Andhra Pradesh H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the amounts of Rs. 22,805, Rs. 20,712 and Rs. 20,713 are allowable as revenue expenditure for the asst. yrs. 1972-73, 1973-74 and 1974-75, respectively ?

Counsel Appeared

M. Suryanarayana Murthy, for the Revenue : Y. Ratnakar, for the Assessee

K. RAMASWAMY, J.:

This is a reference under s. 256(1) of the IT Act, 1961 (for short ” the Act”). The question referred to is as follows :” Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the amounts of Rs. 22,805, Rs. 20,712 and Rs. 20,713 are allowable as revenue expenditure for the asst. yrs. 1972-73, 1973-74 and 1974-75, respectively ? “

2. The facts are as follows : The assessee is a partnership firm carrying on business in ” napa” or cuddapah slabs. It took on lease quarries containing napa-slab deposits from the State Government for excavating the slabs. Its intention was to dress those slabs and sell them as a marketable commodity. The lease was for five years. Under the lease, the assessee had to pay for the above years the amounts referred to herein before. Sub-rule (2) of r. 14 of the Andhra Pradesh Minor Mineral Concession Rules, 1966, for short ” the Rules “, postulates that where quarries are sold by public auction, no seigniorage fees shall be collected in addition to the bid amount and the land assessment. In the auction of the lease-hold rights, the assessee became the highest bidder and became the lessee of the State Government during the relevant years The ITO held for the years 1972-73 and 1973-74 in the first instance that the lease amount paid to the Government is in the nature of revenue expenditure and, therefore, allowed deductions under s. 37(1) and computed the income accordingly. But, the CIT exercised his suo motu revisional power under s. 263 and by order dated February 2, 1974, held that it is capital expenditure and directed the ITO to revise the assessments accordingly. The assessments for the years 1972-73, 1973-74 and 1974-75 were taken up together and it was held that it was a capital expenditure. Therefore, the assessee is not entitled to the deductions. The appeal to the AAC became unsuccessful. But, on second appeal, the Tribunal, placing reliance on r. 14 of the, Rules, found that the payments were revenue expenditure and could not be said to be capital expenditure. The reasoning, in support of the conclusion, is that the bids were for annual payments even though the lease was for five years. The assessee had been paying yearly rental. It was not a source to obtain the raw materials in the sense of acquiring the source of raw materials. The payment was a yearly rental instead of a seigniorage fee akin to rent which is a revenue expenditure. Therefore, it could not be treated as capital expenditure. It may be relevant to note that the Tribunal recorded no definite finding on the question whether the napaslabs of the assessee were available on the surface as stock- in-trade. In one breath, it says that it is to be treated as stock-in-trade and in another breath, though it cannot be treated as stock-in-trade, it says thus : ” Even though the slabs may be easily available above the ground, some operations have to be performed on the land itself to obtain them. It cannot, therefore, be said that the payment was made for the purpose of obtaining this stock-in-trade. “

3. As stated, the question at the instance of the Revenue has been referred to this Court for its opinion.

4. Sri M. Suryanarayana Murthy, learned standing counsel for the Revenue, contended that under the Rules, the assessee is obliged to pay the amount in dispute for acquiring a capital profit-yielding source, namely, the mine. Unless the assessee expends further money on the operations to excavate or extract the napa or cuddapah-slabs, cut them into sizes and dress them as a marketable commodity, it cannot be treated as stockin-trade. Therefore, it is capital expenditure. In support thereof, he placed strong reliance on Pingle Industries Ltd. vs. CIT (1960) 40 ITR 67 (SC), Abdul Kayoom vs. CIT (1962) 44 ITR 689 (SC), R. B. Seth Moolchand Suganchand vs. CIT 1972 CTR (SC) 430 : (1972) 86 ITR 647 (SC) and Aditya Minerals (P.) Ltd. vs. CIT (1987) 167 ITR 774 (AP).

