# Golan Lime Syndicate v. Commissioner of I. T. 59 J.T.R. 718

- **Citation:** [1973] 2 S.C.R. 429
- **Court:** Supreme Court of India
- **Decided:** 1972-09-26
- **Case number:** Civil Appeals Nos. 1596 to 1598 of 1969
- **Bench:** K. S. Hegde, P. Jaganmohan Reddy, I. D. Dua, H. R. Khanna
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/golan-lime-syndicate-v-commissioner-of-i-t-59-j-t-r-718-5862
- **Pages:** 8

## Headnote

/"come Tax Act (11 of 1922), s. 10(2) (xv)-Payment in respect of
monopoly rights and licence and in respect of royalty-Whether capital nr
revenue expenditure.
The grantee of a monopoly from the Government to
manufacture
sugar, transferred his rights, with the permission of the Government, to
the appellant-company (assessee), under a.n agreement., Under the terms
of the grant and the agreement, the assessee was liable to pay royalty at
2% on the price of sugar manufactured by the assessee and this rate was
»evisable, if after five years, it was found to be excessive; but no other
tax was to be charged on the sugar manufactured. The assessee had to
pay to the transferor and to his nominee, evecy year
H% of the 11et
profits of its business, in lieu of the monopoly rights and licence.
For the assessment years 1~50-53, the assessee claimed that, (a) Tlie
<!mount paid to the transferor in respect of the monopoly and licence, and
(b) the royalty.paid to the Government in respect of the sugar manufac'
lured were deductible expenses but the Department, Tribunal
and the
High Court, on reference, held aga.inst the assessee.
Partly allowing the appeal to this Court,
HELP : The payments in respect of the monopoly rights are of a
capital nature, but the royalties paid are of a revenue nature deductible
under s. 10(2) (xv) of the Income-tax Act, 1922. [436 B-C]
None of the tests laid down in the various decisions for determinine
whether an expenditure incurred in bringing into existence an asset is of
a ca?ital or revenue nature, is either exhaustive or universal, because, it is
not always easy to determine whether a particular asset belongs to one
category or the other; nor docs it depend in any way on what may be the
nature of the asset in fact or in law.
The determining factor depends
largely on the nature of the trade in which the asset is employed and the
quality of the payment therefor. [434 C-D, FJ
In the present case, { 1) no arguments were addressed regarding pav·
ments in respect of monopoly rights a.nd licence. [433 BJ
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(2) As regards the royalty "n the sugar manufactured. (a) the words
'no other tax will be charged' suggest that what was being charged, was
intended to be a tax in some form, and (b) the payment of the ~oyalty
is directly related to the sugar manufactnred by the appellant and is not
for securing an enduring advantage.
Therefore, the expenditure is a
revenue expenditure. [433 E; 434 F-G; 435 BJ
,
Golan Lime Syndicate v. Commissioner of I. T. 59 J.T.R. 718
anJ
Associated Stone lndu<fries ( Kotah) Ltd. v. C./.T., 82 l.T.R. 896. fol·
lowed.
43 0
SUPREME COURT REPORTS
[l 973] 2 S.C.I!..
R. B. Seth Moo/c/1a11d S11ga11cha11d v. C.l.T., Delhi, C.A. No. 2020 of
A
1972 decided on 19.9.1972. and Si11gare11i Collieries Co. Ltd. v. C<nn1liis~.
sioner of /, T., 66 l.T.R. 553. referred to.
Assa111 Bengal Ce111en1 C~o. Ltd. v. (~.l.T .. ivest BenKal, 27 l.T.R. 34,
explained.

## Text

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MEW AR SUG~R MILLS LTD., BHOPAL SAGAR
v.
429
COMMISS!ONER OF INCOME.TAX, RAJASTHAN, JAIPUR
September 26, 1972
(K. S. HEGDE, P. JAGANMOHAN REDDY, I. D. DUA AND H. R.
KHANNA, JJ.J
/"come Tax Act (11 of 1922), s. 10(2) (xv)-Payment in respect of
monopoly rights and licence and in respect of royalty-Whether capital nr
revenue expenditure.
The grantee of a monopoly from the Government to
manufacture
sugar, transferred his rights, with the permission of the Government, to
the appellant-company (assessee), under a.n agreement., Under the terms
of the grant and the agreement, the assessee was liable to pay royalty at
2% on the price of sugar manufactured by the assessee and this rate was
»evisable, if after five years, it was found to be excessive; but no other
tax was to be charged on the sugar manufactured. The assessee had to
pay to the transferor and to his nominee, evecy year
H% of the 11et
profits of its business, in lieu of the monopoly rights and licence.
