# PING LE INDUSTRIES LTD., SECUNDERABAD v. COMMISSIONER OF INCOME TAX, HYDERABAD·

- **Citation:** [1960] 3 S.C.R. 681
- **Court:** Supreme Court of India
- **Decided:** 1960
- **Case number:** Civil Appeal No. I 90 of 1955
- **Bench:** S. K. DAs, ]. L. Kapur, M. HrnAYATULLAH
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/ping-le-industries-ltd-secunderabad-v-commissioner-of-income-tax-hyderabad-1889
- **Pages:** 33

## Headnote

Income Tax-Business Expenditure-Right to extract stou~s
fmm quarries-Character of expenditure-Test, whether revenue or
capital in nature-Hyderabad Income Tax Act (Hyderabad VIII oj
1357 F), s. l2(2)(xv)-lndian Income Tax Act, s. 10(2)(xv).
Under a quolnama the assessec company was granted exclusive rights in the nature of a monopoly to extract Shahabad Flag
Stones without limit to quantity or measurement from quarries
situated in six villages for a period of 12 years on annual payment of Rs. 28,000 but not to manufacture cement.
The stones
had to be extracted methodically and skilfully before they could
be dressed and sold. The assessee company paid an initial sum
of Rs. 96,000 as security and the balance of Rs, 20,000 was payable
each year in
monthly instalments of
Rs. 1,666-10-8 each. The
payments were to be made even if no stones were extracted or
could not be extracted.
The question was whether the amount>
paid were allowable as business expenditure under s. 12(2)(xv)
of the Hvderabad Income Tax Act:
Held
(Per
Kapur and Hidayatullah,
JJ.
S. K. Das, J.,
dissenting), that under the quolnama the assessee
acquired by
his long term lease a right to win stones and the lease conveyed
to him a part of land.
The stones in situ were not his stock-intrade in a business sense but a capital asset from which after
extraction he converred the stones into his stock-in-trade. The
payment though periodic in fact was neither rent nor royalty but
a lump sum payment in instalments for acquiring· a capital asset
of enduring benefit to his trade.
The right
acquired is to a
source from which the raw material was to be extracted. The
expenditure was
outgoings
on
capital
account and
was not
allowable as
deductions under
s. 12(2)(xv) of the
Hyderabad
Income Tax Act.
Per S. K. Das, J .-That on its true construction the transaction was the sale of raw materials
coupled with a
licence to
the assessee to
come on the
land and remove
the materials
sold, the purchase price being
paid partly in a lump sum and
partly in mon·hly instalments, that the object was the procuring
of the stones for making flag stones and not the acquisition of
an enduring asset or advantage, that the payments
made were
the price of raw materials and that the · assessee was therefore
entitled to claim them as business expenditure under s. 12(2)(xv)
of the Hyderabad Income Tax Act.
Assam Bengal Cement Works Ltd. v. Commissioner of Income
Tax. West Bengal, r1955] 1 S.C.R. 972, distinguished.
C1v1L APPELLATE
JuR1sri1cnoN: Civil
Appeal
No. I 90 of 1955.
April 26.
1960
Pinglt
Induslrits
Ltd.,
Stc1mderabad
v.
Commissi~nu of
lncomt·lax,
H)'derabad
S.K. Das].
682
SUPREME COURT REPORTS
[1960].
Appeal from the judgment and order dated July 31,
1953, of the Hyderabad High Court in Reference Case
No. 302/5 of 1951-52.
N. A. Palhivala and R.
Ganapathy Tyer,. for the
appellants:
H. N. Sanyal, Additional Solicitor-General of India,
H.]. Uinrignr and D. Gupta, for the respondent ..
1960. April 26. The Judgment of Kapur and
Hidayatullah, .JJ., was delivered by HidayaLUllah,
J.
S. K. Das, ]., delivered a separate Judgment.
S. K. DAS, ].-This is an appeal by the assessee
with leave of the High Court of Hyderabad gr<imed
under s. 66A(2) of the Indian Income-tax Act, 1922.
The short facts arc these. 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, 1343F,
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.
Tht: appellant

## Text

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3 S.C.R.
SUPREl\iE COURT.REPORTS
681
PING LE INDUSTRIES LTD., SECUNDERABAD
1960
v.
COMMISSIONER OF INCOME TAX, HYDERABAD·
(S. K. DAs, ]. L. KAPUR and M. HrnAYATULLAH, JJ.)
