LAIK J. - This is a reference under section 66(1) of the Indian Income-tax Act, 1922, at the instance of the assessee for determination of the question :
'Whether, on the facts and in the circumstances of this case, the sum of Rs. 20,000 paid as consideration for granting the lease, was a receipt in the nature of capital, not taxable under the Indian Income-tax Act ?'
The facts of the case are short. In the year 1940, the assessee purchased a plot of land being an area of 8 cottahs, 3 chittacks and 41 sq. ft. from the Calcutta Improvement Trust in the name of his wife for a sum of Rs. 57,711. On September 18, 1945, the said plot of land was leased out to Sylhet Industrial Bank Ltd. to take effect from the 1st April, 1946, on payment of the said consideration of the sum of Rs. 20,000. The terms of the lease, inter alia, are - salami or premium - Rs. 20,000; rent per month Rs. 800 and the period of the lease is 51 years with an option of renewal for a further period of 10 years at the same rent. The lessee also covenanted to build within three years from the date of the lease, the said plot of land, a brick built building at his own cost of not less than Rs. 1 lakh, for use and occupation as residential-cum-office building. On the expiring or sooner determination of the said term, the lessee was to surrender and give up to the lessor the premises thereby demised to together with the said brick built mansion, which (the said mansion) upon such expiration or sooner determination of the said term, with all out-houses, shall become the absolute property of the lessor.
In a proceeding started under section 34 of the Income-tax Act, 1922, by the Income-tax Officer, the assessee contended that the receipt of the said sum of Rs. 20,000 was a capital receipt and therefore not taxable. In support of the said contention the assessee also produced evidence before the Income-tax Officer showing that another plot of land, about 2 furlongs away from the disputed plot, viz., at 27, Bentinck Street, being an area of 17 cottahs, was purchased by the assessee on the 1st of March, 1941, for a sum of Rs. 1,35,553 from the Calcutta Improvement Trust. The said land was also leased out to Orient Movietone Corporation for the same period of 51 years with effect from the 1st of November, 1945, at a monthly rental of Rs. 1,500 and the assessee also received on March 6, 1945, a sum of Rs. 32,000 as salami or premium for the lease, but the said sum of Rs. 32,000 was not assessed in the hands of the assessee as income by the department. The said lease was also a building lease, similar to the terms of the lease under consideration. The assessee further contended that in consideration of the locality, area, advantages and other surrounding facts and circumstances and in particular the said amount of salami of Rs. 32,000 for about double the area of the almost contiguous land, it would appear that the rent of Rs. 800 was not low and the said sum of Rs. 20,000 in the instant case should be taken a as capital receipt and should not be taxed.
The Income-tax Officer held that the said sum of Rs. 20,000 is nothing but rent received, as the monthly rent of Rs. 800 was low and is therefore a revenue receipt and should be taxed.
Against the said order, the assessee preferred an appeal to the Appellate Assistant Commissioner, which was allowed by him on the finding that the actual rental of Rs. 800 was quite substantial and could not be considered as unreasonably low and he did not accept the finding of the Income-tax Officer to the effect that the said sum of Rs. 20,000 really represented an advance of rent.
Against the said order of the Appellate Assistant Commissioner, the department took an appeal to the Tribunal and the learned members of the Tribunal allowed the appeal holding that, having regard to the extremely favourable terms of the lease, the short duration and 'all the other attending circumstances', the said sum of Rs. 20,000, though described as salami was, in fact, lump sum advance payment of rent and should be taxed.
Against the said order the present reference is taken to this court at the instance of the assessee as hereinbefore stated.
The real question is whether the said premium or salami of Rs. 20,000 represents the price for parting with the land or is only advance rent.
To begin with, if we look into the definitions of salami in Baden Powells Land Systems in British India, Macnaughtons Principles of Mahomedan Law, Willsons Glossary and in the Arabic-English Dictionary of Johnson, we find that they show that salami is a payment by the tenant as a present or price for parting by the landlord with his rights under the lease of a holding. It is lump sum payment as consideration for what the landlord transfers to the tenant.
A reference to some of the reported decisions would assist in determining the nature of the transaction which was evidenced by the documents placed on the record. In Commissioner of Income-tax v. Shaw Wallace & Co. Sir George Lowndes describes 'Income' as 'a periodical monetary return coming with some sort of regularity or expected regularity from definite sources'. Lord Russel of Killowen in Maharajkumar Gopal Saran Narain Singh v. Commissioner of Income-tax, after referring to the said definition give by Sir George Lowndes, held that held that life annuity paid out of an estate is income.
