Case: Pingle Industries Ltd., Secunderabad Vs. Commissioner Of Income Tax, Hyderabad

The appellant 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 appellant took on contract the right to excavate stones from certain quarries in six villages in Tandur taluk for a period of twelve years under a Quolnama dated 9th Mehr, 1343 F from the then jagirdar of the taluk, named Nawab Mehdi Jung Bahadur. The contract provided that the jagirdar should be paid annually a sum of Rs. 28,000 as consideration for extracting the stones till the end of the contract period, as per a plan prepared, within the six villages specified therein. The appellant had no right or interest in the land; nor did he have any other interest in the quarries apart from excavating stones therefrom. The contract specifically provided that the appellant, called the contractor, had no right to manufacture cement from the stones; he had only the right to excavate stones from the quarries till the end of the contract period. I may here quote some of the relevant provisions of the Quolnama as to how the annual consideration of Rs. 28,000 was to be paid. It saidThe period of contract for excavating stones from the quarries of the villages noted above is for 12 years from 1st Ardibehisht 1346 F. to the end of the Farwardi, 1358 Fasli and the contractor will be give possession from 1st Ardibehist 1346 Fasli.2. The annual contract amount would be Rs. 28,000.3. For the surety of the contract the sum of Rs. 96,000 O. S. has been received and deposited in the treasury of the Jagir towards the advance and earnest money and the security, a receipt for the same has been issued separately.4. The remaining annual balance sum of Rs. 20,000 may be deposited in the Jagir Treasury by instalment every month of Rs. 1,667-10-8; if there be any default in paying the instalment regularly, interest at the rate of one rupee per cent per mensem will be charged to the Contractor till full payment".There was another lease or contract taken from Government for a period of five years for which the appellant was required to pay Rs. 9,000 per year in monthly instalments of Rs. 750. That was also in respect of stone quarries. The terms of the said contract with Government have not been printed in the paper book, presumably because they were similar in nature to those of the Quolnama referred to above. The Income-tax Appellate Tribunal found, and there is no dispute as to this, that under the aforesaid two contracts the appellant had merely the right to extract Shahabad stones. The Tribunal saidstones of required thickness are found in leaves in those mines or quarries. Before one gets these flag stones of the required thickness, one has also to extract flag stones of greater thickness. The assessee sells these flag stones both of the usual thickness and thickness greater than usual one, after working on them, ifwas no finding as to how deep the quarrying had to be done to extract the stones of required thickness.According to the appellants books of account, it paid each year of account Rs. 37,000 as lease or contract money to extract the stones under the two contracts and it claimed an allowance in respect thereof under S. 12 (2) (xv) of the Hyderabd Income-tax Act, corresponding to S. 10 (2) (xv) of the Indian Income-tax Act, 1922. The Tribunal stated that the Income-tax Officer was under some misapprehension or error while examining, the appellants books of account, and held for the assessment year 1357F that the expenditure of Rs. 27,054 as lease or contract money was capital expenditure in respect of which the appellant was not entitled to claim any allowance under the relevant provision of the Hyderabad Income-tax Act. For the assessment year 1358F he similarly held that the sum of Rs. 28,158 was capital expenditure and not revenue expenditure. There were two appeals to the Appellate Assistant Commissioner who also held that the expenditure was capital expenditure. Then, there was an appeal to the Income-tax Appellate Tribunal, Bombay. The Accountant member of the Tribunal held that the payments in question stood on the same footing as royalties and dead rent which are allowable as working expenses in cases of mines and quarries. The President of the Tribunal expressed his finding thusthe present case, the assessee purchased his stock-in-trade. Instead of paying so much for so many cubic feet, he pays a lump sum every year. Parties might as well agree that the so called lessee shall pay a sum of money bearing a proportion to the sales or quantum of material extracted or a lump sum for the purpose of convenience. Because these quarry leases are called leases, the assessee does not get an asset of an enduring benefit. In fact, I find that the leases are renewed from time to time. The lease money is, therefore, in my opinion, not capital expenditure but revenue expenditure and should be allowed in computing the assessees income from thethe result, the Tribunal allowed the claim of the appellant that the payment of the two sums of Rs. 27,054 and Rs. 28,158 for the assessment years 1357F and 1358F respectively was in its true nature a revenue expenditure rather than capital expenditure. On being satisfied that a question of law arose out of its order, the Tribunal stated the following question for the decision of the High Court:"Whether the lease money paid by the assessee company to Nawab Mehdi Jung Bahadur and to Government is capital expenditure or revenue expenditure?" The High Court answered the question against the appellant. Hence the present appeal.

Court's reasoning:
6. This distinction between capital and revenue, either on the receipt or expenditure side, is almost a perennial problem in Income-tax law. In general the distinction is well-recognised and is based on certain principles which are easy of application in some cases; but from time to time cases arise which make the distinction difficult of application. A large number of decisions were cited before us, but no infallible criterion of universal application emerges therefrom and each case must turn on its own facts, though the decisions are useful as illustrations and as affording indication of the kind of considerations which may relevantly be borne in mind in approaching the problem. I shall refer in this judgment to such decision only as have a bearing on the real controversy between the parties.It is, I think, an accepted position now that the expression "capital expenditure" must normally be construed in a business sense and emphasis should be placed upon the business aspect of the transaction rather than on the purely legal and technical aspect. It is not, therefore, necessary to determine whether the Quolnama in the present case was in law a lease, or a license, or a license coupled with a grant. What we have to consider is the nature of the transaction from the business point of view, and it seems to me that having regard to the terms of the Quolnama, the transaction in its true nature and quality was a sale of raw materials coupled with a license to the appellant to come on the land and remove the materials sold; the purchase price was to be paid partly in a lump sum and partly in monthly instalments. If that is the true nature of the transaction, there is no difficulty in answering the question rasied. The only answer then is that the payments in question were revenue expenditure.In the result and for the reasons given above, I hold that the expenditure in question was on revenue account and the appellant was entitled to the allowance he claimed. The answer given by the High Court was wrong and the appeal should be allowed with costs.