5. Sri Y. Ratnakar, learned counsel for the assessee, vehemently resisted the above contentions. He argued that the case on hand is one of stock-intrade. The activity to be conducted is not such which requires any revenue to be expended to excavate or extract the napa or cuddapah slabs from underneath. It was available on the surface. The lease was a yearly one. The payment is like a seigniorage fee or dead rent. Instead of making payment as seigniorage fee or dead rent, the assessee contracted, by becoming a bidder under r. 14, to pay annually the bid amount though the contract was for five years. Each year the bid amount was variable. There was no fixed amount. Therefore, it is revenue expenditure. When royalty was held to be revenue expenditure, as held by the Supreme Court in Gotan Lime Syndicate vs. CIT (1966) 59 ITR 718, the annual payment towards the bid amount would be in the nature of royalty. Therefore, it is revenue expenditure. Even otherwise, it is contended that when the assessee is obliged to pay in the nature of seigniorage fee the recurring amount, if the lease is taken under the normal rules, it is to be paid on each quantum of excavated or extracted napa or Cuddapah slabs in addition to the seigniorage fee. Instead, the assessee undertook to pay the amount in a lump sum. Therefore, the assessee surrogated the amount. It is, accordingly, a revenue outgoing entitled to the deduction under s. 37 (1) of the Act. In support thereof, he placed strong reliance on CIT vs. Madras Auto Service Ltd. (1983) 33 CTR (Mad) 106 : (1985) 156 ITR 740 (Mad), Jagat Bits Service vs. CIT (1950) 18 ITR 13 (All), M. A. Jabbar vs. CIT (1968) 68 ITR 493 (SC), Empire jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR I (SC) and the judgment of this Court dated July 13, 1983, in R.C. No. 79 of 1978. He further contended that when a tenant is entitled to the deduction under s. 30 of the Act towards premium paid to the landlord or when royalty is being deducted as a revenue expenditure under s. 37(1) of the Act, this Court could adopt an equitable construction to avoid hardship or injustice to the assessee. In support thereof, he placed strong reliance on Saroj Aggarwal vs. CIT (1983) 49 CTR (SC) 183 : (1985) 156 ITR 497 (SC), CIT vs. J. H. Gotla (1985) 48 CTR (SC) 46 : (1985) 156 ITR 323 (SC) and K. P. Varghese vs. ITO (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC).

6. The respective contentions give rise to the question whether the amount in question expended by the assessee to obtain the lease of the quarry to excavate or extract napa or cuddapah slabs is revenue expenditure or capital expenditure. Before adverting to the question, it is profitable to refer to the relevant provisions of the Mines and Minerals (Regulation and Development) Act, 1957 (Act 67 of 1957), for short ” the Mines Act “, to find the nature of the right acquired and the purpose of acquisition thereof. Sec. 3(e) of the Mines Act defines ” minor minerals ” as building stones, gravel, ordinary clay, ordinary sand “other than sand” used for prescribed purposes and any other mineral which the Central Government, by notification in the Official Gazette, declares to be a minor mineral. Sec. 3(c) of the Mines Act defines ” mining lease ” as a lease granted for the purpose of undertaking mining operations, and includes a sub-lease granted for such purpose. ” Mining operations “, as defined under s. 3(d) of the Mines Act, means any operations undertaken for the purpose of winning any mineral. Sec. 15(1) provides power to the State Government to make rules in respect of minor minerals And it reads thus : ” The State Government may, by notification in the Official Gazette, make rules for regulating the grant of quarry leases, mining leases or other mineral concessions in respect of minor minerals and for purposes connected therewith. “