Income Tax-Business Expenditure-Right to extract stou~s
fmm quarries-Character of expenditure-Test, whether revenue or
capital in nature-Hyderabad Income Tax Act (Hyderabad VIII oj
1357 F), s. l2(2)(xv)-lndian Income Tax Act, s. 10(2)(xv).
Under a quolnama the assessec company was granted exclusive rights in the nature of a monopoly to extract Shahabad Flag
Stones without limit to quantity or measurement from quarries
situated in six villages for a period of 12 years on annual payment of Rs. 28,000 but not to manufacture cement.
The stones
had to be extracted methodically and skilfully before they could
be dressed and sold. The assessee company paid an initial sum
of Rs. 96,000 as security and the balance of Rs, 20,000 was payable
each year in
monthly instalments of
Rs. 1,666-10-8 each. The
payments were to be made even if no stones were extracted or
could not be extracted.
The question was whether the amount>
paid were allowable as business expenditure under s. 12(2)(xv)
of the Hvderabad Income Tax Act:
Held
(Per
Kapur and Hidayatullah,
JJ.
S. K. Das, J.,
dissenting), that under the quolnama the assessee
acquired by
his long term lease a right to win stones and the lease conveyed
to him a part of land.
The stones in situ were not his stock-intrade in a business sense but a capital asset from which after
extraction he converred the stones into his stock-in-trade. The
payment though periodic in fact was neither rent nor royalty but
a lump sum payment in instalments for acquiring· a capital asset
of enduring benefit to his trade.
The right
acquired is to a
source from which the raw material was to be extracted. The
expenditure was
outgoings
on
capital
account and
was not
allowable as
deductions under
s. 12(2)(xv) of the
Hyderabad
Income Tax Act.
Per S. K. Das, J .-That on its true construction the transaction was the sale of raw materials
coupled with a
licence to
the assessee to
come on the
land and remove
the materials
sold, the purchase price being
paid partly in a lump sum and
partly in mon·hly instalments, that the object was the procuring
of the stones for making flag stones and not the acquisition of
an enduring asset or advantage, that the payments
made were
the price of raw materials and that the · assessee was therefore
entitled to claim them as business expenditure under s. 12(2)(xv)
of the Hyderabad Income Tax Act.
Assam Bengal Cement Works Ltd. v. Commissioner of Income
Tax. West Bengal, r1955] 1 S.C.R. 972, distinguished.
C1v1L APPELLATE
JuR1sri1cnoN: Civil
Appeal
No. I 90 of 1955.
April 26.
1960
Pinglt
Induslrits
Ltd.,
Stc1mderabad
v.
Commissi~nu of
lncomt·lax,
H)'derabad
S.K. Das].
682
SUPREME COURT REPORTS
[1960].
Appeal from the judgment and order dated July 31,
1953, of the Hyderabad High Court in Reference Case
No. 302/5 of 1951-52.
N. A. Palhivala and R.
Ganapathy Tyer,. for the
appellants:
H. N. Sanyal, Additional Solicitor-General of India,
H.]. Uinrignr and D. Gupta, for the respondent ..
1960. April 26. The Judgment of Kapur and
Hidayatullah, .JJ., was delivered by HidayaLUllah,
J.
S. K. Das, ]., delivered a separate Judgment.
S. K. DAS, ].-This is an appeal by the assessee
with leave of the High Court of Hyderabad gr<imed
under s. 66A(2) of the Indian Income-tax Act, 1922.
The short facts arc these. 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, 1343F,
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.
Tht: appellant had
no right or interest in the land; nor did he have am·
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 onlv
the right to excavate stones from the quarries till th~
end of tbe 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 said;
"l. The period of contract for excavating stones
from the quarries of the villages noted above is for 12
years from !st Ardibehisht 1346 Fasli to the end of the
Farwardi, 1358 Fasli and the contractor will be given
possession from I st Ardibehisht 1346 Fasli.
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3 S.C.R.
SUPREME COURT REPORTS
683
2. The annual contract amount would be Rs. 28,000.
3. For the surety of the contract the sum of
Rs. 96,000 0. S. has b~en. 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 Tre;:isury by instalment
every month of Rs. 1,667-10-8; if there be any default
in p~ying the instalment regularly, interest at' the rate
of one rupee per cent. per mensem will be charged to
the contractor till the 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. '7SO.
. 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 Ouolnama 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 said:
"Flag stones of required thickness are found in
layers in those mines or quarries.
Before
one gets
these flag stones of the required thickness, one
has
<'.lso to extract flag stones of gTeater thickness.
The
assessee sells thesf flag stones both of the usual thickness and thickness greater than usual one,. after working on them. if necessary."
