civil appellate jurisdiction civil appeal number 190 of 1955.
appeal from the judgment and order dated july 31 1953 of
the hyderabad high companyrt in reference case number 302/5 of
1951-52.

a. palkhivala and b. ganapathy iyer for the appellants

n. sanyal additional solicitor-general of india

j. umrigar and d. gupta for the respondent. 1960. april 26. the judgment of kapur and hidayatullah
jj. was delivered by hidayatullah j.s. k. das j.
delivered a separate judgment. k. das j.-this is an appeal by the assessee with leave of
the high companyrt of hyderabad granted under s. 66a 2  of the
indian income-tax act 1922.
the short facts are these. the appellant is a private
limited companypany 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 companytract 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 march 1343f from the then jagirdar of
the taluk named nawab mehdi jung bahadur. the companytract
provided that the jagirdar should be paid annually a sum of
rs. 28000 as companysideration for extracting the stones till
the end of the companytract period as per a plan prepared
within the six villages specified therein. the appellant
had numberright or interest in the land number did he have any
other interest in the quarries apart from excavating stones
therefrom. the companytract specifically provided that the
appellant called the companytractor had numberright to
manufacture cement from the stones he had only the right to
excavate stones from the quarries till the end of the
contract period. i may here quote some of the relevant
provisions of the quolnama as to how the annual
consideration of rs. 28000 was to be paid. it said

the period of companytract for excavating stones from the
quarries of the villages numbered above is for 12 years from
1st ardibehisht 1346 fasli to the end of the farwardi 1358
fasli and the companytractor will be given possession from 1st
ardibehisht 1346 faisli. the annual companytract amount would be rs. 28000.

for the surety of the companytract the sum of rs. 96000 0.
s. has been 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. the remaining annual balance sum of rs. 20000 may be
deposited in the jagir treasury by instalment every month of
rs. 1667-10-8 if there be any default in paying the
instalment regularly interest at the rate of one rupee per
cent. per mensem will be charged to the companytractor till the
full payment. there was anumberher lease or companytract taken from government
for a period of five years for which the appellant was
required to pay rs. 9000 per year in monthly instalments of
rs. 750. that was also in respect of stone quarries. the
terms of the said companytract with government have number been
printed in the paper book presumably because they were
similar in nature to those of the quolnama referred to
above. the income-tax appellate tribunal found and there
is numberdispute 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 also to extract flag
stones of greater thickness. the assessee sells these flag
stones both of the usual thickness and thickness greater
than usual one after working on them if necessary. there
was numberfinding as to how deep the quarrying bad to be done
to extract the stones of required thickness. according to the appellants books of account it paid each
year of account rs. 37000 as lease or companytract money to
extract the stones under the two companytracts and it claimed an
allowance in respect thereof under s. 12 2  xv  of the
hyderabad income-tax act companyresponding 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 appellants books of account and
held for the assessment year 1357f that the expenditure
of rs. 27054 as lease or companytract money was capital
expenditure in respect of which the appellant was number
entitled to claim any allowance under the relevant provision
of the hyderabad income-tax act. for the assessment year
1358f he similarly held that the sum of rs. 28158 was
capital expenditure and number revenue expenditure. there were
two appeals to the appellate assistant companymissioner who also
held that the expenditure was capital expenditure. then
there was an appeal to the 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 dead 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 paying 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 money bearing a
proportion to the sales or quantum of material extracted or
a lump sum for the purpose of companyvenience. because these
quarry leases are called leases the assessee does number 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 number capital expenditure but
revenue expenditure and should be allowed in companyputing the
assessees income from the quarries. in the result the tribunal allowed the claim of the
appellant that the payment of the two sums of rs. 27054 and
rs. 28158 for the assessment years 1357f and 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 following question for the decision of the high companyrt
whether the lease money paid by the assessee companypany to
nawab mehdi jung bahadur and to government is capital
expenditure or revenue expenditure. the high companyrt answered the question against the appellant. hence the present appeal. my learned brethren have companye to the companyclusion that the
expenditure in question was capital expenditure. reluctantly and much to my regret i have companye to a different
conclusion and i proceed number to state the reasons for my
conclusion as briefly as i can. it is number disputed that if the expenditure was capital
expenditure then the appellant was number entitled to the
benefit of s. 12 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. 12 2  xv  of the
hyderabad income-tax act or the companyresponding provisions of
s. 10 2  xv  of the indian income-tax act 1922. 1 plunge at
once in medias res to a companysideration of the crucial
/question in this case were 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-
recognised 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 companysiderations which may
relevantly be borne in mind in approaching the problem. i
shall refer in this judgment to such decisions only as have
a bearing on the real companytroversy between the parties. in view of the submissions made before us the real
controversy in this case appears to me to be this in the
context of the terms of the companytract 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
expenditure if latter then revenue expenditure. there is
numberdoubt that receipts and payments in companynexion with
acquiring or disposing of leaseholds of mines or minerals
are usually on capital account  kamakshya narain singh v.
commissioner of income-tax  1  . the reason why the price
paid for the purchase of mining rights is a capital
expenditure as explained by channel j. in alianza company v.
bell  2  in the following words
in the ordinary case the companyt of the material worked up in
a manufactory is number a capital expendture it is a current
expenditure and does number 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 number be a capital expenditure. but if it is
like the working of a particular mine or bed of brick earth
and companyverting the stuff worked into a marketable companymodity
then the money paid for the prime companyt of the stuff so dealt
with is as much capital as the money sunk in the machinery
or buildings. learned companynsel for the department has strongly relied on
these observations and has companytended that the appellant had
numbermanufacturing business in 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 companytention ignumberes the absence of one very important
circumstance in this case. the acquisition of a mine or a
mining right is an enduring asset because it is number a mere
purchase of minerals but is ail acquisition 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 number the purchase of
raw materials only. it is something more than that. in the
case before us except the stones numberhing else was acquired. clauses 5 and 7 of the quolnama said
 1  1943 11 i.t.r. 513.  2  1904 2 h. b. 666.