7. In exercise thereof, rules have been framed. Rule 5 of the Rules provides that no person shall undertake quarrying of any minor mineral in any area, except under and in accordance with the terms and conditions of a quarry lease or a permit granted under these rules. It is admitted that napa or cuddapah slabs are minor minerals. It is r. 12 of the Rules under which the lease may be granted, subject to the provisions of sub-rule (?) thereof. Grant of lease may be (1) on application ; or (2) by calling for tenders; or (3) by holding a public auction. In the case of public auction, r. 13 provides the procedure. Notice thereof in Form ” A “, giving due publicity Shall be given. In Form “A”, Note to auction condition No. 1 provides thus: Bids shall be offered in terms of yearly rentals and not for the entire period. Yearly rentals shall be paid as per condition No. 8 thereof, i.e., the successful bidder ” shall deposit on the spot, 25per cent of the first year’s lease amount or bid amount. The remaining 75per cent of the first year’s lease amount would have to be deposited by the successful bidder before he is given possession of the quarry and prior to the execution of the lease deed. If the lease is granted for a period of more than one year, the second year’s lease amount shall be paid in advance in the last month of the first year’s lease, ” and the same procedure for the remaining years. He shall execute the lease in Form ” G “. Under cl. (4) of the lease deed, the period of lease is fixed and assured. Thus the bid is held once and the yearly lease amount is to be offered thereat and the lease amount shall be paid in the manner above prescribed. Rule 15 of the Rules provides thus: ” 15. (1) Quarry lease may be granted by the Deputy Director for a period of one year in respect of the minerals which can be extracted without much equipment or investment just like sand, urram, gravel, lime-shell and lime kankar, etc., and for a period of five years in respect of the minerals which required investment, equipment to develop the quarry, such as limestone, shale, granite, slate, marble, shahabad slabs, napa-slabs, bentonite, Fuller’s earth, etc. If the period exceeds the periods referred to above, prior approval of the Government shall be obtained. (2) If the Government are satisfied that for the proper and systematic development of the quarry, a period longer than 115 years is necessary and that the applicant or lessee is capable, financially and technically, of developing the quarry on a large scale, a quarry lease may be granted for a longer period not exceeding twice the fixed period ; such lease may, however, be renewed from time to time. ” (Emphasis supplied) Rule 10 prescribes payment of seigniorage fee or dead rent. For the purpose of this case, it is not necessary to discuss the same. At the relevant time, r. 14 was in operation which reads thus: ” Rent or bid amount instead of seigniorage fee: (1) when quarry lease is granted on an application, either the seigniorage fee specified in the Schedule to r. 10(1) or a final rent for the specified period shall be payable ; (2) when quarries are sold by public auction, no seigniorage fee shall be collected in addition to the bid amount and the land assessment. ” Sub-rules (iii) and (xiv) of r. 31 of the Rules are also relevant for the purpose of this case. They provide thus : ” (iii) The lessee shall pay annually the land assessment, if any, of the area under lease or permit; (xiv) if the lessee to whom a quarry lease is granted has duly observed all the conditions of his lease or permit and given ninety days previous notice in writing to the Deputy Director, requesting grant of the renewal of the lease, the Deputy Director shall grant renewals for not more than two times the period of quarry lease, subject to the following criteria, namely : First renewal : (a) systematic development of the quarry/quarries; (b) development of good communication facilities and their maintenance; (c) investment on transport (d) training of skilled labour and commitments on labour retention and inducement; (e) preliminary work and investment for establishment of a processing (dressing or upgrading) plant utilising the product from the quarry/quarries in question ; (f) establishment of market for the product either in raw form or in processed or semi-processed form. Second renewal : (a) establishment of processing plant, either individually or in joint partnership with others; (b) development of market in the country or abroad (effort in this direction is very important) ; (c) any long-term contract with established industries for supply of quarry product ; (d) setting up of an industry in the region, either individually or in partnership with others.”

8. The lease contains all the necessary covenants which the lessee has to abide by during the period of the lease. A reading of these provisions of the Mines Act, the rules and conditions of the lease clearly afford us the statutory operation of a minor mineral mining lease to develop quarry such as limestone, shale, granite, slate, marble, shahabad slabs, napa-slabs, bentonite, fuller’s earth, etc. The lease is a statutory one for a fixed period and required the lessee to make investment, to have equipment and skilled labour, to win over the minor minerals, to develop the quarry and he shall abide by the rules and conditions prescribed in the lease. Therefore, it is a statutory lease for a minimum period of five years and two more renewals subject to fulfilling all the conditions under r. 31. The bid is once in five years and the bid amount was offered in annual rentals. The lease amount is to be paid annually. The Tribunal also found as a fact that the lease was granted for five years. The question is, therefore, whether the amount expended by the assessee is towards revenue or capital expenditure. The dividing line between capital and revenue expenditure is always a baffling one. A plethora of precedents made intensive ploughing into the field of expenditure to demarcate the distinction between capital and revenue expenditure and Hidayatullah J. (as he then was) surveyed them in the context of Tandur slabs’ lease, obviating the need to take the plough once over. In Pingle Industries Ltd. vs. CIT (supra), Hidayatullah J., speaking for himself, and Kapur J. approved the dictum of Lord Clyde in Robert Addie & Sons Collieries Ltd. vs. IRC (1921) 8 TC 671 at 676, which reads thus (p. 84 of 40 ITR): ” Is it part of the company’s working expenses is it expenditure laid out as part of the process of profit- earning ?–or, on the other hand, is it a capital outlay ?-is it expenditure necessary for the acquisition of property or of rights of a permanent character, the possession of which is a condition of carrying on its trade at all ? “

