P.V. Rajamannar, C.J.
1. The question referred to us by the Income-tax Appellate Tribunal for our decision, on the application of the Commissioner of Income-tax, Madras, is as follows:
Whether the total sum of Rs. 4,090 paid by the respondents in the year 1937-38 under the documents dated 1st March, 1935, 19th May, 1937, 25th February, 1937, and 2nd October, 1936, is allowable as a deduction under Section 10(2) of the Indian Income-tax Act?
The respondents are a registered firm carrying on business at Gudur. According to the statement of the case their business was, ” to win mica and sell it after refinement.” They entered into four agreements in writing, bearing the dates mentioned in the question, with persons who owned certain patta lands in Nellore district, and who had also obtained what are described as patta land agreements from the Government for mica mining. The four documents relate to different mines, namely, the Kubera mine, the Lakshminarasimha mine, and the Deepadurga mine. The last mine does not appear to have been worked at any time before the dates of the agreements, but in the other two mines, work had been carried on but was suspended at the time of the execution of the agreements relating to them. Under these four documents, the assessees in consideration of payment of sums of money in instalments, were granted the mining rights in the respective mines. The periods for which the assessees were entitled to enjoy the mining rights vary from 5 to 9 years. The assessees claimed a deduction of the amounts paid by them under the four documents above-mentioned under Section 10(2) of the Indian Income-tax Act. Mr. Subbaraya Aiyar, learned Counsel, stated to us that the deductions were claimed under Clause (xii) of that Sub-section (now Clause xv). The amounts, however, were disallowed by the Income-tax Officer on the ground that they were paid for acquiring a right and the expenditure was therefore one of capital nature. On appeal, the Appellate Assistant Commissioner came to the same conclusion, relying upon three decisions of this Court to which reference will be made later. On further appeal, the Appellate Tribunal came to a different conclusion and allowed the amount to be deducted. The ground of the Tribunal’s decision can be set out in their own words. They said,
No doubt, the cases relied upon by the department prima facie lead to the conclusion that they are on all fours with the facts of the present case, but we think that those cases can be distinguished from the present one. One important fact about those cases are that a lump sum amount was fixed for the purpose of procuring the right to work a mine in those cases, which sum was allowed to be paid by instalments, whereas in the present case it was merely an annual sum fixed for the use and occupation of the land. Besides, the lessee could always exercise the option of terminating the lease at the end of any particular year by giving three months’ notice to the lessor, which clause does not find place in the other leases. In the nature of the business the use and occupation may mean excavation of earth, putting in shafts and all that is necessary for the purpose of mica mining, but that to our mind cannot make the annual sum payable to the landlord, in the circumstances of this case, anything else but rent. We, therefore, allow this sum of Rs. 4,090 as a revenue expenditure.
This view of the Tribunal is challenged by the Commissioner of Income-tax.
2. The decision of the question referred depends upon the determination of the nature of the payments made by the assessees under the four documents mentioned in the question, whether they are capital expenditure or revenue expenditure. If capital expenditure, the amounts will not be admissible deductions.
3. There is no definition of “capital expenditure” in the Indian Act. In the English Statute, the phrase “capital expenditure” is not used, but the words used are:
any capital withdrawn from or any sum employed or intended to be employed as a capital in such trade, business, profession, employment, or vocation.
But these words have always been understood to cover what is called “capital expenditure” in the Indian enactment. In the absence of a definition, attempts have been made in Britain to evolve tests, more or less definite, to be applied for the determination of the nature of a particular expenditure. As pointed out in Halsbury’s Laws of England, Vol. 17, Section 325:
It is difficult to lay down a definite series of tests which will cover all cases.
