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Commissioner of Income-tax, Bombay City-iii Vs. Ratilal Tarachand Mehta - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 26 of 1967
Judge
Reported in[1977]110ITR71(Bom)
ActsIncome Tax Act, 1961 - Sections 4
AppellantCommissioner of Income-tax, Bombay City-iii
RespondentRatilal Tarachand Mehta
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateV.H. Patil, Adv.
Excerpt:
.....4 of income-tax act, 1961 - whether salami or pagadi received by assessee can be taxed as capital receipts - salami and pagadi treated as capital receipts as it is single payment made for acquisition of right of lessee to enjoy benefits granted to them by lessee - held, salami or pagadi received by tenants by way of premium could not be taxed as it was capital receipts. - - it is a single payment made for the acquisition of the right of the lessees to enjoy the benefits granted to them by the lease. the fact stands out very clearly in this behalf that in the civil litigation which ensued between the assessee on the one hand and the tenants on the other, the court had actually, while fixing the standard rent, reduced the rent that was payable by each of those tenants to the assessee..........also recorded a finding that the payments that were made by the tenants appear to be pagdi or salami payments made by them for getting accepted as tenants by the assessee and, therfore, the tribunal ultimately held that the pagdi or salami payments by the tenants for getting accepted as tenants by the assessee could not be treated of the nature of income in the hands of the assessee. the tribunal, therefore, directed that the amounts added should be deleted from the assessment. at the instance of the commissioner of income-tax, bombay city no. iii, the question specified above has been referred to us for our determination. 2. mr. joshi, appearing for the revenue, has contended before us that the tribunal was in error in applying the principle which was applicable in the case of.....
Judgment:

Tulzapurkar, J.

1. This is a reference made by the Tribunal to this court under section 66(1) of the Indian Income-tax Act, 1922, and the question of law referred to us for our opinion runs thus :

'Whether, on the facts and in the circumstances of the case, the amount of Rs. 54,000 was a capital receipt in the hands of the assessee ?' The assessee, Ratilal Mehta, is an individual, whose main source or income was property which he had constructed at Ghatkopar. The question relates to the assessment year 1960-61, corresponding previous year being the one which ended on 31st march, 1960. Admittedly, the assessee constructed a property for a sum of Rs. 93,432. Out of this amount, a sum of Rs. 39,432 was secured either by way of loans or by way of deposits from the tenants. The balance amount of Rs. 54,000 was claimed to have been received by the assessee as pagdi or salami from his tenants. In respect of these amounts which he received as pagdi or salami, no receipts were issued by him to the tenants, but some of the tenants who were examined by the taxing authorities confirmed that they had given to the assessee such amounts which according to them were by way of loans. The question that arose for consideration before the Income-tax Officer, while doing the assessment for the year 1960-61, was whether the amount of Rs. 54,000 was the assessee's income or was a receipt of a capital nature. The Income-tax Officer took the view that this amount represented the assessee's income from undisclosed sources and that, at any rate, it was in the nature of composite rents received in advance. The Appellate Assistant Commissioner, to whom the matter was carried by the assessee, confirmed the addition of this amount in the total income of the assessee on the ground that the same was in the nature of composite rent received in advance from the tenants. When the matter was carried in second appeal to the Tribunal, the Tribunal recorded certain findings of facts which have not been disputed before us even by the revenue. The Tribunal found as a fact that the amounts in question which were received by the assessee from his tenants (aggregating Rs. 54,000) were not in the nature of advance rent because the usual disputes between the assessee on the one hand and the tenants on the one hand and the tenants on the other were about the fixation of standard rent which had ultimately been decided by the court on the basis that the monthly rent which was being charged by the assessee from his tenant was excessive and the same shall be reduced by 10%, that is to say, the standard rent was fixed by the court at a figure less by 10% of the actual rent charged. The Tribunal also recorded a finding that the payments that were made by the tenants appear to be pagdi or salami payments made by them for getting accepted as tenants by the assessee and, therfore, the Tribunal ultimately held that the pagdi or salami payments by the tenants for getting accepted as tenants by the assessee could not be treated of the nature of income in the hands of the assessee. The Tribunal, therefore, directed that the amounts added should be deleted from the assessment. At the instance of the Commissioner of Income-tax, Bombay City No. III, the question specified above has been referred to us for our determination.

2. Mr. Joshi, appearing for the revenue, has contended before us that the Tribunal was in error in applying the principle which was applicable in the case of payment of salamis or premiums at the time of creating monthly tenancies that were granted by the assessee to the tenants that the aspect of payment of salami or pagdi made over by the tenants to the assessee should be considered. He urged that it is not as if that in every case, where a premium or salami has been paid by the lessee and received by the lessor, the receipt in the hands of the lessor must invariably be regard as a receipt of a capital nature. He also contended that there were at least more than 12 tenants in the property constructed by the assessee and it appeared to be regular business of the assessee to charge pagdi or premium to each of those tenants before granting the monthly tenancies to them and as such the receipt of these premiums in his hands should have been regarded as a receipt in the nature of income and the same was, therefore, liable to be included in the assessment of the assessee. It is not possible to accept either of these two contentions urged by Mr. Joshi before us for the reasons which we shall presently indicate.

