JUDGMENT Bennett and Madeley, JJ. - This is a reference u/s 66 (3) of the income tax Act. 2. The history of the reference is that the assessee applied to this Court u/s 66 (3) of the Act to direct the income tax Commissioner to state a case on three points : (1) whether the assessee was liable to be assessed as an individual and not as a Hindu undivided family, (2) whether the profits from his contract business were rightly computed by the application of flat rates and, if so whether the rates applied were excessive, and (3) whether the sums spent in taking leases of lands for brick-kiln was admissible as a deduction u/s 10 (2) (ix) of the Act in computing , profits from the brick kilns? (N. B.) According to the amended Act (Act VII of 1939) the sub-section should be 10 (2) (XII). 3. On the first two points the application was rejected, but it was allowed so far as the third point is concerned. 4. There were three applications relating to the years 1936-37, 1937-38 and 1938-39. The amount paid on account of the lease and the compensation for or price of earth in the first year is Rs. 1,436-8-0. In the second year, Rs. 3,268-12-0 and Rs. 500 were paid for 6 bighas and odd and 1 bigha of land for taking earth; total Rs. 13,768-12-0. In the third year there are three items: Rs. 129-7-3 rent of land for brick-kiln Rs. 795-14-0 price of earth and Rs. 64-3-0 rent of land; total Rs. 989-8-3. 5. The question is whether u/s 10 (2) (xii) (ix until amendment of 1939) this is to be deducted from the assessee's income as an allowance as "any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits." 6. The learned Income-lax Commissioner has put on the file the three lease deeds under which the land is "held by the asses- see, and we have to deal, not only with the purely legal question which was argued before us when the applications u/s 66 (3) for a direction to the income tax Commissioner were argued, but also with arguments directed to distinguishing these leases from the cases on which other High Courts have based their decisions concerning coal mines quarries, brick kilns, etc. 7. 7. We may refer to the cases quoted by us in oar order of the 11th August, 1943: (1) Allans(sic) Company v. Ball (1904) L R 2 K B D 666. The appellants ware the owners of the land containing calices. Though the land was situated-in Chili the principle applying to mines in England was applied and the assessees were not allowed to deduct any yearly some to meet the exhaustion of caliche. (2) Commissioner of income tax v. Chengalvaroya Mudaliar 1984 I T R 395 Mad. The assessee held a lease from the Secretary of State for India for excavation of lime shells. The assessee sought to have the money paid to the Secretary of State during the year deducted from his profits, but the High Court held that this was in the nature of capital expenditure. (3) Commissioner of income tax, U. P. v. Tika Rain and Sons Ltd. 1937 A WR 890: ILR 1937 All 908 The assessee was a limited company carrying on .the business of manufacturing bricks. It owned a plot of land from which earth was taken for the manufacture of bricks and it also held a lease for the other portion of the laud. It claimed that a sum of Rs. 2.300 representing the value of the earth used up in the manufacture of the bricks during the year of accounts should be deducted hi computing its income for the purpose of income tax as depreciation of its properly or business expenditure. It was held on a reference by the Commissioner that the assessee was not entitled to the deduction claimed. The case of a brick-field was very similar to that of a quarry or a mine and the proprietor or the lessee is not a mere purchaser of raw materials but person who has acquired certain rights in the land, and the amount invested by him must therefore be treated as capital expenditure within the meaning of Section 10 (2) (ix). 8. As there was no decision of this Court or of the Privy Council on the point at that time we ordered a reference to be made. 9. Since that there has been a decision of 1 heir Lordships of the Privy Council : Raja Bahadur Kamakashya Narain Singh, of Ramgarh v. Commissioner of income tax, Bihar and Orissa (1943) 70 IA 180 : AWR (PC) 76 : OA (PC) 75. 9. Since that there has been a decision of 1 heir Lordships of the Privy Council : Raja Bahadur Kamakashya Narain Singh, of Ramgarh v. Commissioner of income tax, Bihar and Orissa (1943) 70 IA 180 : AWR (PC) 76 : OA (PC) 75. In the head note we find. If the receipts are income it is immaterial for tax purposes that that for which they ?re paid comes from a wasting properly. 10. In this case the royalties from the coal mine were taxed as income in the hands of the lessor. It is clear that this decision cannot be applied directly to the present case. If ii could it would be in favour of the assessee because the royalties were treated an income, avid if it followed that because they were received as income by the lessor, they were therefore expenditure not being capita! expenditure by the asses- see, they would have to bi deducted u/s 10 (2) (xii)- It is however, a well known principle that what is capital in the handy of one man may be income when paid to another, and there is no need to cite authority for it. There is, however, one point which is the same for both the lessor and the lessee, which has been raised in the present case and has been, decided by Their Lordships of the Privy Council. (See page 184 of LXX Indian Appeals in the arguments of Sir Walter Monckton K. G.) : This was in substance a sale of coal at a price which the parties have chosen to call royalty, it is a payment for the coal as and when it is obtained, and not a rent for enjoyment of the lease. 11. Again, at page 188 he reiterates this argument in his rejoinder. It is in fact the point on which the case turns. At page 193 this argument was repudiated by Their Lordships: These (sc. royalties) are periodical payments, to be made by the lessee under his covenants in consideration of the benefits which he is granted by the lessor. What these benefits may be is shown by the extrac. 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. What these benefits may be is shown by the extrac. 