But certain tests may be discovered in the decided cases which can be regarded as sufficiently accurate to form the basis of a working rule. Courts however are more interested in deriving assistance from decided cases on similar or analogous facts and circumstances rather than in an academic statement of a rule of thumb. The following passage from the speech of Lord Macmillon in Van Den Berghs, Ltd. v. Clark (1935) A.C. 431 at 438, represents the use which can be made of decided cases:
My Lords, the problem of discriminating between an income receipt and a capital receipt and between an income disbursement and a capital disbursement is one which in recent years has frequently engaged your Lordships’ attention. In general the distinction is well recognised and easily applied, but from time to time cases arise where the item lies on the borderline and the task of assigning it to income or to capital becomes one of much refinement, as the decisions show. The Income-tax Acts nowhere define ‘income’ any more than they define ‘capital’…Consequently, it is to the decided cases that one must go in search of light. While each case is found to turn upon its own facts, and no infallible criterion emerges, nevertheless the decisions are useful as illustrations and as affording indications of the kind of considerations which may relevantly be borne in mind in approaching the problem.
We shall first refer to leading decisions of the English Courts, which enunciate principles directly or indirectly applicable to the present case. In the City of London Contract Corporation, Ltd. v. Styles 2 T.C. 239, a deduction was claimed in respect of a portion of the sum paid by a company in purchasing the benefit of certain unexecuted contracts which the company was formed to take over and from executing which their profits were realised. It was contended that though the capital was used to purchase contracts it was used wholly and exclusively for the purposes of the concern. But the deduction was disallowed. Bowen, L.J., said:
You do not use it ‘for the purpose of’ your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern.
This case supplies one of the tests often applied, namely, whether the expenditure is for the acquisition of a business or of rights essential to the carrying on of a business.
4. Another test was laid down by Lord Dunedin as Lord President of the Court of Session in Vallambarosa Rubber Co., Ltd. v. Farmer (1910) 5 T.C. 529, namely, that
capital expenditure is a thing that is going to be spent once, and for all and income expenditure is a thing that is going to recur every year.
5. But as the learned Lord himself indicated, it was a criterion which was not a bad criterion “in rather a rough way.” It was not obviously intended to be a decisive one in every case. This was recognised by Viscount Cave, L.C., in British Insulated and Helsby Cables, Ltd. v. Atherton (1926) A.C. 305, the case generally recognised as the leading modern authority on the subject, though as Lord Macmillan points out, Romer, L.J.
was unduly optimistic when he said that it placed beyond the realms of controversy the law applicable to the matter.
The facts were these. The appellant company claimed to deduct in the computation of its trade profits a sum which it had provided to form the nucleus of a pension fund for its employees. It was held that the sum ought to be debited to capital and could not be deducted. The Lord Chancellor laid down the test in the following manner:
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 fact that the asset acquired is of a wasting nature cannot be taken into account and will not make any difference in the legal position that the expenditure for acquiring such an asset would be capital expenditure. See Alianza Co. v. Bell (1904) 2 K.B. 666 : (1905) 1 K.B. 184 : (1906) A.C. 18.
6. The following instances were given as illustrating the application of the rule, namely, monies expended by a brewing firm with a view to the acquisition of new licensed premises, expenses incurred in transferring a manufacturing business to a new premises, expenditure incurred by a ship building firm in deepening a channel, which had all been held to be in the nature of capital expendture and not to be deductible under the Income-tax Acts. Other illustrations are to be found in the speech of Lord Macmillan in Van Den Berghs, Ltd. v. Clark (1935) A.C. 431 at 440 and 443.
7. Another test which was adumbrated in John Smith and Son v. Moore (1921) 2 A.C. 13 depends on a differentiation between fixed and circulating capital. But this test has not been found to be helpful. See Van Den Berghs, Ltd. v. Clark (1935) A.C. 431 at 440 and 443.
8. These then are some of the well-established tests applied in English Courts and are tersely summed up in Halsbury’s Laws of England, Volume 17, Section 325 in the form of a working rule thus:
Outgoings which result in the acquisition of a fixed capital asset, or which produce an advantage of a permanent and enduring nature are not allowable, but such advantage must be analogous to an asset.