There was no finding as
to how deep the quarrying had to be done to extract
the stones of required thickness.
According to the appellant's 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. l 2(2)(xv) of the Hyderabad 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 appellant's books of account, and held
for the assessment year l 357F that the
expenditure
1960
Pingie
Industries
Ltd.,
Secunderabad
v.
Commissioner of
Income-tax,
Hyderabad
S.K. Das J.
1960
Pingle
Industries
Ltd.,
Secunderabad
v.
Commissioner of
Income-tax,
Hyderabad
S.K. Das J.
684
SUPREME COURT REPORTS
[1960]
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 l 358F he similarly held that the sum
of Rs. 28,1.58 was capital expenditure am! 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 th.e 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 deacl rent which are
allowable as
working expenses in cases of mines and quarries. The
President of the Tribunal expressed his finding thus:
"In the present case. the assessee
purchased
his
stock-in-trade.
Instead of paving so much for so many
cubit. feet, he pays a lump sum every year.
Parties
might as well agree that the so called lessee shall pay a
sum of monev 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 assessee's income from the quarries."
In the 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 ancl 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 followini!; question for
the decision of the High Court:
"v\Thether the lease money paid by the as.sessec
company to Nawab Mehdi Jung Bahadnr and to
Government is capital expenditure or revenne expcndi tu re"
The High Court answered the question against the
appellant.
Hence the present appeal.
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3 S.C.R.
SUPREME COURT REPORTS
685
My learned brethren have come to the conclusion
that the expenditure in question was capital expenditure.
Reluctantly and much to my regret I
have
come to a different conclusion, and I proceed now to
state the reasons for my conclusion as briefly as I can.
It is not disputed that if the expenditure was capital
expenditure, then the appellant was not entitled to
the benefit of s. l 2(2)(xv) of the Hyderabad Income-
. tax Act in the relevant years. It is equally undisputed
that· if the expenditure was revenue expenditure, then
the appellant could claim an allowance in
respect
thereof.
Therefore, it is unnecessary
to
read
the
provisions of s. l 2(2)(xv) of the Hyderabad Income-tax
Act or the corresponding provisions of s.
10(2)(xv)
of the Indian Income-tax Act, 1922.
I plunge
at
once in medias res to a consideration of the
crucial
question in this case: where the two payments in question of the nature of capital expenditure or revenue
expenditure?
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-recognisecl 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 Dorne in mind in approaching the problem. I shall refer in this judgment to such decisions
only as have a bearing on the real controversy between
the parties.
In view of the submissions made before us, the real
controversy in this cas~ appears to me to be this: in
the context of the terms of the contract between the
parties, was
the expenditure incurred intended to
create or bring into existence an asset or advantage
of an enduring character or . was it intended to get
only the stock-in-trade or the raw materials for the
business?
If it was the former, then it was capital
25--6 SCI/ND/82
1960
Pingle Industries
Ltd.,
Secunderabad
v.
Commissioner of
Income-tax,
Hyderabad
S.K. Das J.
686
SUPRE:ME COURT REPORTS
[1960]
expenditure;
if latter,
then revenue
expcndit:ur_e.
There is no doubt that receipts and
l)ayments
m
Pingle Industries
Ltd.,
Sernnd,,abad connexion with acquiring or disposing of leasehol<;ls
1960
v.
Commissioner of
Income-tax,
Hyderabad
S.K. Das :J.
of mines or minerals are usually on capital account
(Kamakshya Narain Singh v. Cortimissioner of hlcometax (')).
The reason wby the price paid for the purchase of mining rights is a capital expenditure
was
explained by Channell, J., in Alianza Co. v. Bell (')
in the following words:
"Jn the ordinary case, the cost of the material
worked up in a manufactory is not a capital expenditure; it is a current expenditure and does not become
a capital expenditure merely because the material is
provided by something like a forward contract, under
·which a person for the payment of a lump sum down
secures a supply of the raw material for a period
extending over several years ................ If it is merely
a manufacturing business, then the procuring of the
raw material would not be a capital expenditure. Bnt
if it is like the working of a particular mine or bed
of brick earth and converting the stu!f workecl into a
marketable commodity, then the money paid for the
prime cost of the stuff so clealt with is as much capital
as the money sunk in the machinery or buildings."
Learned counsel for the Department bas strongly relied
on these observations and. has
contended
that
the
appellant had no manufacturing
business
rn
the
present case and the price he paid for
working the
quarries was as much capital expenditure as money
sunk in machinery or buildings.
But this contention
ignores the absence of
one very in1portant c.ircu1nstance in this case.