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 only payable when the coal or coke is gotten and dispatched 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, coke ovens, furnaces, and form railways and roads. AH 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 coal, or the agreed item of royalty as merely the price of each ton of coal. The contract is in truth much more complex. The royalty is "in substance a rent; it is the compensation which the occupiers pays the landlord for that species of occupation which the contract between them allows, to quote the words of Lord Denman C. J. in Reg. v. Westbrook (10 Q.B., 178, 206). He was referring to leases of coal mines, clay pits and slate quarries. He added that in all these the occupation was only valuable by the removal of portions of soil. It is true that he was dealing with occupation from the point of view of rating, but occupation has the same meaning in its application to matters of taxation such as are involved in this case. 12. Their Lordships were also influenced by the fact that there was a minimum royalty which "does not correspond to any coal in fact extracted and taken away." 13. It is clear that if the lessor does not receive royalties as the price of coal extracted, the lessee does not pay them as the price of coal extracted. It is also clear that this principle has been applied to clay pits. 14. This is the mainstay of the argument of the assessee's learned counsel in the present case. He alleges that he has been buying clay as raw material and making it into bricks which he sells. He is entitled to deduct from his income the price of the raw material. 15. Coming to the leases in the present case Exs. 14. This is the mainstay of the argument of the assessee's learned counsel in the present case. He alleges that he has been buying clay as raw material and making it into bricks which he sells. He is entitled to deduct from his income the price of the raw material. 15. Coming to the leases in the present case Exs. F, G and H the first two dated 4th November 1936, Ex. F is a lease of 1 bigha for 12 years and states that the sum of Rs. 500 has been recovered in cash from the lessee on account of rent of the land and cost of the kiln for 12 years. The kiln was already in existence and was leased along with the land. Ex. G is another lease of 6 bighas 10 biswas and 15 biswansis for 12 years for digging earth etc. and manufacturing bricks. The lessee was permitted to dig out earth to the depth of-12 feet including kankar or sand. The co9t of earth is Rs. 500 per bigha and the whole amount of Rs. 3,268-12-0 has been realised. The lessee was entitled to carry his bricks on the existing path and get it repaired. Ex. H is different". .The land was left for Constructing a brick-kiln in another village and a plot measuring 7 bighas 14 biswas and 12 biswansis was let. The period of the theka is 10 years beginning from 12th April 1937 and the payments are divided under two heads: Rs. 47 per annum and compensation for earth at the rate of Rs. 350 per bigha. Kankar is included. The earth is to be dug to the depth of 8 feet only and is to be dug continuously from one side of the plot; if any of the land is left undug it will be measured with the rest but can be dug next year by the lessee. Wells dug are to become property of the estate on the termination of the lease. No building has to be constructed on the land without the owner's permission. The lessee can relinquish the land in June in any year if there is a dearth of earth. The whole material of the brick- kiln is to be removed from the land within six months of the termination of the contract and rent will be payable up to the end of that period. 16. The lessee can relinquish the land in June in any year if there is a dearth of earth. The whole material of the brick- kiln is to be removed from the land within six months of the termination of the contract and rent will be payable up to the end of that period. 16. We think that the price or compensation for earth mentioned in Exs. G and H are akin to royalties on coal extracted from coal mines. The assessee's learned Counsel has tried to distinguish the two cases on account of the limitation of depth to which extraction can take place. We do not think that this is a valid ground of distinction- Coal is extracted from deep mines, whereas, clay is dug from the surface of the earth. In the case of Ex. G the cost of the earth was realised for the whole 12 years and the lessee was entitled to take earth, kankar and sand to that depth. If he does not do so, there is no provision for a refund. It seems clear to us that this is not a case of buying earth but a lease of property for carrying on a business sold to the lessee. The expenditure is of a capital nature and is not exempted tinder Section 10 (2). 17. Coming to Ex. H we find that the lessee is starting another business. He is constructing a brick-kiln and leasing land for the purpose of digging earth and working the kiln. Here the fact that the lease divides the payments into rent of the plot and compensation for earth seems to us to make no difference. The contract is of the same nature as that contained in Exs. F and G read together. It is true that there is a provision for measurement in this case, but it appears, that the measurement will be of the surface area of the land disturbed including any of land which has not been dug, and it seems to follow that if the lessee does not dig to the depth of 8 feet he will still be liable on the basis of the area disturbed. We see no reason to distinguish this lease from the former one. 18. On this point the Commissioner of income tax v. Tika Ram and Sons is very clear and, with respect, we think correct. We see no reason to distinguish this lease from the former one. 18. On this point the Commissioner of income tax v. Tika Ram and Sons is very clear and, with respect, we think correct. It was followed GANESHILAL BHATTAWALA, IN RE., (1938) 6 ITR 489 . 19. Other decisions have been cited before us, but bear more remotely on the subject. We do not think it worthwhile citing them in view of the conclusion at which we have arrived from an examination of the Privy Council ruling cited above in conjunction with income tax Commissioner v. Tika Ram & Sons. 20. This case does not so much involve a question of income derived from wasting essets, a point long ago decided by the Courts, as the question whether under the leases Exs. G and H the price of earth is provided for or the carrying on of business including all the various operations necessary for the making of bricks of which the digging of earth is only one. We think that the latter is the correct view and that the provisions about the' payment for earth contained in Ex. H are akin to the provisions about the payment of royalties contained in the lease dealt with id LXX Indian Appeals. In neither lease can ~ the payment for earth be regarded as the price of earth extracted. It follows that the payments under these leases are payments of a capital nature for |he starting of new business. 21. We therefore answer the reference in favour of the income tax Commissioner. These sums cannot be deducted u/s 10 (2) (xii) of the income tax Act. The assessee will pay the costs of this reference. We fix the fee of, the Counsel for the income tax department at Rs. 200.