Many cases are found in the reports of Tax Cases in Britain in which in applying the test whether the outgoing was for the acquisition of a business, an exception has been made as regards expenditure incurred for acquiring raw material for the purpose of the manufacturing business of an assessee, which has been held to be of the nature of revenue expenditure. The leading case on this subject is Golden Horse Shoe (New), Ltd. v. Thurgood (1934) 1 K.B. 548. In that case, a company which was formed for the purpose acquired the right to take away and re-treat very large dumps of residual deposits resulting from the working of a gold mine and called “tailings.” These “tailings” were known to contain a certain amount of gold and by a new process of treatment some of this gold was recovered and sold. It was held that the amount expended in acquiring these “tailings” was in the nature of revenue expenditure, because it was to acquire the raw material of the company’s trade and therefore the cost of the “tailings ” was a proper deduction.
9. In this case, Lord Hanworth, M.R., points out how none of the tests suggested offered a strict rule of guidance and that the case had to be decided upon its own facts. He found that the facts seemed to point to a manufacturing business applied to raw material already ” won and gotten.” The following observation of his at page 561 is somewhat relevant to the present case;
If the metaphor of working a mine be applied, it might be said that the purchase of the dumps was a capital outlay.
Romer, L.J., puts the question to be decided thus:
Are the dumps the raw material of the appellant’s business or do they merely provide the means of obtaining that raw material?
and answers it that in his opinion they are the raw material itself.
10. Some of the other decisions cited to us in the course of argument by either counsel may be now dealt with. In Bonner v. Basset Mines, Ltd. (1012) 6 T.C. 146, a mining company claimed to be allowed as a deduction the cost of deepening a main shaft. But the deduction was not allowed as it was held to be in the nature of a capital expenditure. The decision in this case turned on the evidence as to the nature of the extension of the shaft and having regard to the evidence, it was held that the assessee by lengthening the shaft to a considerable extent had in effect opened up a new mine, so to speak, in the same way as they would have opened up a new mine if they had started a fresh shaft. In Robert Addie and Sons Collieries, Ltd. v. Commissioners of Inland Revenue (1924) 8 T.C. 671, under the terms of a mineral lease, a colliery company was obliged to restore to an arable state all ground occupied by it or damaged by its workings, or, at its option, to pay the lessor for all such ground not so restored, at the rate of thirty years’ purchase of the agricultural value thereof. In the exercise of its option, the company paid the lessor a sum of 6,104 as representing the value of the damaged lands. It was held by the Court of Session of Scotland that such a payment was in the nature of capital expenditure and was not therefore a proper deduction in computing the company’s liability to income-tax. The following passage from the Lord President’s (Clyde) judgment is instructive:
It is necessary accordingly to attend to the true nature of the expenditure, and to ask one’s self the question, is it a 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?
In Mallett v. The Stavelay Coal and Iron Co., Ltd. (1227) 13 T.C. 772, the assessee was a colliery company who held the right to work certain beds of coal under two leases, dated 1882 and 1919 for terms of 63 and 21 years respectively. In 1923, the company agreed with the lessor for the surrender of a part of the seams demised by the lease of 1882 and of the whole of those demised by the lease of 1919, the Company being absolved in the latter case from the obligation to restore the surface of the land. The consideration paid to the lessor was 3,500 in one case and 3,000 in the other. The assessee company claimed the total sum of 6,500 as a deduction in computing their profits but it was held that the payment for the surrender was an expenditure of capital and not an admissible deduction for income-tax purposes. Though the case dealt with a transaction of surrender of a mining lease, there are observations of Rowlatt, J. at page 778 which have a great bearing on the question in issue:
It is abundantly clear that when a colliery company acquires a lease the expense of acquiring the lease is the expense of acquiring a capital asset and is a capital expenditure, and it has frequently been remarked that it is very hard that there is no provision for allowing the company a sinking fund or anything of that sort to replace that capital expenditure. But there it is; it is a capital expenditure. If they sell the lease that they have acquired, or part of it, at an advantage, I cannot but think that that is a receipt on account of capital, and here what they have done is to get rid of some areas which they thought would be unremunerative; they thought it well to pay for it. In my judgment all the receipts and payments in connection with acquiring and disposing of leaseholds of minerals to be worked by collieries in this way are capital transactions for this purpose.