The acquisition of a mine or a
mining right is an encluring asset, because it is not a
mere purchase of minerals but is an acquisiLion of a
source from which flows the right to extract minerals;
in other words, the acquisition provides the means of
obtaining the raw material rather than the raw material itself; therefore, it relates to fixed capital, and in
a business sense the acquiring of a leasehold of a mine
is not the purchase of raw materials only.
It is something more than that. In the case before us except
the stones, nothing else was acquirecl. Clauses .~ and 7
of the Quolnama said:
(1)
[19431 11 l.T.R. 513.
(2)
[19011 2 K.Jl. G6G.
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3 S.G.R.
SUPREME COURT REPORTS
687
"5. The contractor shall have no right to excavate
stones from other places of the Jagir Ilaqa
except
the villages specified within the prescribed period of
contract.
The J agir authorities will
ndt allow any
other person to excavate these stones
within
the
jurisdiction of villages other than the villages specified
above."
................................................ ................. .
'\7. The contractor shall have to excavate
stones
from the quarries as per the plan. In case he requires
a further area of land in the village for excavation of
stones, this will be don~ on his application four months
in advance.
The contractor will have no right
to
manufacture cement · from
the s'tones in the villages
noted above."
In view of these clauses and the recital in the Quolnama that it was a quarry contract
for excavating
stones only, it is in my view not reasonable to hold
that what the appellant acquired in the present case
was the means of obtaining raw material rather than
'the raw material itself.
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. vVhat
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 raised.
The only
answer then is that the payments in question were
revenue expenditure.
1960
Pingk Industrie&
Ltd.
Secunderabad
v.
Commissioner of
Income-tax,
Hyderabad
S.K. Das J .
1960
Pingle lndustri.ts
Ltd., Secunderabad
v.
Commissioner of
Incom1-tax,
l'f;derabad
S.K. Das].
688
SUPREME COURT REPORTS
[1960]
I now refer to four decisions which in my opinion
come closest to the controversy before 11>.
\I) In re:
Benarsi Das ]agannalh CJ; (2) Mohanlal
f-largovind
of ]ubbul/1ote v. Commissioner of Income-lax, C. P. and
Berar, Nagpw· (2); (3) Abdul Kayoom v. Commissioner
of Income-tax, Madras (') and (4) Stow Bardolj1h Gravel
Co. Ltd. v. Poole (Inspector of Taxes) (').
The first is a
decision of the Full Bench of the Lahore High Court,
the second, a decision of the Privy Council, the third, a
decision of the Full Bench of the Madras High Court
and the last a decision of the Court of Appeal in
England. The facts in Benarsi Das ]agan11ath (') were
these. The assessee, who was a manufacturer of bricks,
obtai11ed certain lands on leases for the purpose of
digging out earth for
the
manufacture of bricks.
Under the deeds he had the right to dig earth up to
three to three and a half feet.
He had no interest left
in the lands as soon as the earth was dug out and
removed.
The periods of the leases varied from six
months to
three years.
The Income-tax
authorities
and the Appellate Tribunal held that the
consideration paid by the assessee to the owners of the lands
was a capital expenditure and was therefore not an
allowable deduction under s. I 0(2)(xv) of the
Indian
Income-lax Act:.
It was held by the Full Bench that
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
~nduring character, that the payments made were the
price of raw material and that the assessee was therefore entitled to claim them as business
expenditure
under s. 10(2)(xv). It was worthy of note that this
decision was approved by this Court: in Assa111 Bengal
Cement Co. Ltd v. Commissioner of Income-tax, West
Bengal C).
Bhagwati, J., delivering the judgment of
this Court said:
"This synthesis attempted by the Full Bench of
the Lahore High Court truly enunciates the principles
which emerge from the authorities.
In cases
where
the expenditure is made for the initial outlay or for
(') [194G] I.L.R. 27 Lah. 307. (') [1949] L.R. 76 I.A. 23>.
(') 1.L.R. [1%3] Mad. 1133. (') [195.\] 27 I.T.R. 14G.
(') [1955] 1 S.C.R. 972.
J...
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3 S.C.R.
SUPREME COURT REPORTS
689
extension of a business or a substantial
replacement
of the equipment. there is no dmibt that it is capital
expenditure.
1} capital asset of the business is either
acquired or extended or substantially
replaced
and
that outlay whatever be its source whether it is drawn
from the capital or the income of the concern ·is
certainly in the nature of capital expenditure.
The
question, however,
arises
for
consideration
where
expenditure is incurred while the business is going on
and is not incurred either for extension of the business or for the substantial replacement of its equipment.
