MEHROTRA, J. - The following question of law has been referred to us by Income-tax Appellate Tribunal, Calcutta Bench, Calcutta, under section 66(1) of the Indian Income-tax Act (hereinafter called 'the Act' for opinion :
'Whether on the facts and in the circumstances of the case and upon the construction of the terms of the lease dated March 3, 1950, the sum of Rs. 11,250 received by the assessee during the year of account is revenue or capital receipt ?'
The assessment year is 1952-53 and the relevant accounting year is the financial year 1951-52. The assessee is a public limited company owning two large tea estates named 'Panbari Tea Estate' and 'Barchola Tea Estate' in the district of Oarrang. The tea leaves grown in both these estates were processed in the factory called the 'Panbari Tea Factory' belonging to the assessee. By a deed of lease dated March 31, 1950, both the tea estates including the factory and all oppurtenances thereto were demised to one Messrs. Hiralal Ramdas for a period of ten years with effect from January 1, 1950. The annual rents reserved in the deed was Rs. 54,000. In addition to that a premium of Rs. 2,25,000 was agreed to be paid by the lessee to the lessor. Rs. 45,000 out of the said amount of premium were payable at the time of the execution of the lease and the balance of Rs. 1,80,000 was payable in sixteen half-yearly instalments of Rs. 11,250 each on or before January 31 and July 31, every year commencing from 1952 until July 31, 1959. In the year of account in pursuance of the aforesaid terms of the lease a sum of Rs. 11,250 was paid by the lessee to the assessee company. The Income-tax Officer was of opinion that this receipt of Rs. 11,250, though described as a part of the premium, was in reality rent and, therefore, it was a receipt of a revenue nature and was liable to be taxed. This amount was thus included in the total income of the assessee. The contention of the assessee was that the receipt was of a capital nature and was not liable to be taxed. The assessment was confirmed by the Appellate Assistant Commissioner. On appeal the Tribunal affirmed the decision of the Appellate Assistant Commissioner. But on an application by the applicant the question has been referred to this court for its opinion as stated above.
The sum of Rs. 2,25,000 has been described as a premium. It was, however, contended by the Department that the amount may have been described as 'premium' but on consideration of the entire circumstances the amount was in fact a rent.
The question whether a particular receipt is a revenue receipt or a capital receipt is of considerable difficulty and the Revenue and the assessee are found ranged on different sides taking up alternate contentions as it suits their purposes. As was observed by lord Macmillan in Van dem Berghs Ltd. v. Clark :
'The reported cases fall into two categories, those in which the subject is found claiming that an item of receipt ought not to be included in computing his profits and those in which the subject is found claiming that an item of disbursement ought to be included among the admissible deductions in computing his profits. In the former case the Crown is found maintaining that the item of income; in the latter that it is a capital asset. Consequently, the argumentative position alternates according as it is an item of receipt or an item of disbursement that is in question, and the taxpayer and the Crown are found alternately arguing for the restriction or the expansion of the conception of income.'
The court has got to determine what is the true character of the receipt or the expenditure irrespective of the stand taken by the Department or the assessee. In the same case Lord Macmillan further held as follows :
'That though in general the distinction between an income and a capital receipt was well recognised and easily applied, cases did arise where the item lay on the borderline and the problem had to be solved on the particular facts of each case. No infallible criterion or test can be or has been laid down and the decided case are only helpful in that they indicate the kind of consideration which may relevantly be borne in mind in approaching the problem. The character of the payment received may vary according to the circumstances. Thus the amount received as consideration for the sale of a plot of land may ordinarily be a capital receipt but if the business of the recipient is to buy and sell lands, it may be his income.'
These observations were referred to with approval by their Lordships of the Supreme Court in the case of Commissioner of Income-tax v. Vazir Sultan and Sons.
Mr. Iyengar who appears for the assessee has first contended that the court should give effect to the transaction entered into between the parties. A solemn document drawn up between the parties representing the transaction should not be lightly overlooked and in the absence of anything to show to the contrary, the words of the document should be given effect to. If the parties have clothed a particular transaction in a particular form, it is not open to this court to re-write the agreement in order to tax an assessee. He contends that the document has described the amount of Rs. 2,25,000 as premium. The lessor was not carrying on the business of selling or leasing out his lands. The tea estate with the factory and all appurtenances thereto was in the nature of a capital asset of the company and if the company parted with its rights though for a limited period of ten years, and assigned it to the lessee, the lessee paid the sum of Rs. 2,25,000 as the consideration for the said assignment. It was nothing but a receipt in lieu of the assignment of its capital asset and cannot be liable to tax. Mr. Chuadhury who appears for the Department has contended that whether a particular sum received is of the nature of an annual profit or gain or is of a capital nature, does not depend upon the language in which the parties have chosen to describe it.
