Case: M/S. Gotan Lime Syndicate Vs. Commissioner Of Income-Tax, Delhi And Rajasthan

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 dead-rent. 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. Commr. of Inland Revenue, (1960) 39 Tax Cas 194 at p. 202, 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 land to the lessee- that is, the Appellant Company - from 5th November, 1957, for one year, paying therefor a royalty of 1s. 3d. per tonne for all coal recovered from the demised land and accepted by the coal sales department of the National Coal Board, or the sum of ? 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."11. He had no doubt in his mind that rent and royalty payments would be deductible as revenue expenditure. In (1960) 40 ITR 67 : (AIR 1960 SC 1034 ) the assessee had already been allowed payments of royalty as revenue expenditure and the only dispute was regarding lumpsum payment. In Ogdan v. Meaway Cinemas Ltd., (1934) 18 Tax Cas 691 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 dead-rent 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 (1962) 44 ITR 689 : (AIR 1962 SC 680 ) is distinguishable because payments there had no relation whatsoever to the amount of conchshells 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 fish, and the payment was not related to the chanks, which it might or might not have brought to the surface in this speculative business."12. The case of (1960) 40 ITR 67 : (AIR 1960 SC 1034 ) is distinguishable because on the facts it was a lumpsum payment in instalments for acquiring capital asset of enduring benefit to his trade.13. 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 Alianza Co. Ltd. v. Bell, (1904) 2 KB 666 "in the ordinary case, the cost of the material worked up in 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 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 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.14. 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 show that any part of the royalty must, in view of the circumstances of the case, be treated as premium and be referable to the acquisition of the mining lease.15. 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 be treated as revenue expenditure and the answer to the question referred to the High Court must be in favour of the assessee.16

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]14. 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 show that any part of the royalty must, in view of the circumstances of the case, be treated as premium and be referable to the acquisition of the mining lease.15. 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 be treated as revenue expenditure and the answer to the question referred to the High Court must be in favour of the assessee.We do not think there is any necessity to decide whether the assessee got a licence or a lease or profit 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 theand 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 at least 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 learnedIn our opinion, the test does not apply fully to this case because there is no payment once for all; it is a yearly payment ofand 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 installments, 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 orNo 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.