MITTER J. - The question referred to us under section 66 (1) of the Income-tax Act is :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 50,000 received by the assessee in consideration of consenting to the assignment of lease by Messrs. Godfrey Phillips (India) Ltd., in favour of Messrs. Blackwood Hodge (India) Ltd., is a revenue receipt taxable under the Indian Income-tax Act ?'
The assessment year is 1950-51, the accounting year ending on December 31, 1949. The facts taken from the statement of the case are as follows : The assessee-companys business is dealing in the purchase and manufacture of tobacco and cigarettes. The Gramophone Co. Ltd. had given a lease of premises mentioned below to B. N. Elias & Co. Ltd. on June 17, 1941, which would terminate on February 27, 1957. On September 21, 1945, B. N. Elias & Company Limited executed and registered a lease in favour of Godfrey Phillips (India) Ltd., of a piece and parcel of land with buildings being premises Nos. 139 of 139/1, Belighata Road, for the period commencing from July 1, 1946, and expiring on February 27, 1957, on the following terms and covenants :
The lessee was -
(a) to pay the monthly rent of Rs. 2,200 only besides municipal taxes, assessments, etc.;
(b) to execute and perform at its own cost and expense such necessary repairs to the demised premises during the said term as the lessor was under obligation to carry out in accordance with the provisions of the lease executed by the Gramophone Company Limited in favour of the lessor;
(c) not to make any alterations in the dismissed premises which might depreciate the value thereof; and
(d) at the expiration or sooner determination of the term to yield and deliver up possession of the demised premises to the lessor in the condition in which the same should then be.
There is no dispute that the real lessor was the National Tobacco Co. of Indian Limited, the assessee, and B. N. Elias & Co. Private Limited merely acted as managing agents of the assessee. It would further appear that in between 1945 and 1949, Godfrey Phillips (India) Ltd. had filed up a tank on the said land and erected certain structures.
On September 20, 1949, Godfrey Phillips (India) Limited assigned the residue of the unexpired term of the lease to Blackwood Hodge (India) Limited with the consent of B. N. Elias & Co. Ltd. as the confirming party and Blackwood Hodge (India) Limited as the assignee. The recitals to this document show :
(a) The assignor had agreed to assign and transfer unto the assignee its leasehold interest in the demised premises as from September 1, 1949, and all its property and interest in the buildings, structures and erections thereon put up by the assignor at and for the consideration of Rs. 1,25,000 and the observance and performance by there assignee of all the covenants and conditions to be observed and performed by the lessee including the covenants to pay to the confirming party the monthly rent reserved by the lease.
(b) The assignor had applied to the confirming party for to consent to the transfer and assignment and to the filling in of the water tank in the demised premises.
(c) In consideration of the payment by the assignor to the confirming party of the sum of Rs. 50,000, the confirming party had given its consent to the said transfer and assignment and the filling in of the tank, as was evidence by its letter to the assignor annexed to the agreement and marked 'A'.
(d) At the request of the assignor the confirming party had agreed to joint in and execute the document for the purpose of confirming the transfer and assignment in the manner set forth in the document.
By the said deed the assignor assigned unto the assignee the said lands and premises with factories, etc., and the buildings and structures standing thereon in pursuance of the agreement mentioned and the assignee agreed to observe and perform all the covenants and conditions contained in the lease dated September 21, 1945, on the part of the lessee thereunder to be observed and performed including the payment to the confirming party of the monthly rent therein reserved. In pursuance of the said agreement and in consideration of the premises the confirming party confirmed the transfer and assignment of the premises the confirming party confirmed the transfer and assignment of the premises mentioned in the schedules unto the assignee. The assignor covenanted with the assignee that the lease dated September 21, 1945, was of full force and effect. The assignor also agreed that, in the event of the assignee being called upon on the expiration of the lease dated September 21, 1945, to re-excavate the said tank and the assignee being legally liable to do so, the assignor undertook and agreed to cause the tank to be re-excavated at its own cost and to indemnify and keep indemnified the assignee from and against all costs, damages, expenses, etc., by reason of such tank not being re-excavated and restored to the same position in which the tank not being existing. The confirming party covenanted with the assignor and the assignee that it had not committed or suffered or been party or privy to any act, deed or matter whereby the said premises or any part thereof may be impeached, affected or encumbered in estate, title or otherwise or by reason whereof it was prevented from confirming the premises unto the assignee in the manner aforesaid.
