KUMARAYYA J. - The two questions referred for decision by the Income-tax Appellate Tribunal, Hyderabad Bench, under section 66(1) of the Income-tax Act are :
'1. Whether the department was justified in reopening the assessment of the assessee under section 34(1)(a) for the assessment years 1950-51 and 1951-52 ?
2. Whether the amount received by the assessee under the sub-leases dated February 21, 1950, and November 20, 1956, were capital receipts and should not have been assessed to income-tax ?'
The assessee is a Hindu undivided family. The assessment years are 1950-51, 1951-52 and 1957-58, the respective accounting years being 1949-50, 1950-51 and 1956-57. The assessment for the year 1957-58 is the original assessment whereas in relation to the other two years it is reassessment. The controversy mainly relates to the nature of the amount received by the assessee under the two documents dated February 21, 1950. and November 20, 1956. The question is whether in the hands of the assessee it is a capital receipt or revenue receipt. The facts of the case may be shortly stated : One Nagasuri Veeraraghavaiah, son of Raghavulu Chetty, took lease of a mica mine at Cherambodi from the Government of Madras and the registered owners of the lands, the Malayalam Plantations Ltd., for a period of 20 years with effect from May 30, 1945, on payment of a sum of Rs. 60,000. He along with two others formed a partnership firm and Company, for a few years. The firm does not appear to have fared well, and was subsequently dissolved. The lessee thereafter on February 21, 1950, entered into an agreement with Jajodias Ltd., purporting to assign his rights, as the mineral owner and lessee, obtained by him under the document of 30th day of May, 1945, for a period of 12 years for a consideration of Rs. 60,000. This amount was, as per the terms of the agreement, to be paid in three short equal installments : Rs. 20,000 were to be paid on the date of execution of the deed itself, another sum of Rs. 20,000 was to be paid within 3 months of the registration of the document and the balance within 3 months of the second payment, i.e., within six months of the date of registration of the deed. The subject-matter of assignment was the existing heaps of ore in the land and the rights possessed by him (Veeraraghavaiah) as the mineral owner including the rights granted to him under the document of 30th May, 1945. The party, in whose favour the transaction was effected, was styled as the sub-lessee. It was provided in the deed that, if the sub-lessee committed any default in payment of the second and third installments, the lessee shall be entitled to claim forfeiture of the rights granted under the deed. On payment of the entire sum alone, the sub-lessee shall be entitled to the benefit of the rights possessed by the mineral owner and lessee to the minerals in the land demised for a period of 12 years. The sub-lessee was entitled to enter into immediate possession, work the mines, remove and sell minerals quarried and lying in heaps on the site of the land as from the date. In sub-clause (8) of the deed it was provided that the sub-lessee shall have option to get the mining lease renewed for the unexpired period of the lease under the document of 30th May, 1945, or for a further term of 12 years for enhanced premium in case the mineral owner gets an extension of the lease. It appears, on the expiry of the stipulated period, a further agreement was formally entered into on 20th November, 1956. Veerarghavaiah had passed away by that time. His widow, Nagasuri Adilakshmamma, and his sons, Nagasuri Raghaveswara Rao, Rajeshwara Rao and Kumaraswamy, who styled themselves as mineral owners and lessees, entered into an agreement with Jajodias (Private) Ltd., assigning their rights possessed by them as the sole owners and heirs of late Nagasuri Veeraraghavaiah, mineral owner, and all the rights granted to him under the document date 30th May, 1945, for the un-expired period of 20 years over the property and all the land adjoining the mining area for a sum of Rs. 15,000 agreeing also that the sub-lessee shall be at liberty to assign transfer the benefits of the transaction to any individual company or firm. After agreement was entered into, Veeraraghavaiah informed the Income-tax Officer on November 15, 1950, that he leased out his mines to Messrs. Jajodias Ltd. It appears that no returns were submitted presumably on the basis that there was no taxable income of the assessee within the territorial limits of the Income-tax Officer. In 1952 also he sent a letter dated September 5, 1952, to the Income-tax Officer to the same effect. Similarly, he informed on February 16, 1953, that he had no business or income for the year 1952-53. Thereafter Veeraraghavaiah died on November 27, 1954. The Income-tax Officer so far did not demand the details of the lease amount. It was in June, 1955, after the death of Veerarghavaiah that he wrote a letter enquiring as to the annual lease amount for which the mining rights were leased. N. Raghaveswara Rao sent his reply on June 13, 1956, that it was leased for 12 years for a sum of Rs. 60,000, i.e., Rs. 5,000 per year and the whole amount was paid at the beginning of the agreement. The Income-tax Officer thereupon issued notes for the assessment years 1950-51 and 1951-52, one in the name of Raghaveswara Rao as the karta and the other in his name as the son and heir of Veeraraghavaiah. Raghaveswara Rao, after the notices were served on him, submitted his returns, as the Karta of the Hindu undivided family on February 21, 1958, for the year 1957-58 and on January 20, 1958, for the year 1951-52. The objection taken by him was that, that being a capital receipt, it was not liable to tax, that the demand for the same was barred by limitations and that the Income-tax Officer had no power to reopen the assessment or being the income to tax. In relation to the assessment year 1957-58 also, which included the lease amount of the subsequent agreement, the objection was that the receipts could not be brought to tax as they were capital receipts. The pleas of the assessee did not find favour with the income-tax authorities, and the Appellate Tribunal. At his request the above two question have been referred to this court under section 66(1) of the Income-tax Act (hereinafter referred to as the Act.)