Such expenditure can be looked at either from the
point of view of what is acquired or from the point of
view of what is the source from which the expenditure
is incurred. If 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 capita~
expenditure. If on the other hand it is made not for
the purpose of bringing into existence of any asset or
advantage but for running the· business or working it
with a view to produce . the profits it is a revenue
expenditure. If any such asset or advantage for
the
enduring benefit of the business is thus acquired or
brought into existence it would be immaterial whether
the source of the payment was
the capital or the
income of the concern or whether the payment
was
made once and for all or was made periodically.
Thi;
aim and object of the expenditure would
determine
the character of the
expenditure
whether
it is a
capital expenditure or a
revenue expenditure. The
source or the manner of the payment would then be of
no consequence. It is only in those cases where this
test is of no avail that one may go to the test of fixed
or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the
business or part of its circulating capital. If it was
part of the fixed capital of the business it would be of
the nature of capital expenditure and if it was part of its
circulating capital it would be of the nature of revenue
expenditure.
These tests are thus mutually exclusive
and have to be1 applied to the facts of each particular
case in the manner above indicated. It has been rightly
]960
Pingle~ Industries
Ltd.,
Secunderabad
v.
Commissiouer ef
Income-tax,
Hyderabad
S.K. Das].
1960
Pinglt lnd11.>tries
Ltd.,
Secunderr-bad
v.
Commissioner of
Income-tax,
H)'duabad
S.K. Da< ].
690
SUPREME COlJRT REPORTS
[19GO]
observed that in the great diversity of human
affairs
and the complicated nature of business operations it
is difficult to lay down a test which would apply to all .
situations.
One has therefore
got
to
apply
these
criteria one after the other from the business point of
view and come to the conclusion whether on a fair
appreciation of the whole situation
the expenditure
incurred in a particular case is of the nature of capital
expenditure or revenue expenditure in which latter
event only it would be a deductible allowance under
section I 0(2)(xv) of the Income-tax Act. The question
has all along been considered to be a question of fact
to be determined by the Income-tax authorities on an
application of the broad principles laid down above
and the Courts of law would not ordinarily interfere
with such findings of fact if they have been arrived at
on a proper application of those principles"
[ do not read these observations as merely indicating
an approval of certain general principles,
but
not
necessarily an approval of the actual decision in
Berwrsidas .f11gannath (')
In cases of this nature it
is the application of t.he principles to the facts of a
case which presents difficulties, and I do not
think
that this Court. would have made the observations it
made, unless it was ap~oroving the actual decision m
Benarsidos .faganalh' (')
In cases of this
nature
it
general principles to the facts of that case
l see no
significant distinction between that case and the one
before us.
In both cases, what was acquired was raw
material--earth in one case and stone in the other-and
the payments made were the price of the raw material.
The only distinction pointed out is the difference in
the period of the contracts; that is a relevant factor
bnt not determinative of the problem before us. Even
in our case the contract in favour of Government was
for five years only.
Surely, it cannot be argued that
three years in one case and five years in the other will
make all the difference.
I think· that the real test is,
in the context of the controversy before us, what was
acquired-an enduring asset or
advantage,
or raw
materials for running the business?
Judged hy that
test the present case stands on the same footing as the
nise of Benarsidas .Jagannath (').
(') [1946] I.L.R. 27 Lah. 307.
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3 S.C.R.
SUPREME COURT REPOR1S
691
In Mohanlal Hargovind (1) the facts were these. The
assessees carried on business at several places as manufactures and vendors of
country
made
cigarettes
known as bidis.
These cigarettes were composed of
tobacco rolled in leaves of a tree known as tendu leaves,
which were obtained by the assessees by entering into
a nuinber of short term contracts· with the Government
and other owners of forests.
Under the contracts·, in
consideration of certain sum payable by instalments,
the assessees were granted the exclusive right to pick
and carry away the tendu leaves from the forest area
described:
The assessees were allowed
to
coppice
small tenclu plants a few months in advance to obtain
good leaves and to pollard tendu trees a few months
,in advance to obtain better and bigger leaves.
The
picking of the leaves however had to start at once or
practically at once and to proceed continuously. The
Privy Council distinguished Alianza Co. v. Bell (') and
overruling the decision in Income-tax Appellate Trihunal v. Haji Sabumiyan Haji Sirajuddin (') held that
'the expenditure was to secure raW1 material and was
allowable as being on revenue account Lord Greene,
delivering the judgment of the. Board said:
"lt appears to their Lordships that there has been
some misapprehension as to the true nature of these
agreements and they wish to state at once what in
their opinion is and what is not the effect of them.