The three Madras decisions which were relied upon by the Income-tax Officer and the Appellate Assistant Commissioner may now be referred to. In Commissioner of Income-tax v. Chengalraya Mudaliar (1934) 67 M.L.J. 350 : I.L.R. 58 Mad. 1 (S.B.) the assessee entered into an agreement with the Secretary of State for India in Council for the excavation of lime shells from certain Government lands. Under that agreement, he was to have the exclusive privilege of excavating lime shells within a specified area for a period of three years in consideration of a sum of Rs. 27,750 payable in 12 equal quarterly instalments. The assessee was described as a lessee, the document as a lease. It was held by Full Bench consisting of Beasley, C.J., Ramesam and Sundaram Chetti, JJ., that the sum of Rs. 27,750 was neither rent nor the purchase price of the shells lying upon and under the land which was to be excavated but that it was capital expenditure and therefore not a deductible item in computing the income derived by the assessee. Dealing with the contention that the amount was really the purchase price of the shells, the learned Chief Justice says:
I am clearly of the opinion that this cannot by any stretch of imagination be considered a purchase of lime shells. It might be different had the lime shells been previously excavated and heaped up in heaps upon the land. It might then have been argued that it was a purchase of so much raw material. Here the amount of shells won is entirely dependent upon the will or the efforts of the assessee.
The fact that the amount was paid by instalments did not make it in any sense rent. A distinction was drawn between payments made for the purpose of starting a particular venture and payments made in order to carry on an already existing business and to earn a profit out of it. But this distinction did not depend upon the fact that the assessee had previously entered into a number of similar engagements and the expenditure in question was an initial expenditure for that particular venture. In the Commissioner of Income-tax, Madras v. Chengalvaraya Chettiar (1937) 1 M.L.J. 182: I.L.R. 1937 Mad. 792 (S.B), a transaction very similar to that in Commissioner of Income-tax v. Chengalvaraya Mudaliar (1934) 67 M.L.J. 350 : I.L.R. 58 Mad. 1 (S.B.) was the subject-matter of the reference. There the assessee got by a deed the exclusive right to excavate shells lying under Government property for three years for a payment of Rs. 30,450, payable by certain instalments and one-third of this amount was described therein as ” the annual lease amount.” It was held that the amount was a capital expenditure and not a revenue expenditure and the assessee could not claim a deduction in respect of such sum, following the ruling in Commissioner of Income-tax v. Chengalvaraya Mudaliar (1934) 67 M.L.J. 350 : I.L.R. 58 Mad. 1 (S.B.). An attempt made by the learned Counsel for the assessee to show that the words ” the annual lease amount ” appearing in the instrument in question there, made a material difference, completely failed. These two decisions were followed in Abdul Kayam Sahib Hussain Sahib v. Commissioner of Income-tax, Madras 1939 I.T.R. 652, by another Full Bench of this Court. There, the assessee acquired the exclusive right for a certain period to collect chunks, from chunk beds belonging to the Ramnad and Sivaganga Samasthanams and agreed to pay them a certain amount in instalments in consideration of the grant of the right. It was held that the amount paid was capital expenditure and was not therefore an admissible deduction. For the assessee, reliance was; placed on the case of Golden Horse Shoe (New), Ltd. v. Thurgood (1934) 1 K.B. 548. But that case was distinguished thus:
Now in the present case what the assessee paid for was the right to win conch shells. He was-not purchasing the right to any specified quantity of conch shells. It was merely the right to win what he could from the beds where the conch shells were lying. What he got was the means of obtaining the material for his business, not the material itself.
