the assessee-company for the purpose of extraction of clay irrespective of the depth. The depth to which the assessee can go on digging in the process of extraction is referred to as "up to the available depth". The assessee is entitled to construct buildings or lay roads on the lands with the permission of the joint owners. The assessee has undertaken to defray all the taxes, rates, cesses, etc., including urban land tax. What is of considerable importance is that the assessee is entitled to sub-lease the right conferred by the lease. In other words, the right of extraction of earth and it is to be noticed that it is not a right of removal of clay simpliciter can be transferred by way of a sub-lease by the assessee, which means that a sub-lessee can be inducted on the premises and the sub-lessee can, in his own right, exploit the surface of the earth and dig to an unlimited depth. For this right, the payment made by the assessee is in two parts. The amount of Rs. 5 lakhs is described as a consideration for the grant of the lease-cum-licence to extract clay. In addition to this, there is a further payment which is described as royalty. As already pointed out, the lease was for a period of 10 years, subject to the right of renewal. If there is one thing which is apparent on the terms of the lease, it is that it purports to convey a leasehold interest with which the owners have parted fully and it cannot, by any stretch of imagination, be read as a licence merely for the removal of earth. When the sum of Rs. 5 lakhs is described as premium or salami, it must be presumed that the words are used in the sense they are normally understood in a commercial sense.
19. What is "salami" has been the subject-matter of several decisions. It is enough to refer to some of them. In CIT v. Panbari Tea Company Ltd. [1965] 57 ITR 422, the Supreme Court referred to the definition of lease in section 105 of the Transfer of Property Act and pointed out the distinction between the price which is referred to in the definition and the moneys, share, service or other thing to be rendered by the transferee. Referring to this definition, the Supreme Court observed as follows (p. 425) :
"The section (105 of the Transfer of Property Act), therefore, brings out the distinction between a price paid for a transfer of a right to enjoy the property and the rent to be paid periodically to the lessor. When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital income and the latter a revenue receipt."
20. In Maharaja Chintamani Saran Nath Sah Deo v. CIT , the decision in CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422 was followed and the difference between the premium and the rent was set out as follows (p. 467) :
"When the interest of the lessor is parted with for a price, the price paid is premium or salami but the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent; the former is a capital receipt and the latter is a revenue receipt. Parties may camouflage the real nature of the transaction by using clever phraseology and, therefore, it is not the form but the circumstances of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the courts, having regard to the other circumstances, to ascertain the intention of the parties."
21. The same principle is reiterated in the decision earlier referred to of this court in which the transaction of lease in question has been held to result in the transfer of a capital asset. If the document is properly read according to its plain tenor, it will appear that even on the recitals, the sum of Rs. 5,00,000 is consideration for the transfer of the right to extract clay. Clause 1 of the agreement reads as follows :
"The joint owners hereby grant a lease-cum-licence to the company to extract clay from the schedule lands in consideration of the payment of Rs. 5 lakhs (Rupees five lakhs only) as and by way of premium or salami for a period of 10 years, the receipt of which sum the joint owners do hereby acknowledge."
22. Thus, the amount of Rs. five lakhs is, as contemplated by the definition under section 105 of the Transfer of Property Act, a price for the transfer of the right to enjoy the property, the enjoyment being in the form of extraction of clay. Recurring payment contemplated by section 105 is the royalty, agreed to be paid at the rate specified in the lease deed. Both the payments must, therefore, be treated as having been agreed to be made for independent considerations, one as consideration for the transfer of the right to enjoy the property and the other as royalty in respect of the clay extracted depending upon the quantity extracted. We have, therefore, no doubt that the transaction in question is a lease and the payment of Rs. five lakhs which is expressly described as premium or salami is consideration for a right to be enjoyed by the lessee. This right which was vested in the assessee-company has provided the company with advantage for a period of 10 years to extract clay. On the plain terms of the document including the right to sublease, it is clear that it provides for a transfer of interest in-the property which is the subject-matter of the lease.