The first question relates to the legality of the notice issued under section 34. The question of reopening of the assessment under section 34 arose only in the case of the first two assessment years 1950-51 and 1951-52. The contention is that section 34 is not attracted by the facts and circumstances of the case, and if at all, it is sub-section (1) (b) thereof and not (1) (a) that would be applicable and in that case, the statute of limitation would stand in the way of issuance of notice. In the view of the contention raised, it is expedient to notice the relevant portions of section 34 at this very stage. The said section reads thus :
'34. (1) if - (a) the Income-tax Officer has reason to believe that by reason of the omission or failure on the part of an assessee to make a return of his income under section 22 for any year or to disclose fully and truly all material facts necessary for his assessment for that year, income, profits or gains chargeable to income-tax have escaped assessment for that year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under the Act, or excessive loss or depreciation allowance has been computed, or
(b) notwithstanding that there has been no omission or failure as mentioned in clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income, profits or gains chargeable to income-tax have escaped assessment for any year, or have been under-assessed, or assessed too low a rate, or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed.
he may, in cases falling under clause (a) at any time and in cases falling under clause (b) at any time within four years of the end of that year, serve on the assessee, or, if the assessee is a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 22 and may proceed to assess or reassess such income, profits or gains or recompute the loss or depreciation allowance; and the provisions of this Act, shall, as far as may be, apply accordingly as if the notice were a notice issued that sub-section.'
It is manifest that section (1) (a) would be attracted only when the income had escaped assessment or full assessment by reason of the omission or failure on the part of the assessee either to make a return of his income under section 22 for the concerned year or to disclose fully and truly all material facts necessary for the assessment for that year. On the other hand, sub-clause (b) would be attracted where the income-tax Officer has, in consequence of information in his possession, reason to believe that income has escaped assessment or full assessment. It is indisputable that, if sub-clause (b) were to be applicable, the impugned notice would be bad in law as the statutory period of four years had elapsed by the time the notice was issued. The only question therefore is whether section 34(1) (a) is applicable. It is the case of the department that no return was filed as contemplated by section 22 of the Act during the said periods. It is also its case that the assessee had not disclosed fully truly the income or profits in those years even otherwise. The fact that the returns were not filed is evident from the order of the Income-tax Officer. The Assistant Commissioners order also shows that by reason of the failure on the part of the appellant to make a return of his income for the relevant years, the Income-tax Officer had taken action under section 34 of the Act. If no return was filed for the relevant years as is evident from the record, there can be little doubt that section 34(1) (a) would be attracted provided that this omission or failure has resulted in escapement of assessment. It is then argued that the department was aware of the letters given by Veeraraghvaiah and that in fact relied upon certain correspondence that passed from time to time between Veeraraghavaiah and the department, and that when the department was thus put on notice it cannot subsequently resort to section 34(1) (a). It may be recalled that the last assessment made on the firm carrying on the business of working the mine in question was in the year 1948-49 and no assessment was ever made on N. Veeraraghavaiah as such. It was N. Veeraghavaiah that sub-leased the properties to Messrs. Jajodias Ltd., and that sub-lease was for a period of 12 years and Rs. 60,000 was the lease amount and it was to be paid in three short installments. On November 15, 1950, Veeraraghavaiah intimated the department that he had leased out the mine to Messrs. Jajodias Ltd., and therefore there was no business or income for which he could be assessed. The letter, to the extent relevant, reads thus :
'I bring to your kind notice that I leased out my mines at Cherambadi, H. O. 40/42, Mooker Nallamuthu Street, G. T., Madras.
Hence there is no business or income for me in your area. I request that my name may be deleted from your list of assessees.' Then again he sent a letter on September 3, 1952, to the Income-tax Officer wherein he said :
'I already informed you on November 15, 1950, by registered post that I leased out my mines to M/s. Jajodias Ltd., Cherambadi, head Office 40/42, Mooker Nallamuthu Chetty Street, Madras-1, on February 21, 1950.