Cases of other High Courts in India were also cited. In Commissioner of Income-tax v. Tikaram & Sons Ltd. I.L.R. (1937) All. 908. (F.B.), a Full Bench consisting of Sulaiman, C.J., Harries and Bajpai, J J., held that where a company carrying on the business of manufacturing bricks was the proprietor of a part, and the lessee of the remainder, of a piece of land on which it carried on the business and from which it dug up the earth for making the bricks, the value of the earth dug up and utilised for the manufacture of bricks was of the nature of ” capital expenditure ” and should not be deducted from the total profits for the purpose of assessment to income-tax. The decision in that case proceeded on a distinction between a company purchasing merely raw materials for the purpose of manufacturing bricks and a company acquiring rights in immoveable property which included the right to dig out earth and use it for the purpose of manufacturing bricks. The learned Judges say:
The company by taking this lease has not purchased so many maunds of earth for so many rupees but has acquired lessee’s rights in the immoveable property which includes the right to dig out earth and use it for the purpose of manufacturing bricks. The position seems to be more analogous to that of a company which is working a quarry or mine rather than to an ordinary manufacturer who purchases raw materials for the purpose of his manufacturing business.
After discussing some of the leading decisions in English Courts their conclusion; is stated thus:
It therefore seems that the case of a brick field is very similar to that of a quarry or a mine and the proprietor of the land or the lessee is not a mere purchaser of raw materials but a person, who has acquired certain rights in the land and the amount invested by him must therefore be treated as capital expenditure within the meaning of Section 10(2)(ix)….He has really not purchased any raw materials for cash and he cannot be allowed to claim a deduction of the supposed value of the earth taken out of the land as part of the property.
This decision was followed by a Division Bench of the same High Court in In re Ganeshilal Bhattawala 6 I.T.R. 489.
11. The case of Sardar Singhar Singh & Sons v. Commissioner of Income-tax (1944) I.T.R, 504, decided by the Oudh Chief Court also related to leases of plots of land for the purpose of excavating earth for the manufacture of bricks. The leases mentioned a certain rate per bigha as the cost of, or compensation for, the earth excavated. It was held that the price of or compensation for the earth mentioned in the deeds was akin to royalties on coal extracted from coal mines, and that the expenditure incurred was of a capital nature. The decision in Commissioner of Income-tax v. Tikaram and Sons, Ltd. I.L.R. (1937) All. 908 (F.B.), was approved and followed.
12. The facts in In re Parmanand Haveliram (1945) 13 I.T.R. 157 decided by the Lahore High Court were as follows: The assessee was a manufacturer of potassium nitrate and sodium chloride. He manufactured his own crude saltpetre at different places and brought it to his refinery and analysed it into potassium nitrate and sodium chloride which are the finished products. Salt bearing land was acquired by the assessee in different villages from the proprietors on short term leases, the period of, leases, varying from one to two years. The assessee employed his own labourers on the sites who scraped and collected the salt bearing earth and by an elaborate process of evaporation obtained the crude saltpetre which was sent to the refinery. It was held that the sum expended by the assessee on the leases for acquiring the sites for the purpose of extracting crude saltpetre was not in the nature of capital expenditure as it was expended for the purpose of running the assessee’s business and not in acquiring it. The judgment of the Full Bench was delivered by Munir, J. The learned Judge considered the following among other circumstances appearing from the statement of the case as having an important bearing on the decision of the question whether the expenditure was in the nature of capital expenditure; (1) that the dominant trait of the assessee’s business was that of a manufacturing business, (2) that the assessee acquired for his manufacture his own raw material, (3) that the raw material was the crude saltpetre which may or may not be a marketable commodity, (4) that the assessee did not sell crude saltpetre but extracted it only for the purpose of subsequently being analysed into potassium nitrate and sodium chloride which were the finished products, (5) that in the extraction of crude saltpetre an elaborate process was employed and the raw material for its manufacture was kallar obtained from the sites acquired by the assessee under short term leases, the kallar itself not being a marketable commodity, and (6) that the money paid as consideration for the leases was an outlay from circulating capital, the leases themselves not being a fixed capital asset. The learned Judge considered the case as one of exceptional difficulty as no parallel case had been cited before them which could have assisted them in the decision of the precise point involved in the case, namely, that though the predominant character of the assessee’s business was that of a manufacturing business, the assessee did not purchase his raw material in the ordinary way from the market but procured it by a process of collection and manufacture. According to him, the essential point was that crude saltpetre was not sold by the assessee in the market and was acquired by him for the sole purpose of converting it into the finished products, that is, potassium nitrate and sodium chloride. The assessee did not make any profit by selling the crude saltpetre. The learned Judge found that the money expended by the assessee in acquiring the sites for the purpose of extracting crude saltpetre was not expended in acquiring the assessee’s business but for the purpose of running it. The period of the leases ranged from one year to two years and for that reason these leases according to him could not be said to bring into existence an asset or an advantage for the enduring benefit of the trade. The learned Judge, however, went on to observe:
The result may perhaps be different where the land worked is the property of the assessee, or is acquired by him on a long term lease, because in such a case the rights in the land would be a fixed capital asset.