23. Normally, this would have been enough to dispose of the contention as to whether the payment of Rs. five lakhs is in the nature of a capital expenditure or revenue expenditure. It has, however, been vehemently pressed upon us by learned counsel for the assessee that the facts of the instant case must be considered as similar to the facts in the decision of the Lahore High Court in Benarsidas Jagannath's case [1947] 15 ITR 185 and that the right to extract earth must not be equated with a right to dig minerals as in the case of a mining lease. It, therefore, becomes necessary to refer in some detail to the decision in Benarsidas Jagannath's case [1947] 15 ITR 185. The principle laid down in Benarsidas Jagannath's case [1947] 15 ITR 185 has undoubtedly been approved by the Supreme Court in Assam Bengal Cement Co. Ltd.'s case [1955] 27 ITR 34. But, we shall presently refer to the later decision of the Supreme Court in which the question as to what was decided in Assam Bengal Cement Co. Ltd.'s case , when the decision in Benarsidas Jagannath's case [1947] 15 ITR 185 (Lah) came to be approved, fell for consideration. In Benarsidas Jagannath's case [1947] 15 ITR 185, the assessee was a manufacturer of bricks. He had obtained certain land on lease for the purpose of digging out earth for the manufacture of bricks. Under the deed, he had the right to dig earth up to a depth of three to three and a half feet. As soon as the earth was dug out and removed, the lessee had no interest left in the land. The period of the lease varied from six months to three years. The income-tax authority and the Tribunal held that the consideration paid by the assessee to the owners of land was capital expenditure and was, therefore, not liable for deduction under section 10(2) (xii) of the Indian Income-tax Act, 1922. On a consideration of the agreements, however, the Full Bench of the Lahore High Court held that the main object of the agreements was the procuring of earth for manufacturing bricks and not the acquisition of an advantage of a permanent nature or of an enduring character and the payments made were the price of raw material and that the assessee was, therefore entitled to claim them as business expenditure under section 10(2) (xii) of the Indian Income-tax Act, 1922. It is this decision which, according to learned counsel, concludes the controversy in the present case.
24. Firstly, we must refer to the fact that the conclusion that the amounts in question were not capital expenditure was reached by the Full Bench of the Lahore High Court on a consideration of the salient features of those agreements in question. Those features which weighed with the learned judges in reaching the conclusion which they did are to be found at page 197 of the report. The relevant part of the judgment reads as follows :
"The agreements abovementioned clearly prescribe the limits not only to the extent of the length and breadth of the land but even the extent of its depth to which earth was to be excavated. These agreements did not convey the property in favour of the assessee. In effect and substance, they are for the purchase of earth with a privilege to enter upon the land for the purpose of digging and removing the earth. The arrangements evidenced by these transactions are transitory in character and the whole intention and purpose of these so-called leases was to procure raw material for the manufacture of bricks. Once the earth was dug and removed, the right created by these agreements in the assessee had automatically to come to an end. The arrangements evidenced by these documents can neither be given the status of leases nor of permanent grants. All that may be reasonably suggested is that they confer on the assessee temporary rights of easement, even if they are found to vest some very limited and insignificant interest in the land out of which earth had to be dug. But, no advantage of a permanent nature of an enduring character can be held to have been gained by them. In short, the transactions evidenced by these leases were for the sale of earth which had to be excavated with the labour employed by the so-called lessee and not by the labour employed by the so-called lessor.'"
25. Now, it is undoubtedly true that in Benarsidas Jagannath's case [1947] 15 ITR 185 (Lah), a transaction which on its face appeared to be a lease, was construed as vesting in the lessee temporary rights of easement and as amounting to purchase of raw material. The period of arrangement was obviously of considerable importance relating to the question as to whether the advantage of a permanent nature or of an enduring nature was acquired by the lessee or not. There are two reasons why we are not inclined to apply the ratio of this decision to the facts of the present case. Firstly, in the same decision, the learned judges have made it clear that if the transaction would have been of a different nature so as to confer an advantage of an enduring nature, then the expenditure would have been of the character of capital expenditure. At page 198 of the report, the learned judges have observed as follows :
"It may be presumed in a transaction of such a transitory nature that there was no intention of investing the money as capital of the concern. Had the transaction been of such a nature as would have conferred an advantage of an enduring nature on the trade and the payment was made once and for all to avoid recurring expenditure, it may have been possible to infer that the expenditure incurred was of a capital nature but when the expenditure incurred neither swells the capital nor improves it, but it only increases or decreases the profit or loss, it must be held to be a part of the profit and loss account of the business.