I am the proprietor for the Nilagiri Mica Mining Company. My address is 'N. Veeraraghavaiah, Mica Miner, Nilagiri Mica Mining Company, Kavali, Nellore District.' I was assessed in the office of the Nellore Income-tax Officer. My head office is at Kavali in Nellore District.
Now I have not any business in Cherambadi or in Kavali...'
On February 16, 1953, he sent a letter to the Additional Income-tax Officer, Nellore, informing him of the sub-lease that he made to Messrs. Jajodias Ltd., and made it clear that he had already intimated the Income-tax Officer, Ootacamund, on November 15, 1952, by registered post and that he had no business and no income. He further enclosed his profit and loss statement to the said Income-tax Officer. Admittedly, the income-tax department did not try to ascertain from him, the amount for which the lease was given. It was only in June, 1955, that the assessee was asked to state the amount of lease. On June 13, 1956, thereupon Veeraraghavaiahs son sent the following letter :
'My father, late Sri N. Veeraraghavaiah, sub-leased out the mica mines at Cherambadi, Nilagiri District, to Messrs. Jajodias Ltd., under registered document dated February 21, 1950, for Rs. 60,000 (rupees sixty thousand) for 12 years, that is Rs. 5,000 per year. The whole amount was paid at the beginning of the agreement.'
This letter alerted the income-tax department which started the proceedings under section 34. It is clear from the above that, while sending the letters, the assessee did not make a disclosure of the lease amounts that he got during the period under the lease agreement. That is the reason why the Income-tax Officer did not promptly take due steps in this behalf. It is the only when the facts were disclosed by letter dated June 13, 1956, that the department came to know of the fact that the income had escaped assessment. Then the notice under section 34(1) (a) was issued. It is therefore clear not put on notice of the nature and extent of the lease amount in time. There was no return submitted by the assessee at all. In that premises it is manifest that the action of the Income-tax Officer in giving the notice is not open to challenge.
Learned counsel next argued that the plea that no return was filed is not available when the department could act upon the letter that was sent to the department and make an assessment to the best of its judgment; it is urged that an assessment made on that basis could not have been open to attack in view of the decision of the Privy Council in Malik Damsaz Khan v. Commissioner of Income-tax. Obviously, that authority is not on the point with which we are concerned in this case. It was not case where no return was filed at all. All that can be said is that the return filed was in one respect somewhat defective for want of full details. None of the observations of their Lordships in that case can lead us to an inference that a bald letter such as the one sent in this case could replace a statutory return. That apart, that case was not concerned with section 34(1) (a) of the Income-tax Act. Section 34(1) (a) is express and explicit. Omission on the part of the assessee to make return of the income would justify the Income-tax Officer to take proceedings under section 34(1) provided he has reason to believe that the income, profits or gains had escaped assessment or under-assessed, etc., thereby. Therefore, the first question must be answered in the affirmative.
Then we advert to the next question which is of great moment. The question is whether the amounts received under the documents dated February 21, 1950, and November 20, 1956, are in the hands of the assessee capital receipts or income. If it is capital, it is not liable to tax. The case would be different if it is income in view of what section 3 enjoins. The term 'income' has nowhere been defined in the Income-tax Act, nor is the term 'capital'. However, the Judicial Committee in the case of Shaw Wallace & Co. has attempted to define the term 'income' and referred to the word 'capital' in that connection in the following words :
The object of the Indian Act is to tax income, a term which it does not define. It is expanded, no doubt, into income, profits and gains, but the expansion is more a matter of words the of substance. Income, their Lordships think, in this Act connotes a periodical return coming in with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall.... It is essentially the produce of something, which is often loosely spoken of as capital. But capital, though possibly the sources in the case of income from securities, is in most cases hardly more than an element in the process of production.'
This definition has been further amplified by Lord Wright in Raja Bahadur Kamakshya Narain Singh v. Commissioner of Income-tax. Lord Wright observed thus :
'Income is not necessarily the recurrent return from a definite sources, though it is generally of that character. Income again may consist of a series of separate receipts, as it generally does in the case of professional earnings. The multiplicity of forms which income may assume is beyond enumeration. Generally, however the mere fact that the income flows from some capital assets, of which the simplest illustration is the purchase of an annuity for a lump sum, does not prevent it from being income, though in some analogous cases the true view may be that the payments, though spread over a period, are not income, but installments payable at specified future dates of a purchase price.'