In Kamakshya Narain Singh v. Commissioner of Income-tax, the payments by way of premium were held to be capital receipts. In the said case large payments by way of royalty for granting various mining leases were received by the assessee. The leases were for a period of 999 years for mining coal with liberty to prospect and also with power to sink the shafts. In consideration of these rights, the lessees paid a sum by way of salami (premium) and an annual sum as royalty on the quantity of coal raised, subject to a minimum annual royalty. Under the covenant, the lessor had the right to re-enter, in case ofa non-payment of royalty. It was, therefore, contended by the assessee that the sums received as salami and royalty were capital receipts representing the price of the minerals removed. Lord Wright held the salami to be a capital receipt on the principle, that the money paid by the lessee to purchase the general right for enjoying the benefits granted by the lease, is a payment on capital account. The importance lies in the in use of the words 'the money paid to purchase' in the said decision, i.e., the right of the lessee to enjoy the benefits granted under the lease. In Raja Shiva Prasad Singh v. King-Emperor, where also the lease was a mining lease for a period of 999 years, salami was described a as sum which is payable at the inception of the lease and as a non-recurring payment in the nature of a premium for granting a lease. In Commissioner of Income-tax v. Visweshwar Singh, the salami was not held as an advance rent and was, therefore, not income, of course, the lease being bemiade, i.e., for an indefinite period.
Harries C.J. in the case of Province of Bihar v. Maharaja Pratap Udai Nath Sahi Deo, followed the definition of the word 'salami' as given in Kumar Visweshwar Singhs case. I am not unmindful that in the said case it was also held that salami may in certain cases be regarded as a payment of rent in advance. In the case of In re Gooptu Estate Ltd., Rankin C.J. held the payment of one lakh of rupees as salami not to be income. In that case, the said amount was demanded and paid in respect of resettlement of a lease which had still to run for 48 years, but had been forfeited for the non-payment of rent. In a Full Bench of the Patna High Court, Rajendra Narayan Bhanja Deo v. Commissioner of Income-tax, mutation fees were held to be agricultural income but it should be remembered that it was a case of payment after the relationship of landlord and tenant had come into existence.
Similarly, in Commissioner of Income-tax v. Manavikraman Rajah, moneys paid for the renewal of leases were held to be agricultural income within the meaning of section 2(1)(a) of the Indian Income-tax Act. Here again it should be remembered that moneys were paid, not for the constitution of the relationship of landlord and tenant, but after the said relationship had come into existence and for the continuance of the same.
The Orissa High Court in the case of S.M. Bose v. Secretary, Board of Revenue, held that salami is not a payment of rent in advance nor is it income but is a payment by way of capital receipt.
In the case of Commissioner of Income-tax v. Raja Bahadur Kamakshya Narain Singh, a coal company had been given by the court of wards a prospecting licence in respect of certain coal bearing lands with the option of renewal and also to take a mining lease of certain terms and conditions. The period of prospecting licence was extended of four occasions. On attaining majority, the assessee having asserted that the court of wards had no power to give the licence, a settlement followed between the licensee and the assessee by which the latter agreed to accept the various prospecting licences, their extensions and leases in consideration of which he received by way of salami a sum of Rs. 5,25,000 and a capital lump sum of Rs. 40,000 and some other payments in lieu of cesses. The question arose whether the amounts were capital or revenue and it was held that the said sum of Rs. 5,25,000 received as salami and the amounts received as cesses were capital receipts and, therefore, not taxable. Manohar Lall A.C.J. held that the amount was received by way of settlement and not by way of salami but S.K. Das J. (as he then was) held that salami was a lump sum payment for rights which were being given to the licensee, namely, the right to prospect for a certain number of years and also the right to get mining leases, and, therefore, the salami in question was undoubtedly a capital receipt.
Mr. Meyer appearing for the revenue, submitted that the lump sum of Rs. 20,000 in the instant case is in reality only an advance rent on the ground, viz., that the rent of Rs. 800 is low and that the period of the lease is not only not permanent but very short.
In dealing with Kamakshya Narains case, Mr. Meyer sought to distinguish the same on the ground that the lease in the said case was a for a long period, i.e., for 999 years, but in my view the decision was not based on the said consideration of the length of the period of the lease but on the nature of the right which was conveyed. It was argued that the Privy Council also based its decision on the wasting nature of the assets under the lease. But that is also not correct, because their Lordships of the Judicial Committee laid down the definition of salami in general terms and described the characteristics of payment by way of salami without any reference to the nature of the lease or without any reference as to the nature of assets under the lease.
Mr. Meyer then argued that the question in the said case was whether the licensor had allowed the licensee to take his capital or he had allowed him to use the capital. If it was the former, the receipts were in the nature of capital receipts and if the latter, they were in the nature of revenue. His contention was that it was really the latter, because all that the licensee was allowed to do was to enter on the lands and make use of the assets belonging to the appellant.