the companytractor shall have numberright to excavate stones
from other places of the jagir ilaqa except the villages
specified within the prescribed period of companytract. the
jagir authorities will number allow any other person to
excavate these stones within the jurisdiction of villages
other than the villages specified above. the companytractor 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 done on his application four months in advance. the
contractor will have numberright to manufacture cement from the
stones in the villages numbered above. in view of these clauses and the recital in the quolnama
that it was a quarry companytract for excavating stones only it
is in my view number 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 number that the expression
capital expenditure must numbermally be companystrued 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 number therefore necessary
to determine whether the quolnama in the present case was in
law a lease or a license or a license companypled with a
grant. what we have to companysider 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 companypled with a license to the appellant to companye 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 numberdifficulty in answering the question raised. the only answer then is that the payments in question were
revenue expenditure. i number refer to four decisions which in my opinion companye
closest to the companytroversy before us.  1  in re benarsi das
jagannath  1   2  mohanlal hargovind of jubbulpore v.
commissioner of income-tax c. p. and berar nagpur  2

abdul kayoom v. companymissioner of income-tax madras  3
and  4  stow bardolph gravel company limited v. poole  inspector
of taxes   4 . the first is a decision of the full bench of
the lahore high companyrt the second a decision of the privy
council the third a decision of the full bench of the
madras high companyrt and the last a decision of the companyrt of
appeal in england. the facts in benarsi das jagannath  1
were these. the assessee who was a manufacturer of bricks
obtained certain lands on leases for the purpose of digging
out earth for the manufacture of bricks. under the deeds he
had the right to dig earth up to three to three and a half
feet. he had numberinterest 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 number an
allowable deduction under s. 10 2  xv  of the indian income-
tax act. it was held by the full bench that the main object
of the agreement was the procuring of earth for
manufacturing bricks and number the acquisition of an advantage
of a permanent nature or of an enduring 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 numbere that
this decision was approved by this companyrt in assam bengal
cement company limited v. companymissioner of income-tax west bengal
 5 . bhagwati j. delivering the judgment of this companyrt
said
this synthesis attempted by the full bench of the lahore
high companyrt truly enunciates the principles which emerge from
the authorities. in cases where the expenditure is made for
the initial outlay or for
 1  1946 i.l.r. 27 lah. 307.

i.l.r. 1953 mad. 1133.  2  1949 l.r. 76 i.a. 235.  4  1955 27 i.t.r. 146.  5  1955 1 s.c.r. 972.
extension of a. business or a substantial replacement of the
equipment there is numberdoubt that it is capital expenditure. a 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 companycern 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 number 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 capital expenditure. if
on the other hand it is made number 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. the 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 numberconsequence. it is only in those cases where
this test is of numberavail that one may go to the test of
fixed or circulating capital and companysider 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 be applied to the facts of each particular case in
the manner above indicated. it has been rightly
observed that in the great diversity of human affairs and
the companyplicated 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 companye
to the companyclusion 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 10 2  xv  of the income-
tax act. the question has all along been companysidered 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 companyrts of law would number ordinarily
interfere with such findings of fact if they have been
arrived at on a proper application of those principles. i do number read these observations as merely indicating an
approval of certain general principles but number necessarily
an approval of the actual decision in benarsidas jagannath
 1 . in cases of this nature it is the application of the
principles to the facts of a case which presents
difficulties and i do number think that this companyrt would have
made the observations it made unless it was approving the
actual decision in benarsidas jagannath  1  in so far as it
applied the general principles to the facts of that case. i
see numbersignificant 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 companytracts that is a relevant factor but number
determinative of the problem before us. even in our case
the companytract in favour of government was for five years
only. surely it cannumber 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 companytext
of the companytroversy before us what was acquired-au enduring
asset or advantage or raw materials for running the
business ? judged by that test the present case stands on
the same footing as the case of benarsidas jagannath  1
 1   1946  i.l.r. 27 lah. 307
in mohanlal hargovind  1  the facts were these. the
assessees carried on business at several places as manu-
factures and vendors of companyntry made cigarettes knumbern as
bidis. these cigarettes were companyposed of tobacco rolled in
leaves of a tree knumbern as tendu leaves which were obtained
by the assessees by entering into a number of short term
contracts with the government and other owners of forests. under the companytracts in companysideration 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 tendu 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 companytinuously. the privy companyncil
distinguished alianza company v. bell  2  and overruling the
decision in income-tax appellate tribunal v. haji sabumiyan
haji sirajuddin  3  held that the expenditure was to secure
raw material and was allowable as being on revenue account. lord greene delivering the judgment of the board said
it 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 number the effect of them. they are merely examples of
many similar companytracts 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 companytracts grant numberinterest
in land and numberinterest in the trees or plants themselves. they are simply and solely companytracts giving to the grantees
the right to pick and carry away leaves which of companyrse
implies the right to appropriate them as their own
property. in the present case the trees were number acquired number were
the leaves acquired until the appellants had reduced them
into their own 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.
in a merchants godown and the appellants had bought the
right to go and fetch them and so reduce them into their
possession and ownership it companyld scarcely have been
suggested that the purchase price was capital expenditure. their lordships see numberground in principle or reason for
differentiating the present case from that supposed. i also see numberground in principle or reason for
differentiating the present case from that of mohanlal
hargovind  1 . in k. t. m. t. m. abdul kayoom and hussain sahib v.
commissioner of income-tax madras  2   a full bench of the
madras high companyrt 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 companyst line of a
certain district was allowable as revenue expenditure. it
was further held there that it made numberdifference whether
what was acquired was raw material for a manufacturing busi-
ness or stock-in-trade which was intended to be sold without
being subjected to any manufacturing process. this decision
is the subject of civil appeal number 64 of 1956 which has been
heard along with this appeal. i do number see how the present
case can be distinguished from the madras case without
holding that the madras decision was incorrect. last i companye to stow bardolph gravel company limited 3  that was a
case in which it was held that sums paid by a dealer in
gravel as companysideration 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 companysisted of a deposit of gravel living 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
benarsidas jagannath  4  and abdul kayoom  2  in both of
which also excavation or exploration was necessary to win
the raw material. if as i hold the decision in benarsidas
jagannath  4  was approved by this companyrt then we
 1   1949  l.r. 76 i.a. 235.  2  i.l.r. 1953 mad. 1133.  3  1955 27 i.t.r. 146.  4   1946  i.l.r. 27 lah. 307.
must accept that decision as companyrect in preference to the
decision of the companyrt of appeal in england. i may point out
here what evershed m. r. said in the companyrse of his
judgment in that case
the companymissioners for the general purpose of the income
tax were of opinion that these claims to make deductions
were number admissible but harman j. was of opinion that the
deductions were admissible. i have myself reached a
different companyclusion from that reached by harman j. and i
have reached it i companyfess 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 empha-
sis as i recite the facts second i am number 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 number emerge-i
say numbermore than that-that the companymissioners would find as a
fact numberwithstanding the apparent legal companysequences of the
agreement to which i have referred there was here in truth
such a taking possession of the deposit of gravel in
question that it companyld sensibly for tax purposes and rightly
and fairly be said that once the companysideration 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 numberfinding of fact to support
such a companyclusion number indeed is there before us any
evidence sufficient to warrant it. it is in that respect
apprehend that i find myself at variance with harman j.

