BRIJLAL GUPTA J. - This a reference under section 66(1) of the Income-tax Act. Two questions have been referred for opinion of the court :
'(1) Whether, on a true interpretation of the terms of the deed of lease, the sum of Rs. 6,000 received by the assessee as compensation for leasing out a land for a period of five years for the purposes of digging earth and moulding bricks therefrom, etc., was a capital receipt or a revenue receipt
(2) If the above receipt is held to be a revenue receipt whether the entire amount of Rs. 6,000 would be taxed as the income of the year of receipt or should be spread over a period of five years, i.e., the tenure of the lease ?'
It is clear that the second question will arise only if the answer to the first question is that the amount of Rs. 6,000 is revenue receipt and not capital receipt. If on the other hand the answer is that the amount is capital receipt, the second question would not arise. As in our opinion the answer to the first question would not arise. As in our opinion the answer to the first question is that the amount of Rs. 6,000 is capital receipt, the second question does not arise and we do not, therefore, propose to answer that question.
So far as the first question is concerned the material facts are that the assessee which is a Hindu undivided family was, inter alia, the owner of certain zamindari properties and land. During the year Kartik Samvat 2007-2008, which is the relevant accounting period for the assessment year 1952-53, the assessee leased out to one Madan Lal 6 bighas 13 biswas of land for a period of five years for a lump sum payment of Rs. 6,000 on the terms and conditions set out in the agreement which is a part of the statement of the case and is annexed as annexure 'A' thereto.
The reason for the giving of the land on lease is contained in the recital and is as follows :
'The land does not yield good crops on account of poor soil. The lessee is in need of earth for preparation of bricks for setting up a kiln and he expressed a wish to the lessor for the land. The lessor has accordingly decide to give the lessee the earth of the land for manufacture of bricks and have the soil of the land changed.'
The terms of the lease are contained in the succeeding paragraphs and are to the effect that the lessee shall remain in possession of the land for the period of the lease, namely, five years, and shall dig earth for the manufacture of bricks. The earth shall be dug up to a depth of five feet and in such manner as to leave the lower bed of the excavation level. If any kankar was found, that was to belong to the lessor. The lessee shall set up a kiln fitted with a chimney or an open kiln over part of the land, bake bricks and make sale of them but except for the setting up of a kiln and taking earth the lessee shall not be entitled to carry on cultivation or to use the land for any other purpose. On the expiry of the term of five years the lessee was to surrender the land to the lessor. If he failed to do so he would be responsible for damages at the rate of Rs. 2,000 per annum and any costs incurred in legal proceedings for dispossession. If at the end of five years any manufactured bricks were left to be removed they could continue lying over an undemarcated area of 'about 2 bighas pukhta of land' out of the land in question for a period of one year but during that year on earth could be dug or bricks prepared or kiln worked or bricks baked.
The income-tax authorities as well as the Income-tax Appellate Tribunal held that the amount of Rs. 6,000 was a revenue receipt liable to income-tax. The view of the Tribunal was that the amount was in the nature of compensation which the occupier paid to the landlord for entering on the land, digging earth and moulding bricks, etc., and was a sort of rent for allowing the land to be used as wasting asset and the rent bore a close analogy to the royalties received from mineral bearing lands and the fact that the amount was received in a lump sum was immaterial.
After the appeal had been decided by the Tribunal, the assessee asked for a reference to this court and the case has been stated as already mentioned above.
The question whether in such or similar circumstances the receipt amounts to a capital or a revenue receipt has always presented difficulty to courts whether in this country or elsewhere. The question has, however, never been treated as a pure question of law but as a mixed question of law and fact depending upon the particular facts and circumstances. Naturally, the facts and circumstances have to be gathered from the terms of the lease or the licence. It is well settled, however, that it is not the form of the document or the form in which the transaction is couched that is determinative of the matter. It is the real nature of the transaction upon which the answer to the question depends. It is also well settled that it is also not conclusive whether the receipt in a particular case is a lump sum receipt or is spread over the terms of years or is partly paid by an initial lump sum payment and partly by subsequent annual payments. A lump sum payment may in some cases represent the value of the rights or the property transferred or may merely be a capitalised annual rent for the use of the property during the term of the lease paid in the beginning of the lease. The principle on the basis of which the question has to be decided is whether the document or the transaction embodied in the document is a transfer of any rights and the amount paid is the price of those rights or the transaction is merely the right or the liberty to use the property for a term of years any the amount paid is the price of the use. If it is the former, the receipt is a capital receipt; if the latter, the receipt is a revenue receipt. It is a question of law in every case whether on the language of the document or having regard to the true nature of the transaction it is the one or the other. This principle is laid down in a recent decision of the Supreme Court in Chintamani Saran Nath Sah Deo v. Commissioner of Income-tax. In that case, at page 511 of the report, it is stated as follows :
'What the licence gave to the licensee was the right to enter upon the land to prospect, search and mine, quarry, bore, dig and prove all bauxite lying in or within the land and for that purpose the licensee had the right to dig pits, shafts, borings and to remove, take away and appropriate samples and specimens of bauxite in reasonable quantities not exceeding 100 tons in the aggregate. It cannot be said that this amounts merely to a grant of the use of the capital of the licensor but it was really a grant of a right to a portion the capital in the shape of a general right to the capital asset.'
