Full Judgment Text
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PETITIONER:
MEWAR SUGAR MILLS LTD., BHOPAL SAGAR
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, RAJASTHAN, JAIPUR
DATE OF JUDGMENT26/09/1972
BENCH:
REDDY, P. JAGANMOHAN
BENCH:
REDDY, P. JAGANMOHAN
HEGDE, K.S.
DUA, I.D.
KHANNA, HANS RAJ
CITATION:
1973 AIR 2326 1973 SCR (2) 429
1973 SCC (3) 143
ACT:
Income Tax Act (11 of 1922), s. 10(2) (xv)-Payment in
respect of monopoly rights and licence and in respect of
royalty-Whether capital or revenue expenditure.
HEADNOTE:
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 an
agreement., Under the terms of the grant and the agreement,
the assessee was liable to pay royalty at Z% on the price of
sugar manufactured by the assessee and this rate was
revisable, 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, every year 1 1/4% of the net profits of its
business, in lieu of the monopoly rights and licence.
For the assessment years 1950-53, the assessee claimed that,
(a) The ,amount paid to the transferor in respect of the
monopoly and licence, and (b) the royalty paid to the
Government in respect of the sugar manufactured were
deductible expenses but the Department, Tribunal and the
High Court, on reference, held against the assessee.
Partly allowing the appeal to this Court,
HELD : 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. [436B-C]
None of the tests laid down in the various decisions for
determining whether an expenditure incurred in bringing into
existence an asset is of a capital 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 does 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 therefore. [434C-D, F]
In the present case, (1) no arguments were addressed
regarding payments in respect of monopoly rights and
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licence. [433 B]
(2) As regards the royalty on 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 royalty is directly related to the sugar
manufactured by the appellant and is not for securing an
enduring advantage. Therefore, the expenditure is a revenue
expenditure. [433E; 434F-G; 435E]
Gotan Lime Syndicate Y. Commissioner of I.T. 59 I.T.R. 718
and Associated Stone Industries (Kotah) Ltd. v. C.I.T., 82
I.T.R. 896. followed.
430
R. B. seth moolchand Suganchand v. C.I.T., Delhi, C.A. No,
2020 of 1972 decided on 19.9.1972, and Singareni Collieries
Co. Ltd. v. Commissioner of I.T., 66 I.T.R. 553, referred
to.
Assam Bengal Cement Co. Ltd. v. C.I.T., West Bengal, 27
I.T.R. 34, explained.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1596 to
1598 of 1969.
Appeals by certificate from the judgment and order dated
November 27, 1967 of the Rajasthan High Court in Income-tax
Reference No. 29 of 1962.-
S. T. Desai, A. K. Verma, J. B. Dadachanji, O. C. Mathur
and Ravinder Narain, for the appellant.
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 Income-tax Appellate
Tribunal under S. 66(1) of the Income-tax Act, 1922
(hereinafter referred to as the ’Act’ partly in 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 1950-51, 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 power as
a Ruler granted through the intervention of Pandit Ramakant
Malaviya granted a licence for 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
:-
"(2) No permission will be granted to any other person for
starting a sugar factory for a period of 32 years from the
date of this 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 maximum of 30,000 acres as
may be available in the vicinity of Jaisamand. Mr. Banarsi
Prasad Jhunjhunwala will have to acquire 5000 acres within
two years of this order and the remaining should be acquired
within 10
431
years from the date of order if land near Jaisamund is not
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found suitable for cultivation of sugarcane, some other land
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 refixed 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
considered 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 install 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 whereby the rights of monopoly available to
Jhunjhunwala and Malaviya were transferred 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 Mills 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
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 1/4 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 of 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
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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 Jhunjhunwala 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 4 per cent. The assessee claimed that
the amounts paid in respect of the monopoly and licence as
also those paid to the Government inrespect of the royalty
for sugar and oil were deductible expenses but the Income-
tax Officer disallowed them holding that the expenditure 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 to the respective parties 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 provisions of
S. 10(1) or 10(2) (xv) of the Act but the payment made by
the assessee to the transferor 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
deduct-ion" under the aforementioned provisions of the Act.
433
The appeal raises two controversies the one relates to the
deduction of the payments 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 advocate 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 assessee in respect of
the monopoly rights. The only other question which survives
is, the finding of the High Court that the payment of 2 %
royalty on the price of sugar manufactured by the appellant
is relatable to monopoly rights and is an expenditure of a
capital nature. Is the finding sustainable in law is what
has to be determined. According to clause (5) the rate of
2% could be revised if after five years it was found to be
excessive for the running of the factory. This clause
certainly has no relationship with any payment referable, to
the monopoly conferred under cl. (2) of the grant. The
advantages which Jhunjhunwala obtained under cls. (3) and
(4) of the grant which right has been transferred to the
appellant are advantages and facilities which any Government
with progressive economic policy would grant to encourage
the setting 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
recognised that the words "no 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
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as giving of agricultural land on favourable terms, charging
water rates at a concession, exemption 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 overall 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
as capital expenditure and was consequently
not an 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.I.T., Delhi(1) to
which two of us were a party (Jaganmohan Reddy
and Khanna, JJ.)- pointed out the difficulty
which the Judges are confronted with in the
application of the principles and criteria for
determining the nature 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 same ground
again, except to say that none of the tests
laid 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. None
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 different situations arising on
the facts of each case, but the difficulty in
matching them with the seeming
irreconcilability are perhaps explicable only
on the ground that the determination in any
particular case is dependent on the character
of the lease or agreement, the nature of the
asset, the purpose for which the expenditure
was incurred and such other factors as-, in
the facts and circumstances of that case would
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indicate."
The determining factor, therefore, will depend 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 determined
whether a particular expenditure is a capital expenditure or
a revenue expenditure. In this case the payment made is
directly related to the sugar manufactured by the appellant.
The decision in Assam Bengal,, Cement Co. Ltd., v. C.I.T.,
West Bengal (2 ) which has been relied upon by the High
Court and the Tribunal has in our view been misapplied. In
that case the question was, whether in computing the 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 S. 10
(2) (xv) of the Act. This payment was in addition to the
rents and royalties, which were agreed to be paid by the
lessee and was
(1) Civil Appeal No. 2020/1972 decided on 19th September.
1972.
(2) 27 I.T.R. 34.
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
" 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 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 expenditure."
In Gotan Lime Syndicate v. Commr. of I.T.(1) which was a
case dealing with the amount of dead rent payable per acre
and the amount of royalty payable for a maund of lump lime
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
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 relatable 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 more 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 I. 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 (Kotah) Ltd. v. C.I.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
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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
(1) 59 I.T.R. 718. (2) 66 I.T.R. 553.
(3) 82 I.T..R. 896.
436
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 of this, the expenditure incurred i.e., 2%
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
assesses, the appeal is partly allowed with costs.
V.P.S.
Appeal partly allowed.
437