The observations would, therefore, indicate that, even according to the learned judges, the decision must be restricted to the facts of that case. The other distinguishing feature which appears on the agreement in question is that the first agreement in that case dated December 22, 1939, merely provided for lease money. The second agreement dated January 17,1940, provided for a payment of Rs. 570 "as consideration for the earth at the rate of Rs. 190 per bigha. If the digging exceede 3-1/2 feet, the owners were entitled to recover Rs. 200 per bigha as consideration for the earth so dug. There was, therefore, no payment in the nature of a premium and the terms themselves indicated that the amount agreed to be paid was really purchase price of the earth.
26. The second reason is that the effect of this decision of the Lahore High Court in Benarsidas Jagannath's case [1947] 15 ITR 185 was considered by the Supreme Court in Pingle Industries Ltd. v. CIT [1960] 40 ITR 67. In the majority judgment, it was pointed out that when the decision in Benarsidas Jagannath's case [1947] 15 ITR 185 (Lah) was approved in Assam Bengal Cement's case , the approval was only in respect of the principles laid down in the decision and not to the decision itself. The question before the Supreme Court in Pingle Industries' case [1960] 40 ITR 67, was in respect of a lease by which a right to extract stones from quarries was granted to the assessee on an annual payment of Rs. 28,000 for 12 years. In order to safeguard the payment, Rs. 96,000, representing a part of the annual payment of Rs. 8,000 per year, was paid in advance as security and the balance of Rs. 20,000 was payable each year in monthly instalments of Rs. 1,636-10-8. The assessee claimed deduction in two assessment years of Rs. 27,064 and Rs. 28,158 paid to the lessor in the relevant years as expenditure under section 12(2) (xv) of the Hyderabad Income-tax Act. These amounts were held as representing capital expenditure by the Income-tax Officer. The whole sum was paid in instalments. The Income-tax Appellate Tribunal, however, held that the payments were similar to the royalties and dead rent which were allowable as working expenses in the cases of mines and quarries. Relying upon the decision in Mohanlal Har govind v. CIT [1949] 17 ITR 473 (PC), the Tribunal held that the payments represented the purchase of the stock-in-trade of the assessee and that the leases did not create an asset of an enduring character. In the reference before the Hyderabad High Court (CIT v. Pingle Industries Ltd. [1954] 25 ITR 226 the question referred was "Whether the lease money paid by the assessee-company to Nawab Mehdi Jung Bahadur and to the Government is capital expenditure or revenue expenditure ?" The High Court held that the payments amounted to capital expenditure. When the matter was taken to the Supreme Court, the contention on behalf of the assessee was that the quolnama was a licence and not a lease, that it created no interest in the land and no premium was payable for the right but what was paid was periodic compensation corresponding to rent, and that the payments could only be regarded as periodic compensation or periodic royalty or licence fees and thus revenue in character. The further argument was that even if it was held to be a lump sum payment broken up into instalments, it was still allowable as expenditure because it represented the price for the acquisition of raw materials, viewed from the business angle. The decision of the Lahore High Court (Benarsidas Jagannath's case [1947] 15 ITR 185) was relied upon and the argument on behalf on the assessee was that as the decision was approved by the Supreme Court in Assam Bengal Cement Co. Ltd.'s case [1955] 27 ITR 34, the expenditure could not be held as on capital account. Repelling this contention, the majority judgment took the view that the approval given in Benarsidas Jagannath's case [1947] 15 ITR 185 (Lah) did not extend beyond the summary of the tests and the actual decision was not before the court and could not be said to have been approved. After referring to the material observations by the Full Bench of the Lahore High Court in which the Full Bench took the view that the expenses incurred in that case for the purchase of earth on the basis of agreements in that case were admissible deductions, the Supreme Court observed as follows (p. 87) :
"It appears that the Full Bench was persuaded to this view from two considerations. The first was that what was acquired was earth with no interest in land, and the other was the short-term of the leases.
