Shah, J.
(1) The Income Tax Appellate Tribunal has referred the following three questions to this Court :
(I) Whether the sum of Rs. 15,27,000/- paid by the assessee-company for the leasehold interest in several manganese mines was capital
expenditure and as such not an allowable deduction?
(ii) Whether even a proportionate amount of the total sum paid for the leasehold manganese mines, I. e., Rs. 98,280/- per annum was not
deductible in determining the profits of the business?
(iii) Whether the legal and other expenses incurred for the leases of the manganese mines were not admissible deduction u/s 10(2)(xv) of the
Income Tax Act?
(2) The facts which give rise to the reference may be briefly stated. The assessee-company was originally a private (limited company having its
registered office at Nagpur. It was converted into a public limited company on 17th march 1952. R. B. Bansilal abirchand Mining Syndicate
hereinafter referred to as the Minning Syndicate were lessees from the Government of Madhya Pradesh of certain mining rights under leases
executed before and after the year 1949. Under the mining leases the Mining Syndicate were entitled to enter upon the lands described in the
leases and to search for and win manganese ore and to raise and carry away and dispose of the same. The right of the Mining Syndicate under the
leases were sold by the Court Receiver appointed in a suit for dissolution of partnership and rendition of accounts of that syndicate and were
purchased on 13th December 1951 by the assessee-company for a lump sum of Rs. 17,00,000/. Out of the sum of Rs. 17,00,000/- , Rs.
15,27,000/- were allocated to the price of the rights in the mines, Rs. 21,320/- for buildings and other Immovable properties, Rs. 14,900/- for
machinery, furniture and other moveable properties and Rs. 1,36,780/- for stock of raw and ready manganese ore. The Income Tax Officer held
that the amount of Rs. 15,27,000/ paid by the assessee company for the interest it purchased from the Mining Syndicate in the manganese mines
was capital expenditure. In appeal to the Appellate Assistant Commissioner, the order passed by the Income Tax Officer was confirmed. That
order was further confirmed by the Income Tax Appellate Tribunal. The assessee-company then applied to the Tribunal for a reference to this
Court u/s 66(1) of the Income Tax Act, and a reference was accordingly made and the three questions, which we have already set out, have been
referred to us for decision.
(3) This reference raises the rather familiar question as to what may, having regard to the facts and circumstances, be regarded as capital
expenditure as distinct from revenue expenditure. In the mining lease obtained by the Mining Syndicate before the year 1949 it was recited that in
consideration of the rents and royalties, covenants and agreements the lessor, i.e., the Government of the Central Provinces and Berar, granted and
demised unto the lessees the mines, beds, veins and seams of manganese ore situate, lying and being in or under the lands referred to in Part I of
the Schedule together with the lberties, powers and privileges to be exercised or enjoyed in connection therewith set out in Part II of the Schedule
subject to the restrictions and conditions as to the exercise and enjoyment of such liberties, powers and privileges set out in Part III of the Schedule
except and reserving out of the demise unto the lessor the liberties, powers and privileges set out in Part IV of the Schedule. The lease included a
schedule consisting of nine parts. In part II were set out the liberties, powers and privileges to be exercised or enjoyed by the lesses subject to the
restrictions and conditions in Part III. Under this part the lesses were entitled to work minies, to sink pits, to erect or construct machinery, to make
roads, to get building and road materials, to use water, to use the land adjacent to the land granted on lease for stacking, to prepare manganese
ore and to take timber from reserved forest. These liberties were made subject to the restrictions set out in Part III. Certain liberties were also set
out in Part IV which were exercisable by the lessor. We are not concerned in this reference with the restrictions and liberties set out in Parts III
and IV of the Schedule. In the leases executed after the year 1949 it was recited that in consideration of the rents and royalties, covenants and
agreements by and in the presents and the schedule thereunder the State Government granted and demised to the lessees all the mines, bed/veins
and seems situate, lying and being in or under the lands referred to in Part I of the Schedule together with the liberties, powers and privileges to be
exercised or enjoyed in connection therewith set out in Part II of the Schedule subject to the restrictions and conditions as to the exercise and
enjoyment of such liberties, powers and privileges set out in Part III of the Schedule except and reserving out of the demise unto the State
Government the liberties, powers and privileges set out in Part IV of the schedule. This lease also included a Schedule the first four parts of which
set out respectively the area of the lease, the liberties, powers and privileges to be exercised and enjoyed by the lessees, the restrictions and
conditions as to such exercise or enjoyment and the liberties, powers and privileges reserved to the State Government.
