1. At the instance of the assessee the question referred to this Court under Section 66 (1) of the Income-tax Act is: 'Whether on the facts and circumstances of the case the premium received by the assessee at the time of issue of cash certificate is a revenue receipt and assessable to income-tax.' The assessee is the Canara Industrial and Banking Syndicate Ltd., Udipi, which is a scheduled Bank with its head office at Udipi. The Syndicate issued cash certificates after the manner of postal cash certificates from the year 1933. The certificates are of five years' currency and were originally issued at a lower price but from 1937 they were issued at the prices of Rs. 8, 80, 400 and 800 and are repay-able on maturity at Rs. 10, 100, 500 and 1000 respectively. They can be cashed at any time before maturity and the certificate contains a table showing the amounts repayable after different periods during the currency of a certificate of the price of Rs. 8. The said table proportionately holds good from the certificates of other denominations. During the relevant assessment years, 1944-45, 1945-46 and 1946-47 they were issued at a premium of eight annas for a certificate of Rs. 10, Rs. 5 for a certificate of Rs. 100, Rs. 25 for a certificate of Rs. 500 and Rs. 50 for a certificate of Rs. 1000. This premium was not refundable. The certificates are not transferable and are repaid at the head office of the syndicate; but facility was provided to the constituents to send their deposits through any of the branches and arrangements were also made to cash them at the respective branches of the syndicate. The certificates are in other respects subject to the rules relating to depositors and deposits of the bank.
2. During the assessment years now in question, the assessee contended that the premium collected at the time of issue was a capital receipt and was not taxable. This contention was - not accepted by the department though different reasons were given for the conclusion by the Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal. The Tribunal was of the view that as the assessee carried on normal banking business the certificates were treated practically as equivalent to fixed deposit receipts and that as the interest payable at the end of five years was higher than what banks generally gave on fixed deposits, the extra interest was obviously paid because of the premium received which in substance must be treated as a recoupment in advance on account of the additional interest to be paid. The payment of interest at the end of five years being a revenue expenditure, theTribunal treated the receipt of premium at the time of issue of certificates as a revenue receipt.
3. The question therefore for determination is whether the premium is a capital receipt or a revenue receipt. It is always difficult to decide in 'a case of this description whether the receipt of premium is the one or the other. The illuminating judgment of Lord Greene M. R. in 'Lomax v. Peter Dixon & Son, Ltd.', (1943) 25 Tax Cas 353, is of considerable assistance in solving the problem and in determining the quality that ought to be attributed to the sum in question. As pointed out by the learned Master of the Rolls in that judgment each case must be decided on its own facts and it is permissible to consider the evidence 'de hors' the contract, if the contract does not enable the Court to reach a solution. After an examination of the authorities, the learned Master of the Rolls summed up his conclusions in the form of propositions at page 367 as follows:
' 1. Where a loan is made at or above such a reasonable commercial rate of interest as is applicable to a reasonably sound security, there is no presumption that a 'discount' at which the loan is made or a premium at which it is payable is in the nature of interest.
2. The true nature of the 'discount' or the premium as the case may be, is to be ascertained from all the circumstances of the case and, apart from any matter of law which may bear upon the question (such as the interpretation of the contract), will fall to be determined as a matter of fact by Commissioners.
3. In deciding the true nature of the 'discount' or premium in so far as it is not conclusively determined by the contract, the following matters together with any other relevant circumstances are important to be considered, viz., the term of the loan, the rate of interest expressly stipulated for, the nature of the capital risk, the extent to which, if at all, the parties expressly took or may reasonably be supposed to have taken the capital risk into account in fixing the terms of the contract.'
In the present case, the premium is not a payment received by the lender but paid by the borrower, the bank, at the time of the issue of the certificate so that for obtaining a certificate, for example of Rs. 10, a lender had to pay Rs. 8 and a premium of eight annas. There is no rate of interest mentioned in the contract but it cannot be disputed and indeed, it was not disputed before us that the difference between Rs. 10 and Rs. 8, viz., Rs. 2 represents the interest on Rs. 8 for a period of five years. It is open to the lender to cash the certificate even during the currency of the period of five years before maturity in accordance with the table provided in the certificate itself. There are also other principles gatherable from the judgment of the learned Masters of the Rolls which enable us to draw the right inference from the above facts, for example, if the premium was calculated by reference not to any element of capital risk but to the period of the loan whatever it might turn out to be, the premium will be stamped with a revenue character. If A lends B 100 on the terms that B will pay him 110 at the expiration of two years on interpretation of the contract B's obligation is to make this payment and though the contract does not indicate the nature of the extra 10 payable at the end of the period, the obvious inference in the absence of any stipulation for payment of interest, is that the 10 represents interest for the two years on 100 and if the rate of interest worked out on the basis is a reasonable commercial rate the 10 is stamped with the character of interest. If the stipulation for the return of the capital is contained in the contract, the premium will undoubtedly be capital. In the case of debentures issued by a limited company generally if the credit of the company is good and the security is sufficient, the issue may be made at par with a normal and reasonable rate of interest. If the company's credit and security are exceptionally good, the issue can be made at a premium. If the credit of the company and the security are not particularly stable, the debentures may be issued below par or the rate of interest may be high or it may be both. Bearing in mind the discount or the premium on which the debentures are issued and the rate of interest stipulated to be paid which may be' higher or lower than the ordinary commercial rate of interest the Court has always to find, as reflected in those features, the credit of the company and the soundness of the security which it offers for the debentures issued. According to the risk of the credit, sometimes the debentures are issued at discount, sometimes the premium is made payable on redemption and sometimes both things may happen. These are some of the factors which enter into the consideration of the question whether in a given case the receipt is a capital receipt or a revenue receipt.