The Supreme Court went on to state :
'The terms of the covenant in the present case which have been quoted above show that the transaction was not one merely of the user of capital assets but of their realisation.'
Accordingly, the rights were on capital account and not revenue.
Further at page 512, the Supreme Court observed as follows :
'The covenants in the licence show that the licensee had a right to enter upon the land and take away and appropriate samples of all bauxite of every kind up to 100 tons and, therefore, there was a transfer of the right the consideration for which would be a capital payment.'
Several things will be noticed from this decision : (i) that the transaction there was a licence and not a lease but the real nature of the licence was interpreted by the Supreme Court to be that of a transfer and not of mere use; (ii) the payment there also was a lump sum payment; (iii) the grant consisted of rights to come upon the land, to stay there, to do something on the land as well as the right to carry away bauxite in quantities not exceeding 100 tons; (iv) the term of the licence was from six months to one year.
Compare these terms with the terms of the lease in our case. Here the transaction is not merely a licence but is in fact and reality a lease. Once this is accepted it necessarily follows that there is a transfer of property involved and not merely the use of property as in a licence. The term is five years which is much longer than the term in the Supreme Court case. The rights conferred are both the right to enter upon the land, to remain there, to dig earth, to mould bricks, to set up a brick kiln and to bake the bricks and sell them. The right is also there to dig and appropriate earth and use it for moulding bricks and after they have been baked in the kiln on the land to sell them there, that is to say, to remove them or to carry away the earth dug in the form of bricks. The payment in either case is a lump sum payment. No portion of that payment is referable to any single one of the various rights conferred upon the lessee. In the circumstances, it seems to me, that if anything, the present case, on facts, is on a higher footing than the case before the Supreme Court. It follows that the case is fully governed by the principle laid down in that case and it must, therefore, be held that the amount of Rs. 6,000 was received by the assessee as capital and not as revenue.
Sri Gopal Behari, learned counsel for the department, could not point out any really distinguishing feature between the present case and the case before the Supreme Court so as to take the present case out of the rule laid down by the Supreme Court. He only urged in a general way as was urged by Sri Rajagopala Sastri, counsel for the income-tax department in the Supreme Court case, that the various rights conferred on the lessee in the present case were the right to enter on the land and make use of the asset of the lessor. This was held by the Supreme Court not to be a correct approach to the question, with the result which has already been indicated above.
Sri Gopal Behari also relied on the decision of a Bench of the Patna High Court Janki Kuer v. Commissioner of Income-tax. The facts of the case before the Patna Bench were stated in the judgment of Courtney-Terrell, Chief Justice, as follows at pages 264 and 265 of the report :
'... on the assessees land there is a quantity of earth which is suitable for brick-making and licences are granted to brick-makers to erect brick kilns upon the land in question and to take away brick earth and use it for the making of bricks. The method by which the assessee receives remuneration in respect of the licence which are granted is that a definite rent of Rs. 10 a katha is charged for the land upon which the brick kiln stands and furthermore, for earth from one kind of land the licensee has to pay Rs. 10 per specified measure and he has to pay Rs. 5 per specified measure in respect of the brick earth which is removed from another kind of land. In consideration of making this payment, he is entitled to remove brick earth from either of the two kinds of land to erect his brick kilns, to burn his bricks, and to take them away. The licensor also grants licences to persons who desire to remove what are termed concretes from the land (these, we are told, are merely in the nature of kankar for road-making), and for the privilege of going upon the land and removing the concrete where it may be found. The licensee has to pay a royalty of Rs. 1-8-0 for every 100 cubic feet of kankar which he may remove.'