Before examining the authorities cited by the counsel for the assessee I might refer to the authorities cited by Mr. Chuadhury in support of this contention. The first case referred to is Minister of National Revenue v. Catherine Spooner. In this case the assessee sold to an oil company all her right, title and interest in and to twenty acres of her land. In consideration of the sale the company agreed to pay to the assessee the sum of pound 5,000 in cash on the execution of the agreement, to issue to her 25,000 fully paid shares in the company and further to deliver to her order 'the royalty hereby reserved... namely, 10 per cent. of all the petroleum, natural gas and oil produced and saved from the said lands free of costs.' In 1927 the company did not deliver to the respondent any of the oil produced, but sold the whole of it, and paid ten per cent. of the gross proceeds to the respondent, which sum she accepted in satisfaction of the 'royalties' reserved to her under the agreement. The assessee was assessed to tax in respect of this sum which she had received from the oil company. The Privy Council held that the royalties were in effect payment by instalments of part of the price of the property which the assessee had finally disposal of to the company and were thus not liable to be taxed. Dealing with this case the Privy Council observed as follows :
'... whether a particular sum received is of the nature of an annual profit or gain or is of a capital nature does not depend upon the language in which the parties have chosen to describe it. It is necessary in each case to examine the circumstance and see what the sum really is, bearing in mind the presumption that it cannot be taken that the Legislature meant to impose a duty on that which is not profit derived from property but the price of it.'
The amount in that case although was payable as a royalty and was a recurring payment, still their Lordships held that it was a part of the sale consideration and thus was in the nature of a capital receipt. This case to my mind supports the contention of the assessee.
The next case cited is Rajah Manyam Meenakshamma v. Commissioner of Income-tax. In this case the assessee had granted two mining leases, one of which was for a period of thirty years and the other for twenty-five years. In the first lease Rs. 12,000 in a lump sum was fixed 'as royalty for the whole period of the lease' and in the second, a sum of Rs. 23,000 in lump sum was fixed as royalty for the whole period of the lease, and both these sums had been paid to the lessor on November 19, 1946, and on consideration of the circumstances it was held by the Andhra High Court that the sums of Rs. 12,000 and Rs. 23,000 were consolidated advance payments of the amounts which would otherwise be payable periodically for the occupation of the mines and were, consequently, revenue receipts liable to be assessed to income-tax and not capital receipts. It was observed in that case as follows :
'There is a distinction between price paid for a transfer of right to enjoy a property and the rent to be paid periodically to the owner in respect of a lease of the property. When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital income and the latter a revenue receipt. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price. It is not the form but what matters is the substance of the transaction. The nomenclature used may not be decisive or conclusive but it helps the court, having regard to the other circumstances, to ascertain the intention of the parties. The intention of the parties has to be ascetained on the facts of each case.'
These observations clearly point out that each case will have to be determined on its own facts. The criterion laid down in this case is that from the language of the document and from the surrounding circumstances the intention of the parties is to gathered. If a particular payment is made as a consideration for parting with certain rights, it is nothing but in the nature of a capital receipt. If, however, a payment is made periodically for the continuous use and enjoyment of the property, it is in the nature of a rent. There is no difficulty if there is a single payment in the document. The difficulty arises when a part of the payment is described as premium and there is another part of the payment described as rent.
The next case is Maharaja Chintamani Saran Nath Sah Deo v. Commissioner of Income-tax. In this case the assessee granted licences to different parties to prospect for bauxite and aluminous laterite ores for short terms and received lump sums as consideration for the grant of the licences. The Appellate Tribunal found that no possession over any land or property of the assessee was given to the licensees nor was any interest in any property created in the licensees favour; the licensees were to do as little damage as possible, no rent was separately payable; the assessee frequently granted such short term licences; and in some cases the licensees were to report on the progress of work each month. In each of the four licences granted by the assessee, the period for which the licence was granted was rather short; in two cases the period was six months and in the other two, one year. In one of the licences there was a condition that the licensees could remove bauxite up to the extent of 100 tons during the term of the licence. The Tribunal held that the amounts received by the assessee were income and not capital receipts. The High Court of Patna on reference held that there was sufficient material for the Tribunal to hold that the amounts in question were income and there was no ground for holding that the amounts were capital receipts. In this case reliance was placed by the counsel for the assessee on the earlier case of the same court in Kamakshya Narain Singh v. Commissioner of Income-tax. It was however distinguished on the ground that the question whether a certain amount is capital receipt or income has always to be decided on the facts and the circumstances of each case and no hard and fast rule can be laid down for the purpose. Ramaswami, J. (as he then was), accepted the principle laid down by Lord Greene in Commissioners of Inland Revenue v. 36/48 Holdings Ltd., in the following terms :
'The true nature of a sum payable to a recipient for purposes such as the present is to be ascertained from all the circumstances relevant to that matter. The true nature of the sum is not necessarily its nature in law, but its nature in business or in accountancy which ever 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 relation-ships 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.'