Thus the true drift and implications of the term 'income' as amplified by authorities make it plain that it is term of very wide connotation and not invariably therefore we are faced with great difficulty in drawing a line in certain cases between what is capital receipt and what is a revenue receipt or income. The distinction between the two may in certain cases be thin, but it is real and the determination of their true character largely depends upon the facts of each individual case. The broad principles laid down by authorities would, however, serve as a guide. We, therefore, purpose to examine first carefully the contents of the documents to come to a conclusion as to the nature and substance of the transactions contained therein and determine the character of payment in the hands of the assessee in each case.
There are two agreements, one of February 21, 1950, and the other of November 29, 1956, and the covenants in both are substantially the same. We have already noticed that one N. Veeraraghavaiah had obtained lease of a mica mine from Messrs. Malayalam Plantations Ltd., and the Government for carrying on mining operation for a period of 20 years. He was a businessman and the mica mine was intended to be one of the sources of his income. He planned first to work the mine himself by forming a partnership firm consisting of himself (Veeraraghavaiah), G. Malakondiah and P. Singiah under the name and style of Nilgiri Mica Mining Company, he having 12 annas share and the two others having 3 annas share each. Probably, resort to this method of exploitation did not yield appreciable profits or that there might have arisen some differences among the partners are long. Thereafter, Veeraraghavaiah did not choose to press forward and the partnership firm was dissolved. He then thought of an alternative method of exploitation which would ensure for him a dividend or income certain. He sub-leased the mine to Messrs. Jajodias (Private) Limited on agreement to pay a sum of Rs. 60,000 for a period of 12 years. The agreement dated February 21, 1950, was duly executed and registered by him as the mineral owner and lessee. The convenants entered into are embodied in the document. The document first in brief the history of the transaction. It says that the mineral owner and lessee had taken lease from the Government of Madras and the registered owner, Messrs. Malayalam Plantations Ltd., on 30th day of May, 1945, with effect from that date for a period of 20 years to carry on mining operations, that certain acts were done by him for some years for conducting the mining operations but that thereafter agreed with the sub-lessee to assign his rights as mineral owner and lessee under the document of 30th day of May, 1945, for a period of 12 years for a sum of Rs. 60,000 which has to be paid in three installments. There were also certain bungalows, huts, tenements and other structures on the lands occupied for carrying on the mining operations. The sub-lessee was given right to occupy them for purposes of carrying on the said operations during the said period. There were also heaps of ore existing on the land on that day. They too were handed over to the sub-lessee under the terms of the agreement. Paragraph 1 of the agreement bears reference to the assignment of the rights and the consideration which was payable in 3 equal installments. The first installments was to be paid on the date of the execution of the document, the second was payable within 3 months from the date of registration of the document and the third within 6 months from the date of registration. Paragraph 2 contained a clause to the effect that, should there be any default in payment of the second and the third installments, the mineral owner and lessee shall be entitled to claim forfeiture of the rights granted by the document and take possession of all lands, mines and other buildings. Paragraph 3 is specific enough to show that only on payment of the consideration in the manner provided the sub-lessee shall be entitled to the benefit of all the rights possessed by the mineral owner and lessee for the agreed period. The sub-lessee was permitted to sell away the minerals, quarried or them lying in heaps on the site of the lands also to work the mines and remove minerals from the date of the document itself. Paragraph 4 refers to the obligations of the sub-lessees to perform all the conditions and terms agreed to be observed and performed by the lessee under the document of 30th May, 1945, and they should pay the royalties payable to the Government, according to the scheduled rates, and shall abide by the rules laid down by the Government or the local bodies for working the mines and removing minerals. Whereas Paragraph 1 speaks of assignment of all the rights possessed by the lessee as mineral owner and all rights granted to him under the lease, paragraph 1 speaks of assignment of all the rights possessed by the lessee as mineral owner shall keep his rights as pattadar and mineral owner alive and in full force and effect during the subsistence of the said agreement and these stipulations shall bind his heirs and legal and personal representatives. Paragraph 6 says that, to the extent necessary for working the mines effectively, the mineral owner and lessee shall constitute the sub-lessee to be his agent or attorney to represent him in regard to dealings with the registered holder, Malayalam Plantations Ltd., and the Government of Madras. Paragraph 7 relates to the fixtures, fittings and all mining equipment, implements, tools and other materials. Paragraph 8 reads thus :
'The sub-lessees shall have an option of renewing the mining lease for the unexpired balance period of 20 years under the document of 30th May, 1945, or for another 12 years if the mineral owner shall get an extension for such period on the payment of the enhanced premium calculated at Rs. 1,000 per year of such extended period. The parties shall then enter into a separate document for the period of renenwal.'
Paragraph 9 says that all dues outstanding in respect of the properties on the date were payable by the mineral owner and lessee and that the lessee shall take all steps for securing the sub-lessee peaceful possession of the properties so as to enable the sub-lessee to fully exploit the mining rights for the entire period. Paragraph 10 gives power to the sub-lessee to assign or transfer the benefits of this transaction to any company or firm. Then follows the schedule. There are all the material contents of the document.