3. The question whether salami received by a landlord for settling agricultural land or granting of a perpetual lease camp up for consideration before the Supreme Court in the case of Member for the Board of Agricultural Income-tax, Assam v. Sindhurani Chaudhurani : [1957]32ITR169(SC) . At page 174, Kapur J., speaking for the court, has observed thus :

'The characteristics and incidence of salami disclosed from the 'statements of the cases' are that it is a lump sum non-recurring receipt of money by a landlord from a tenant before making a settlement of the holding, waging C.A. No. 162 of 1955 varied from Rs. 7 to Rs. 10 per bigha and was less in other cases. He is also entitled to charge a fixed periodical amount of 11 thousand per bigha per annum. Salami is charged whenever a fresh settlement is made whether it is of a piece of virgin land or of an auction-purchase holding. Thus, salami is papyment by a tenant to the landlord antecedent to the constitution of the relationship of landlord and tenant. It is really a payment by the tenant to the landlord for being allowed to take possession of the land for cultivation under the lease.......salami is not a recurring or periodical payment or a fee or fine levied at fixed intervals from the tenant for the same holding.'

4. The Supreme Court in that case also expressly took the view that salami was not rent and, therefore, unless it was revenue it would not fall within section 2(a)(1) of the Assam Tenancy Act. Justice Kapur has also referred to Lord Wright's observations in Kamakshya Narain Singh v. Commissioner of Income-tax [1943] 11 ITR 513, where the learned Law Lord has described salami in the case of a grant of a mining lease for a period of 999 years as follows :

'The salami has been, rightly in their Lordship's opinion, treated as a capital receipt. It is a single payment made for the acquisition of the right of the lessees to enjoy the benefits granted to them by the lease. That general right may properly be held to a payment on capital account.'

5. It would thus appear that by its nature the salami being a on-recurring payment made by a tenant to the landlord at the inception of the grant of the lease has always been regarded as a receipt of a capital nature in the hands of the landlord.

6. In the case of Durga Das Khanna v. Commissioner of Income-tax : [1969]72ITR796(SC) , the question about the real nature of premium or salami paid for obtaining lease of a cinema house for 30 years was considered by the Supreme Court. The material facts in that case were that on February 23, 1946, the appellant entered into a lease by which the building was demised to the lessees for 30 years and the lessees agreed to pay under the lease Rs. 55,200 to the appellant towards the cost of erecting the cinema house and the rent agreed to be paid was Rs. 2,100 per month and it was payable from June 1, 1946. The lease did not contain any condition or stipulation from which it could obe inferred that the sum of Rs. 55,200 had been paid by way of advance rent. Nor was there provision for its adjustmenttowards rent or for its repayment by the appellant. The lessees entered into possession after the cinema house was completed which was subsequent to the date of the lease. The Tribunal took the view that the receipt of the sum of Rs. 55,200 was in the nature of advance payment of rent which view was accepted by the High Court on a reference. On appeal to the Supreme Court, it was held that, in the absence of any material on record to that effect, the Tribunal and the High Court were in error in holding that the sum Rs. 55,200 was an advance payment of rent, and that the sum Rs. 55,200 paid to the appellant was in the nature of a premium or salami and that it had all the characteristics of a capital payment and was not revenue. The Supreme Court has also taken the view that, prima facie, the premium or salami would not be income and it would for the income-tax authorities to show that facts existed which would make it a revenue payment. Having regard to be aforesaid position which has been clarified by the Supreme Court in the two aforesaid decisions, it seems to us clear that in the instant case also the receipt of Rs. 54,000 in the hands of the assessee will have to be regarded as a capital receipt and not a receipt of income nature. It may be stated that Mr. Joshi did not canvass before us that the amount of Rs. 54,000 which the assessee received from his tenants should be regarded as payment of advance rent. The fact stands out very clearly in this behalf that in the civil litigation which ensued between the assessee on the one hand and the tenants on the other, the court had actually, while fixing the standard rent, reduced the rent that was payable by each of those tenants to the assessee under the contract by 10 per cent. Moreover, the finding that has been recorded by the Tribunal is that this payment was made to the assessee by the tenants for getting them accepted as tenants. In other words, it was by way of a premium or salami that these payments were received by the assessee as a consideration for granting monthly tenancies to the tenants. Obviously, it was a non-recurring payment made by the tenants to the assessee for the purpose of getting the monthly tenancy. It is true that every payment by way of a salami or a premium need not necessarily be held to be of a capital nature or no capital account, but since prima facie that is the nature of such payment it is for the department to establish facts which would go to show that such payment was in the nature of income and not on capital account. In the instant case no facts have been established or brought on record by the department to show that this payment which was by way of a premium for obtaining monthly tenancy was in the nature of revenue or income. In the absence of any material brought on record by the department in that behalf, therefore, the Tribunal was right in coming to the conclusion that the receipt of Rs. 54,000 by the assessee from the tenants which was by way of a premium for grant of monthly tenancy to the tenants was capital receipt.

7. It is true that in the instant case there were at least more than 12 tenants in respect of which the assessee must have received these amounts by way of premiums from the respective tenants before granting the monthly tenancies to them. But here again, no material has been brought on record to show that the construction of the present building, from the tenants of which he received premium, was a part of his business as a builder or promoter. Moreover, even the department did not seek to include this item of Rs. 54,000 in the assessee's total income under section 10 of the Indian Income-tax Act, 1922, but the only attempt was to show that it was his income from other sources under section 12 of the Act. As we have said above, considering the case under section 12 of the Act it is difficult to come to the conclusion that the amount of Rs. 54,000 that was received by the assessee from his tenants by way of premium for the grant of monthly tenancies to the tenants would be receipt in the nature of income or revenue.

8. In the result, the question is answered in the affirmative and in favour of the assessee. The department will pay the costs of the reference to the assessee.


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