For the assessment years 1~50-53, the assessee claimed that, (a) Tlie
<!mount paid to the transferor in respect of the monopoly and licence, and
(b) the royalty.paid to the Government in respect of the sugar manufac'
lured were deductible expenses but the Department, Tribunal
and the
High Court, on reference, held aga.inst the assessee.
Partly allowing the appeal to this Court,
HELP : The payments in respect of the monopoly rights are of a
capital nature, but the royalties paid are of a revenue nature deductible
under s. 10(2) (xv) of the Income-tax Act, 1922. [436 B-C]
None of the tests laid down in the various decisions for determinine
whether an expenditure incurred in bringing into existence an asset is of
a ca?ital or revenue nature, is either exhaustive or universal, because, it is
not always easy to determine whether a particular asset belongs to one
category or the other; nor docs it depend in any way on what may be the
nature of the asset in fact or in law.
The determining factor depends
largely on the nature of the trade in which the asset is employed and the
quality of the payment therefor. [434 C-D, FJ
In the present case, { 1) no arguments were addressed regarding pav·
ments in respect of monopoly rights a.nd licence. [433 BJ
·
(2) As regards the royalty "n the sugar manufactured. (a) the words
'no other tax will be charged' suggest that what was being charged, was
intended to be a tax in some form, and (b) the payment of the ~oyalty
is directly related to the sugar manufactnred by the appellant and is not
for securing an enduring advantage.
Therefore, the expenditure is a
revenue expenditure. [433 E; 434 F-G; 435 BJ
,
Golan Lime Syndicate v. Commissioner of I. T. 59 J.T.R. 718
anJ
Associated Stone lndu<fries ( Kotah) Ltd. v. C./.T., 82 l.T.R. 896. fol·
lowed.
43 0
SUPREME COURT REPORTS
[l 973] 2 S.C.I!..
R. B. Seth Moo/c/1a11d S11ga11cha11d v. C.l.T., Delhi, C.A. No. 2020 of
A
1972 decided on 19.9.1972. and Si11gare11i Collieries Co. Ltd. v. C<nn1liis~.
sioner of /, T., 66 l.T.R. 553. referred to.
Assa111 Bengal Ce111en1 C~o. Ltd. v. (~.l.T .. ivest BenKal, 27 l.T.R. 34,
explained.
CivIL APPELLATE JURISDICTION : Civil Appeals Nos. 1596
to 1598 of 1969.
B
Appeals by certificate from the judgment and order dated
November 27, 1967 of rhe Rajasthan High High Court in Incometax Referencee No. 29 of 1962~
S. T. Desai, A. K. Verma, J.B. Dadachanji, 0. C. Mathur and
Ravinder Narain, for the appellant.
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S. C. Manchanda, J. Ramamurthy, B. D. Sharma and R. N.
· Sachthey, for the respondent.
The Judgment of the Court was delivered by
JAGANMOHAN REDDY, J. These appeals are by certificate
against the judgment of the Rajasthan High Court answering the
questions ·referred to it by the Inco1ne-tax Appellate Tribunal
under s. 66(1) of the Income-tax Act. 1922 (hereinafter referred to as the 'Act' partly Jn favour of the revenue and against
the assessee.
The assessee appellant is a public company on
which the assessments in dispute were levied for the years 195051, 1951-52 and 1952-53. the corresponding
previous
years·
being the years ending 31st March 1950, 31st March 1951 and
31st March 1952 respectively.
It appears from the statement
of the case that the appellant carries on the business of sale of
sugar and oil, that the manufacture of sugar was started in 1940
while that of oil in 1942. On April' 5, 1932 the Maharana of
the Udaipur State, in exercise of his sovereign pow~r as a Ruler
granted through the intervention of Pandit Ramakant Malaviya
granted a licence fot the manufacture of sugar to Sri Banarsiprasad Jhunjhunwala which was to be a monopoly enduring to his
benefit for 32 years.
Clauses (2), (3) and (5) of the terms
of licence which are relevant are as under :-
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"(2) No permission will be granted to any
other person
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for starting a sugar factory for a period of 32 years from the date
of thls order.