It is manifest that the document purporting to be the deed of assignment of all the rights that the mineral owner and the lessee had, contains essentially the covenants of sub-lease. The transaction thus in substance is not a sale of capital asset; nor is it an absolute assignment of all rights and interests of the mineral owner and lessee under the deed of 30th May, 1945, even though the document purports to be so. When it endures for 20 years under the deed, how could the totality of these rights become extinct by reason of the agreement in question which had to endure only for 12 years Further, if those rights had to become extinct even for this limited period of 12 years where was the occasion for the specific covenant that the lessee shall keep his rights as pattadar and mineral owner alive during the period of sub-lease This stipulation was possible only if what was given was a sub-lease for the use and enjoyment of mineral wealth for a stipulated period. Further, there is also a stipulation that the period of lease liable to be extended to a further period at an enhanced premium calculated at Rs. 1,000 per year under a separate agreement. This again is consistent with the theory that the interests of the lessee were still alive, only that instead of working the mines himself, he has entrusted that work to Jajodias Ltd., on terms of the sub-lease ensuring for himself profit at all events. In fact under paragraph 6 he tried to constitute the sub-lessee as agent in order to represent him so that the work of mining may be effectively carried on. The term sub-lessee used to denote Jajodias Ltd., also indicates that the parties treated the transaction as a sub-lease. Then again, though the consideration paid is shown as premium it is, in reality, consolidated rent for 12 years paid in advance. The words 'enhanced premium calculated at Rs. 1,000 per year' used in clause (8) of the document must give clue to the true intention of the parties that what they had fixed as consideration payable in three installments as provided in paragraph 1 was in fact the advanced payment of rent of 12 years calculated at Rs. 5,000 per year. All these salient features of the transaction which bear the impress of a transaction of sub-lease leave no room for doubt that it is not a transaction of sale of the capital asset or of totality of interests of the assessee in the land or mineral wealth. We shall have to deal with this aspect and also with the nature of payment at greater length in the later of this judgment. For the present, suffice it to notice that this mine was a capital asset in the hands of Veeraraghavaiah as he took it for purposes of profit making business. He exploited the mineral himself for some time and then he got this work done through the agency of Jajodias Ltd., under the said terms of the deed. It is a transaction resorted to as a means of effective use and enjoyment of his capital asset and not for realisation of the asset itself. For the purpose of this case we are concerned more with the character of the payment rather than with the nature of the transaction itself; but the determination of the former depends largely upon the latter.
The contention of the learned counsel, Mr. T. Ramachandrarao, is that neither of the transactions evidenced by the above two documents is a sub-lease though the term 'sub-lessee' has been employed in both the documents and, therefore, the amounts paid thereunder cannot be said to be rent. Alternatively, it is argued that even if they were to be assumed as sub-leases in the strictest sense of the term, receipts thereunder constitute in the hands of the lessee only the premium, or in other words, 'salami' which, in the eye of law is capital and not income and, therefore, not liable to tax. In any event, it is argued that, as the document names the transaction as assignment of all the rights that the lessee had, these amounts, in the hands of the lessee, are not income but only capital. The learned counsel has invited our attention to the definition of the term 'lease' in section 105 of the Transfer of Property Act and argued that, though transfer of a right to enjoy the immoveable property for a time certain or in perpetuity for price or promised will no doubt come within the definition of lease, the price paid, however, being premium, it is a capital receipt and not a revenue receipt as settled by dicta of the Privy Council and the Supreme Court. It is no doubt true that the payments which a tenant makes some times partake of the nature of premium or salami; but there is a clear distinction between the amounts paid by way of salami and those paid by way of rent. The true character of the payment, however, is to be judged on consideration of facts and circumstances under which or for which it was made. It is well-settled that, whenever the question arise under the income-tax law as to the nature of the payment resulting from a transaction, the nature of the transaction and the character of the payment have to be judged not in a strict legalistic manner, but from business or accountancy point of view and accordingly a decision has to be reached as to the character of the payment. We may with advantage refer here to the principle stated by Lord Green M. R. in Commissioners of Inland Revenue v. 36/49, Holdings Ltd., which is in the following terms :
'The true nature of the sum is not necessarily its nature in law, but its nature in business or in accountancy whichever way one likes to put it, because from the legal point of view there may be no difference whatsoever as between the parties between a capital and an income sum. It may be totally irrelevant to the legal relationships into which they are proposing to enter. When, however, the tertius gaudens, in the shape of the revenue, appears on the scene, that matter which as between the parties may have been a matter of not the slightest importance becomes immediately a matter of very great importance, and it is necessary to examine the circumstances of each individual case, including any documents which require to be construed, in order to ascertain what is the character to be attributed to the payment. That is why I say that I personally find very little assistance from examining the circumstances of other cases. In some of them a particular feature has appeared which the court has regarded as turning the scale one way or another. In other cases that features may have been absent, but another feature was present, and so on. Nothing can be more misleading than to take cases previously decided on the basis of the presence of a particular factor and to argue from that that the cases where that factor is absent ought to be decided the other way.'