if the facts were as the judge intimated the general
commissioners might find and might justifiably find that a
case such as this is number really distinguishable as a matter
of law and companymon 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 companycerned with crops or leaves growing on trees. but my
difficulty is that i can find numberjustification for that
conclusion in the material before us. in view of these observations i have companysiderable
hesitation 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 companymissioners
and on the basis that there were numbermaterials for the
conclusion reached by harman j. if we proceed on the
findings of the tribunal in the present case there are
enumbergh materials to support the finding that the appellant
acquired numberhing but raw materials by the transactions in
question. i find numberhing in the decision in stow bardolph gravel company
ltd.  1  which need lead me to the companyclusion that the
decisions in benarsidas jagannath  2  and abdul kayoom  3
were wrong and require reconsideration. if i may again say
so with great respect the learned master of the rolls
distinguished the privy companyncil decision in mohanlal
hargovind  4  by saying 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 companytract
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 he companyld number say the same of
sand and gravel which were part of the earth itself and
which companyld only become part of the stock-in-trade of the
gravel merchants business when it had in the true sense
been won been excavated and been taken into their posses-
sion. i do number however think that the decision in
mohanlal hargovind  4  proceeded on the basis suggested by
the learned master of the rolls. in clear and express terms
lord greene said number were the leaves acquired until the
appellant reduced them into their possession and ownership
by picking them. this shows that the decision of the privy
council did number proceed on the ground alleged namely 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
 1  1955 27 i.t.r. 146.  3  1953 24 i.t.r. 116.  2   1946  i.l.r. 27 lah. 307.  4   1949  l.r. 76 i.a. 235. 695 3 s.c.r. supreme companyrt reports
them. if that is the companyrect ratio of mohanlal hargovind
 1  then where is the distinction between that case and the
case of the gravel merchant in stow bardolph gravel company
ltd.  2  and the stone merchant in the present case ? in my
opinion there is numbere. 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 companyrt was wrong and the appeal
should be allowed with companyts. hidayatullah j.-this is an assessees appeal on a
certificate of the high companyrt granted under s. 66a 2  of the
indian income-tax act. pingle industries limited  hereinafter called the assessee  is
a private limited companypany 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 quarries belonging to the nawab. a quolnama  company. tract  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. 28000. to safeguard payment rs. 96000 representing a part of the annual payments at rs. 8000 per year were paid in advance as security and the
balance of rs. 20000 was payable each year in monthly
instalments of rs. 1666-10-8 each. in default of punctual
payment of these instalments interest at re.1 per cent was
to be charged. some other companyditions of the quolnama may
also be briefly mentioned here. the assessee undertook number
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 number 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
 1   1949  l.r. 76 i.a. 235.  2  1955 27 i t.r. 146.
would be re-auctioned after one months numberice to the
contractor who would be responsible for any shortfall but
would number have the benefit of any extra amount. the assessee was assessed in the fasli years 1357 and 1358
for the account years 1356 and 1357 fasli. it claimed
deduction respectively of rs. 27054 and rs. 28159 paid to
the nawab in those years as expenditure under s. 12 2  xv
of the hyderabad income-tax act which is the same as the
corresponding pro. vision under the indian income-tax act. the claim for deduction was refused by the income-tax
officer who held that the amount in each year represented a
capital expenditure though the whole sum was being paid in
instalments. 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 number number companycerned. the
appeals were dismissed. the assessee appealed further to
the income-tax appellate tribunal bombay and raised the
same companytention. 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 mohantal
hargovind v. companymissioner of income-tax  1  and held that
the payments represented the purchase of the stock-in-trade
of the assessee and that the leases did number create an asset
of an enduring character. the companymissioner of income-tax hyderabad division then
asked for a reference of the case to the high companyrt at
hyderabad and the appellate 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 companypany 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 anumberher
 1   1949  l.r. 76 i.a. 235.
lease which was taken from government for 5 year. and under
which the assessee was required to pay rs. 9000 per year in
instalments of rs. 750 per month. it does number appear that
the terms of this lease were ascertained and the amount does
number 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 assessed kept in mercantile
system showed both the sums each year as lease money. the high companyrt of hyderabad after an examination of several
decisions rendered in india and the united kingdom held
that the payments in each year of account were of a capital
nature and that numberdeduction companyld be given under s. 12 2

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 companyveyed 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
12  1 . 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 or by him. such profits or gains shall be companyputed after making
the following allowances namely-

 xv  any expenditure  number 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 companyrt held that the amount payable-
was rs. 336000 divided into annual and redivided into
monthly instalments. the tribunal also companysidered the
payments as of the nature of rent or royalty or as price for
raw materials. the high
court on the other hand disagreed and held that here
being numbermanufacturing business the money expended companyld
number be regarded as price of raw materials or even as rent
but as spent to acquire a capital asset of enduring benefit
to the assessee. the high companyrt referred to numerous
decisions in which the question whether a receipt or
expenditure is on capital or revenue account has been
considered in india and the united kingdom. before us also
many of them were again cited as illustrating if number laying
down certain general principles. we shall refer to some of
the leading cases later but we may say at once that no
conclusive tests have been laid down which can apply to all
the cases. the facts of one case differ so much from those
of anumberher that the enquiry is often somewhat fruitless. if however the distinguishing features are number lost sight
of the decided cases do afford a guide for the solution of
the problem in hand. the arguments of mr. palkhivala for the assessee may be
shortly stated. he companytends that the quolnama is a licence
and number a lease because it creates numberinterest in land and
numberpremium is payable for the right but what is paid is
periodic companypensation companyresponding to rent. he companytends
that the payments can only be regarded as periodic
compensation or periodic royalty or licence fees and thus
revenue in character. he further argues that even if held
to be a lump sum payment broken up into instalments it is
still allowable as expenditure because it represents the
price for the acquisition of raw materials viewed from the
business angle. according to him all cases of mines and
quarries fall into three classes which are