(3) If they require land for sugarcane for this factory, it
will be allotted out of the Khalsa uncultivated land not less than
5000 and subject to a maximnm of 30,000 acres as may
be
available in the vicinity of J aisamand.
Mr.
Banarsi Prasad · H
Jhunjhunwala will have to acquire 5000 acres within two years
of this order ?nd the remaining should be acquired within 10
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MEWAR SUGAR MILLS v. C.1.T. (Jagamnohan Reddy, J.) ·131
years from the date of order if land near Jaisamund is r.ot fo1md
suitable for cultivation of sugarcane, some other l"nd if available in some other Pargana of Mawar may be allotted.
This
land will be given without Nazrana with full ownership right
(Bapi) on the condition that it will not be alienated without
sanction of Durbar..
No land revenue will be charged for first
five years from the date of acquisition. . . .
After that full
land revenue will be charged. . . . the rate of land revenue will
be re-fixed according to settlement rules and likewise will be
done in future according to settlement rules.
(5) Royalty will be charged on price of goods manufactured
in the factory. If after five years the rate be found excessive for
the running of the factory, it can be cornidered then. On sugar
manufactured in the factory on other tax will be charged."
After the grant of this monopoly, Malaviya and Jhunjhunwala
floated a limited company called the "Mewar Industries Ltd."
This company then took steps to set up a factory, obtain requisite machinery and instat it.
After completion of the factory
production could not be started on account of financial difficulties. Thereafter, the Government gave notice to the company on
March 19, 1936 that if it did not start the business, the permission granted to it would be granted to other parties for the manufacture of sugar.
In view of this notice, the said Malaviya and
Jhunjhunwala arranged for Bansidhar Dhandania and Lokenath
Prasad Dhandania (hereinafter referred to for convenience as
'Dhandanias') to acquire from the company all the rights and
assets held by it for the unexpired period of 28 years and to run
the business in consideration of the payment of 10% of the net
profits of the business.
On November 15, 1936 an agreement
was entered into between the said Dhandhanias and Jhunjhunwala wher~by the rights· 0f n:iJllOpoly available to Jhunjhunwala
and Malav1ya were ~ransferred to Dhandania. The inter se
arrangement under the agreement which is. set out in the statement
of the case is not really material for the purpose of this case and
is therefore not referred to here. It may however be .mentioned
that the Government permitted this arrangement after which the
Dhandanias floated a new company known as Mewar Sugar Milts
Ltd. (hereinafter called the appellant) and on March 11, 1940
Jhunjhunwala transferred to the sugar company his rights under
an agreement. It is not relevant to set out all the clauses of the
agreement except to notice that under one of the clauses it was
provided that the transferee shall
"until the expiry of the period mentioned in the
said licence and monopoly or in the event
of ·the
period thereof being extended whether in the name of
the company or otherwise, so long as the monopoly
-432
SUPREME COURT REPORTS
[1973] 2 S.C.R.
rights. and licence continue to be in force, under such
extension, pay and continue to pay to each of the transferor and to his nominee the said Pandit Ramakant
Malaviya yearly and every year 1 t per centum respectively of the net profits of the business of the company
to be ascertained from the audited accounts of the company, provided however the profit payable
to
the
transferor and the said Pandit Ramakant Malaviya shall
be in respect 9f such business only as are provided in
the said monopoly and licences."
By and under the said arrangement the appellant was carrying on the business of sugar manufacture and during the years
1950-51, 1951-52 and 1952-53 it paid to the State Government
in respect of sugar Rs. 72,394, Rs. 15,724 and Rs. 50,455 and
in respect of oil Rs. 24,729, Rs. 18,168 and Rs. 13,909 respectively.
It also paid to JhunjhunwaJa and Malaviya for the year
1950-51 Rs. 3,072 and for the year 1952-53 Rs. 2,613 in lieu
of the monopoly rights and licences at the stipulated amount of
H per cent.
The assessee clcimed that the amounts paid in
respect of the monopoly and licence as also those paid to the
Government in respect of the royalty for sugar and oil were
deductible expenses but the Income-tax Officer disallowed them
holding that the expendituri:i in respect of the said amounts were
of a capital nature. In appeal the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer.
Against
this order a further appeal was filed to the Tribunal which was
rejected.
On an application by the assessee under s. 66 (1) of
the Act, the following question was referred to the High Court :-
"Whether on a proper construction of Annexure 'A'
and Annexure 'E' the sums paid ro the respective partie>
are allowable as expenditure under the provisions of
s. 10(1) or 10(2}(xv) ?"
