M/S. Gotan Lime Syndicate Vs.
Commissioner of Income-Tax, Delhi and Rajasthan  INSC 247 (15 November
15/11/1965 SIKRI, S.M.
CITATION: 1966 AIR 1564 1966 SCR (2) 596
CITATOR INFO :
R 1968 SC 745 (4) E 1973 SC2326 (9) E 1991 SC
Income-tax--Royalty paid for mining
lease-Capital or Revenue expenditure--Tests.
The appellant was a registered firm carrying
on the business of manufacturing lime from lime-stone. By an indenture dated March
4, 1949, it was granted by the Government of Rajasthan the right to excavate
limestone in a certain area, subject to certain conditions. The lease expired
on July 14, 1952. The lease was extended from time to time by the Government
for short periods. While working out a new scheme for leasing out lime-stone
quarries the Government sanctioned the leasing out of 15 sq. miles of lime
deposits to the appellant. Till the new lease was given effect to the appellant
agreed to pay Rs. 96,000 per year to the Government as royalty. For each of the
assessment years 1954-55, 1955-56 and 1956-57 the assessee paid a sum of Rs. 96,000
to the Government and claimed it as a deduction against its profits for those
years. The Income-tax Officer disallowed this expenditure as being of a capital
On reference the High Court also upheld that
In appeal to the Supreme Court it was
contended on behalf of the appellant that under the Rajasthan Mineral
Concession Rules and the arrangement with the Government the appellant did not
get exclusive possession of the mines as such; what he got was a right to get
lime for manufacturing and the payment had direct relation to the amount of
lime removed by the appellant.
HELD : Under the, arrangement read with, the
Rajasthan Mineral Concession Rules, 1955. the assessee was certainly entitled
to upon the land and had some rights to build premises for the purpose of
mining, the lime. But it was also clear that the assessee could not carry away
any other mineral which might be found on the mine and further he was obliged
to allow other lessees of other minerals to go on the land and win their
minerals. [603 B-D] The, royalty payment by the assessee in the present case
was not a direct payment for securing an enduring advantage; it had relation to
the raw material to be obtained. No material had been placed on the record to
show that any part of the royalty must in view of the circumstances,of the case
be treated as permium and be preferable to the acquisition of the mining lease.
[605 E-G] The yearly payment of Rs. 96,000 must therefore be treated as revenue
expenditure. [605 H] H. R. Rorke Ltd. v. Commissioner of Inland Revenue, 39
T.C. 194, Ogden v. Medway Cinemas Ltd., 18 T.C. 691 and Allenza Company v.
Bell,  L.R. 2 K.B. 666, relied on.
Abdul Kayoom v. Commissioner of Income-tax,
44 I.T.R. 689 and Pingle Industries Ltd. v. Commissioner of Income-tax, 40
I.T.R. 67, distinguished.
597 Assam Bengal Cement Co. Ltd. v.
Commissioner of Income-tax, 27 I.T.R. 34 and British Insulated and Helsby
Cables Ltd. v. Atherton, 10 T.C. 155, referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeals
Nos. 692 to 694 of 1964.
Appeal from the judgment and order dated
October 9, 1963 of the Rajasthan High Court in D. B. Civil Income-tax Reference
No. 73 of 1961.
N. A. Palkhivala, T. A. Ramachandran and J.
B. Dadachanji for the appellant.
C. K. Daphtary, Attorney-General, S. T.
Ganapathy Iyer, R. N. Sachthey and B. R. G.
K. A char, for the respondent.
A. V. Viswanatha Sastri, J. B. Dadachanji,
for interveners Nos. 1 and 2.
M. M. Tiwari, .S. S. Khanduja and Ganpat Rai,
for Intervener No. 3.
The Judgment of the Court was delivered by
Sikri, J. These three appeals are directed against the judgment of the
Rajasthan High Court in a consolidated reference made to it by the Income Tax
Appellate Tribunal, Bombay Branch, under S. 66(1) of the Indian Income Tax Act,
1922 (hereinafter referred to as the Act). The question referred to by the
Appellate Tribunal is as follows "whether on the facts and in the
circumstances of the case. the sum of Rs. 96,000 paid by the assessee during
each of the relevant accounting,, years was rightly allowed as a revenue
deduction in computing the business profits of the assessee company." The
reference arose out of the following facts : The appellant, M/s Gotan Lime
Syndicate, hereinafter referred to as the assessee, is a registered firm and
carries on the business of manufacturing lime from lime-stone. By an indenture
dated March 4, 1949, the assessee was granted the right to excavate lime-stone
in certain area at Gotan and Tunkaliyan, subject to certain conditions. It is
not necessary to detail the conditions contained in this indenture except that
the lease expired on July 14, 1952.