The amount of Rs. 50,000 was held by the Income-tax Officer as income taxable under the Indian Income-tax Act. The Appellate Assistant Commissioner considered the receipt to be a capital one. On further appeal, the Tribunal held that, since no acquisition of any capital asset was involved in respect of the sum of Rs. 50,000, the amount received by the assessee was clearly a revenue receipt liable to be taxed in the hands of the assessee. The Tribunal negatived the contention that it was a casual receipt on the ground that since the receipt was in the nature of income which the assessee had obtained in respect of leasing its property, the amount of Rs. 50,000 could not be said to be undesigned.
When the reference first came up for hearing by another Division Bench, consisting of Mr. Justice Laik and myself, many different points were argued. The contention raised on behalf of the assessee were as follows :
(a) Merely because the assessee happened to be the lessor of the property, there was no presumption that moneys received from the lessee or the assignee of the lease was income in its hands.
(b) The lessor had a right to withhold consent to the assignment; such a right was one in the property itself and payment received in lieu thereof was a capital receipt.
On behalf of the revenue it was argued :
(a) The amount charged to the lessee was for recognition of the transfer of tenancy and as such was in the nature of a mutation or transfer fee. It was therefore a revenue receipt.
(b) The amount was paid by the lessee to terminate his obligation to pay rent. In effect it was a lump sum paid in lieu of a series of recurrent and periodic revenue payments and as such of a revenue character.
(c) Assuming the payment to be of the nature of the salami, it was taxable in this case because of the short period during which the lease was to be in force and in consideration of the further fact that there could be no increase of rent by reason of the West Bengal Premises Rent Control Act of 1948.
(d) The receipt was not of a casual or non-recurring nature, because the lease showed that the word 'lessee' was to include 'successors and assigns.'
So far as the assessees contentions were concerned, the court was of the opinion that, if the consideration was for the wiping out of the liability to pay the monthly rent, it would partake of the capitalised value of the liability and as such of a revenue receipt. The same remark applied to the obligation to effect repairs and discharge rates, taxes and impositions. All this liability was of a periodic nature which the lessee had to discharge. This would not hold true of the obligation not to make any alternation in the demised premises. Such alternation would affect a capital asset, and any payment made to compensate the owner for change in the demised premises would savour of a capital payment.
So far as the contentions of the revenue were concerned the court held that the payment was not in the nature of a mutation fee. Neither was it salami or in the nature of salami. With regard to the last contention of the revenue that if the payment was in the nature of a revenue receipt the assessee was not entitled to any exemption under section 4 (3) (vii) of the Act as being a receipt of a casual or non-recurring nature, the court held that, on the materials, it was not possible too hold that the receipt arose from business. According to the Division Bench 'the payment of Rs. 50,000 was referable to a predetermined agreement between the parties, namely, that the assessee would be absolved from further compliance with the covenants under the lease by reason of this payment. It may be that such payments are not common and the lessor may probably never receive another sum of money in similar circumstances but it cannot be described as a gift or a windfall or something wholly unexpected like the picking up of a thing of value or winning a prize in a lottery.' Holding that the payment of Rs. 50,000 was referable not only to the release of the lessee from its covenants under the lease but may include a sum referable to the consideration for the filling in of the tank, the court remitted the case back to the Tribunal for finding out whether any, and if so, what, portion of the payment of Rs. 50,000 was referable to the consent given for the filling in of the tank.
The Tribunal noted that the recitals to the deed of assignment threw no light as to what portion of the sum of Rs. 50,000 was attributable to the consent given for the filling in of the tank. According to the Tribunal 'Blackwood Hodge (India) Ltd. was bound on the expiry of the lease on the 27th February, 1957, to re-excavate the said tank and restore the status qua ante at the cost of the assignor, Messrs. Godfrey Phillips India Ltd., if called upon to do so by the superior landlord. 'The Tribunal noted that 'apart from this it is not possible to say anything on the matter for which the case has been remitted to the Tribunal.' The Tribunal refrained from taking additional evidence in view of the decision of the Supreme Court in New Jehangir Vakil Mills Ltd. v. Commissioner of Income-tax. Further the Tribunal recorded after hearing the parties that even if additional evidence were taken, it would not be possible to assess, with any degree of precision, the sum in consideration of which the assessee assented to the filling in of the tank.