9. It further approved the test laid down by Channell J. in Alianza Co. Ltd. vs. Bell (1904) 2 KB 666, 673, which was also approved by the House of Lords thus (p. 72 of 40 ITR): ” 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 lump sum down secures a supply of the raw material for a period extending over several years…. If it is merely a manufacturing business, then the procuring of the raw material would not be a capital expenditure. But if it is like the working of a particular mine or bed of brick earth, and converting the stuff worked into a marketable commodity, then the money paid for the prime cost of the stuff so dealt with is just as much capital as the money sunk in the machinery or buildings. “

10. In In re Benarsidas Jagannath (1947) 15 ITR 185 (Lah) (FB), Mahajan J. (as he then was) laid down three tests, as approved by Bhagwati J. in Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34 (SC). The same was approved in Pingle Industries Ltd.’s case (supra). In the Assam Bengal Cement Co.’s case (supra), the facts are that a mining lease for twenty years to extract limestone for manufacturing cement with a further right to renewal at variable rent for certain duration was obtained from the Government. The rent paid was held to be a capital expenditure. Bhagwati J. in Assam Bengal Cement Co.’s case (supra), approved the tests laid down by Mahajan J. for the Full Bench in In re Benarsidas Jagannath’s case (supra) at page 45, as follows : ” In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. 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 the income of the concern is certainly in the nature of capital expenditure. The question, however, arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. 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. If, on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce profits, it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence, it would be immaterial whether the source of the payment was capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business, it would be of the nature of capital expenditure and if it was part of its circulating capital, it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. ” While accepting the said propositions, it was held by Hidayatullah J. in Pingle Industries Ltd.’s case (supra) thus: “Here, the stones are not lying on the surface but are part of a quarry from which they have to be extracted methodically and skillfully before they can be dressed and sold. These deposits are extensive, and the work of the assessee carries him deep under the earth. Such a deposit cannot be described as the stock- in-trade of the assessee, but stones detached, and won can be so described.”

12. The facts in that case are that the assessee-company is a private limited company carrying on the business, inter alia, of sale of Shahabad stones (flag stones) which had to be extracted from quarries, dressed and then sold. For the purpose of its business, the assessee-company took on contract the right to excavate stones from quarries in six villages for a period of 12 years from a jagirdar on annual payment of Rs. 28,000. To safeguard the payment, a sum of Rs. 96,000 was paid in advance as security of which Rs. 8,000 was to be adjusted annually against Rs. 28,000 and the balance of Rs. 20,000 was payable in monthly instalments of Rs. 1,667-10-8. The assessee had only the right to excavate the stones from the quarries and undertook not to manufacture cement from the stones and the jagirdar undertook not to allow any other person to excavate the stones in those areas. The said amount was claimed as revenue expenditure under s. 12(2)(xv) of the Hyderabad IT Act. It was held that the amount was expended for excavating the Tandur slabs and, therefore, it was a capital expenditure. This principle was reiterated in Abdul Kayoom vs. CIT (supra). In that case, the assessee was found to have been carrying on business in the purchase and sale of conch (chank) shells and he had taken on lease from the Government the exclusive right, liberty and authority to fish and carry away all the chank shells in the sea off the coastline of a certain area specified in the lease for a period of three years on a consideration of a yearly rent of Rs. 6,111. It was held that the expenditure was capital in nature and the assessee was not entitled to any deduction.