The lease was extended from time to time by
the Government Sup. CI/66-8 598 for short periods. The last letter dated
December 17, 1952, extending the lease was in the following terms :
"In continuation to this office letter
cited above, Government have been-pleased to convey extension up to the 31st
March, 1953, or till the finalisation of the proposals for leasing out the area
whichever may be shorter, with the clear understanding that you will have to
vacate the area, when you may be asked to do so, and will have no claim whatsoever
over the area after it" By letter dated December 1, 1953, the Government
intimated to. the Director of Mines and Geology, Rajasthan, Udaipur, that the
Government had adopted a new policy for leasing out lime-stone quarries. The
proposal Was to divide the limestone quarries in Jodhpur Division in blocks of
5 sq. miles each and the dead rent was to be charged at Rs. 10/per acre while
royalty was to be charged at Re. -/1/per md. of lime-stone. It was further
contemplated that the period of lease will be for five years with option to
renewal for another five years, and the minimum area to be granted to each
party would be 10 sq. miles and maximum 30 sq. miles and the other terms and
conditions would be generally the same as were in practice in such cases. But
as it was necessary to give legal form to these proposals, the Director of
Mines and Geology was directed to frame rules on the lines of the Mineral
Concession Rules. It appears that on October 4, 1954, the Government sanctioned
the leasing out of 15 sq. miles of lime deposits to the assessee. The
Government in this letter further stated as follows :
"2. As regards the payment of arrears by
M/s Gotan Lime Syndicate for the period between 30-7-52, and the date the new
lease is given effect to, it has been decided that they may pay @ Rs.
96,000/(Rupees Ninety six thousand) per year which has also been agreed to by
them before the Chief Minister (Industries) on the basis of dead rent under the
new proposals for 15 sq. miles at Rs. 10/per acre.
3. Lease agreement may be got executed by
them at an early date and the arrears recovered.
4. The new rules may be incorporated in the
Mines Mineral Concession Rules for Rajasthan." It further appears that the
assessee never executed any lease but continued,to work the lime deposits and
the payments to be 599 made were finalised by letter dated November 30, 1959
from the Mining Engineer, Jodhpur, to the assesee. The Mining Engineer stated
in this letter as follows :
"On checking the figures of export of lime
stone, limekali and lime kachra for the settlement of royalty, the figures of
royalty amount payable in the following years is as under : From 1st April Year
Export figures Amount, to 31st March Rs. as. p.
1953-54 13511 tons30,553 10 6 1954-55 13308
tons27,965 11 6 1955-56 18033 tons37,3321 9 0 1956-57 18382 tons 37,740 0 6
1957-58 614946 mds 49,162 14 6 1958-59 604498 mds 43,673 15 0 At the end of
each financial year the accrued royalty amount is far less actually and as such
as per agreement royalty payable is Rs. 96,000/in all the years above written.
The royalty for each of these years was
settled -after the end of each year i.e. in the subsequent year." At this
stage it would be convenient to mention the terms on which the assessee
remained in possession. It is common ground that these terms are contained in
the Jodhpur Division Vindhyan Lime-stone Mining Leases Rules, 1954, and the
Rajasthan Minor Mineral Concession Rules, 1955. These rules were made in
exercise of the powers conferred by r. 4 of the Central Mineral Concession
Rules, 1949. In the Jodhpur Division Vindhyan Lime-stone Mining Leases Rules,
1954, "Mining' lease" was defined to mean "a lease to mine,
quarry, bore, dig, search for, win, work and carry away lime-stone". Under
these rules the assessee had to make an application for a mining lease in
response to a Notification issued by Director of Mines and Geology, Rajasthan,
inviting applications in respect of a lime-stonedeposit. Rules 13 provided that
the lease shall be in respect of plots comprising of 5 sq. miles each. The
applicant had to deposit security equal to one-fourth of the annual dead rent
of the lease in cash or Government bonds, for due observance of the terms and
conditions of the lease. The lessee was entitled to transfer his lease or any
right, title or interest therein, to a person holding a certificate of approval
on payment of a fee, subject to the previous sanction of the Director of Mines
and Geology, and subject to some other conditions. Rule 18 prescribed a period
of 6 00 fiveyears for a lease and the lease was renewable at the option -of the
assesseefor a further period of five years.