The approval given to Benarsidas' case [1947] 15 ITR 185, by this court does not extend beyond the summary of the tests settled in it, and the tests have to be applied to the facts of each case in the manner indicated by this court. But the actual decision was not before this court, and cannot be said to have been approved. The agreements in the present case are long-term contracts. They give the right to extract stones in six villages without any limit by measurement or quantity. They give the right exclusively to quarry for a number of years. This case is thus very different on facts. Further, the duration of the right which seems to have weighed with the Full Bench in the Punjab High Court has little to do with the character of the expenditure even if it be a relevant factor to consider..."
27. Therefore, the Supreme Court has clearly taken the view that the decision on facts reached in Benarsidas' case [1947] 15 ITR 185 by the Full Bench of the Lahore High Court cannot be said to have been approved by that court and that only the principles laid down by the Full Bench were approved.
28. With regard to the tests laid down in Benarsidas Jagannath's case [1947] 15 ITR 185 (Lah) as approved in Assam Bengal Cement Co. Ltd.'s case , there cannot be any doubt, but the facts of the present case, in our view, are more akin to the facts of the case in Pingle Industries Ltd. .
29. We shall now refer to the decisions relied upon by learned counsel for the assessee, which in our view, are clearly distinguishable on facts. The decision in M. A. Jabhar v. CIT was a case in which the question related to a lease for a term of 11 months whereby the lessee had obtained exclusive lease and liberty to enter, occupy and use for quarrying purposes and to raise, to render marketable, carry away, sell and dispose of sand within or under or upon land constituting the beds of a river and certain nallahs specified in the lease. t was found as a fact that the contract was for removal of sand lying on the surface of the river beds, that all the sand that could be removed was lying on the surface and that no excavation or skilful extraction was to be performed on the land before obtaining it. On those facts, it was held that the right to remove the sand Iying loose on the land within the short period of 11 months to the extent to which the lessee could do so did not amount to acquisition of any fixed or capital asset of an enduring nature by obtaining the lease. It was held that the sums paid were expenditure of a revenue nature. It will be clear from the decision that the lease was merely a lease for removal of sand and specific mention is made of the fact that no excavation was necessary. This and the short period of 11 months were clearly distinguishing features in that case.
30. In Raj Singh Baldev Kishan v. CIT [1969] 72 ITR 735 (Punj), there was a lease for a period of 10 years for the purpose of extracting earth for the manufacture of bricks. The Income-tax Officer allowed only one-tenth of the lease amount as business expenditure. The Appellate Assistant Commissioner, however, disallowed the entire expenditure as being capital in nature and the Tribunal agreed with that view. On a reference, the High Court held that the entire expenditure in question was revenue in nature. It is necessary to notice that the payment in that case related to what was expressly referred to as lease money and did not refer to any payment in the nature of premium or as salami. On those facts, the Punjab and Haryana High Court followed the Full Bench decision in Benarsidas' case [1947] 15 ITR 185 (Lah). Reference was made to the decision of the Bombay High Court in CIT v. J. A. Trivedi Bros. [1979] 117 ITR 983. A bare reading of that decision will indicate that there is no similarity of facts with the present case. That was a case of a mining firm whose business consisted of mining manganese and coal. The question was whether the expenditure incurred on earth-cutting was revenue expenditure or capital expenditure. The decision was that it was revenue expenditure. In the light of the fact that the earth work was done not with a view to explore or to prove the mine or to reach the point where the ore could be reached, but that the digging was done by the assessee from the top consistent with the mining laws and that because the reef had been found to be broken, the quantity of ore was less in spite of considerable earth work, it was found that the cutting of the earth resorted to by the assessee had admittedly not resulted in bringing into being any permanent fixture or structure. The nature of the expenditure showed that it was incurred for the purposes of removal of the earth known technically as earth-cutting which was an intrinsic part of the process of mining and, therefore, it was held to be revenue expenditure. The decision, therefore, clearly turns on the peculiar facts of the case.