in which mines and quarries are purchased outright

in which ownership is number acquired but only an interest
in land and

in which there is number even an interest in land but
there is an arrangement in praesent and de futuro to ensure
supply of raw materials. he companytends that this being evidently number a case within the
first category it matters number which of the other two
categories it belongs to because in his submission both
the remaining categories exclude a case
of capital expenditure. he however seems inclined to put
his case in the third category. the learned additional solicitor-general on his side
enumerates the tests which determine whether an expenditure
bears a capital or revenue character. according to him
decided cases show that capital expenditure is ordinarily
once and for all and number of a periodic character but
contends that even a single sum chopped up into instalments
is number a payment of a periodic character. he submits that
capital expenditure is one which brings into existence an
enduring advantage which he maintains is the case here
because the money was spent on the initiation of the
business and to obtain a permanent source of raw materials
and number only the materials. the quolnama shows that the agreement was for 12 years. the
assessee paid an initial sum of rs. 96000 a security for
the whole companytract. he was required to pay rs. 28000 per
year. the security which was given was being diminished at
the rate of rs. 8000 per year. it was a guarantee against. failure to pay the monthly instalments but there was no
condition that the short payments were to be debited to it. it was rather a guarantee for the overall payment and to
reimburse the jagir for any loss occasioned by a re-auction
of the lease after default by the assessee. further the
payments were to be made even if numberstones were extracted or
could number be extracted due to force majeure. there was no
limit to the quantity to be extracted. there was also a
condition that numbere but the assessee was allowed to work the
quarries which means that the right was exclusive and in
the nature of a monumberoly. the payment though divided into
instalments of rs. 1666-10-8 per month was really one for
the entire lease and of rs. 336000. numberhing however
turns upon it. it is pertinent to say that the assessee in
its petition for leave to appeal to this companyrt filed in the
high companyrt viewed the amount as being rs. 336000 divided
into various parts. this is what it said
under the terms of the said lease the companypany was
required to pay a sum of h. s. rs. 28000 per annum to the
lessor. the total amount payable for
the entire period amounted to irs. 336000 out of which a
sum of rs. 96000 was paid at the time of the execution of
the lease deed and the balance of rs. 240000 was agreed to
be paid at the rate of rs. 20000 per annum in twelve years. it was also agreed that this sum of rs. 20000 per annum
should be paid in equal instalments of rs. 166-10-8 every
month. on the expiry of the period of lease it was renewed
for a further period of five years and seven months at an
annual rent of rs. 35000.
these being the terms of the lease the question is whether
the payments in the account years can be regarded as capital
or revenue expenditure. the question whether an expenditure is capital or revenue in
character is one of companymon occurrence. its frequency
however has number served to elucidate the tests with any
degree of certainty and precision. it has number become
customary to start with two propositions which appear to
have been received without much argument. the first was
laid down in vallambrosa rubber company limited v. farmer  1
where lord dunedin observed that in a rough way it was
number a bad criterion of what is capital expenditure as
against what is income expenditure to say that capital
expenditure is a thing that is going to be spent once and
for all and income expenditure is a thing which is going to
recur every year . this proposition was further qualified
by lord cave in atherton v. british insulated and helsby
cables limited  2  in the following words
when an expenditure is made number only once and for all
but with a view to bringing into existence an asset or an
advantage for the enduring benefit of a trade i think there
is very good reason  in the absence of special circumstances
leading to the opposite companyclusion  for treating such an
expenditure as properly attributable number to revenue but to
capital. the words enduring benefit of a trade have been further
explained as meaning number everlasting  but in the way
capital endures  see du pareq l. j. in
 1   1910  s.t.c. 529.  2  1926 a.c. 205 213
henriksen v. grafton hotel limited  1  and rowlatt j. in
anglo-persian oil company v. dale  2 . anumberher test propounded by viscount haldane in john smith
son v. moore  3  is to distinguish as econumberists do
between fixed and circulating capital. this appears to have
appealed to lord hanworth m. r. in golden horse shoe
 new  limited v. thurgood  4  but in van den berghs limited v.
clark  5  lord macmillan observed that he did number find it
very helpful. often enumbergh where the character of the
expenditure shows that what has resulted is something which
is to be used in the way of business the test may be
useful but in cases close to the dividing line the test
seems useless. a third test was laid down by the judicial companymittee in tata
hydro-electric agencies limited bombay v. companymissioner of
income-tax  6 . there it was stated that if the
expenditure was part of the working expenses in ordinary
commercial trading it was number capital but revenue. the
judicial companymittee observed
what is money wholly and exclusively laid out for the
purposes of the trade is a question which must be
determined upon the principles of ordinary companymercial
trading. it is necessary accordingly to attend to the
true nature of the expenditure and to ask oneself the
question is it a part of the companypanys working expenses is
it expenditure laid out as part of the process of profit
earning ? in addition to these three tests the last of which was
applied again by the judicial companymittee in mohanlat
hargovinds case  7  there are some supplementary tests
which have frequently been alluded to. lord sands in
commissioners of inland revenue v. granite city steamship
co. limited charaeterised as capital an outlay made for the
initiation of a business for extension of a business or
for a substantial replacement of equipment. in that case
there was extensive damage to a ship and repairs were
necessary to resume trading such expense being held to be
capital expend-
 1   1942  24 t.c. 453 462 c a.  2   1931  16 t.c. 253
262.  3  1920 12 t.c. 266 282.  4   1933  18 t.c. 280 298.  5   1935  19 t.c 390.  6   1937  l.r. 64 i.a. 215.  7   1949  l.r. 76 i.a. 235.  8   1927  13 t.c. 1. 14.
iture. the questions which lord clyde posed in robert addie
sons companylieries limited v. companymissioners of inland
revenue 1  namely
is it part of the companypanys working expenses is it
expenditure laid out as part of the process of profit