Rule 19 prescribed the conditions which had
to be inserted in the lease. The following conditions are relevant (1)the lessee
shall not encroach upon cultivable land or Bapi holdings, within, the leased
area, unless otherwise after ,obtaining permission of Director of Mines and
(2)the lessee shall perform a minimum
development work as instructed from time to time by the Director of Mines and
Geology, whose instructions in this respect and in maintaining standards of
lime products, and arranging an adequate supply of the same in the market at
reasonable price shall be binding upon the.' lessee;.
(3)On expiry or sooner determination of lease
the lessee -shall remove all stock of limestone or its products and movable
property within six months from the date of expiry of the, lease and shall pay
the royalty on the stock within this period. There was a proviso to this condition
to the effect that the Rajasthan Government would be free to lease out the
deposits afresh to any person on expiry of the tenure of the lease, and the
lessee shall hand over the quarry to the new lessee in a workable condition.
Rule 31 of the Rajasthan Minor Mineral
Concession Rules, 1955, prescribed inter alia the following conditions (i) The
lessee shall pay the royalty on minerals despatched from, the leased area at
the rate specified in the First Schedule to these rules.
(ii)The lessee shall pay for the surface area
used by him for the purpose of mining, surface rent at such rate 'not exceeding
the land -revenue as may be specified by the Government in such case.
(iii) The lessee shall also pay, for every
year, such yearly dead-rent within the -limits specified in the Second Schedule
to these rules as may be. fixed, by the Director in each case, and if the lease
permits. the working of more than one mineral in the same area the Government
may charge separate deed-rent in respect of each mineral.
(iv)The lessee shall keep correct accounts
showing the, quantity and particulars of all minerals obtained from the mines,
(v)The lessee shall allow existing and future
licensees or lease-holders of any land'-which is comprised in or adjoins or 601
is reached by the land held by the lessee, reasonable facilities for access
(vi) The lessee may erect on the area granted
to him any building required for bona fide purposes and such buildings shall be
the property of the Government after expiry of the lease.
(Vii) The lessee if he discovers any new
mineral was entitled to apply for a mining lease in respect of the newly
(viii) The Government shall the have right of
preemption at current market rates over all minerals demised by the lease and
shall be indemnified by the lessee against claims of any third party in respect
of such minerals.
(ix) In case of any breach on the part of the
lessee, of any covenant or condition contained in the lease other than a
condition regarding rent or royalty, the Government may determine the lease and
take possession of the said premises, or in the alternative, may impose payment
of a penalty not exceeding twice the amount of the annual dead-rent from the
(x) At the end or sooner determination of the
lease the lessee shall deliver up the said premises and all mines, if any, dug
therein in a proper and workable state, save in respect of any working as to
which the Government might have sanctioned abandonment.
For each of the assessment years 1954-55,
1955-56 and 1956-57, the assessee paid a sum of Rs. 96,000/to Government and
claimed it as a revenue deduction against its profits for those years. The
Income Tax Officer disallowed this expenditure, as being of a capital nature.
The Appellate Assistant Commissioner upheld his view, but on appeal, the
Appellate Tribunal held that the payment should be treated as a revenue
expenditure. The High Court held on a reference that the payment was capital
expenditure and could not be allowed as a revenue deduction in computing the
business profit of the assessee.
These appeals raise the difficult question of
distinguishing between revenue expenditure and capital expenditure. The learned
counsel for the assessee, Mr. N. A. Palkhiwala, and the leaned counsel for the
Revenue, the Attorney General both cited a number of cases before us but we
agree with Hidayatullah J.'s observations in Abdul Kayoom v. Commissioner of
Income Tax(1) that "none of the tests (laid down in various Authorities)
(1) 44 I.T.R. 689.
