Minimum royalty on mining leases treated as capital expenditure where no mining business had yet been established.

Minimum royalty paid under mica mining leases was treated as capital expenditure, not revenue expenditure deductible under section 10(2)(xv) of the Income-tax Act, 1922. The mining venture had not yet yielded any income, and the material showed only preliminary prospecting operations. The mining activity was distinct from the assessee's existing purchase-and-sale business, and no substantive mining business had been established or carried on during the year. On those facts, expenditure incurred merely to preserve or safeguard the mining leases was not laid out wholly and exclusively for business purposes, and the distinction between setting up and commencement of business did not assist the assessee. The deduction was disallowed.

---

---

Issues: Whether the minimum royalty paid under mica mining leases during the relevant year was allowable as a revenue expenditure under section 10(2)(xv) of the Income-tax Act, 1922, or was capital expenditure not deductible.

Analysis: The assessee's mining venture had not yet produced any income from raising or sale of mica during the accounting year, and the material placed before the Tribunal disclosed only some prospecting operations. The business of mining was found to be distinct from the existing business of purchase and sale of mica, and the assessee failed to show any substantive mining activity during the year that could amount to the setting up or carrying on of that mining business. Expenditure incurred merely to preserve or safeguard the mining leases, in the absence of an operative business, could not be treated as expenditure laid out wholly and exclusively for business purposes. On those facts, the distinction between setting up and commencement of business did not assist the assessee, because the proved activity was only preliminary prospecting.

Conclusion: The minimum royalty was rightly treated as capital expenditure and was not deductible as revenue expenditure.

Final Conclusion: The reference was answered in favour of the revenue, and the claimed deduction was disallowed.

Ratio Decidendi: Expenditure on minimum royalty paid for mineral leases is not deductible as revenue expenditure where the assessee has not yet established or carried on the relevant mining business and the payment is merely to preserve a capital asset.

---