4. What is the position with reference to the cash certificates of the syndicate in the present case? The contract gives no indication why the premium was for the first time introduced in 1943 at the rate of four annas in the case of certificates of Rs. 10 and a proportionate amount in the case of other certificates and why later it was increased to eight annas in 1946. It cannot be said, nor is there any indication, that the credit of the syndicate began to become exceptionally good from 1943 onwards while it was not so good at the inception in 1933. The rate of interest which the certificate yielded excluding the premium from consideration, was as much as 5 per cent, while the interest payable by the bank on fixed deposits for a period of two years in 1937 was 5 per cent, in 1942 for a period of five years 3 3/4 per cent, and in 1946 for five years it was 31/2 per cent. This information was furnished to us by an affidavit filed on behalf of the Syndicate under our directions. The attempt of the Syndicate in collecting this premium, it is not a far fetched inference to draw, was to bring the rate of interest under the certificates as near as possible to the interest payable on fixed deposits for a similar period. In other words, it is a receipt in advance, from the lender to be set off against the interest, so as to reduce the ultimate burden of the interest while at the same time ostensibly keeping and continuing the high rate of interest under the cash certificates. The lender in effect returns, even at the time of the issue, part of interest which would be payable to him under the certificate. No doubt it is true as was stressed on behalf of the assessee that if the cash certificates were to be cashed before maturity and immediately after the lapse of a year, the lender would lose. But that may be with a view to preventing the lender from cashing the certificates immediately after their issue. The scheme therefore of the syndicate revised under the cash certificates issued by it is not very dissimilar to that of fixed deposits which it receives and in respect of which receipts are issued. It is rather difficult in these circumstances to accept the contention that the certificates were purchased by the lender at a premium by reason of the extraordinarily good and sound credit position of the Syndicate.
On the facts in 'Lomax v. Peter Dixon and Son Ltd.', (1943) 25 Tax Cas 353, it was no doubt found that the discount and premium payable at the time of redemption were capital sums; but very good reasons were given for this conclusion by the Master of the Rolls. It was found that there was no ground for distinguishing the facts of the case from that of ordinary debentures issued by a trading company. There was an element of capital risk of a serious kind which was expressed in the form of capital rather than in the form of interest in the transactions and it was found to be a bona fide commercial transaction. The facts in that case were: the respondent company manufactured newsprint and in order to obtain a continuous supply of wood pulp in 1930 a Finnish company was formed. The respondent company advanced a sum of 319,000 to the Finnish Company. This debt had to be discharged and for that an arrangement was made in 1933 between the Finnish Company and the respondent. This agreement provided for the redemption of the loan over a number of years and in accordance with the arrangement the Finnish company gave to the respondent company 680 notes of 500 each totalling a face value of 34,000. The notes were issued at 94 per cent. and carried interest at the rate of one per cent. above the lowest discount rate of the bank of Finland. Of the 680 notes some were to be repaid each year and each note was to be redeemed at a premium of 20 per cent. above its par value if the profits of the Finnish company permitted. The above notes were paid off and the respondent company received in full the amount of their face value including the discount and the premium. The discount and premium received were carried by the respondent company to a reserve fund. The question was whether the discount and premium were assessable to income-tax as income arising from security. The special Commissioners were of opinion that the receipt was a capital receipt and was not taxable and that decision was reversed by Macnaghten, J. whose decision was reversed by the Court of appeal confirming that of the Special Commissioners. Referring to this arrangement it is stated at page 365 by Lord Greene M. R. as follows:
'The parties to the transaction, faced with an existing debt which the Finnish company was obviously not in a position to repay there and then did what in effect amounted to writing down the capital value of the debt which by the terms of the agreement was now to be repaid over a long period of years, bearing interest in the meantime at a normal commercial rate. I can see no difference between writing down the capital value of an existing debt and writing down the capital value of a new debt which is what is done where a company makes an ordinary issue of debentures at a discount or repayable at a premium. Moreover, it is quite common for a company to issue debentures as security for an existing loan. This is often done in the case of a company's bankers who call for security, and also not infrequently under schemes of arrangement when debentures are issued to existing creditors of the company. In such case circumstances may well call for a writing down of the value of the debts.'
The case therefore bears no analogy to the facts of the present case though the principles enunciated and gather able from the erudite judgment of the learned Master of the Rolls have undoubtedly been of considerable assistance to us. It follows that the question referred to this Court must be answered in the affirmative and against the assessee. As the assessee has failed he must pay the costs of the Commissioner which we fix at Rs. 250/-.