Thev are merely examples of many similar
contracts
entered into by the appellants wholly and exclusively
for the purpose of their business, that purpose being
to supply themselves with one of the raw materials
of that business.
The contracts grant no interest in
land and no interest in the trees or plants themselves.
They .are simply and solely contracts giving to the
grantees the right to pick
and car11y away leaves,
which, of course, implies the right to appropriate them
as their own property."
·
. "In the present case the trees were not acquired:
nor were the leaves acquired until the appellants had
reduced them into their own 1 possession and ownership
by picking them. If the tendu leaves had been stored
(1)
[1949] L.R. 76 I.A. 235.
(2)
[1904] 2 K.B. 666.
(3)
[1946] 14 I.T.R. 447.
1960
Pi rig le
fod11slries
Ltd., Securiderabad·
v.
Commissioner of
Income-tax,
Hyderabad
S.K. Das.].
692
SUPREME COURT REPORTS
[1960]
in a merchant's g·oclown and the appellants had bought
Pingfr Iud.,,,.;,,
the right to go and fetch them and so reduce them
Ltd., S<cundunbnd into their possession and ownership it could scarcely
have been suggested that the purchase
price
was
capital expenditure.
Their Lordships see no ground
in principle or reason for differentiating· the
present
case from that supposed."
1960
v.
Comrr,issio11er of
Income-lax,
Hyderabad
SX. Da; J.
I also see no ground in principle or reason
for
differentiating the present case from that of Mohanlal
H argovind (').
In K. T. M. T. M. Abdul Ka"/OOrn and Hussain Sahib
v. Commissioner of lncorn.e-taC:., Madras(') a Full Bench
of the Madras High Court dissenting from its earlier
decisions held that rent paid by a dealer in chank under
an agreement in the form of a "lease" with the
Government under which he had an exclusive right
"to fish for, take and carry away all the chank shells
· in the sea off the coast line" of a certain district, was
allowable as revenue expenditure. It was further held
there that it made no difference whether what was
acquired was raw material for a manufacturing business or stock-in-trade which was intended to be sold
without being subject to any manufacturing process.
This decision is the subject of Civil Appeal No. 64 of
19.16 which has been heard along with this appeal. I
do not see how the present case can be distinguished
from the Madras
case
without holding
that
the
Madras decision was incorrect.
Last, I come to Stow Bardolph Grnvd Co. Ltd. (').
·1 ·hat was a case in which it was held that sums paid
b' a dealer in gravel as consideration for the right to
excavate and take away deposits of gravel represented
capital expenditure. The decision rested on the fact
that the subject matter of the agreement consiste<l of
" deposit of gravel lying some feet beneath the surface
of the land and requiring to be won from the land by
a process of excavation.
I find it difficult to reconcile
this decision with the decision in. Benars£rl,1s
.Taganuath (') and A l"lul Kayoom (') in both of which also
excavation or exploration \Vas 11ecessary to
'vln
the
raw material. If, as I hold, the decision in Benarsidas
]agannath (') was approved by this
Court then
we
(I) (1949) L.R. 7G IA 23".
(2) l.L.R. [1953] M"d. 1133.
(3)
[1955] 27 J.T.R. \.,!.).
en (19Hi) I.L.R. 27 T.1.h, 307.
. ...
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>
3 S.C.R.
SUPREME COURT REPORTS
693
must accept that decision as correct in preference to
me decision of the Court of Appeal in England.
I
may point out here what Evershed, M. R., said in the
course of his judgment in that case:
"The Commissioners for the General Purpose of
the Income Tax were of opinion that these claims to
make deductions were not admissible, but Harman, ] .,
was of opinion that the deductions were admissible.
I have myself reached a different conclusion
from
that reached by Harman, ]., and I have reached it, I
confess, with some slight feeling of regret and
misgiving on two grounds: first, I think the result bears
a little hardly on the taxpayers for reasons
which
will, I think, emerge without any necessity for emphasis as I recite the facts; second, I am not for my own
part satisfied that if close investigation were made of
the method whereby the taxpayers and others in the
same line of business carry on their
businesses,
it
might not emerge-I say no more than that-that the
commissioners would find as a fact, notwithstanding
the apparent legal consequences of the agreement to
which I have referred, Lhere was here in truth such a
taking possession of the deposit of gravel in question
that it could sensibly for t~,x purposes and rightly and
fairly be said that once the consideration money had
been paid under the agreement the deposit was in
truth the stock-in-trade of the
taxpayer. However,
I have felt compelled to say that there is no finding
of fact to support such a conclusion, nor indeed is
there before us any evidence sufficient to warrant it.