(4) Though different phraseology has been used in these two sets of leases, it is evident that in substance by the leases the Government of the
Central Provinces and Berar granted to the Mining Syndicate the beds, veins, and seams of manganese ore lying in or under the lands described in
the Schedule with certain rights and subject to certain restrictions. all those rights of the Mining Syndicate under the leases were transferred to the
assessee-company under the agreement, dated 13th December 1951. The principal question which falls to be determined is whether the
consideration paid by the assessee for purchasing the rights of the lessees under the mining leases was capital expenditure.
(5) Mr. Palkhivala for the assessee-company contends that by the leasses no right or interest in land was created but manganese ore lying
underground though unascertained but nonetheless ascertainable-was sold to the Mining Syndicate; and by the transfer of all those rights the
assessee in substance acquired a stock of manganese ore for the purpose of its business. Evidently expenditure incurred for acquiring the stock-in-
trade of a business is revenue expenditure. But we are unable to agree with the contention raised by Mr. Palkhivala that by the leases the
Government of the Central Provinces and Berar sold any definite or identifiable quantity of manganese ore to the Mining Syndicate; in our opinion,
they only authorised the Mining syndicate to win manganese ore from the area defined by the leases and subject to the restrictions and conditions
set out therein. The right conferred by the leases was not a proprietary right to any stock of manganese ore readily indentifiable, but merely a right
during the period specified in the leases to get at the ore, and to remove and dispose of the same. By exercising the right and obtaining ore, the
lessees may obtain a stock-in-trade; but the consideration paid for acquiring the means to obtain the stock-in-trade may not be regarded as
consideration paid for acquiring the stock-in-trade itself. Therefore, the consideration paid by the assessee-company for purchasing the benefits
and the rights under the leases to win the manganese ore from the lands described in the leases must, in our judgment, be regarded as capital
expenditure.
(6) In our judgment, the question has been conclusively decided by their Lordships of the Privy Council in AIR 1943 153 (Privy Council) , where
the material facts were closely similar to the facts of the present case. In that case, the assessee had received large paymens by way of royalty
under various mining leases. By the leases the lessees were granted and demised for a period of 999 years the underground coal mining rights
specified in the schedule to the leases and all the estate, right, title and interest of the lessor into and upon the same and every part thereof with full
liberty and power to the lessees to search for, work, make merchantable and carry away the coal there found and with power to dig and sink pts,
to erect engines, machinery, buildings, workshops, cottages and to make such railways, tramways and roads as were requuired. In consideration
of these rights the lessees were to pay a sum by way of salami or premium and an annual sum as royalty computed at a certain rate per ton on the
amount of coal raised and coke manufactured, subject to a minimum annual sum. It was contended before the taxing authorities by the lessees that
the sums received as salami and royalty did not constitute income but was a capital receipt representing the price of the minerals removed, and
their Lordships of the Privy Councilheld that the salami was paid for the acquisition of the rights of the lessees to enjoy the benefits granted to them
by the lease and that right being a capital asset, the money paid to purchase it was a payment on capital account. In the present case, the transferee
from the lessees is contending that the payment made by it for acquiring the rights of the lessees was revenue expenditure and treated as allowable
deduction in assessing its table income. In kamakshya narain Singh''s case 1943-11 ITR 513: (AIR 1943 PC 153), in dealing with the argument
that the salami received by the lessees for transferring their rights was received on capital account, their Lordships observed :
It is a single payment made for the acquisition of the right of the lessees to enjoy the benefits granted to them by the lease. that general right may
properly be regarded as a capital asset, and the money paid to purchase it may properly be held to be payment on capital account.
In the present case the assessee-company has purchased all the rights which the transferors had obtained from the Government of the Central
Provinces and Berar. There was no stock-in-trade in the hands of the transferors and for purchasing merely the rights or benefits granted under the
leases and not the stock-in-trade the assessee-company must, in our judgment, be regarded as having incurred a capital expenditure. By the leases
merely a source from which the raw materials required for the business of the assessee-company were to be ontained was indicated, with rights to
tax the source and it was not a sale of the raw materials in situ.
