Pingle Industries Ltd., Secunderabad v. Commissioner of Income Tax, Hyderabad

Case Analysis

Pingle Industries Ltd., Secunderabad v. Commissioner of Income Tax, Hyderabad

June 15, 2025

A) ABSTRACT / HEADNOTE

In Pingle Industries Ltd., Secunderabad v. Commissioner of Income Tax, Hyderabad, 1960 3 SCR 681, the Supreme Court of India deliberated upon a crucial issue of distinction between capital and revenue expenditure under the Hyderabad Income Tax Act (equivalent to Section 10(2)(xv) of the Indian Income Tax Act, 1922). The assessee, a private company dealing in Shahabad stones, had acquired exclusive quarrying rights from a jagirdar for 12 years on annual payments and claimed this payment as revenue expenditure. The central question was whether such expenditure constituted a capital investment in a source of raw material or was simply a payment towards procuring raw materials. A split decision emerged. Justices Kapur and Hidayatullah held that the expenditure was capital in nature as it conferred a source of material, a benefit of an enduring nature. In contrast, Justice S.K. Das dissented, asserting that the payments were for raw material itself and therefore revenue in nature. This case engages deeply with precedent decisions, especially those concerning mines, leases, and recurring versus lump-sum payments, while applying business-commonsense and doctrinal principles like “enduring benefit” and “stock-in-trade” characterization.

Keywords: Capital Expenditure, Revenue Expenditure, Lease, Raw Material, Income Tax Act, Hyderabad, Quolnama, Shahabad Stones, Judicial Interpretation, Quarry Rights

B) CASE DETAILS

i) Judgement Cause Title
Pingle Industries Ltd., Secunderabad v. Commissioner of Income Tax, Hyderabad

ii) Case Number
Civil Appeal No. 190 of 1955

iii) Judgement Date
April 26, 1960

iv) Court
Supreme Court of India

v) Quorum
S.K. Das, J.; J.L. Kapur, J.; M. Hidayatullah, J.

vi) Author
M. Hidayatullah, J. (majority) and S.K. Das, J. (dissenting)

vii) Citation
AIR 1960 SC 896; 1960 3 SCR 681; (1960) 38 ITR 546 (SC)

viii) Legal Provisions Involved

Section 12(2)(xv) of Hyderabad Income Tax Act, 1357 Fasli
Section 10(2)(xv) of the Indian Income Tax Act, 1922

ix) Judgments Overruled by the Case
None explicitly overruled; but distinguished Assam Bengal Cement Works Ltd. v. CIT, [1955] 1 SCR 972

x) Law Subjects
Taxation Law, Corporate Law, Income Tax, Business Expenditure

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The judgment concerns a nuanced question in taxation law: whether a payment made by a company for rights to extract raw materials (flag stones) over a long period constitutes a capital or revenue expenditure under income tax provisions. This is not merely a technical issue; it strikes at the core of how businesses account for recurring versus one-time payments associated with rights to exploit a natural resource. The background unfolds in the unique legal context of the erstwhile Hyderabad State governed by its own income tax statute, similar to the Indian Income Tax Act. The case gained substantial legal importance due to the duality of judicial opinions on interpreting the nature of such quarrying rights and their classification under tax laws, offering guidance on the interpretational norms of “enduring benefit” versus “procurement of raw material”.

D) FACTS OF THE CASE

The appellant, Pingle Industries Ltd., carried on the business of selling Shahabad flag stones, extracted from quarries. In 1343 Fasli, the company entered into a quolnama (lease agreement) with Nawab Mehdi Jung Bahadur, the jagirdar of Tandur taluk, granting exclusive quarrying rights for 12 years across six villages. The agreement mandated an annual payment of ₹28,000, with ₹96,000 deposited as security and the remaining ₹20,000 paid annually through monthly instalments. The lease was absolute regarding extraction rights but strictly prohibited any cement manufacturing.

Notably, the lease did not confer land ownership or any proprietary interest. It only gave access to extract stones methodically and skillfully. The company also obtained a similar lease from the Government for 5 years at ₹9,000 per annum. The firm treated these payments as revenue expenses in their books, claiming deductions under Section 12(2)(xv) of the Hyderabad Income Tax Act, but the tax authorities held them as capital expenditures. The matter escalated through appeals, ultimately leading to divergent interpretations by the High Court and then the Supreme Court.

E) LEGAL ISSUES RAISED

i) Whether the payments made by the assessee under the quolnama and similar government lease constituted capital expenditure or revenue expenditure under Section 12(2)(xv) of the Hyderabad Income Tax Act?