The deed of assignment consented to by the assessee shows clearly that it agreed to the substitution of the original lessee by the assignee, that it waive its claim, if any, with regard to the filling in of the tank without giving up its right to call upon the lessee (Godfrey Phillips India Ltd.) to re-excavate the tank if Gramophone Co. Ltd. insisted therein at the expiration of the lease. The recital to the deed of assignment expressly shows that a part of the sum of Rs. 50,000 was taken for the consent given to the filling in of the tank. This part cannot be described as a revenue receipt. We are only concerned now with the balance of the consideration of Rs. 50,000. The lease, Godfrey Phillips India Ltd., was under no obligation to take the consent of the assessee to the assignment of the lease but by such assignment confirmed by the assessee the lease certainly rid itself of the liability to pay rent and to kept the demised premises in repair. But for the consent given to the transfer, the assessee might have enforced the covenants under the original lease to Godfrey Phillips India Ltd. and sued it from time to time to recover the rent reserved under the lease as also to enforce other covenants with regard to repairs, etc.
Mr. Mitra appearing for the assessee raised a two-fold contention before us. His first contention was that we should consider whether the receipt of Rs. 50,000 was of a revenue nature and secondly, whether the receipt even if it partook of that character was 'casual' so as to attract section 4 (3) (vii).
The first point was developed in the following way : Mr. Mitra said that one must consider the nature of the receipt. If it was not of a revenue nature, then the question of taxability did not arise. He argued that ordinarily by an assignment the liability to pay rent is left undisturbed and all that happens is that the lessee continues to be liable even after the assignment. In this case the assessee was giving up its right to proceed under the lease against Godfrey Phillips India Limited and as such the receipt was in respect of a capital asset. As the business of the company was the dealing in and purchase of tobacco and manufacture of cigarettes the sum of Rs. 50,000 according to Mr. Mitra would not be treated as business income. He referred to the assessment order of the Income-tax Officer wherein it had been treated as income from other sources. He drew our attention to several passage in the judgment of the Supreme Court in Kettlewell Bullen & Co. Ltd. v. Commissioner of Income-tax. There the appellant received a sum of Rs. 3,50,000 from Mugneeram Bangur and Co. in pursuance of an agreement by which it gave up its managing agency of the Fort William Jute Company Ltd. and the question was whether this receipt for relinquishment of the managing agency was a revenue receipt. On the facts of the case, the Supreme Court came to the conclusion that what the assessee was paid was to compensate it for loss of a capital asset : the transaction was not in the nature of a trading transaction but was one in which the assessee parted with an asset of an enduring value. The Supreme Court there formulated the test applicable to the nature of compensation received in respect of contracts for termination of agencies in the following words : 'What has the assessee parted with in lieu of money or moneys worth received by him which is sought to be taxed If compensation is paid for cancellation of a contract of agency which does not affect the trading structure of the business of the recipient, or involve loss of an enduring asset, leaving the taxpayer free to carry on his trade released from the contract which is cancelled, the receipt will be a trading receipt. Where the cancellation of a contract of agency impairs the trading structure, or involves loss of an enduring asset, the amount paid for compensating the loss is capital.' It must be noted that the facts here are very different. The trading structure of the business of the assessee was in no way disturbed by the consent to the loss of an enduring asset, i.e., the lease, and to that extent the analogy of the test formulated in Kettlewell Bullen & Companys case is applicable. It can be said that what the assessee has parted with in this case in lieu of money or moneys worth received by him is the right to derive rents regularly from a responsible lessee. It may be that the assignee is no less responsible and respectable but that is not what we are assignee is no less responsible and respectable but that is not what we are concerned with. The matter does not seem to have been argued in this light before it was remitted for a supplementary statement of the case to the Tribunal. As against this our attention was drawn to the first order of the Tribunal at page 29 of the paper book of paragraph 4 where the Tribunal had observed 'since no capital asset or right in a capital asset was involved in respect of the payment of the said sum of Rs. 50,000 and as the assessee wanted to gain a sum of Rs. 50,000 in respect of the transaction mentioned supra, we consider that the amount that had been received by the assessee is clearly a revenue receipt liable to be taxed in the hands of the assessee.' It was argued that we are bound by this finding but this finding is not one of a primary fact. It was an inference sought to be drawn from all the circumstances of the case, namely, the original lease in favour of Godfrey Phillips India Ltd., the recitals and covenants therein contained, the payment of Rs. 50,000 and the terms of the assignment and of the tripartite agreement. For the revenue Mr. Pal further contended that, notwithstanding the assignment, the assignor, Godfrey Phillips India Ltd., was not released from its obligation under the lease of 1945. I do not think that this is a correct proposition of law on the facts of this case. Ordinarily, no doubt, the lessee, unless there is a contract to the contrary, has the right to transfer and assign a lease. But mere assignment does not put an end to his obligation. Once the lessor accepts rent from the assignee or agrees to take rent from him, the liability of the lessee would cease. In this case it is clear that the assessee was content to release the lessee, Godfrey Phillips India Ltd., from the entirely of the latters obligation except possibly with regard to the right to call upon it to re-excavate the tank. The case cited by Mr. Pal of James Smith & Sons (Norwood) Ltd. v. Goodman has no application to the facts of this case. There the facts were as follows : the plaintiffs were the lessors under two lease of September, 1925, the lessees were a limited company named G. A. Britain Ltd., the monthly rents payable being quite substantial.
