Case: Moolchand Suganchand Vs. Commissioner of Income Tax, Delhi

2. The assessee, a firm carrying on mining business at Udaipur with a branch at Mandal, had pursuant to an invitation to tender for mica mining in accordance with the terms and conditions prescribed in the Mineral Concession Rules, tendered for certain areas for Rs. 1,57,150/of which Rs. 3,360/was payable towards the mica scrap lying on the surface. The lease was for 20 years and the areas which were offered had been worked by other private companies for 15 years. This offer of the appellant was accepted and the lease was granted to it. In the relevant assessment year3 for which the previous year for the head office ended on October 30, 1951 and for the branch ended on March 30, 1952, the appellant claimed Rs. 7,857/being the 1/20th of the tender money as revenue expenditure incurred during that year. The claim of the assessee was rejected by thex Officer on the ground that the money was paid for the value of the land which it had acquired because the mine granted to the assessee had already been worked by the private companies. In an appeal against this order, the Appellate Assistant Commissioner confirmed the disallowance of the expenditure as in his view, it was of a capital nature expended for the acquisition of a capital asset. Against this order, an appeal was filed to the Appellant Tribunal. The Tribunal however allowed Rs. 3,360/paid for mica scrap lying on the surface as a revenue expenditure incurred in the acquisition of, but disallowed the claim for the balance of Rs. 1,53,800/which was paid under the tender as a capital expenditure3. The assessee had also claimed Rs. 3,200/as the fee paid by it at the rate of Re. 1/per acre per year for prospecting licence. Thex Officer disallowed this amount under S. 10 (2) (xv) of the Indianx Act, 1922 (hereinafter called the Act) on the ground that the licence was obtained by the assessee only that year, that the fee was paid in addition to the royalty payable on the value of the emeralds excavated and sold and that it was an initial expenditure for procuring a right to prospect mines. The Appellate Assistant Commissioner in an appeal by the assessee negatived the claim on the ground that under that licence the assessee had a right to win and commercially exploit the minerals which the assessee actually carried out. The Tribunal while dismissing the appeal filed against the order of the Appellate Assistant Commissioner observed that the prospecting licence fee cannot be equated to a payment made for the purchase of, that it was not based on any quantity of minerals, that the minerals had to be won and extracted from the earth and the term "prospecting licence" shows that the mine had not yet started working as a mine and that the payment was to initiate the business. It also held that the period of one year for which the licence was obtained cannot justify the fee paid as a revenue expenditure. The assessee thereafter filed application under S. 66 (1) of the Act and as in its opinion a question of law did arise, referred the following two questions to the High Court for its opinion:1. Whether on the facts and in the circumstances of the case, the prospecting licence fee of Rs. 3,200/is allowable as revenue expenditure?2. Whether on the facts and in the circumstances of the case, the appropriate part of Rs. 1,53,800/was allowable as revenue expenditure?

Court's reasoning:
The finding of the Tribunal given in the above excerpt is clear and consistent with that given by the9. In our view the principles which have been applied in the Pingle Industries case, 40 ITR 67   = (AIR 1960 SC 1034  ) are equally applicable to the facts and circumstances of this case.The test for ascertaining whether the amount spent is of a capital nature is, whether it was spent for obtaining a right of an enduring character which in the case of mining leases is to acquire rights over land for winning the mineral. In other words, where the mineral is part of the land and some mining operations have to be performed to extract it from the earth, the amount paid to acquire a right over or in the land to win that mineral is of an enduring character and hence a capital expenditure. In this case the mica pillars which have been exposed by the mining operation of other private companies had no doubt enhanced the value of the right which was leased to the appellant but nonetheless the appellant still had to carry out some mining operations to extract the mineral from the pillars which was embedded in the land. If the private companies before the mica was exposed had taken the lease, they would have paid a much lesser amount which nonetheless would have been a capital expenditure. It is the labour and expense which the private companies expended that has enured for the benefit of the Government and enhanced the capital value of the lease. This is not a case, as is contended, of mica having been gotten so as to form part of thee of the assessee as in the case of (1934) 18 Tax Cas 280.In that case the company had acquired rights in certain dumps of "tailings or residuals that remained after the extraction of gold from ore taken from certain gold mines.It was contended on behalf of the revenue that the companys rights in tailings and a dumps were part of the undertaking which the company was formed to acquire and any sum paid therefor was capital expenditure, and that the companys rights in the dump was the purchase of a wasting asset.This contention was negatived and it was held that the purchased price of the tailings was an admissible deduction in computing the companys profits for11. On the first question whether the prospecting licence fee of Rs. 3,200/is allowable as revenue expenditure, the contention on behalf of the assessee is that it is a licence fee, not a lease amount nor does it create an interest in the land.Thex Officer, the Appellate Assistant Commissioner and the Tribunal have all held that the fee paid for prospecting licence was not of a revenue nature.It was submitted before the Tribunal that under a prospecting licence issued under Chapter 3 of the Mineral Concession Rules, 1943 the licensee had a right to win and carry away the minerals for commercial purposes, and for that reason the amount should be treated as in the nature of a purchase price of a. In support of this contention the provisions of R. 23 were referred to but the Tribunal rejected that contention because in its view the amount was paid, as and by way of prospecting fees which was for initiation of a business as in the case of other minerals and that the character of the licence did not change merely because the licensee had certain rights over the minerals obtained under the prospecting licence nor was it based on any quantity of minerals. The minerals had to be won and extracted from earth and the term prospecting licence shows that the mine has not yet started working as a mine. It was a fee paid irrespective of the quantity of minerals obtained which demonstrated clearly that the object of the payment was to initiate the business. That apart, the period for which the licence was obtained viz., one year, does not also make it a revenue payment and consequently it held that the authorities rightly disallowed the amount. The finding by thex authorities as well as the Tribudnal that it was a payment for initiating the mining operations was a finding of fact. In our view also the fee was paid to obtain a licence to carry out, investigate, search and find the mineral with the object of conducting the business of extracting ore from the earth. It is therefore clear that the fee was paid for initiating the business and is of a capital nature. By no stretch of argument can the fee paid for a prospecting licence be equated to a payment made for the purposes ofe think that thex authorities, the Tribunal and the High Court are right in coming to that conclusion. Our answer to the first question is, therefore also in the negative.