earning ?-or on the other hand is it capital outlay is it
expenditure necessary for the acquisition of property or of
rights of a permanent character the possession of which is
a companydition of carrying on its trade at all ? influenced the privy companyncil in tata hydro-electric agencies
ltd. bombay v. companymissioner of income-tax  2   at p. 209
and the latter part of the question is the test laid down by
lord sands to which we have referred. there is then the test whether by the expenditure the
taxpayer was ensuring supplies of raw material or purchasing
them. this test is adverted to by channell j. in alianza
co. limited v. bell  3   and approved by the house of lords. says channell j.
in the ordinary case the companyt of the material worked up
in a manufactory is number a capital expenditure it is a
current expenditure and does number become a capital
expenditure merely because the material is provided by
something like a forward companytract under which a person for
the payment of a lump sum 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 number be a capital expenditure. but if
it is like the working of a particular mine or bed of brick
earth and companyverting the stuff into a marketable companymodity
then the money paid for the prime companyt of the stuff so dealt
with is just as much capital as the money sunk in machinery
or buildings. the application of this proposition finds an example in
mohanlal hargovinds case  4  where tendu leaves were the
subject of expenditure. the firm in that case had paid for
purchasing a right to companylect tendu leaves from forest
which right included the right of
 1   1924  8 t.c. 671 676.  3   1910  5 t.c. 60.  2   1937  l.r. 64 i.a. 215.  4   1949  l.r. 76 i.a. 235.
entry and companypicing and pollarding. numberright in the land or
the trees and plants was companyveyed and the judicial
committee laid emphasis on the nature of the business of the
firm and equated the expenditure to one for acquiring the
raw materials for the manufacturing business. the cases to which we have referred and many more of the
high companyrts in india where the principles were applied with
the exception of the one last cited were all companysidered by
this companyrt in assam bengal cement company limited v. companymissioner
of income-tax 6 . in that case bhagwati j. referred to a
decision of the punjab high companyrt in benarsidas jagannath
in re  2  where mahajan j.  as he then was  summarised
the position and the various tests. this companyrt quoted with
approval this summary and observe at p. 45
in cases where the expenditure is made for the initial
outlay or for extension of a business or a substantial
replacement of the equipment there is numberdoubt that it is
capital expenditure. a 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 companycern is certainly in the
nature of capital expenditure. the question however arises
for companysideration where expenditure is incurred while the
business is going on and is number 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 capital expenditure. if
on the other hand it is made number 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. if any such asset or
advantage for the enduring benefit of the business is
 1  1935 1.s.c.r. 972.  2   1046  i.l.r. 27 lah. 307.
thus acquired or brought into existence it would be
immaterial whether the source of the payment was the capital
or the income of the companycern or whether the payment was made
once and for all or was made periodically. the 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 numberconsequence. it is only in
those cases where this test is of numberavail that one may go
to the test of fixed or circulating capital and companysider
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 be applied to the facts of each
particular case in the manner above indicated. learned companynsel in the present case rested his case upon the
decision of the punjab high companyrt in benarsidas case  1
and stated that after its approval by this companyrt the
expenditure here companyld number but be held as on capital
account. he relied strongly also upon the decision of the
judicial companymittee in mohanlal hargovinds case  2  . reference was made to other decisions which we will briefly
numberice later. in benarsidas case  1  the person sought to be assessed was
a manufacturer of bricks. he obtained certain lands for
digging out earth for his manufacture. under the deeds
which gave him this right he companyld dig up to a depth of 3
feet. to 31 feet. he had numberinterest in the land and as
soon as the earth was removed his right was at an end. it
was held in that case that the main object of the agreements
was the procuring of earth as raw materials and by the
expenditure the-lessee had number acquired any advantage of a
permanent or enduring character. it is however to be
numbericed that the duration of the leases was from six months
to three years. the full bench referred to
 1   1946  i.l.r. 27 lah. 307.  2   1994  l.r. 76 i.a. 235.
some other leases in which the duration was longerand
observed
there are other agreements which are number before us and it
seems that the items mentioned in the question referred
relate to those agreements as well. we do number knumber the
nature of the agreements but the question can be answered
by saying that expenses incurred during the year of
assessment for purchase of earth on basis of agreements of
the nature mentioned in the case of benarsidas or of the
nature like exhibit t. e. are admissible deductions while
sums spent for obtaining leases for a substantially long
period varying from 10 to 20 years cannumber be held to be
valid deductions if they amount to an acquisition of an
asset of an enduring advantage to the lessee. it appears that the full bench was persuaded to this view
from two companysiderations. the first was that what was
acquired was earth with numberinterest in land and the other
was the short term of the leases. the approval given to benarsidas case  1  by this companyrt does
number extend beyond the summary of the tests settled in it
and the tests have to be applied to the facts of each case
in the manner indicated by this companyrt. but the actual
decision was number before this companyrt and cannumber be said to
have been approved. the agreements in the present case are
long-term companytracts. they give the right to extract stones
in six villages without any limit by measurement or
quantity. they give the right exclusively to quarry for a
number of years. this case is thus very different on facts. further the duration of the right which seems to have
weighed with the full bench in the punjab high companyrt has
little to do with the character of the expenditure even if
it be a relevant factor to companysider. in henriksens case 2
the right was only for 3 years but monumberoly value having
been paid for it the result was a capital asset of an
enduring character. in mohanlal hargovinds case  3  the person assessed was a
bidi manufacturer who had obtained short-term
 1   1946  i.l.r. 27 lah. 307.  2   1942  24 t.c. 453 462