13. In R. B. Seth Moolchand Suganchand vs. CIT (supra) the facts are that the assessee-firm paid a sum of Rs. 1,53,800 to acquire lease of certain areas of land bearing mica for a period of 20 years. Those areas had already been worked for 15 years by other lessees. The question was whether a proportionate part of the amount was allowable in the relevant year as business expenditure. It was held that it is capital expenditure. In M.A. Jabbar’s case (supra), the lease was to extract ” sand ” from the surface and the lease was for one year and no further investment was to be made. So it was held to be stock-in-trade. In all cases of mining leases where minerals are part of the land and have to be extracted and brought to the surface, the expenditure for acquiring the right on the land to win the minerals was held to be of a capital nature. But, where the mineral has already been got or is on the surface, the expenditure incurred for obtaining the right to acquire the raw material would be of a revenue expenditure laid out for the acquisition of stock-intrade. The case of Aditya Minerals (P.) Ltd. vs. CIT (supra), is also one where the assessee-company entered into an agreement of lease for excavation of manganese. Under the agreement, the assessee had to pay Rs. 35 by way of rent per month per acre. The rent per year accordingly worked out to Rs. 10,752. The assessee deposited with the lessor, the rent for 15 years aggregating to Rs. 1,61,280. In connection with the income-tax assessment, the assessee claimed as business expenditure the annual rental paid to the lessor, While negativing the claim as business expenditure, our learned brother, Anjaneyulu J., speaking for the Bench, had held that the expenditure was incurred for acquiring an asset or an advantage of an enduring character to the business of the assessee and must, therefore, be held to be capital in nature and hence was not allowable as a business expenditure. We, therefore, hold that the settled law is that in each case the question to be posed is whether the expenditure is laid out or expended as current expenditure as part of the process of profit-earning or whether it is necessary for the acquisition of a capital asset or of a right of a permanent character the possession of which is a condition of carrying on the trade. Such an expenditure could be broached from the angularity of what is the source from which the expenditure is incurred. If it is expended to acquire an asset or an enduring advantage to trade or a source from which the assessee would derive or draw raw material for conducting the business, it is a capital outlay and so is capital expenditure. On the other hand, if the expenditure is laid out or expended in running the business or in working it out for the purpose of producing profits in the conduct of business, it is revenue expenditure. Then, a distinction is to be drawn between the acquisition of an income-earning asset and the process of earning of the income. The expenditure for the acquisition of that asset is capital expenditure. The outgoing, if it relates to the carrying on or the conducting of the business, may be regarded as an integral part of the profit- earning process. It is, therefore, a revenue expenditure. The nature of payment of premium is not decisive but the purpose for which the expenditure is expended is crucial. 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. The expression ” enduring benefit ” or ” of a permanent character ” was introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as a capital asset. In the case of a mining lease where the premium is paid for acquiring the right to extract or excavate the mineral, the amount expended in that regard is for acquisition of an enduring advantage or a source to draw raw material for conducting the business. Therefore, it is a source of profit-earning enduring asset. The assessee expended the amount in question as premium to initiate its business for excavation to extract napa or cuddapah slabs (minor mineral) and obtained a lease for 5 years for exclusive right to, win over the minerals. It has an assured enduring period of leasehold right with two renewals on fulfilling the conditions prescribed in r. 31 of the Rules. The acquisition of the mining lease is an enduring advantage or a source for a profit-earning asset. Therefore, it is a capital expenditure.

The further contention of Sri Y. Ratnakar is that the expenditure incurred for winning over the mineral and bringing it to the surface would alone constitute capital expenditure and if the expenditure was incurred for removal of the mineral on the surface, it constitutes a revenue expenditure and, therefore, to that extent it is to be excluded. On the facts of this case, we are unable to agree with learned counsel whether any mineral is available on the surface so as to treat it as a revenue expenditure. No finding was recorded by the Tribunal in that regard. It is seen that a lease of minor mineral was granted for excavating and winning over the napa or cuddapah slabs. It is not as if they are available on the surface. Operations have to be carried out; equipment is to be installed ; skilled labourers are to be employed to excavate the mineral from underneath and bring it to the surface. As stated earlier, r. 15 of the Rules itself recognises the carrying on of these activities. Therefore, it goes without saying that there is no dichotomy in its operation and it is an integral process and so it constitutes capital expenditure. Had it been the case that the Tribunal has recorded a finding that the minerals are available on the surface itself, it would have made a world of difference and the principle in M.A. Jabbar vs. CIT (supra) would have squarely applied to the facts. But, that is not the position in this case.

It is true, as contended by Sri Y. Ratnakar, that as laid down in Jabbar’s case (supra), where without expending any further amount the material is to be taken out from the surface like sand, it is stock-in-trade. Therefore, it is revenue expenditure. It is also true that in an appropriate case, the commercial expediency is to be considered in deciding the question whether the amount expended is for the purpose of expanding the business or replacement of an existing asset or circulating capital in the course of the business or for the purposes of business. No single test is exhaustive, universal and conclusive in deciding the question whether the expenditure expended is of a revenue or a capital nature. Each case has to be considered in the light of its own peculiar facts. Even one peculiar circumstance available in a particular case may tilt the balance either way. As held in Abdul Kayoom’s case (supra),” one should avoid the temptation to decide cases (as said by Cordozo in The Nature of the judicial Process, p. 20) by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se and this is the only key to resolve the issue in the light of the general principle “. Even the mode of payment or contract to pay the consideration in a particular way, be it yearly or monthly, or of variable amount is of little consequence. The duration of the lease may be one of the factors to decide the enduring nature of the advantage.