31. We may now refer to the decision of the Delhi High Court in CIT v. Shanker Dass Sethi & Sons [1986] 157 ITR 770. It is true that in that decision the learned judges of the Delhi High Court have taken the view that the facts of the case before them had resemblance to the facts in Benarsidas Jagannath's case [1947] 15 ITR 185 (Lah). The agreement of lease entered into by a building contractor who was also running a brick-kiln, enabled the assessee to excavate earth up to a total depth of 6 feet over a period of seven years. The assessee was entitled to make use of the land for erection of bhatta and temporary huts. All that he did was to dig earth up to six feet for the manufacture of bricks. He was allowed to put a tube well for his brick-kiln but to leave the same on the expiry of the lease. The assessee had no right or interest in the trees standing on the land. The assessee had paid a total sum of Rs. 44,822 and claimed deduction of one-seventh thereof for each of the assessment years 1967-68 and 1968-69 as revenue expenditure. The Tribunal allowed the deduction holding that it was lease money, but paid in advance in lump sum for obtaining the raw material. This decision of the Tribunal was affirmed taking the view that the payment of Rs. 44,822 was made in advance by the assessee to ensure regular supply of earth over a period of seven years and as the assessee had no right or interest in the land and was to deliver back possession on the expiry of the stipulated period, the expenditure incurred by the assessee was a revenue disbursement. It is obvious from a reading of the judgment that with regard to the observations of Hidayatullah J. in Pingle Industries Ltd.'s case in which it was observed that the approval given to Benarsidas Jagannath's case [1947] 15 ITR 185 (Lah) was only with regard to the tests settled in it, the learned judges of the Delhi High Court in Shanker Dass Sethi & Sons' case [1986] 157 ITR 770 construed those observations as having been made "to bring home the fact that the decision in each case must turn on its own facts". They then proceeded to observe thus (p. 776 of 157 ITR) :
"However, on a careful examination of the facts in Benarsidas Jagannath's case [1947] 15 ITR 185 (Lah) and those in the case on hand, I am of the view that there is a lot of resemblance between the two."
32. The Delhi High Court took the same view that the payment was made in order to ensure supply of raw material in order to produce bricks expeditiously and economically and then observed (p. 777) :
"All these factors, to my mind, are quite apposite and germane to the decision of the case on hand as the stipulations embodied in the transaction are by and large similar."
33. It, therefore, appears that the decision is based on the fact that on comparison, the facts of the case before the Delhi High Court were found to be similar to the case in Benarsidas Jagannath [1947] 15 ITR 185 (Lah). Even according to the learned judges of the Delhi High Court, each case has to be decided on its own facts and, on the view which we have taken on the document of lease, the ratio of the Delhi High Court cannot be invoked in the present case.
34. In fairness to the learned counsel for the Revenue, we must point out that he has brought to our notice two decisions of the Allahabad High Court and one decision of the Andhra Pradesh High Court which support the view which is canvassed on behalf of the Revenue. The decisions of the Allahabad High Court expressly dealt with the right to excavate clay.