That the final conclusion of the learned Judge was greatly influenced by the fact that in the case before him the leases were for short periods is amply evident from the following passage at the end of his judgment:
We have not been referred to any case where…in the case of an annual lease or leases it has ever been held that the expenditure incurred in acquiring the leases is not a proper debit item to be charged against the incomings of the year. The case where the assessee owns a mine or acquires it under a long term lease is essentially different from that where he acquires yearly or short term leases, for the simple reason that whereas the former become fixed assets the latter represent circulating capital. What period would make a certain lease a short term lease or circulating capital and what period would make it an asset of a ‘relatively permanent character’ is difficult to determine and no general rule can be laid down on the point, but I have no doubt that where as here the asset acquired is not even a mine in the true sense and gets exhausted in the course of a year or so and is acquired with several other similar assets for the sole purpose of providing raw material for a manufacture and not for the purpose of producing a marketable commodity for sale, the expenditure incurred in acquiring the asset is not a capital expenditure but a revenue expenditure.
As the correctness of this decision was questioned in a later case before the same High Court, a Bench of five Judges was constituted to deal with it. In that case In re Benarsidas Jagannath (1947) I.T.R. 185 (F.B.), the assessee who was a manufacturer of bricks obtained certain lands on leases for the purpose of digging out earth for the manufacture of bricks. The periods of the leases varied from six months to three years. It was held that the consideration paid for the leases represented the price of raw material and the assessee was therefore entitled to claim it as revenue expenditure-under Section 10(2)(xii). The main object of the agreement was the procuring of earth for manufacturing bricks and not the acquisition of an advantage of a permanent nature or of an enduring character. The position would be different in the case of sums spent for obtaining leases for a substantially long period, say, varying from ten to twenty years, because they would amount to an acquisition, of an asset of an enduring advantage to the lessee.
13. In Income-tax Appellate Tribunal, Bombay v. Haji Subumiyan Haji Sirajuddin (1946) I.T.R.447 it was held that payments made by the assessee in consideration of leases of several forests for the right to take harra nut and lac from the forest trees was capital expenditure and could not be allowed as deduction under Section 10(2)(xii) of the Income-tax Act. The argument was that the assessees merely purchased the raw material under the several agreements and that the price of such material should be deducted. But the argument was not accepted. In this case, there is an exhaustive discussion of case-law, both in Britain and in India, by Sen, J.