In Jabbar’s case (supra), since the sand is available on the surface, their Lordships of the Supreme Court held that it is a stock-intrade and so a revenue expenditure. Jabbar’s dictum was distinguished in R.B. Seth Moolchand Suganchand’s case (supra) which applied the ratio of Pingle Industries Ltd.’s case (supra) and of Abdul Kayoom’s case (supra). Therefore, the ratio in Jabbar’s case (supra) is of little assistance to the assessee. The ratio in CIT vs. Madras Auto Service Ltd. (1985) 156 ITR 740 (Mad) is not applicable to the facts of this case. The facts therein are that the assessee entered into an agreement with the landlord to demolish the dilapidated building and in its place it undertook to construct a new building subject to the condition that the landlord could lease it out to the assessee for a period of 39 years and for 35 years the landlord contracted to take rent at Rs. 1,000 per month and for the last four years at Rs. 2,000 per month. Pursuant to that contract, it expended Rs. 1,62,835 on the construction in the asst. yr. 1968-69 and Rs. 50,937 in the asst. yr. 1969-70. It claimed it as a business loss and the Tribunal upheld the same and on a reference to the Division Bench, the learned judges have held that it is a business loss and the amount surrogated by the assessee would be treated as a business loss. In that case, if the facts are carefully analysed, it would be clear that the assessee intended to acquire an asset to carry on his business on payment of lesser rent. In that case, it was admittedly found that the prevailing rent was Rs. 12,000 odd per month for a similar accommodation. Therefore, with a view to ward off the recurring revenue expenditure of the business outgoing, the assessee entered into the aforesaid contract and an agreement with the landlord to construct a building by expending the amount. Thereby he incurred expenditure. It may not be a loss in business but a revenue expenditure. But, the Division Bench held it to be a business loss. It is not a source of income. This is the distinguishing feature in that case.

The mining lease is an immovable property transferring right under s. 105 of the Transfer of Property Act to enjoy the minor minerals, the exclusive property and right of the State, made for a specified time in consideration of the price paid to the State by the assessee. In Kanji and Moolji Brothers vs. T. Shunmugam Pillai, ILR 56 Mad 169, it was held by the Division Bench that the lease of immovable property is a right on land. In Secretary of State vs. Kuchwar Lime and Stone Co. Ltd. (1937-38) 65 IA 45 at 54; AIR 1938 PC 20, it was held that the right to lease is a right on land and it is compulsorily registrable under s. 17 of the Indian Registration Act. In Pingle Industries Ltd.’s case (supra) also, it was held that it is a right on land. Therefore, the assessee has acquired a right on land to extract minor minerals from that land for a specified period.

In Empire Jute Co. Ltd. vs. CIT (supra), the facts are that the assessee purchased loom hours for the purposes of expanding the business during its business operations to earn more profits. On that basis, it was held by Bhagwati J. (as he then was) that it was revenue expenditure. The ratio in Jagat Bus Service vs. CIT (supra) of the Allahabad  High Court appears to no longer hold the field in the teeth of the ratio in Pingle Industries Ltd.’s case (supra) and that of its successors. Under those circumstances, it is difficult to follow the ratio laid down therein. The judgment dated July. 13, 1983, of this Court in R.C. No. 79 of 1978 is also of little assistance to the assessee. In that case, the assessee claimed deduction for the spreading over of the lump sum amount paid towards rent to the landlord to acquire the leasehold rights of the cinema talkies and the Division Bench accepted and held that it is to be apportioned by spreading over the expenditure for the number of years of lease. We are not concerned in this case with such a situation. The doctrine of equitable construction does not arise on the facts of this case. We are not called upon to construe the language of any provisions of the Act. We are concerned merely in finding out whether the expenditure in dispute is a capital or revenue expenditure. In an appropriate case, if there is any inequity or hardship to the assessee, the appeal lies elsewhere. Under Art. 141 of the Constitution, this Court has to abide by the law laid down by the Supreme Court. Considered from this perspective, we express our inability to adopt the equitable construction for the advantage of the assessee. Accordingly, we hold that the amount expended during the relevant assessment years by the assessee is only a capital outlay for enduring advantage as profit earning source and not revenue expenditure.

[Citation : 171 ITR 193]