It is manifest from the above that decide cases may not be of much help as facts of any two cases can never be identical. It is on the facts and circumstances of each case including the documents, the conclusion has to be reached as to the true nature of payment. The transaction though in form an assignment of the right to realise the assets may in substance be a sub-lease. The payment of lump sum down may in fact be nothing but advance payment of total rent. The parties may deliberately camouflage the real nature of the transaction by using clever phraseology. The so-called premium in the document may be, in fact, advance rent or the terminology of rent given in the document may be only deferred price. Therefore, the nomenclature given to the document may not be decisive or conclusive. What is to be gathered is the intention of the parties. The probe must be full and attempt must be since to ascertain the true intention from the circumstances of the case and acts of the parties that is material and shall determine the nature of the transaction as well for purposes of income-tax law. That is what has been stated by this court in Rajah Manyam Meenakshamma v. Commissioner of Income-tax and Commissioner of Income-tax v. Panbari Tea Co. Ltd. The intention may be gathered from the document and also as already stated from the relevant surrounding circumstances. The document should be read as a whole. The various clauses of the document should be construed resolving inconsistency, if any. If the words used are unambiguous, effect must be given to them. In case of ambiguity, surrounding circumstances must also be looked into to find out what was intended. The nature of the transaction should be so determined as to fit in with all the circumstance and specific provisions of the deed. It is not mere lack of the thing, but its real character that is material. As Rowlatt J. in Jones v. Commissioners of Inland Revenue, has said :
'A man may sell his property for a sum which is to be paid in installments, and when that is the case the payments to him are not income : .... Or a man may sell his property for an annuity. In that case the Income Tax Act applies. Again, a man may sell his property for what looks like an annuity, but which can be seen to be not a transmutation of a principal sum into an annuity but is in fact a principal sum payment of which is being spread over a period and is being paid with interest calculated in a way familiar to actuaries - in such a case income-tax is not payable on what is really capital : .... On the other hand, a man may sell his property nakedly for a share of the profits of the business. In that case the share of the profits of the business would be the price, but it would bear the character of income in the vendors hands.'
Thus in short, if the character of payment has to be ascertained it has to be from the nature of the transaction as determined from the document and if necessary from the surrounding circumstances and all this from business or accountancy point of view for that is the main concern of the Income-tax law and not strictly from the true legal character of the transaction.
As noticed above, the agreement entered into between the parties is, in substances, a mining lease. Whatever may be the legal position of a mining lease in English law, it is regarded in India as a lease and not a sale of minerals. What is a lease in the ordinary parlance in India, may also be so within the meaning of sections 105 - 108 of the Transfer of Property Act of 1882 as observed by the Privy Council in Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income-tax. Then again, sub-lease even if it were for the whole of the unexpired term, unlike in English law, it would not operate otherwise than as sub-lease. That is the legal position of a lease or sub-lease. But as already noticed, it is not the true legal nature of the transaction but it is the nature of the transaction from business point of view that should be material for our purposes. We have already said that the lessee is a trader and had obtained the mines for carrying on mineral operations. It was a capital asset in his hands. He worked the mines for a view years himself forming a partnership firm. Then he entrusted the working of mines to Jajodias Ltd., under the agreement. He did not assign his rights for the total unexpired period and did not sever off his total connections with the asset that he had obtained under the lease for certain stipulations show that his connections with the asset were always there. His object was to use the asset in a more effective manner resulting in gain for him. He, therefore, gave it to Jajodias Ltd., on the terms embodied in the document. Whereas he obtained the lease himself for a sum of Rs. 60,000 for a period 20 years, the consideration for 12 years alone for use of the asset was fixed at Rs. 60,000. Of course, the existing heaps of ore which were his stock-in-trade were also included therein. We have already set out and discussed the material parts of the documents in the earlier part of the judgment. The question is could it be said, having regard to the whole tenor and purport of the document and the nature and character of the receipt in the hands of the assessee, that the receipts represented the price of the asset Could the transaction in question be said to be a means of realising the asset in the hands of the lessee or is it a means of obtaining income with the help of that asset If the answer to the last part of the question is in the affirmative, it cannot but be said that the payment of Rs. 60,000 which was paid in installments, even if it had been paid in lump sum, would be income in the hands of the lessee.