14. In this state of the authorities, counsel took up the following positions. For the department, it was contended that the amounts in question which were paid under the four documents were capital expenditure, as they were expended as outlay for the initiation of the business. It was expenditure necessary for the acquisition of property, of rights of a permanent character, the possession of which was a condition of carrying on the business. The business of the assessee was to win mica and sell it. It was not the business of a manufacturer and the expenditure was not for the purchase of raw material for the manufacturing business. The mining rights which were obtained under the four documents would be in the nature of an asset or an advantage for the enduring benefit of the business, and it is not necessary, that the benefit should be everlasting. The three decisions of this Court and the decisions in In re Ganeshilal Bhattawalar 6 I.T.R. 489. Commissioner of Income-tax v. Tikaram & Sons, Ltd. I.L.R. (1937) All. 903 (F.B.), and Income-tax Appellate Tribunal, Bombay v. Haji Subumiyan Haji Sirajuddin (1946) I.T.R. 447 were relied on, besides the observations in Robert Addie & Sons Collieries, Ltd. v. Commissioners of Inland Revenue (1924) 8 T.C. 671 and Mallet v. The Staveley Coal and Iron Co., Ltd. (1927) 13 T.C. 772, to which reference has already been made. For the assessee,. Mr. Subbaraya Aiyar, his learned Counsel, urged that there was no initiation of a business, as the assessee was doing business in mica even before the agreements in question, and that two of the mines had already been worked before the execution of the concerned agreements. His further contention was that the business of the assessee was of the nature of manufacture and the acquisition of any rights under the documents must be treated as purchase of raw material necessary for the carrying on of the manufacturing business. He placed great reliance on the judgment of the Lahore High Court in In re Parmanand Haveli ram (1945) I.T.R. 157, which he said was substantially approved in the later decision in In re Banarsidas Jagannath (1947) I.T.R. 185.
15. Mr. Subbaraya Aiyar attempted to distinguish the decisions in Commissioner of Income-tax v. Chengalvaraya Mudaliar (1934) 67 M.L.J. 350 : I.L.R. 58 Mad. 1 (S.B), Commissioner of Income-tax, Madras v. Chengalvaraya Chettiar (1937) 1 M.L.J. 182 : I.L.R. 1937 Mad. 792 (S.B.) and Abdul Kayum Sahib Husain Sahib v. Commissioner of Income-tax, Madras (1939) I.T.R. 652, oft the ground that in those cases the expenditure was incurred for beginning the business, that it was outlay for the first time and not expenses for an already existing business. There is a slight fallacy in the way in which this attempt was made, namely, to treat the business of the assessee as mica mining, and because the assessee had been carrying on that business even prior to the execution of the agreements in question, to treat the said agreements as acts done in the course of the carrying on of the business. The fallacy is this: In a broad sense, an assessee can be said to carry on a particular kind of business, but it may consist in several separate ventures. While carrying on an already existing business, there may be an extension of a business, there may be a substantial replacing of equipment. In all such cases, the expenditure incurred for starting new ventures, for extending the business and for replacing equipment cannot be treated as revenue expenditure. In Commissioner of Income-tax v. Chengalvaraya Mudaliar (1934) 67 M.L.J. 350 : I.L.R. 58 Mad. (S.B.), the learned Chief Justice points out:
The payment to be made was merely for the purpose of starting that particular venture…I do not think that the fact that the assessee had previously entered into a number of similar agreements affects the question.
16. Nor does the fact that two of the mines had been worked before make any difference. The money paid by the assessee was for taking over such mines. It is exactly similar on principle to the case in the City of London Contract Corporation, Ltd. v. Styles 2 T.C. 239, in which the assessees took over the business of another company which had a number of unexecuted contracts on hand and the assessees paid a lump sum of money to obtain the benefit of those contracts. Vide also John Smith & Son v. Moore (1921) 2 A.C. 13, in which the price paid for similar forward coal contracts was held to be part of the assessee’s fixed capital and not allowable as a revenue expenditure.