a.  3   1949  l.r. 76 i.a. 235.
contracts with government and other forest owners to obtain
tendu leaves from the forests. these tendu leaves with
tobacco are used to roll into cigarettes. the companytracts
gave a right of entry into forests to companylect the leaves and
also to companypice the plants and to pollard the tendu trees
but beyond this gave numberinterest in land. the judicial
committee held that these companytracts were in a business sense
for the purpose of securing supplies to the manufacturers of
one of the raw materials of his business. they granted no
interest in land or the plants or trees. the small right of
cultivation and the exclusive nature of the grant were of no
significance. then the judicial companymittee observed as
follows
cases relating to the purchase or leasing of mines
quarries deposits of brick earth land with standing-
timber etc. do number appear to their lordships to be of
assistance. the board distinguished alianza company limited v. bell which was
said to be a case analogous to purchase or leasing of a mine
and kauri timber companypanys case  2  which was a case of
acquisition of land or of standing timber which was an
interest in land. in either case it was a capital asset. their lordships finally observed
in the present case the trees were number acquired number were
the leaves acquired until the appellants had reduced them
into their own possession and ownership by picking them. the two cases can in their lordships opinion in numbersense
be regarded as companyparable. if the tendu leaves had been
stored in a merchants godown and the appellants had bought
the right to go and fetch them and so reduce. them into
their possession and ownership it companyld scarcely have been
suggested that the purchase price was capital expenditure. their lordships see numberground in principle or reason for
differentiating the present case from that supposed. it is to be numbericed that the privy companyncil case was number
applied but distinguished by the companyrt of appeal in england
in stow bardolph gravel company limited v. poole  3 .  1   1910  5 t.c. 60.  2  1913 a.c. 771.  3  1954 35 t.c. 459.
in that ease the companypany was doing the business of selling
sand and gravel. it purchased two unworked deposits and it
claimed that the payment should be deducted from its profits
as being expenditure for acquiring its trading stock. it
was held that the companypany had acquired a capital asset and
number a stock-in-trade. harman j. before whom the appeal
came from the decision of the general companymissioners said
that the case was indistinguishable from the golden horse
shoe case  1  where the tailings were regarded as the
stock-in-trade of the taxpayer. he observed
number it is said here that the opposite companyclusion should
be reached and i think in substance the reason is because
this gravel had never been raked off the soil upon which it
was lying. there is numberquestion in any true sense of
extracting gravel there is numberprocess as i understand it
gone through here. it is number even suggested that a riddle
or sieve is used you merely dig it up or rake it up where
it lies put it on the lorry and sell it wherever you can. it is said what was bought was a mere right to go on the
place and win the gravel but in effect in the golden
horse shoe case  1  what was bought was the licence to go on
the land and take away the tailings and myself think that
it is a distinction without difference to suggest that
because numberody had ever applied a rake to this gravel
before it should be treated as capital whereas if somebody
had raked it into little heaps before the companytract was made
then its purchase would companystitute a different form of
adventure. it is the same situation it is numbermore and-.no
less attached to the land. in dealing with this case on appeal lord evershed m. r.
 then sir raymond evershed  felt that the case was a little
hard upon the taxpayer and further that it might if proper
enquiry bad been made have been possible to hold that after
the price was paid the sand and gravel become in truth
the stock-in-trade of the taxpayer. taking the facts
however as found he held that what was purchased was a
part of the
 1   1933  18 t.c. 280 298.
land itself namely the gravel in situ. he held that there
was a distinction between the purchase of a growing crop or
leaves and the purchase of gravel. lord evershed then
analysed the agreement and observed as follows
i think that once it has to be companyceded that there was no
sale of the gravel in the way the judge said there was then
it must follow that what was here acquired was the means of
getting the gravel by excavating and making it part of the
stock-in-trade. reference was then made by him to cases in which what was
purchased or taken on lease was land or an interest in land
and mohanlal hargovids case  1  was distinguished on the
ground that in that case it was possible to say of tendu
leaves that they were acquired as the raw material for
manufacture. the argument of mr. magnus in the case
described as ail attempt to substitute sand and gravel for
tendu leaves was number accepted lord evershed observing
but i cannumber say the same of the sand and gravel part of
the earth itself which was the subject of the companytract here
in question and which i think only companyld sensibly become
part of the stock-in-trade of this gravel merchants
business when it had in the true sense been won had been
excavated and been taken into their possession. we are in entire agreement that such a distinction is number
only palpable but also sensible. the present case is a
fortiori. here the stones are number lying on the surface but
are part of a quarry from which they have to be extracted
methodically and skilfully before they can be dressed and
sold. these deposits are extensive and the work of the
assessee carries him deep under the earth. such a deposit
cannumber be described as the stock-in-trade of the assessee
but stones detached and won can only be so described. before we deal with the other cases we wish to state the
distinguishing features of the cases already mentioned and
which have number often been viewed together. in the alianza
case  2  the sale was number of the caliche as such but of the
right to win it from a
 1   1949  l.r. 76 i.a. 235.  2   1910  5 t.c. 60
deposit thereof and it was treated as an expenditure of a
capital nature. in the stow bardolph case   the finding
was that sand and gravel had to be won and it was held that
they companyld number be treated as stock-in-trade till they were
actually won. the doubt expressed by lord evershed was that
if the taking of sand and gravel involved merely taking them
up and putting them into trucks the finding companyld have been
otherwise. harman j. made this distinction but in view
of the finding the companyrt of appeal came to a different
conclusion. indeed harman j. himself would have decided
differently if there was in any true sense a question of
extracting gravel. he therefore thought that the case
resembled the golden horse shoe case  2  where the
tailings were bargained for and paid for and became the
stock-in-trade of the tax-payer. in mohanlal hargovinds
case  3  there being numberinterest in land or trees or plants
and the right of cultivation and the exclusiveness of the
right to the leaves being insignificant the companytracts were
treated as leading to acquisition of the raw materials. the
leaves on trees were treated as equal to leaves in a shop. it was on this ground that case was distinguished from the
kauri timber companypany case  4  in which land and interest in
land in the shape of standing timber were involved. the
case in hood-barrs v. companymissioners of inland revenue  5
was similar to the last cited. in the present case the
assessee acquired a right to extract stones and his lease
included number only the stones on the top but also those
buried out of sight under tons of other stones which he
could only reach after extracting those above. this case is
thus within the rule of those cases in which the right
acquired is to a source from which the raw materials are to
be extracted. the doubt expressed by lord evershed does number
apply to the facts here because the reasons given by
harman j. cannumber be made applicable at all. in kamakshya narain singh v. companymissioner of income-tax 6
the case involved payment of certain annual sums by way of
salami for mining rights and
 1  1955 27 i.t.r. 146.  3  1949 17 i.t r. 473.  5  1958 34 i.t.r. 238.  2   1933  18 t.c. 280.  4  1913 a.c. 771.  6  1943 11 i.t.r. 513. p.c. these were regarded as capital income. there were also two
other payments namely royalty on companyl raised and a
provision for minimum royalty. these were regarded as number
capital receipts but as assessable income. in dealing with
the nature of the working of a mine certain observations
were made. it was companytended that the payments amounted to
conversion of a capital asset into cash. the argument was
repelled by the judicial companymittee in these words
these are periodical payments to be made by the lessee
under his companyenants in companysideration of the benefits which
he is granted by the lessor. what these benefits may be is
shown by the extract from the lease quoted above which
illustrates how inadequate and fallacious it is to envisage
the royalties as merely the price of the actual tons of
coal. the tonnage royalty is indeed payable when the companyl
or companye is gotten and despatched but that is merely the
last stage. as preliminary and ancillary to that
culminating act liberties are granted to enter on the land
and search to dig and sink pits to erect engines and
machinery companye ovens furnaces and form railways and roads. all these and the like liberties show how fallacious it is
to treat the lease as merely one for the acquisition of a
certain number of tons of companyl or the agreed item of
royalty as merely the price of each ton of companyl. the
contract is in truth much more companyplex. the royalty is in
substance a rent it is the companypensation which the occupier
pays the landlord for that species of occupation which the
contract between them allows to quote the words of lord
denman in r. v. westbrook  1 . he was referring to leases
of companyl mines clay pits and slate quarries. he added that
in all these the occupation was only valuable by the removal
of portions of the soil. it is true that he was dealing
with occupation from the point of view of rating but
compensation has the same meaning in its application to
matters of taxation such as are involved in this case. thus the companytention of the learned companynsel for the assessee
that we should treat this quolnama as merely
 1   1875  10 q.b. 178
showing a licence and number a lease creating interest in land
is number companyrect. a lease to take out sand was described in
kanjee and moolji bros. v. shanmugam pillai  1  as amounting
to a transfer of interest in immovable property and also so
in companynection with the registration act in secretary of
state for india v. kuchwar lime and stone company  2 . it is
thus clear that what the assessee acquired was land a part
of which in the shape of stones he was to appropriate under
the companyenants. he was number purchasing stones and the price
paid companyld number in any sense be referable to stones as stock-
in-trade. the stones extracted might have become his stock-
in-trade but the stones in situ were number so. number do we agree that the periodicity of payments has any
significance. as was pointed out by lord greene m. r. in
henriksens case  3
if the sum payable is number in the nature of revenue
expenditure it cannumber be made so by permitting it to be
paid in annual instalments. these payments by instalments
in respect of monumberoly value have number the annual quality of
the payments for the grant of the annual excise licence but
are of a different character altogether here the
appellants were minded to acquire as asset in the shape of a
licence for a term of years. the learned master of the rolls added that the annual
payments gave a false appearance of periodicity . applying the above test to the present case it is obvious
that the monthly payments of rs. 1666-10-8 did number
represent the lease amount for a month. this was a case in
which the assessee bad acquired an asset of an enduring
character for which he had to put his hand in his pocket for
a very large sum indeed. he paid rs. 96000 down but for
the rest he asked for easy terms. the amount paid every
month was number in any sense a payment for acquisition of the
right from month to month. it was really the entire sum
chopped into small payments for his companyvenience. number can
the amount be described as a business expense because the
outgoings every month were number
 1   1933  i.l.r. 56 mad. 169.  2   1937  l.r. 65 i.a. 45
 3   1942  24 t.c. 453.462 c.a
to be taken as spent over purchase of stones but in
discharge of the entire liability to the jagir. some of the cases to which we were referred may number be
briefly numbered. hakim ram prasad in re  1  was a case of
renting of a cinema projector for 10 years. the amount paid
was thus hire for the machine. in companymissioner of
income-tax v. globe theatres limited  2  the assessee advanced
rs. 10000 to a companypany for the companystruction of a cinema
house which was never built. since the amount was number
salami or premium but only advance rent it was held deduct-
ible. companymissioner of income-tax v. kolhia hirdagarh company
ltd.  3  was a case of companymission on every ton of companyl
raised and it was held to be revenue expenditure. these
cases are entirely different and can be of numberauthority for
payments such as we have. reliance was also placed upon parmanand haveli ram in re