On those facts it was held by the Patna High Court that the amounts received by the licensor were in the nature of royalties and were assessable to income-tax.
It appears to me that the case was decided by the Patna High Court on the analogy of the nature of receipts from the grant of coal mining rights in England and the case in Secretary of State v. Sir Andrew Scoble was mentioned in this connection. Counsel for the assessee before the Patna High Court had sought to argue that the analogy of mining cases in England special provision had been made in the income-tax statutes for treating the receipts arising from the grant of such rights as income and for the levy of income-tax thereon, but the argument was negatived on the ground that for treating the royalties arising from the grant of coal mining rights as income there was nothing peculiar in the English Income Tax Act but that Act only included the royalties in a schedule of income. It appears to me, however, with the utmost respect, that even from the passage from the English case referred to in that decision, this conclusion is not borne out. Lord Halsbury, from whose speech a quotation is made in the report, observed as follows :
'My Lords,.. Where you are dealing with income-tax upon a rent derived from coal, you are in truth taxing that which is capital in this sense, that it is a purchase of the coal and not a mere rent.'
Lord Halsbury went on to observe as follows :
'The income-tax is not and cannot be... cast upon absolutely logical lines and to justify the exaction of the tax the things taxed must have been specifically made the subject of taxation....'
It is clear from these quotation that in general and without specific reference to income-tax statutes, the view of Lord Halsbury was that rent derived from coal was capital and not income but considered in the context of the Income Tax Acts where rent derived from coal is taxable as income, he felt compelled to observe that the Income Tax Act are not cast upon logical lines. Whether or not coal was treated as a subject of special legislation in the English Income Tax Act or was mentioned merely in the schedule which dealt with a special method of dealing with certain classes of income was to my mind of no consequence. Lord Halsbury was clearly of the view that in a general sense apart from the special treatment in income-tax law rent from coal was capital and not income. It follows that the view of the Chief Justice in the Patna case was not, with the utmost respect, correct on the interpretation of Lord Halsburys speech in the case quoted there.
The actual decision in the Patna case can, however, to may mind, be justified on other grounds. Apart from the facts as appearing from the quotation made above it was stated by the Chief Justice at page 266 as follows :
'... it is the ordinary practice for persons, who own brick-fields, to charge certain sums which, however they may be measured, are paid quarterly or annually or monthly, and....... it is part of the well recognised methods of exploiting brick-fields to let them out on leases of this character.....'
It was also mentioned earlier on that page as follows :
'If the brick-maker carries on his business until all the earth is exhausted, the land will still remain in the ownership of the licensor, possibly diminished in value, possibly unaffected in value and possibly even increased in value, according to the special circumstances which may prevail, at the termination of the period and it is in no sense a capital sale of the land itself'.
Therefore, from the facts of the case and from the view taken of those facts, it appears that the assessee in the Patna case carrying on the trade of utilising his capital asset, namely, the land, by allowing earth to the cut away from it in consideration for a periodical payment. The assessees trade was to utilise the land as a profit-making apparatus. On the view of the Chief Justice the capital asset remained intact 'possibly unaffected or even increased in value'. Clearly, this amounted to exploitation of an asset of an enduring nature for producing regular income or taxable profit. These very facts will, however, show how very different the facts in the case before us are.
After the clear pronouncement of the Supreme Court in the case mentioned above, I should not have felt called upon to deal at any length with this Patna decision but I have done so merely out of consideration for the insistence of Sri Gopal Behari that this case also was a case of grant of certain rights in land which were of the same nature as the rights granted in the Patna case. I have, however, pointed out how different the facts there were. I have also pointed out that I find it difficult to understand the Chief Justices interpretation of Lord Halsburys speech in the case quoted there and that being the basis of the decision, on a correct interpretation of that speech, it seems to me as already observed that the view taken there was not correct.
It follows that for the reasons stated above the first question must be answered by saying that the amount of Rs. 6,000 paid as compensation for leasing out the land was a capital receipt and not a revenue receipt. In view of this answer, as already stated above, the second question does not arise.
The reference shall be returned to the Income-tax Appellate Tribunal, Allahabad, with this answer under the seal of the court and the signature of the Registrar. The assessee shall be entitled to the costs of this reference which we assess at Rs. 200.
M. C. DESAI C.J. - I agree with my learned brother that the answer to the first question should be that the receipt of Rs. 6,000 was a capital receipt and not a revenue receipt. I concur in the order proposed by him.