17. The point which learned Counsel for the assessee most strenuously pressed was that here was a case of a manufacturing business for which the assessee was making provision for raw material. The process of manufacture, according to him, was refining the mica which was won and gotten from the mine just as the assessee in the case of In re Parmanand Haveliram (1945) 13 I.T.R. 157, took short term leases to collect the crude saltpetre to serve as raw material for manufacturing the finished products, potassium nitrate and sodium chloride. In this case, the assessee had taken the agreements in question to obtain the ” raw mica ” to manufacture the refined mica which is the finished product. The flaw in the argument is that the business of the assessee can in no sense be described as a manufacturing business. The following observations of Channel, J., in the case of Alianza & Co. v. Bell (1904) 2 K.B. 666 at 673 are extremely useful in considering this point:
The question in this case which we have to consider is what is the nature of the adventure or concern which this particular company is carrying on. 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 machinery or buildings.
The decision of Munir, J., in In re Parmanand Haveliram (1945) 13 I.T.R. 157, must be read along with the later decision of the Full Bench of five Judges in In re Benarsidas Jagannath (1947) 15 I.T.R. 185 (F.B.). There are different passages in the judgment of Munir, J., which it is difficult to reconcile. The duration of the leases to which Munir, J., appears to attach great weight is not certainly a valuable or correct test. In Income-tax Tribunal, Bombay v. Haji Subumiyan Haji Sirajuddin (1946) 14 I.T.R. 447, Mahajan, J., refused to assent to the obiter dicta of Munir, J., in the concluding portion of his judgment relating to the duration of the lease. He says:
With great respect to my learned brother Munir, J., I cannot assent to the obiter observations that His Lordship made in the concluding portion of the passage cited above. If according to ordinary principles of the trade, the crude saltpetre obtained from the leased land is merely raw material, then whether the raw material is obtained for a number of years or only for a year or so cannot affect the decision of the case and alter the nature of the revenue expenditure into capital expenditure.
The judgment of the Fuller Bench of five Judges in In re Benarsidas Fagannath (1947) 15 I.T.R. 185 (F.B.) was delivered by Mahajan, J., and the learned Judge states the question in controversy in that case thus:
The question in controversy, however, is that when in the course of a business and in order to produce bricks expeditiously and economically (and not when the business is being started for the first time) a manufacturer makes certain of the supply of earth (which would be the raw material for his finished product) by taking a plot of land on lease, either of short or moderate duration but not such as to amount to a conveyance of land, can the expenses incurred in entering into such a transaction be classed as those of a capital nature?
He answered the question thus:
…in the present case privileges acquired to excavate a specified quantity of earth from a certain area of land during a period of six months to three years cannot be held to amount to the establishment of a source of supply of raw material of any stable character to the manufacturers of bricks. The transactions amount to the mere purchase of unloosened earth from the land and to no more.
It is impossible to find any analogy between the facts in In re Parmanand Haveliram (1945) 13 I.T.R. 157 or In re Benarsidas Jagannath (1947) 15 I.T.R. 185 (F.B.), and the facts of the present case. Here is a simple case of an assessee carrying on the business of winning mica and selling it, and acquiring mining rights in different plots of land. This is not a case like that, for instance, of the Golden Horse Shoe Case (1934) 1 K.B. 548, in which after the mineral had been won and gotten it was dumped on the surface. This is not a case of sale of any raw material as such. The business consists in winning mica. In the case of an agreement under which an assessee is entitled to excavate all earth to a particular depth to be used as raw material for the manufacture of bricks, it can be said that there is a sale of all that quantity of earth. You can with some trouble give even the exact cubic contents of the earth sold in that way. But in the case of an acquisition of mining rights under an agreement like the agreements in question, it is impossible to say that there is a sale of so much mica. The winning of mica depends upon many uncertain factors. The mine may prove disappointing in that it may not yield much mica. It will be opposed to common sense to say that an acquisition of rights to win mica is a sale of mica as raw material. On the facts of this case, it is abundantly clear that there is no manufacturing business and there is no sale of any raw material. The assessee carries on the business of winning and selling mica and for the business acquire mining rights in various places. Money expended for the acquisition of such rights must be held to be capital expenditure.
18. The answer to the question is in the negative. The respondent will pay to the applicant costs of this reference-Rs. 250.