It is in that respect, I apprehend, that I find myself
at variance with Harman, ]."
"If the facts were as the judge intimated,
the
General Commissioners might find, and might justifiably find, that a case such as
this
is
not
really
distinguishable as a matter of law and common sense
from a sale of loose objects lying on the surface of the
ground, such as windfalls from apple trees, or even
from cases like those I have mentioned,
which
are
concerned with crops or leaves growing on trees. But
my difficulty is that I can find no justification for that
conclusion in the material before us."
26-6 scr I ND I 82
1960
Pingle Indusa·ies
Lui.,
Secunderabad
v.
Commissioner of
Income-tax,
Hyderab·ad
5.K. Das J.
1960
Pingle Industries
Ltd.,
Secunderabad
v.
Commissiontr of
Income-tax,
Hyderabad
S.K. Das J,
694
SUPREME COURT REPORTS
[1960]
In view of these observations I have considerable
hestitation, and I say this with
great
respect,
in
accepting the decision as a decision on a general question of law. The decision proceeded on the findings of
the Commissioners and on the basis that there were no
materials for the conclusion reached by Harman, J.
If we proceed on the findings of the Tribunal in the
present case, there
are enough materials to support
the finding that the appellant acquired
nothing but
raw materials by the transactions in question.
I fine! nothing in the decision in Stow Bardolfih
Gravel Co. Ltd. (') which need lead me to the conclusion that the decisions in Benarsidas
Jagannath (')
and Abdul Kayoom (") were wrong and require reconsideration. If I may again say so with great respect,
the learned Master of the Rolls
distinguished
the
Privy Council decision in Mohan/al
Hargovind (') by
saying that that decision rested upon the particular
circumstances of the case and upon the fact that the·
Board was able to say that from the moment the contract was entered into and before
the
leaves
had
actually been picked, the tendu leaves
were
part of.
the raw material of the appellant. He added that 1ie
could not say the same of sand and gravel, which
were part of the earth itself and which could only
become part of the stock-in-trade of the gravel merchant's business when it had, in the true sense, been
won, been excavated and been taken into their possession.
I do not, however, think that the
decision in
l\fohan/al Hargovind (') proceeded on the basis
suggested by the learned Master of the
Rolls.
In clear
and express terms Lord Greene said: "nor were the
leaves acquired until the appellant reduced them into
their possession and ownership by
picking them."
This shows that the rl.ecision of the Privy Council did
not proceed on the ground alleged, n~mely, that even
before the leaves had actually been picked, they were
part of the raw ·material of the appellant of that case.
The decision proceeded on the footing that the leaves
became part of the raw
material when
they were
reduced into possession
and
ownership by picking
(I)
[195.5] 27 1.T.R. 146.
(2)
[1946] J.L.R. 27 Lah. 307.
(3)
[1953] 24 1.T.R. 1 IG.
(4)
[1949] L.R. 76 I.A. 235.
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3 S.C.R.
SUPREME COURT REPORTS
695
them. If that is the correct ratio of Mohanlal Hargovmd ('), then where is the distinction between that
case and -the case of the gravel merchant . in
Stow
Bardolph Gravel Co. Ltd. (')and the stone merchant in
the present case?
In my opinion there is none.
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.
HmAYATULLAH, ].-This is an assessee's appeal on
a certificate of the High Court granted under s. 66A(2)
of the Indian Income-tax Act.
Pingle Industries Ltd. (hereinafter called the
assessee) is a ptivate limited Company which carries
on, among other businesses, the business of extracting
stones from quarries, which, after dressing, it sells as
flag stones.
In the year
1343 Fasli,
the assessee
. obtained from
Nawab
Mehdi Jung Bahadur of
Hyderabad the right to extract stones from certain
q1iarries belonging -to the Nawab.
A quolnama (contract) was executed, and it has been produced in the
case.
Under this quolnama, the assessee was granted
the right to extract stones from quarries situated
in
six named villages for a period of 12 years (1346 Fasli
to 1358 Fasli) on annual payment of Rs. 28,000.
To
safeguard payment Rs. 96,000 representing a part of
the annual payment at Rs. 8,000 per year were
paid
in advance as security, and the balance of Rs. 20,000
'vas payable each year in
monthly
instalments
of
Rs. 1,666-10-8 each.
In default of punctual payment
of these instalments, interest at Re. 1 per cent. was to
be charged.