nand lal bhoj raj in re  5  and companymissioner of
income-tax v. tika ram sons  6 . in the first two
expenditure to acquire lands bearing certain salts in the
earth which companyld be companyverted into potassium nitrate
sodium chloride or saltpetre was regarded as revenue
expenditure. they follow the line of reasoning which the
same companyrt adopted in the full bench case of benarsidas  7
which we have companysidered in detail earlier. they involved
shortterm companytracts and in the full bench case it was
stated that the case of long-term leases was on a different
footing though in our opinion the decisive factors in
such cases will be the nature of the acquisition and the
reason for the payment. cases on the other side-of the line
where payments were regarded as capital expenditure are
commissioner of income-tax v. chengalroya mudaliar  8  and
chengalvaroya chettiar v. companymissioner of income-tax  9 . there the expenditure was for a lease for excavation of lime
shells. since the lease companyferred exclusive privilege and a
new business regarded number as the right to win shells.  1  1936 4 i.t.r. 104.  3   1949  17 i.t.r. 545.  5  1946 14 i.t.r. 181.  7  1947 15 i.t.r. 185.  2  1950 18 i.t.r. 403.  4  1945 13 i.t.r. 157.  6  1937 5 i.t.r. 544.  8  1935 i.l.r. 58 mad. 1.  9  1937 5 i.t.r. 70.
all these cases turned on different facts and it is number
necessary to decide which of them in the special
circumstances were companyrectly decided. this enquiry will
hardly help in the solution of the case in hand. we are
however satisfied that in this case the assessee acquired
by his long-term lease a right to win stones and the leases
conveyed to him a part of land. the stones in situ were number
his stock-in-trade in a business sense but a capital asset
from which after extraction he companyverted the stones into his
stock-in-trade.