It may here be mentioned that Annexure 'A' referred to in
the question is the grant while Annexure 'E' is the agreement
between Jhunjhunwala and the appellant.
The High Court, as
already stated, answered the question partly against the assessee
holding that "on a proper construction of the Annexures 'A' and
'E' the sum paid by the assessee to the State Government
as
royalty on the sale of oil and its products is an allowable deduction under the provisiops of s. 10(1) or 10(2)(xv) of the Act
but the payment made by the assessee to the transfi;ror and his
nominee in terms of the agreement or the royalty paid by the
assessee to the State Government in respect of sugar is not an
allowable deduction" under the aforementioned provisions of the
Act.
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MBWAR SUGAR MILLS l', C.J.T. (Jaganmohan Reddy, J.) 433
The appeal raises two controversies, the one relates to the
deduction of the pr.yments made by the appellant for monopoly
rights and the other concerns the payment to the State of the
royalty on the price of sugar manufactured by the company. The
learned adv_ocate for the appellant having regard to the view of
the law taken by the High Court has not pressed the question in
so far as it relates to the disallowance of payments made by the
asscssee in respect of the monopoly rigr.ts. The only other
question which survives is, the finding of the High Ccurt that the
payment of 2 % royalty on the price of sugar '1lanufactured by
the appellant is relatable to monopoly rights and is an expenditure
of a capital nature. Is the finding sustainable in law iii what has
to be deternuned. According to clause ( 5) the rate of 2% could
be revised if after five years it was found to be excess;ve for the
running of the factory. This clause certainly hes no relationship
with any payment referable to the monopoly co.'lferred under cl.
(2) of the grant. The advantages which Jhunjhunwala ebtained
under els. ( 3) and ( 4) of the grant which right has heen trc::sferred to the appellant are advantages and facilities which ~.ny
Government with progressive economic policy would grant to
en~ourage the settii1g up of nascent industries in the State in any
region of the State.
In our view the High Court has neither
properly appreciated nor correctly interpreted the grant and the
agreement referred to in the question.
While it i;,ecognised that
the words "110 other tax will be charged" in cl. (5) suggest that
what was being charged was intended to be a tax in some form
it seems to have been influenced by the grant conferring important
benefits to the grantee such as giving of agricultural land on
favourable. terms, charging water ra<es at a concessiqn, exemp·
tion of customs duty for the period of the grant and the benefit of
monopoly rights by undertaking not to grant permission for 32
years from the date of the grant to any persons to start a sugar
factory.
Referring to the several advantages set out above the
High Court observed :-
·
,"Thus on consideration of the grant as
a whole,
we are unable to hold that 2 per cent royalty on the
production of sugar was only by way of tax. It was
an owrall payment for the enjoyment of the monopoly
rights as well as for immunities from taxation. The
nature of payment was hybrid in character. A royalty
of this kind therefore could, taken as a whole, be regarded as a consideration for the grant of benefits to the
grantee by the State Government.
. . . . . . .
In the present case, it cannot be gainsaid that the acquisition of monopoly rights in the trade was an advantage
of enduring benefit and, therefore, taken as a whole,
the payment of two per cent royalty .could be regarded
434·
SUPREME COURT REPORTS
[1973] 2 s.c.R.
as capital expenditure and was consequently not ah
allowable deduction under s. 10 of the Act. '
The _passage extracted above shows a confusion of the principles
applicable for determining what is an expenditure of a capital
nature and that which is a revenue expenditure. This Court in
a recent decision in R. B. Seth Moolchand Suganchand v. C.l.T.,
· Delhi ( 1) to which two of us were a party ( J aganmohan Reddy
and Khanna, JJ.) p6inted out the difficulty which the Judges are
confronted with in the application of the principles and criteria
for determining the nafiire of the expenditure incurred in bringing
into existence an asset or advantage for the enduring benefit of
the trade, in which context several cases of this Court and the
English Courts were examined. It is unnecessary to traverse the
~ame ground again, except to say that none of the tests faid down
in any of the cases is either exhaustive or universal because it is
not always easy to determine whether a particular asset belongs
to one category or the other nor does it depend in any way on
what may be the nature of the asset in fact or in law. l\one of
the tests .suggested in decided cases affords a strict rule of guidance. In that case it was observed :
"The principles enunciated for
determining
the
nature of the expenditure have been sought to be applied
to differe11.t situations arising on the facts of each case,
but the. difficulty in matching them with the seeming·
irreconciliability are perhaps explicable only on
the
ground that the determination in any particular case is
dependant on the character of the lease or agreement.