602 is exhaustive or universal. Each case
must depend on its own facts, and a close similarity between one case and
another is not enough , because even a single significant detail may alter the
entire aspect. In deciding such cases, one should avoid the temptation to
decide cases...... by matching the colour of one case against the colour of
another." Therefore, we do not propose to review all the cases cited
before us, especially as this Court has, after reviewing the relevant cases, formulated
certain tests in Assam Bengal Cement Co. Ltd. v. Commissioner of Income Tax(1).
The cases were reviewed again in Pingle Industries Ltd. v. Commissioner of
Income-tax, Hyderabad (2) , and Abdul Kayoom v. Commissioner of Income Tax (3).
In this case, in view of the-arguments of the
respondent and the judgment of the High Court, we have to concentrate on the
following test laid down by Viscount Cave in British Insulated and Helsby
Cables Ltd. v. Atherton (4):
"But when an expenditure is made, not
only once and for all, but with a view to bringing into existence an asset or
an advantage for the enduring benefit of a trade, I think that there is very
good reason (in the absence of special circumstances leading to an opposite
conclusion) for treating such an expenditure as properly attributable not to
revenue but to capital." The learned Attorney-General, relying on this
test, urges that what the assesses got by entering into the mining lease was an
asset or advantage of an enduring nature; that this asset or advantage was an
interest in land for not only has the assessee the right to go upon the land
and excavate but also has the right to use part of the area as premises, and it
was by virtue of this that the assessee eventually got raw-material for his manufacturing
Mr. Palkhiwala, the learned counsel for the
assessee, on the Other hand, contends that under the Rajasthan Minor Mineral
Concession Rules and the arrangement between the assessee and the Government,
the assessee did not get exclusive possession of the mines as such; what he got
was a right to get lime for manufacturing and the payment had direct relation
to the amount of lime removed by the assessee. He says that the cases decided
in this Court (Pingle Industries Ltd. v. Commissioner of Income (1) 27 1. T. R.
34. (2) 40 I. T. R. 67.
(3) 44 I. T. R. 689. (4) 10 T. C. 155 at p.
603 Tax Hyderabad(1), and Abdul Kayoom v.
Commissioner of Income Tax ( 2 ) were distinguishable. He further urges that in
no case has royalty payment been treated as capital expenditure, and as a
matter of fact, in Pingle Industries Ltd. v. Commissioner of Income Tax(1) it
was a lumpsum payment that was under dispute and not the royalty payable under
We do not think there is any necessity to
decide whether the assessee got a licence or a lease or profits a prendre.
Under the arrangement, read with the
Rajasthan Minor Mineral Concession Rules, 1955, the assessee was certainly
entitled to go upon the land, win the raw-material and had some rights to build
premises for the purpose of winning the lime. But it is also clear that the
assessee could not carry away any other mineral which might be found in the
mine, and further he was obliged to allow other lessees of other minerals to go
on the land and win their minerals.
Thus there is no doubt that the assessee did
derive an advantage by having entered into this arrangement. We will assume for
the sake of this case that this advantage was to last atleast for a period of
five years. The question then arises whether the circumstances of this case
fall within the test laid down by Viscount Cave and relied on strongly by the
learned Attorney-General. In our opinion, the test does not apply fully to this
case because there is no payment once for all; it is a yearly payment of
deadrent and royalty. It is true that if a capital sum is arrived at and
payment is made every year by chalking out the capital amount in various
instalments, the payment does not lose its character as a capital payment if
the sum determined was capital in nature. But it is an important fact in this
case that it is a case of an annual payment of royalty or deadrent. No lumpsum
payment was ever settled or paid. We have not been referred to any case in
which payments of royalty under a mining lease have been treated as capital
expenditure. In H. R. Rorke Ltd. v. Commissioner of Inland Revenue(3) Cross,
J., while dealing with a similar question observed as follows :
"The case then proceeds to set out the
leases in question, which were substantially in the same form. The first was an
agreement made on 16th December, 1957, between a Mr.
Parker, the lessor, and the Company. Clause 1
provided that the lessor, being the owner of the land in question (four acres
and five perches of agricultural land in Yorkshire) should let the (1) 40 I. T.
R. 67 (3) 39 T. C. 194 at 202 (2) 44 I. T. R. 689.
604 land,to the lessee-that is, the Appellant
Company from 5th November, 1957, for one year, paying therefor a royalty of Is.