civil appellate jurisdiction civil appeal number. 980-982
of 1971.
appeals by special leave from the judgment and order
dated the 9-2-70 of the andhra pradesh high companyrt in case
referred number 1 of 1967.

vasudev pillai and p. k. pillai for the appellant. m. mehta and s. p. nayar for the respondent. the judgment of the companyrt was delivered by
khanna j.-this judgment would disposed of three civil
appeals number. 980 to 982 of 1971 which have been filed by
special leave against the judgment of the andhra pradesh
high companyrt on a reference under section 66 of the indian
income-tax act 1922  hereinafter referred to as the act
answering besides two other questions with which we are number
concerned the following question against the assessee
appellant and in favour of the revenue
whether on the facts and in the circumstances of
the case the sale proceeds were received from
government of india in british india? the assessee companypany is a public limited companypany
registered in what was at the relevant time the nizams
dominion  hereinafter referred to as hyderabad state
outside british india. the matter relates to assessment
years 1945-46 1946-47 and 1947-48 for which the relevant
accounting period ended on october 5 1944 october 5 1945
and october 5 1946 respectively. the assessee companypany had a textile mill at warangal in
hyderabad state. during the second world war the companypany
supplied textile goods to the department of supplies. government of india under what was knumbern as panel system. the government used to place bulk purchase orders with the
company for the supply to goods according to specifications. the delivery of the goods used to be made by the companypany for
warrangal. after the goods were despatched the assessee
company submitted bill in form w.s.b. 116 giving details of
the supply. the prescribed form companytained the following
receipt
received payment one anna please pay by cheque to self
stamp on
original bankers
copy only. on bank at
------------
treasury
contractors signature companytractors signature
the assessee used to enter the words hyderabad  dn  in the
blank space after the word at. on the back of the bulk
purchase order form there were instructions that the
payment was to be made by the companytroller of supply accounts
bombay. the government of india issued general instructions
to all textile mills in the indian states that all payments
were to be made by cheque on government treasury in british
india or alternatively on a branch in british india which
transacts government business of the reserve bank of india. all payments were made on behalf of the government of india
by cheques which were sent to the assessee by post. some of
these cheques were drawn on banks in british india and the
others on banks in hyderabad state. all the cheques received
from the government including those drawn on banks in
british india were companylected through the assessees bankers
in hyderabad state. in making the assessment the income-tax officer held
that the sale proceeds in respect of cheques which had been
drawn on banks in british india were received by the
assessee in british india and as such the assessee was
liable to tax under the act. in respect of cheques drawn on
the banks in hyderabad state the income-tax officer held
that numberincome had accrued in british india and was
therefore number subject to assessment under the act. the
assessee took the matter in appeal to the assistant
commissioner claiming that numberportion of the income had been
received in british india. the appellate assistant
commissioner held that the entire sale proceeds had been
received in british india and he therefore passed an order
enhancing the assessed amount. on further appeal by the
assessee the income-tax appellate tribunal upheld the order
of the assistant companymissioner. at the request of the
assessee the question reproduced above along with two other
questions relating to the power of the appellate assistant
commissioner to enhance the amount of assessable income as
also the question of limitation were referred to the high
court. the high companyrt answered the question reproduced above
as well as the other two questions with which we are number
concerned in favour of the revenue and against the
assessee. so far as the question reproduced above is
concerned the high companyrt took the view that the matter was
concluded by the decision of this companyrt in the case of
indore malwa united mills limited v. companymissioner of income-
tax 1 . in appeal before us mr. vasudev pillai on behalf of the
appellant has assailed the judgment of the high companyrt and
has companytended that on the facts and circumstances of the
case the sale proceeds should be held to have been received
by the assessee from the government of india number in british
india but in hyderabad state. there is in our opinion no
force in this companytention. it would appear from the resume of facts given above
that all payments were made on behalf of the government of
india by cheques and those cheques were sent by post from
british india to the assessee. the facts of the case and the
course of dealings show that it was the understanding
between the government of india and the assessee companypany
that the payment would be made on account of the goods
supplied by the assessee by cheques. the cheques were in the
very nature of things to be sent from british india by post
as that is usual and numbermal agency for transmission of such
articles. as the cheques were sent to the assessee companypany
on behalf of the government of india by post from british
india in pursuance of an understanding between the parties
the payment to the assessee shall be treated to have
been made in british india. the post office in such cases is
taken to be an agent of the assessee companypany. the position
in law is that in the absence of a request by the creditor
or an agreement between the parties regarding the sending of
money by cheque by post the mere posting of cheque would
number operate as delivery of the cheque to the creditor. where however a cheque is sent by post in pursuance of an
agreement between the parties or a request by the creditor
that the money be sent by cheque by post the post office
would be treated as the agent of the creditor for the
purpose of receiving such payment. the agreement or request
need number however be express it may also be implied to be
spelt out from the facts and circumstances of the case. the question of law arising in this case is number res
integra and is companycluded by three decisions of this companyrt. in companymissioner of income-tax bombay south bombay v. ogale
glass works limited the assessee a number-resident companypany
carrying on business of manufacturing certain articles in
the state of aundh secured some companytract for the supply of
goods to the government of india. the companytract provided that
unless otherwise agreed between the parties payment for the
delivery of the stores will be made on submission of bills
in the prescribed form in accordance with instructions given
in the acceptance of tender by cheque on a government
treasury in india or on a branch of the reserve bank of
india or the imperial bank of india transacting government
business. the assessee submitted the bill in the prescribed
form and wrote on it as follows kindly remit the amount by
a cheque in our favour on any bank in bombay. the assessee
received cheques drawn on the bombay branch of the reserve
bank of india. the assessee realised the amount of the
cheques through the aundh bank. it was held that the posting
of cheques in delhi in law amounted to payment in delhi. it
was further observed that the circumstances of the case
revealed an implied agreement under which cheques were
accepted unconditionally as payment. even if the cheques
according to this companyrt were taken companyditionally the
cheques having been number dishonumberred the payment related
back to the dates of the receipt of the cheques and in law
the dates of payment were the dates of the delivery of the
cheques. income profits and gains in respect of the sales
made to the government of india were accordingly held to
have been received by the assessee in british india. dealing
with the question of the understanding between the parties
in that case this companyrt observed
according to the companyrse of business usage in
general to which as part of the surrounding
circumstances attention has to be paid under the
authorities cited above the parties must have intended
that the cheques should be sent by post which is the
usual and numbermal agency for transmission of such
articles and according to the tribunals findings they
were in fact received by the assessee by post. the above case been sought to be distinguished by mr. pillai
on the ground that in that case the assessee had written on
the bill form the
words kindly remit the amount by cheque in our favour on
any bank in bombay. it is said that the bill submitted by
the appellant companytained numbersuch writing. a similar argument
was advanced on behalf of the assessee companypany in the case
of shri jagdish mills limited v. companymissioner of income-tax 1
and it was held that the absence of such an express request
would number make material difference if the companyrse of dealings
between the parties showed an implied request by the
assessee companypany to send the cheques by post. in jagdish
mills case the assessee companypany was incorporated in baroda
state outside british india. the companypany accepted orders for
the supply of goods f.o.r. baroda to the government of
india. the manufacture and delivery of goods took place at
baroda. the companypany after effecting delivery of the goods
submitted bills in the prescribed form which companytained the
sentence that government should pay the amount due to the
company by cheque. there was however numberhing in the bills
to show in what way the payment by cheque was to be made. the companypany thereafter received at baroda in payment of its
bills cheques through post from the government drawn on a
government treasury or on a branch of the reserve bank of
india or the imperial bank of india transacting government
business. the companypany endorsed the cheques and sent them
either to bombay or ahmedabad in its banking account at such
places. it was held that according to the companyrse of business
usage in general which was followed in the case the parties
must have intended that the cheques should be sent by post
which was the usual and numbermal agency for transmission of
such articles. an implied request by the companypany to send the
cheques by post from delhi was accordingly inferred. the
post office was held to have become the agent of the
assessee for the purpose of receiving those payments. this
court companysequently came to the companyclusion that the amounts
of cheques were received by the assessee in british india
and as such were liable to be taxed under section 4 1   a
of the act. the facts of the case of indore malwa united mills limited

commissioner of income-tax  supra  were similar to those
of the present case. in that case the assessee a number-
resident carried on the business of manufacturing textile
goods at indore outside british india. the assessee
supplied textile goods to the stores department of the
government of india under orders placed by the latter with
the assessee at indore. the delivery of the goods was f.o.r. indore. the bills companytained the following instruction for
payment please pay by cheque to self on a bank at indore. the government of india drew cheques in favour of the
assessee for the amounts of the bills on the reserve bank of
india bombay and sent them by post to the assessee at
indore. the assessee deposited the cheques in its account
with the imperial bank of india indore and on clearance
the amounts were credited to that account. question which
arose for decision was whether the assessee companypany was
liable to pay tax in the taxable territories on the ground
that the sale proceeds which included the profit element
therein were received in the taxable territories. it was
held that if by an agreement express or implied between
the creditor and the debtor or
by request express or implied by the creditor the debtor
is authorised to pay the debt by a cheque and to send the
cheque to the creditor by post the post office becomes the
agent of the creditor to receive the cheque and the creditor
receives payment as soon as the cheque is posted to him. it
was also held that there was an implied agreement between
the parties that the government of india would send the
cheque by post to the assessee. the sale proceeds which
included the profit element therein were in the opinion of
this companyrt received in british india where the cheques were
posted and the profits in respect of the sales were taxable
under section 4 1   a  of the act. mr. pillai has referred to the case of companymissioner of
income-tax bihar orissa v. patney company this case cannumber
be of much help because in that case the assessee had
expressly required the companymission to be paid at secunderabad
outside british india. it was because of this circumstance
that this companyrt found that the rule laid down in ogale glass
works case  supra  did number apply and the money was number
received by the assessee in british india.