(7) A similar view was taken by their Lordships of the House of Lords in Hood v. Inland Revenue Commissioner (1958) 36 ITR 238. In that case,
a timber merchant soon after commencing business, entered into two agreements with a company undertaking to pay certain sums of money in
respect of a large number of trees growing on the company''s land. The merchant acquired the right to
mark, fell and carry away all the said trees and complete all the operations authorized at such times as he ............ shall consider convenient.
no time limit being fixed. The trees had not been selected or inditified. The House of Lords held (Lord Oaksey dissenting) that in computing the
timber merchant''s Income Tax liability the sums payable should be treated as capital expenditure and not as the price for stock-in-trade and
accordingly should not be debited in calculating his tradiang profits.
(8) In STOW BARDOLPH GRAVEL CO. LTD. Vs. POOLE (INSPECTOR OF TAXES)., , a company of sand and gravel merchants, in
consideration of a payment of .... 2,000/-, acquired the benefit of a contract to take a deposit of sand and gravel. They later exercised an option
contained in the contract under which they acquired for ....2,250/- a right to take a further deeposit. It was held that the amounts paid were not
expended on the purchase of stock-in-trade and were not, therefore, admissible as deductions in the computation of the company''s profits under
the relevant Income Tax provisions, the reason for that conclusion being that by the contract and option the company did not acquire any
proprietary right in the deposits in situ but merely had the right to work them and to take away what was won, and the company had not, on the
facts, purchased stock-in-trade readily identificable as such from the moment of purchase but merely a means of getting gravel and sand which
when excavated and taken into possession would be part of their stock-in-trade. The same reasoning will, in our judgment, apply to the facts of the
present case for holding that the rights purchased by the assessee-company are not rights to stock-in-trade readily indentifiable as such from the
moment of purchase but merely the rights to the means of getting manganese ore which if excavated and taken into possession may from part of its
stock-in-trade.
(9) But Mr. Palkhivala relies upon a judgment of their Lordships or the Privy Council in AIR 1949 311 (Privy Council) in which it was held that the
consideration paid for purchasing a right to tendu leaves required for manufacturing bidis was revenue expenditure and not capital expenditure. In
that case, the Privy Council held that the contracts made by the assessees were wholly and exclusively for the purpose of supplying themselves
with one of the raw materials for their business, that under the contracts no interest in land or in the trees or plants was conveyed to the assessecs,
that under the contracts it was the tendu leaves and nothing but the tendu leaves that were acquired, that the right to pick the leaves or to go on to
the land for the purpose was merely ancillary to the real purpose of the contracts, that under such a contract, even if not expressed, by the clearest
implication of law there was a transfer of a growing crop and that therefore, the expenditure incurred in acquiring the raw material was in a business
sense on revenue account and not on capital account. In our view, this case is clearly distinguishable from the facts of the present case and the
cases to which we have already referred. Bu the contracts which the assessees had made in AIR 1949 311 (Privy Council) , no interest in land
was conveyed to the assessees and the assessees merely acquired a right to the tendu leaves, I. e., a right to the growing crops, and having regard
to the nature of the business and the purpose for which the commodity was acquired, their Lordships of the Privy Council regarded the expenditure
as expenditure incurred for obtaining raw materials for the business of the assessees. In the present case, the expenditure having been incurred by
the assessee-company for acquiring a right to the manganese ore, which was not indentifiable in sity, the expenditure must be regarded as capital
expenditure.
(10) We accordingly answer the three questions referred for decision as under :
(i) The sum of Rs. 15,27,000/- paid by the assessee-company for the leasehold interest in several manganese mines was capital expenditure and
not revenue expenditure and as such it was not an allowable deduction.
(ii) Even a proportionate amount of the total sum paid for the leasehold manganese mines, i.e., Rs. 98,280/- per annum, was not deductible in
determining the profits of the business.
(iii) The legal and other expenses incurred for the leases of the manganese mineswere not admissible deductions u/s 10 (2) (xv) of the Income Tax
Act.
The assessee-company to pay the costs of the Commissioner of Income Tax.
(11) Answer accordingly.