3d. per ton for all coal recovered from the demised land and accepted by the
coal sales department of the National Coal Board or, the sum of pound 312 10s.
whichever was the greater, such payment to be made by calendar monthly
instalments. There is, of course, no doubt that those rents or royalty payments
would be allowable as deductions on revenue account." He had no doubt in
his mind that rent and royalty payments, would be deductible as revenue
expenditure. In Pingle Industries Ltd. v. Commissioner of Income Tax(1) the
assessee had already been allowed payments of royalty as revenue expenditure
and the only dispute was regarding lumpsum payment. In; Ogden v. Medway
Cinemas, Ltd.(2) an annual payment in respect of the goodwill of the business
was held to be an admissible deduction on the ground that "this is a
revenue payment for the use during a certain period of certain valuable things
and rights." The reason why royalty has to be allowed as revenue
expenditure must be the relation which the royalty has to the raw-material which
is going to be excavated or extracted. The more you take the more royalty you
pay, and the minimum payment or the deadrent also has the same characteristic,
i.e., it is an advance payment in respect of certain amount of raw-material to
be excavated. We find that it is on this ground that the case strongly relied
on by the learned Attorney-General Abdul Kayoom v. Commissioner of Income
Tax(3) is distinguishable because payments there had no relation whatsoever to
the amount of conch shells taken. As observed by Hidayatullah, J., in obtaining
the lease, the respondent obtained a speculative right to fish for chanks which
it hoped to obtain and which might be in large quantities or small, according
to its luck The respondent changed the nature of its business to fishing for
chanks instead of buying them." Hidayatullah, J., then put the case in a
nutshell as follows "That amount was paid to obtain an enduring asset in
the shape of an exclusive right to Ash, and the payment was not related to the
chanks, which it might or might not have brought to the surface in this
(1) 40 I. T. R. 67.
(3) 44 I. T. R. 689.
(2) 18 T. C. 691 605 The case of Pingle
Industries Ltd. v. Commissioner of Income Tax(1) is distinguishable because on
the facts it was a lumpsum payment in instalments for acquiring capital asset
of enduring benefit to his trade.
It is not the law that in every case, if an
enduring advantage is obtained the expenditure for securing it must be treated
as capital expenditure, for as pointed out by Channell, J., in Allanza Company
v. Bell(2) "in the ordinary case, the cost of the material worked up in a
manufactory is not a capital expenditure; it is a current expenditure, and does
not become a capital expenditure merely because the material is provided by
something like a forward contract, under which a person for the payment of a
lumpsum down secures a supply of the raw material for a period extending over
several years." This illustration shows that it is not in every case that
an expenditure in respect of an advantage of an enduring nature is capital
expenditure. The reason underlying the illustration is that the payments made
to enter into a forward contract have relation to the raw material eventually
to be obtained. Viscount Cave acknowledged that in certain cases an expenditure
for obtaining an enduring advantage need not be capital expenditure for he
inserted the words "in the absence of special circumstances leading to an
opposite conclusion" within brackets.
We are of the opinion that in the present
case the royalty payment is not a direct payment for securing an enduring
advantage; it has relation to the raw material to be obtained. Ordinarily, a
mining lease provides for a capital sum payment; but the fact that there is no
lumpsum payment here cannot by itself lead to the conclusion that yearly
payments to be made under the mining lease have relation to the acquisition of
the advantage. No material has been placed on the record to how that. any part
Of the royalty must, in view of the circumstances of the case, be treated as
premium and be preferable to the acquisition of the mining lease.
Therefore, on the facts of this case we must
hold that the royalty payment, including the dead-rent, have relation only to
the lime deposits to be got. If it has no direct relation to the acquisition of
the asset, then the principle relied on by the learned Attorney-General does
not afford him any assistance. We, therefore, hold that the yearly payment of
Rs. 96,000/should (1) 40 I. T. R. 67.
(2) (1904) L. R. 2 K. B. 666 at p. 673.
606 be treated as revenue expenditure and the
answer to the question referred to the High Court must be in favour of the
In the result the appeals are accepted and
the question referred to the High Court answered in the affirmative. The
appellant will have his costs incurred in this Court, one set of hearing fee.