The circumstances of the case which I have already pointed out when referring to this case earlier weighed with their Lordships in coming to the conclusion that it was a case of revenue receipt. No interest in the land was parted with. The licensees were only permitted to do some work on the land and for carrying out that work periodically they paid a lump sum.
The counsel for the assessee referred to the case of Commissioners of Inland Revenue v. Fishers Executors. Therein a limited company resolved that part of its undivided profits should be capitalised and distributed as a bonus and created and issued five per cent. debenture stock to its ordinary shareholders in satisfaction of such bonus, the shareholders having no option to receive cash in lieu of the stock. The arrangements were at the same time made under which the whole of the preference shares were acquired by the ordinary shareholders in exchange for a corresponding amount of the debenture stock. Under these circumstances the bonus paid to the ordinary shareholders in debenture stock was taken as an income in the hands of the share-holders for the purposes of super-tax. The Commissioners of Inland Revenue held that the bonus thus paid to the shareholders was not a distribution of profits and did not constitute income in their hands for the purposes of super-tax. This decision was reversed by Rowlatt, J. But the Court of Appeal reversed his decision which was ultimately affirmed by the House of Lords. Lord Shaw in his judgment observed as follows :
'Upon the legal side of the matter it must not be forgotten that all the necessary resolutions, confirmations, new articles of association, etc., required to regularise the transaction have been carried through. It is a transaction in itself unassailable in law. The result of it was to negate emphatically the idea of distribution to shareholders as income; on the contrary, it was to withdraw from each shareholder the sum which might have been given to him as income, and to withdraw it definitely from an income fund. It was stamped as a capitalisation transaction. Such a transaction was within the power to the share-holders of the company, and all, including the Crown, are bound by that. It is incorrect in principle to attempt to get behind that transaction, legal and competent and regular in form, and to endeavour to construct a canon of liability to income-tax out of conjecture as to the motive or scheme for the defeat of the Revenue which underlay its various stages.'
Lord Sumner also observed as follows :
'The proposition, that the substance of a transaction must be looked to and not merely the form, is generally invoked against those who have carried it out. I think it is unusual, where the form of a transaction is against those whose transaction it is, to invoke the substance in their favour, in order to eke out what they have left defective in form. Sometimes again it is the intention of the company that is said to be dominant (Burrells case); sometimes it is what the company desired to do. In any case desires and intentions are things of which a company is incapable. These are the mental operations of its shareholders and officers. The only intention that the company has is such as is expressed in or necessarily follows from its proceedings. It is hardly a paradox to say that the form of a companys resolutions and instruments is their substance... My Lords, the highest authorities have always recognised that the subject is entitled so to arrange his affairs as not to attract taxes imposed by the crown, so far as he can do so within the law, and that he may legitimately claim the advantages of any express terms or of any omissions that he can find in his favour in taxing Acts. In so doing, he neither comes under liability nor incurs blame.'
The next case referred to is the case of Margerison v. Tyresoles Ltd. The respondent company carried on business of tyresoling of which it owned the patent. It entered into agreements with motor traders under which (i) the trader provided suitable premises in which the respondent company erected and operated plant to carry out the process, the trader paying a monthly rental for such plant and (ii) the company agreed not to introduce another tyresoling plant nor to canvass for orders within the traders prescribed territory, but it retained the right of tyresoling tyres sent direct to its own works by persons within the said territory. In return for the rights conferred under (ii) the trader, on the signing of the agreement, made a lump sum payment to the company based on the size capacity of the plant installed. The agreement was for five years, but was to continue thereafter indefinitely. It was, however, determinables at any time by either side on certain specified grounds. The tyres processed on the traders premises were to be invoiced by the company to him at a discount off current list prices and were to be sold by him at prices fixed by the company. The question arose about the lump sum payments made under the agreements as to whether they were trading receipts. The company contended that under the agreements they were disposing of capital assets and that the sums in question were capital receipts. This constention was upheld. Wrottesley, J., observed as follows :
'Capital and income are not purely legal conceptions, but conceptions which arise in trade and business, and in all borrowings and lendings. Sometimes it is the easiest thing in the world to distinguish between capital and income; as for instance, in the case of simple loan at a rate per cent. of interest. On the other hand it is sometimes a matter of the greatest difficulty to say whether any particular receipt or expenditure is in the nature of capital or revenue.