This, in the opinion of their Lordships of the Supreme Court in the case of Maharaja Chintamani Saran Nath Sah Deo v. Commissioner of Income-tax, is not a correct approach to the question. Their Lordships held that what the licence gave to the licensee was not merely a grant of the use of the capital of the licensor, but it was really a grant of a right to a portion of the capital in the shape of a general right to the capital itself.
In this case the assessee received certain amounts, namely, Rs. 15,290, Rs. 1,24,789, Rs. 1,500 and Rs. 70,146 for four licences granted for the purpose of prospecting bauxite. The periods of the licences were six months in two cases and a year each in the other two and thus 'comparatively short' as noticed by their Lordships of the Supreme Court. Under the licences, the licensees were granted, inter alia, the sole right to enter upon the land to prospect and prove the said mineral and for the said purpose had the right to dig pits, etc., and appropriate samples of bauxite, not exceeding 100 tons in the aggregate. Under the covenants, the licensees were to cause as little damage to the surface and to plug the holes to be made by them. The licensor also covenanted that, in consideration of the premium paid and on payment of further sum, the licensee could get mining lease for a term of thirty years on the terms and conditions set out in the indenture attached as schedule 2 to the licence. The Income-tax Officer held that the amounts were received as revenue payments and were, therefore, taxable. On appeal to the Appellate Assistant Commissioner, the amounts were held to be capital receipts but this order was set aside by the Appellate Tribunal. The Patna High Court affirmed the finding of the Tribunal and held that the amounts received by the assessee were revenue receipts. Their Lordships of the Supreme Court, after discussing some of the cases mentioned hereinbefore, set aside the judgment and order of the High Court and held that the amounts were capital receipts and laid down the principle that if it is a consideration paid by tenant or the licensee for being let into possession with the object of obtaining a tenancy or in the said case with the object of obtaining a right to remove minerals, it cannot be termed rent or revenue but is a capital receipt. It was also held that the covenants show that there was a transfer of the right, the consideration for which would be a capital payment.
The cases of H.P. Bannerji v. Commissioner of Income-tax, Greyhound Racing Association (Liverpool) Ltd. v. Cooper, Smethurst v. Davy, Stow Bardolph Gravel Co. Ltd. v. Poole, Rajah Manyam Meenakshamma v. Commissioner of Income-tax, were all reviewed by their Lordships and it was held that none of the said cases was of any assistance to the case sought to be made out on behalf of the revenue. Their Lordships also held that the Privy Council, in dealing with the case of Kamakshya Narain Singh, laid down the definition of salami in general terms and described the characteristics of a payment by way of salami without any reference to the nature of the lease.
The point arose in another Supreme Court decision, viz., Member for the Board of Agricultural Income-tax v. Sindhurani Chaudhurani. The said case as well as the case of Chintamani Saran Nath were relied by Dr. Debi Pal appearing on behalf of the applicant. Sindhurani Chaudhurani case has a chequered career. The original assessee was Jatindra Narayan Choudhury and on his death in 1953, his widow, Sindhurani, and others were substituted. The Agricultural Income-tax Officer held , in the year 1941, the sum to be agricultural income which was affirmed on appeal by the Assistant Commissioner. The revision taken to the Commissioner being dismissed, the assessee took a reference to this court which held in 1945 that the receipts were agricultural income. Against the said judgment of this court, an appeal was taken to the Privy Council but, on the abolition of the jurisdiction of the Privy Council, the appeal was transferred to the Federal Court and was heard by that court as C.A. No. 30 of 1949. The Federal Court set aside the judgment of the High Court and remitted the case to this court for consideration of certain additional factors. After remand, the case was again stated by the Board and this court then held that, on a consideration of the facts found by the Board, the amounts received by the assessee as salami were not agricultural income. Against the said judgment, the Board brought the above appeal to the Supreme Court. The Supreme Court in the said case defined 'salami' as follows :
'The indicia of salami are (1) its single non-recurring character and (2) payment prior to the creation of the tenancy. It is the consideration paid by the tenant for being let into possession and can be neither rent nor revenue but is a capital receipt in the hands of the landlord.'
Mr. Meyer also attempted to distinguish the above case on the ground that there was a transfer of tenancy which was capable of ripening into an occupancy holding but in my view that was not the ground on which the Supreme Court decided the question of salami in the said case. 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.
Mr. Meyer, lastly, drew our attention to the general observations of Sir Ashutosh Mookerjee in the Bench decision in the case of Birendra Kishore Manikya v. Secretary of State, which lays down the following proposition of law :
'There can be little doubt that when a lease is granted, the amount fixed for periodical payment is not independent of the amount paid in a lump sum as a premium. The capitalised value of the sum periodically payable taken along with the premium constitute in the aggregate the consideration for the grant; so that the larger the one element, the smaller the other.'