35. The decision in Ford and Macdonald Ltd. v. CIT [1964] 54 ITR 133 (All) was a case in which the assessee, who carried on the business of manufacture and sale of bricks, took plots of land on lease, erected kilns extracted clay from the land and manufactured bricks and sold them. An amount described as lease money was paid by the assessee in lump sum at the time of the execution of the leases and another sum of money called "rent" was payable by the assessee year after year. The rights granted under the lease were to dig earth, to erect brick-kilns for manufacturing tiles and bricks, to set up engines for the manufacture of lime and surkhi, to build workshops, to construct roads and wells and to put up temporary structures for the residence of employees and workmen. There was a general right to use the land in any manner it liked including the right to cultivate the land or to sublet it. The lump sum payments were held to be of a capital nature. The annual payments also were held to be of a capital nature. On a reference, the Allahabad High Court held that as the main purpose of the lease was not merely to provide the lessee with earth which was the raw material for his manufacturing business but of providing him with an interest in land for setting up brick-kilns, engines, workshops and residences for carrying on his manufacturing business, the leases provided him with an asset of an enduring nature. There was a transfer of property in the real sense and not merely as incidental to the right of digging the earth and the amounts in question were, therefore, expenditure of a capital nature. We are not required to go into the question as to whether the recurring payments made annually could be properly held to be capital expenditure. But so far as lump sum payments are concerned, which were held to be consideration for transfer of the leasehold interest, in our view, the decision of the Allahabad High Court clearly supports the proposition canvassed by the Revenue.
36. In United Commercial Corporation v. CIT , the assessee, which was a firm carrying on the business of manufacturing bricks, had acquired a piece of land on lease for seven years for digging earth for manufacturing bricks. It incurred an expenditure of Rs. 13,205 in obtaining the lease. The assessee spent Rs. 1,729 for erecting a chimney for the brick-kiln. Both the items were sought to be claimed as revenue expenditure. The Tribunal rejected the claim. The Allahabad High Court held that by obtaining the lease, the assessee acquired an enduring benefit for the purpose of manufacturing bricks and the sum of Rs. 13,205 was rightly held to be capital expenditure.
37. Since the question as to whether a particular expenditure is capital or revenue has to be decided on the facts of each case, we do not see any point in elaborating the decisions which were cited before us. However, we may mention that learned counsel for the Revenue has cited before us some decisions in which mining or cinema leases were involved, but we do not think it necessary to consider those decisions in detail.
38. The decisions relied upon by him were Abdul Kayoom v. CIT , H. Dear & Co. (P) Ltd. v. CIT , Ramakrishna & Co. v. CIT [1973] 88 ITR 406 (Mad), CIT v. Project Automobiles [1984] 150 ITR 266 (Bom), Aditya Minerals (P) Ltd. v. CIT and CIT v. Project Automobiles [1987] 167 ITR 781 (MP).
39. In the view which we have taken, we do not find any infirmity in the conclusion reached by the Tribunal that the payment of Rs. 5 lakhs constituted capital expenditure.
40. In so far as the second part of the question is concerned, we are inclined to follow the decision in CIT v. Cinceita Private Ltd. [1982] 137 ITR 652 (Bom), in preference to the decision in Gobind Sugar Mills Ltd. v. CIT and Hotel Rajmahal v. CIT [1985] 152 ITR 218 (Kar).
41. In CIT v. Cinceita Private Ltd. [1982] 137 ITR 652, the Bombay High Court has taken the view that the expenditure incurred in connection with a lease in the form of payment of stamp duty, registration charges and professional fees paid to the solicitors would be allowable expenditure For the reasons given therein, we hold in the present case also that the amount of Rs. 30,274 was liable to be treated as deductible expenditure.
42. It is true that the Calcutta High Court in Gobind Sugar Mills Ltd. v. CIT [1979] 117 ITR 747, has taken the view that the legal charges incur red by the assessee in connection with the execution of a temporary lease for a period of 5 years was capital and not revenue expenditure. We, however, prefer to adopt the reasoning of the Bombay High Court and hold that irrespective of whether the incidental expenditure is incurred in connection with or is related to capital expenditure having regard to the nature of the expenditure, which is in connection with the document of lease, it must be treated as revenue expenditure.
43. Accordingly, the question referred is answered as follows :
In so far as the premium amount of Rs. 5 lakhs is concerned, the expenditure is capital expenditure. In so far as the amount of Rs. 30,274 is concerned, the expenditure was of a revenue character. The Revenue will get its costs. Counsel's fee Rs. 500.