Some other conditions of the quolnama
may also be briefly mentioned here.
The
assessee
undertook not to manufacture cement and also to be
responsible for the payment of the money in spite of
"any celestial or terrestrial or unexpected calamity or
unforeseen event", while the Nawab
on
his
part
undertook not to allow any other person to excavate
stones in the area of the six villages.
It was agreed
that in case of default of instalment,
the
contract
(I)
[19+9] L.R. 76 LA. 235.
(2)
[1955] 27 I.T.R. 146.
1960
Pingle Industrie,
Ltd.,
Secunderabad
v.
Commissioner of
Incomt-tax,
Hyderabad
Hidayatu/lah ].
1960
Pingle
Industrie~
Ltd., -Secunderabad
;,
Commissfoner of
b.come~l.ix,
Hyderabad
Hida;•atullah J.
G96
SUPREM.E COURT REPORTS
fl 9GO I
would be re-auctioned after one month's notice to the
contractor, who would be responsible for any shortfall
but would not have the benefit of any extra amount.
The assessee was assessed in the Fasli years 1.357
and 1358 for the account years 1356 and J 357 Fasli.
It claimed deduction respectively of Rs. 27,051 and
Rs. 28,159 paid to the Nawab in those years, as expenditure under s. l 2(2)(xv) of the Hyderabad Incometax Act, which· is the same as the corresponding provision under the Indian Income-tax Act.
The claim
for de¢uction was refused by the Income-tax Officer,
who held that the amount in each year represented a
capital expenditure though tbe whole sum was being
paid in
inst~lments. The assessee
appealed against
the two orders of assessment to the Appellate Officer
of Income-tax, and questioned
this
decision.
The
·appeals involved other matters also, with which
we
are not now concerned. The appeals were dismissed.
The asses;ee appealed further
to
the
Income-tax
Appellate Tribunal, Bombay, and raised the same
contention.
The Appellate Tribunal accepted
the
appeals.
Different reasons were
given by the President and the Accountant Member.
According to the
latter, the payment of these sums was similar to the
payment of royalties and dead rent which is allowable
as working expense in the case of mines and quarries.
The President relied
upon
Mohan/al Hargovind v.
Commissioner of Income-tax ('), and held that the
payments represented the purchase of
the stock-intrade of the assessee, and that the leases did not create
an asset of an enduring character.
The Commissioner of Income-tax, Hyderabad Division, then asked for a reference of the case to the High
Court at Hyderabad, and
the
,;.ppellate
Tribunal
referred the following question of law under s. 66(1) of
the Hyderabad Income-tax Act.
"Whether the lease-money paid by the assessee
Company to Nawab Mehdi Jung Bahadur and to
Government is
capital
expenditure or revenue
expenditure."
The reference to Government in the question arises
in this way.
It appears that there was yet another
(I)
[1949] I..R. 76 !.A. 235.
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-
3 S.C.R.
SUPREME COURT REPORTS
697
1960
lease which was taken from Government for 5 years'
and under which the assessee was reguired to pay
Rs. 9,000 per year in instalments of Rs. 750 per
month.
It does not appear that the terms of this
lease were ascertained and the amount does not figure
in the order of assessment, though apparently it was
assumed that what applied to the payment to the
Nawab held equally good in regard to the payment to
Government. In any event, the books of the assessee
kept in mercantile system showed both the sums each
year as lease money.
Pingle Industries
Ltd.,
Secunderabad
The High Court of Hyderabad after an examination
of several decisions rendered in India and the United
Kingdom, held that the payments in each year of
account \~•ere of a capital nature, and that no deduction could be given under s. 12(2)(xv) of the Hyderabad
Income-tax Act.
The assessee
then applied, and
obtained the certificate as stated, and this appeal has
been filed.
The arguments in the case involved the interpretation of the quolnama as to the right conveyed
there
and the nature of the payments with reference to the
provision of the law under which the deduction was
claimed.
That section reads as follows :
"1 2 (l): The tax shall be payable by an assessee
under the head profits and gains of business, profession or vocation in respect of the profits and gains
of any business, profession or vocation carried on
by him.
(2) Such profits or gains shall be computed after
making the following allowances, namely:-
~
(xv) Any expenditure (not being in the nature of
capital expenditure or personal expenses of the
assessee) laid out or expended
wholly and exclusively for the purpose of such business, profession or
vocation."
While the Appellate Tribunal looked to the periodicity of the payments, the High Court held that the
;.,..
amot1nt payable '"ras Rs. 3,36,000 divided into annual
and redivided into monthly instalments.