The directors of the company were desirous of getting rid of the lease as they were not profitable; they started negotiations with the lessors in this regard shortly before the company went into liquidation. The landlord, the plaintiffs, declined to release the company from its obligation. The defendant was appointed the liquidator of the company. The final meeting of the company was held within a matter of weeks after the date of the resolution for the winding up of the company which was finally dissolved in August, 1933, the landlords never having heard a word of the liquidation proceedings and not having had any communication made to them whatever in reference to the matter. At the date of the liquidation the leases had been assigned to one Kingsman. The assignment took place in January, 1933, some three months before the liquidation. Kingsman subsequently assigned the premises with the consent to pay any rent since December 25, 1933, and a large sum of money became due to the plaintiffs in respect of rent. When they sought to get their rent and found that Manns Motors Ltd. were apparently insolvent, they made an application against the company and found that it had been dissolved. It then started the action 'it was argued for the defendant, and this is the proposition which was asserted by Mr. Christie (counsel for the defendant) that, in a case where a company, whilst still a going concern, has assigned a lease to an assignee with the licence of the landlord as required by the terms of the lease, there is nothing whatever to prevent the company from liquidating and distributing its assets to its creditors and shareholders and being dissolved in the ordinary way.' His Lordship came to the conclusion that if the liquidator had done his duty and kept the assets, the plaintiffs claim for rent under the leases might have been satisfied thereout but as the liquidator was in breach of his duty he was liable for damages. This judgment was upheld by the Court of Appeal. Lord Hanworth M. R. observed that the liquidator had misconceived his position, misconceived the effect of an assignment and failed to appreciate that there was the liability under the leases. There the assignment was not with the consent of the landlords and the landlords never agreed to the replacement of the lessee by the assignee.
In my view, that position does not obtain here. The assessee, as already observed, without in any way disturbing the rents received under the lease, was giving up its right against Godfrey Phillips India Ltd. and to that extent was losing his right in respect of a capital asset.
Mr. Pal next contended that the onus of proving that a particular receipt was not income was on the assessee on the strength of the judgment of the Supreme Court in Kale Khan Mohammed Hani v. Commissioner of Income-tax. I do not think that the Supreme Court laid down any such proposition.
There the case related to certain cash credits which appeared in the books of the assessee and the Supreme Court observed : 'It is well established that the onus of proving the source of a sum of money found to have been received by the assessee is on him. If he disputes liability for tax, it is for him to show either that the receipt was not income or that, if it was, it was exempt from taxation under the provisions of the Act.' But where the source of a sum of money is proved, the question of taxability depends on a consideration of all the circumstances of the case as to whether it was a revenue receipt or a capital receipt.
In this view of the matter, the question as to whether the receipt was a casual one and so not exigible under section 4 (3) (vii) does not arise. The word 'casual' means 'accidental, irregular, undesigned, unmethodical, careless, etc.' As was noted in the judgment delivered on April 3, 1962, the receipt was not undesigned, although it was not likely to recur, but, being a capital receipt, it is not taxable.
The answer to the question posed is in the negative and in favour of the assessee who will have the costs of this reference.
MASUD J. - I agree.
Question answered in favour of the assessee.