In this connection we may also refer to the letter dated June 13, 1956, sent by the son of the lessee, which reads thus :
'My father, late Sri N. Veeraraghavaiah, sub-leased the mica mines at Cherambadi, Nilgiris District, to Messrs. Jajodias Ltd., under registered document dated February 21, 1950, for Rs. 60,000 (rupees sixty thousand) for 12 years, that is Rs. 5,000 per year. The whole amount was paid at the beginning of the agreement.'
Even Jajodias Ltd., in their letter dated January 5, 1958, stated that the sum of Rs. 60,000 paid for 12 years is adjustable at the rate of Rs. 5,000 and has been so adjusted in the books. That again gives a clue to the nature of the transaction that, even though the sums were paid in lumpsum, they represented the consolidated sum by way of compensation or rent which the sub-lessee paid to the lessee for the use and occupation as provided by the contract between them. Though this amount has been termed as premium, it is in fact advance rent for all the 12 years. It is an income or revenue receipt in the hands of the assessee. At this stage we may refer to the following observations of the privy council in Rajah Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income-tax which were made while citing with approval the remarks of Lord Blackburn :
'.... Lord Blackburn was dealing with the English statutes which were clearly different from the Indian Act. Under the latter Act, the tax is on income. Mines are not specifically mentioned as they are in the English Act. But if income is in fact derived from mines, it is to be taxed as much as income from any other source. The general term covers the specific instances. The ground on which the appellant contends that the royalties are not income are that they are capital receipts from a wasting property. In principle, in their Lordships opinion, both these points are disposed of by Lord Blackburns words, which depend on general principles, not on rules peculiar to the English Acts.'
What Lord Blackburn said was this :
'But the argument that no income-tax should be imposed on what is, perhaps not quite accurately, called rent reserved on a mineral lease, because it is payment by installments of the price of minerals forming part of the land (any more than on the price paid down in one sum for the out and out purchase of the minerals forming part of the land), is, I think, untenable.'
As to the argument that it is a capital receipt from a wasting property, the said Lord observed thus :
'It has also been sometimes argued that it is very unjust to tax at the same rate a terminable interest, such as that in a mine, which must at some time be worked out, and a fee simple interest, which will endure so long as this world continues in its present state. I will not inquire whether this is just or not. There is much force in the argument on the other side, that if the interest is terminable, so is the tax, and will cease when the interest ceases; but whether just or not, there can be no doubt that the same annual charge is imposed upon a terminable annuity and on one in perpetuity, and, what seems harder, that the same annual charge is imposed upon a professional income, earned by hard labour, often extending over many years before any return is got, and, when earned, precarious, as depending on the health of the earner.'
If, therefore, the payment of Rs. 60,000 for 12 years in the hands of the assessee-lessee is nothing but a consolidates amount of advance rent for 12 years, it is liable to tax being an income. What is contended for on behalf of the assessee is that it is not rent but a premium or a 'salami', being the price of the capital asset, hence not income. The distinction between 'premium' and 'rent' has been brought out in several decisions of the Privy Council and the Supreme Court. In Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income-tax, the Judicial Committee said thus :
'It (salami) 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 regarded as a capital asset, and the money paid to purchase it may properly be held to be a payment on capital account.'
In Member for the Board of Agricultural Income-tax, Assam v. Sindhurani Chaudhurani, Kapur J., who delivered the judgment of the Supreme Court, observed thus :
'The payments by way of salami were made by the prospective lessees anterior to the constitution of the relationship of landlord and tenant as the price for the lessor agreeing to the parting of his rights in an agricultural holding in favour of the proposed lessee....
Thus all these definitions show that salami is a payment by the tenant as a present or as price for parting by the landlord with his rights under the lease of a holding. It is a lump sum payment as consideration for what the landlord transfers to the tenant... when a tenant paid salami he did so in order to get in return an estate in the land owned by the zamindar.
Salami is thus not rent... it was a payment to the landlord by the tenant as a consideration for the transfer of a right in zamindari lands owned by the landlord. It has, therefore, all the characteristics of a capital payment and is not revenue.'
As observed by Subba Rao J. (as he then was) in Commissioner of Income-tax v. Panbari Tea Company Ltd.'
'It is true that in that case the payment was paid in a single lump sum, but that was not a conclusive test, for salami can be paid in a single payment or in installments is the consideration paid by the tenant for being let into possession.'
The said decision also refers to Chintamani Saran Nath Sah Deo v. Commissioner of Income-tax, which had considered all the relevant decisions on the subject in the context of licences granted to the assessee to prospect for bauxite in some cases for six months and in others for a year or two and observed :
'The definition of salami was a general one, in that it was a consideration paid by a tenant for being let into possession for the purpose of creating a new tenancy.'