On this basis, the premium paid for the settlement of waste lands or abandoned holdings were regarded as 'rent or revenue' derived from the land and therefore within the definition of 'agricultural income' in section 2(1)(a)(i) of the Income-tax Act.
This was a case which was decided under the Income-tax Act and the question whether it was a capital receipt or revenue receipt and therefore exempt or not for taxation did not arise because the Bengal Agricultural Income-tax Act was passed in 1944 and the Assam Act in 1939. In my view, it was not necessary for the purpose of that case to decide whether it was a capital receipt or revenue because what was to be decided was whether salami was exempt from income-tax under section 2(1)(a)(i) of the Indian Income-tax Act. As a matter of fact, the assessee argued in that case that the sums constituted 'agricultural income'.
Moreover, the aforesaid dictum, the smaller the salami the higher the rent and vis-a-vis, did not receive acceptance by the Federal Court when the case of Sindhurani was heard in the said court before remand. i.e., in C.A. No. 30 of 1949. The said view was expressed by their Lordships of the Supreme Court in Sindhuranis case after remand.
It is also to be noticed that in a Full Bench decision of our court, Mehar Bano Khanum v. Secretary of State salami was defined to be an amount received by the landlord for the recognition of the transfer of a non-transferable holding which was paid to the landlord because of his ownership of the land. It was held to be 'agricultural income' as it was 'rent or revenue' within the meaning of that expression. The counsel appearing for the Secretary of State for India conceded that it was not revenue but his argument was that it was not revenue derived from land but that it was a question of the transfer and not of tenancy and therefore did not flow from the land. It is also important to notice that the case of Birendra Kishore Manikya v. Secretary of State was expressly overruled by the said Full Bench decision.
I may also mention that in neither of these two cases two cases was it argued whether salami was a revenue receipt or a capital receipt and, therefore, the case of Birendra Kishore Manikya is of no assistance to Mr. Meyer.
From the discussion made above, the following principles are deduced :
(1) Prima facie or premium is no income; it is for the taxing authorities to prove that the facts exist which would make the same an income, if they seek to tax it.
(2) Where the premium represents payment of rent in advance it is income. But if it represents the whole or part of the price of the land or the sale price of the leasehold interest, it is not income but capital.
(3) Salami to be income, should be a periodical monetary return coming in with some of sort of regularity or expected regularity from definite sources.
(4) Salami or premium paid at the beginning of a mining lease for a long period ordinarily represents the purchase price of an out and out sale of the property and the sum received is capital and not income, but rent or royalty paid periodically is income. The principle is the same, whether the premium is for a simple lease of mineral rights. But royalty payable under the mining lease stands on a different footing from premium or salami.
(5) When a premium is received merely as an incident in the possession of property (even if leasehold) and there is no finding that the letting out of the property is the business of the assessee, the premium receipt is capital.
(6) Salami or premium paid in advance of rent once for all at the outset, the period of tenancy being uncertain and the chances of the resettlement of the same land to some tenant being remote, is capital.
(7) Premium (salami) is a single payment made for the acquisition by the lessee of the right to enjoy the benefits granted to him by the lease. Money paid to purchase the said general right is a payment on capital account.
(8) Salami is the amount of money which a landlord insists on receiving as a condition precedent for parting with the land in favour of the lessee and that it was received by the landlord, not because of the use of the land, but before the land was put into use by the assessee.
(9) The question of salami should not be decided on the length of the period of the lease, but on the nature of the right conveyed. The characteristics of the payment should be decided without reference of the nature of the lease including the wasting nature of the assets under the lease.
(10) The smaller the salami the higher the rent and vis-a-vis (Birendra Kishore Manikya v. Secretary of State) is no longer a good law.
Of course it is true, as to whether salami was income or not the same had to be decided on the facts of each case, but on the construction of the terms of the lease in the instant case, we hold that the payment has a close analogy to the payments as in Sindhuranis and Chintamanis cases. We also find that the sum of Rs. 20,000 in the present case is a consideration paid by the tenant at the beginning for being let into possession with the object of obtaining a new tenancy and the covenants of the lease show that there was a transfer or parting with of the landlords right under the instant building lease. The sum of Rs. 20,000 was also paid prior to the creation of the tenancy and not after the relationship of landlord and tenant had come into existence. The payment is also of a single non-recurring character in the nature of the premium for granting the lease. In view of the absence of any evidence on behalf of the department to show that the rental of Rs. 800 is low and the period of the lease is short and there being no other attending circumstance and in view of assessees proof of another building lease of a contiguous area showing the same state of affairs, we find that the receipt of the said sum of Rs. 20,000 is a capital receipt and not an advance rent.
In our opinion, the question referred to us should be answered in the affirmative and in favour of the assessee, who will have his costs of this reference.
G.K. Mitter J. - I agree.
Question answered in the affirmative.