the nature of ~he asset, ihe purpose for
which
the
expenditure was incurred and such other factors as in
the facts and circumstances pf that case would indica_te. •·
The determining factor, therefore, will dep,ehd largely_ on the
nature of the trade in which the asset is employed and the quality
of the payment therefrom. It appears to us that on the facts of
each case it will have to be .determir.~d whether a particular
expenditure is a capital expenditure or a revenue expenditure. In
this case the payment made is di~tly related to the sugar manufactured by the'appellant. The decision in Assam Bengal Crmmr
Co, Ltd., v. C.l.T., West Bengal(') which has been relied upon
by the High Court and the Tribunal has in our view been misapplied.
Jn that case the question was, whether in computing
'die profits of the appellant the sum of Rs, 5,000 ·and Rs. 35.000
paid to the lessor by the appellant could be deducted under '· J 0
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(2) (xv) of the Act. This payment was in addition to the rents
and royalties which were agreed to be paid by the lesaee and was . H
(I) Civil AopeaJ No. 2020/1972 decided on 19th September, 1972.
(2) 27 I.T.R. 34.
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MEWAR SUGAR MILLS v. C.l.T. (Jaganmohan Reddy, J,) 435
payable for obtaining a right to acquire an asset of an enduring
nature which had necessarily to be incurred for initiation of the
business or trading activity. Bhagwati, J. speaking for this Court
observed at page 45 :-
"li the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring
benefit of the business it is properly attributable to
capital and is of the nature of capital expenditure. If
on the other hand it is made not for the purpose of
bringing into existence any such asset (or) advantage
but for running· the business or working it with a view
to produce the profits it is a revenue exp~nditure."
Jn Gotan Lime Syndicate v. Commr. of I. T.( 1) which was
a case dealing with the amount of dead rent payable per acre
and th~ amount of royalty payable for a maund of lump limo and
per maund of limestone, it was held that in the absence of material to show that any part of the royalty had to be treated as
premium and referable to the acquisition of the mining lease,
the royalty payment, including the dead rent, had relation only
to the lime deposits to be got, and had therefore to be treated as
a revenue expenditure; and although the appellant did derive an
advantage-assuming that that advantage was to last at
least ·
for a period of five years-there was only an annual payment of
royalty or dead rent which was not a direct payment for securing
an enduring advantage but was rel11table to the raw material to
be obtained.
It was further emphasised that the reason why
royalty has to be allowed as revenue expenditure is the relation
which it has to the raw materials to be excavated or extracted;
that the niore you take the more royalty you pay and that the
minimum payment or the dead rent also has the same characteristic i.e., it is an advance payment in respect of a certain amount
of raw material to be excavated. In a similar case dealt with by
the Andhra Pradesh High Court in Singareni Collieries C. Ltd. v.·
Commr. of l.T.( 2 ) to which one of us (Jaganmohan Reddy. C.J.)
was a party dead rent payable under the lease was characterised
as having a direct relation to the working of the coal from the
mine and so it was a revenue expenditure.
In another case
Associated Stone Industries (Kot ah) Ltd. v. C.l.T. (3 ) to which
one of us (Hegde, J.) was a party, the royalty was payable at a
certain rate or rates on the stone excavated and an additional
royalty was· leviable at a certain rate on polished
stone.
On
these facts it was held that the nature of the payment was no
different from that of the minimum royalty paid and the excess
royalty was not paid for getting some additional capital asset or
(I) 59 J.T.R. 718.
11)
66 l.T.R. 553.
(]) 82 l.T .. R. 896.
436
SUPREME COURT REPORTS
[1973] 2 s.c.R.
even an enduring benefit but was paid on the basis of commercial
expediency not of a capital expenditure.
A consideration of all these cases certainly support the contention of the appellant that on the facts and circumstances oE
this, the expenditure incurred i.e., 2 3 royalty on the sugar manufactured, is a revenue expenditure. Our answer to the question
therefore is that the two payments in respect of the monopoly
rights for the years 1950-51 and 1952-53 are of capital nature
while thOSe paid for royalty for the three assessment years under
consideration are of a revenue nature deductible under s. 10(2)
(xv) of the Act.
With these answers in favour of the assessee,
the appeal is partly allowed with costs.
:V.P.S.
Appeai partly allowed .
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