Thus the dividing line between 'capital receipt and rent' has been demarcated by a long chain of compelling authorities. In the light of the above observations it is to be judge whether the payment of Rs. 60,000 in installments is capital or revenue receipt. From the above discussion it is obvious that though the word 'premium' is used in the document it was not in fact price paid for acquisition of the rights in the asset. It represented the consolidated amounts of rent that were payable to the lessee at certain annual rate by the sub-lessee for use and enjoyment of the mineral wealth in the mines for the prescribed period. It was advance rent. It was intended to be such. The subsequent conduct of the parties also shows that it was treated as such. In the circumstances of the case, it cannot be said that the assessee resorted to this transaction as a means of realising the asset. In that case the transaction would have been different and the totality of his interests would have been wiped out. It was not at all a sale of capital asset. The payment received by him for the use and occupation of the asset for the period fixed was intended to be rent. It was paid in lump sum, the rate being Rs. 5,000 per year, as it is implicit in the terms of the document itself. It is therefore 'income'.
Much reliance has been placed on the decision of this court in Rajendra Mining Syndicate v. Commissioner of Income-tax, and the judgment of the Supreme Court in Pingle Industries Ltd. v. Commissioner of Income-tax. The facts in the first mentioned case make it abundantly clear that it was out and out a sale of the capital asset. There, the assessee, Messrs. Rajendra Mining Syndicate, Guntur, a registered firm having three mining leases and one prospecting license for varying terms for certain plots in the Kondapalli Reserve Forest area, entered into an agreement on January 29, 1946, to transfer to one B. D. V. Ramaswami Naidu, the mining rights, concessions, licences and leases in those mines possessed by the assessee together with stocks, equipments, etc., the consideration for the transfer being Rs. 3,00,000. The title of the vendor to the properties in question was approved of by the vendee on February 20, 1946. On March 9, 1946, the assessee put in an application to the District Collector for permission to sell the leases and the prospecting licence and the Government of Madras sanctioned the transfer of the three mining leases but refused to sanction for transfer of the prospecting licence on March 20, 1947. The sale deed was actually executed and registered on May 5, 1947, and the balance of the sale proceeds was paid in the presence of the sub-registrar at the time of registration of the sale deed. There was no dispute that it was an out and out sale transaction. As the price for which the sale was effected was higher than the original cost, the question arose whether the profits thus derived by the assessee were within the scope of section 12B of the Indian Income-tax Act and, therefore, liable to tax. Obviously enough, the transaction was resorted to as a means of realisation of assets and not earning profits by means of the use and enjoyment of the same. It was an out and out sale of capital assets. Therefore it could not be income. Having regard to the period for which the said transaction was entered into the matter could not fall within section 12B. It is clear that the question as has arisen now did not and could not have arisen on the facts of the said decision.
The second mentioned case, Pingle Industries Ltd. related to the question of capital and revenue expenditure. There the assessee-company which carried on, amongst others, the business of selling Shahabad flag stones, obtained from a jagirdar under a contract the right to extract stones from quarries situated in six named villages for a period of 12 years on the annual payment of Rs. 28,000. By way of security for complying with the condition of regular payment, a sum of Rs. 96,000 was paid in advance, out of which Rs. 8,000 were to be adjusted annually against Rs. 28,000 and the balance was payable in monthly installments of Rs. 1,666-10-8. The assessee had only the right to excavate stones. He and the jagirdar had undertaken not to allow any other person to excavate stones in those areas. There was also another similar lease taken from the Government for a period of five years under which the appellant had to pay Rs. 9,000 per year in monthly installments of Rs. 750 each. The question was whether the amounts paid by the assessee to the jagirdar and the Government each year were revenue expenditure allowable under section 12(2) (xv) of the Hyderabad Income-tax Act corresponding to section 10(2) (xv) of the Indian Income-tax Act, 1922. It was held that the stones in the site were not his stock-in-trade in a business sense but a capital asset from which after extraction he converted the stones into his stock-in-trade. The payment was neither rent nor royalty, but a lump payment in installments for acquiring a capital asset of enduring benefit to his trade. The amounts were outgoing capital account and were not allowable deductions. The facts of this case are also different from the facts of the case with which we are concerned. What was acquired by the lessee was a capital asset and the expenses incurred for acquiring the same could not be an expenditure on capital of enduring character.
The result of the above discussion is that having regard to the nature of the transaction which was entered into between the parties as embodied in the sub-leases dated February 21, 1950, and November 20, 1956, the payments made by the sub-lessee in the hands of the lessee-assessee are not capital receipts but income and therefore liable to tax. We answer the second question accordingly. We direct that the assessee shall pay the costs of the department. Advocates fee Rs. 150.