F) PETITIONER/ APPELLANT’S ARGUMENTS

i) The counsels for Petitioner / Appellant submitted that the essence of the agreement was the procurement of raw material, not the acquisition of any enduring capital asset. Citing cases like Benarsidas Jagannath v. Commissioner of Income Tax, ILR 27 Lah 307, and Mohanlal Hargovind v. Commissioner of Income Tax, [1949] LR 76 IA 235, the counsel emphasized that the right granted was for a limited period with no ownership in land or source. The payment, though spread over years, merely reflected a commercial arrangement akin to buying inventory.

They argued that the recurring nature of payments, the lack of proprietary interest, and the character of the transaction as “sourcing” supported the view that this was expenditure wholly and exclusively incurred for running the business. They invoked the “business test” evolved in Tata Hydro-Electric Agencies Ltd. v. CIT, [1937] 64 IA 215, stating that if an expenditure is part of the ordinary process of earning profits, it is revenue.

They further emphasized that under the quolnama, the stones became the company’s property only after extraction. Hence, the assessee had merely paid for access to and collection of stock-in-trade. The case was analogized to Alianza Co. Ltd. v. Bell, (1904) 2 KB 666 and Assam Bengal Cement Co. Ltd. v. CIT, [1955] 1 SCR 972, reinforcing that expenditure for procuring materials, even under long-term contracts, does not ipso facto become capital.

G) RESPONDENT’S ARGUMENTS

i) The counsels for Respondent submitted that the company acquired a monopoly right to extract flag stones over a large area and long period. The recurring nature of payments did not alter the inherent character of the expenditure, which was clearly capital as it involved acquiring an asset of enduring benefit. The quolnama conferred a right to a source of raw material and not the material itself, fitting squarely into the category of capital acquisition.

They distinguished the present facts from the tendu leaf and brick-earth cases, contending that those involved short-term, non-exclusive, and non-substantial rights. The instant case, however, involved exclusive rights over 12 years, with no limitation on quantity or depth of extraction, thereby creating a business advantage lasting well beyond individual transactions.

The respondent emphasized decisions such as Henriksen v. Grafton Hotel Ltd., 24 TC 453, and Stow Bardolph Gravel Co. Ltd. v. Poole, 27 ITR 146 (CA), where similar rights to extract minerals were held capital in nature due to their enduring value and foundational nature to the business model.

H) RELATED LEGAL PROVISIONS

i) Section 12(2)(xv) of the Hyderabad Income Tax Act (equivalent to Section 10(2)(xv) of the Indian Income Tax Act, 1922): Deduction allowed for any expenditure not being capital in nature, incurred wholly and exclusively for business.

I) JUDGEMENT

a. RATIO DECIDENDI

i) The majority held that the assessee acquired a capital asset in the form of a source of supply of raw materials. The lease, although time-bound and payment-based, conferred an exclusive, long-term right over a part of land. Extraction of stone required significant technical operations, and the rights created a business structure rather than being incidental to it. Therefore, payments were not revenue but capital outgoings.

The decision relied heavily on the principle that expenditure made for securing a means to obtain raw materials, and not the raw material itself, constitutes capital. Citing Kamakhya Narain Singh v. CIT, 11 ITR 513, and Alianza Co. Ltd. v. Bell, the Court differentiated between stock-in-trade and acquisition of rights over a natural resource. The payments, although periodic, constituted a lump sum in substance for an enduring advantage.

b. OBITER DICTA

i) Justice S.K. Das, in dissent, emphasized that the transaction should be viewed from a business and commercial point of view. He opined that the quolnama essentially amounted to a sale of raw material with access rights. He highlighted the absence of any ownership or reversionary interest and argued for applying the reality of transaction test rather than form-based classification. He favored applying precedents like Mohanlal Hargovind and Benarsidas Jagannath to conclude that the expenditure was revenue.

c. GUIDELINES

If a lease or contract grants rights to a source of raw material, it is a capital asset.
Periodicity of payment is irrelevant if the transaction creates enduring benefits.
The existence of exclusive rights and absence of quantitative limits supports capital characterization.
The substance-over-form principle applies in determining the character of expenditure.

J) CONCLUSION & COMMENTS

The Supreme Court’s judgment in this case created a significant doctrinal anchor in Indian tax jurisprudence. It refined the test for distinguishing capital and revenue expenditure by emphasizing the nature of the asset acquired—not the structure or frequency of payment. The ruling underscored the importance of evaluating the enduring advantage and exclusivity of rights granted. Though the minority opinion by Justice Das introduced a robust and commercially practical perspective, the majority’s view aligned more with traditional tax doctrine. This case remains a critical precedent for interpreting long-term mineral and resource extraction contracts in taxation law.

K) REFERENCES

a. Important Cases Referred