For the purposes of income-tax the test is put in the case of Rees Roturbo Development Syndicate Ltd. v. Ducker, and the passage to which I want particular to refer is to be found on page 389 in the judgment of Scrutton, L.J. The line between receipts, says the Lord Justice, which are not taxable as being the result of sale of capital assets, and receipts which though receipts which, though receipts of sale, are taxable as profits of trade is stated by Lord Dunedin in the Privy Council in Commissioner of Taxes v. Melbourne Trust Ltd., as follows : 'Their Lordships think that the principle is correctly stated in the Scottish case quoted, Californian Copper Syndicate v. Harris. It is quite a well settled principle in dealing with questions of income-tax that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not profit in the sense of Schedule D of the Income Tax Act of 1842 assessable to income-tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable where what is done is not merely a realisation or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business.'...
We have in this case an agreement made in the ordinary course of trade. That is common ground and forms a principal ground of the case for the Crown. It is not one of those agreements which sometimes come under review in this court, consisting of a facade, or entered into in order to afford a shield of defence against the tax-gatherer. It was intended to regulate and does regulate the commercial relations between the parties, and deals expressly with these payments. They were in return for the rights conferred by clause, conferred that is to say, on the garage owner, the other party.'
Wrottesley, J., further observed, at page 68 of the report, that : 'Prima facie here, therefore, what the company had done is to grant an exclusive right to the garge owner, which will be enforced by the courts of law... I find some difficulty in saying that there is not here material upon which the Commissioners could find that the company had sold part of its capital resources.'
In the case of Commissioner of Income-tax v. Mercantile Bank of India the Privy Council affirmed the decision of the Calcutta High Court and held that by the transactions in question no income, profits or gains accrued or arose or were received by the trustees under section of the Indian Income-tax Act and the trustees were not liable to be assessed to income-tax in respect of the debentures. It was observed by their Lordships of the Privy Council that the personal motive or purpose of the individual shareholders, even if they hold a controlling interest in the company, is irrelevant, if it is made out that the company has in fact capitalised the accumulated profits. The observations of Lord Sumner in Fishers case1 which I have already referred to earlier were approved. These cases have been cited by the counsel for the assessee for the proposition that the motive of the party is not to be taken into consideration in deciding as to the nature of the receipt in the hands of the assessee. The transaction has got to be taken, if valid and in accordance with the law, on its face value and in accordance with the law, on its face value and in the absence of anything to show that the transaction was different from what it is represented to be under the document, the court cannot read into the minds of the parties and re-write the document for itself. On the face of it in the present case there was a lease under which the assessee parted with its rights in the tea estate and assigned it to the lessee. The amount of Rs. 2,25,000 was, on the face of it, a consideration paid for such an assignment and in the absence of anything to show that the amount of Rs. 2,25,000 was an advance payment of the rent, the Department could not succeed in showing that the receipt was in the nature of a revenue receipt.
In the case of Eastern Investments Ltd. v. Commissioner of Income-tax their Lordships of the Supreme Court observed that the only question that should be considered was whether the transaction was voluntarily entered into in order indirectly to facilitate the carrying on of the business of the assessee and was made on the ground of commercial expediency.
In the case of Henriksen v. Grafton Hotel Ltd. certain lessees of licensed premises under a covenant paid annually certain sums imposed by licensing justices as instalment of the monopoly value on the grant and renewal of the licence for three-year periods. The lessees claimed that these sums were revenue payments and as such deductible for income-tax purposes. It was held by the Court of Appeal that the payments were imposed for the term of the licence and these payments fell into the same class as a premium paid on the grant of a lease which was not deductible for income-tax and the payment was held to be capital payment and not revenue payment. Lord Greene, M. R., observed as follows :
'These sums were made payable by annual instalments but this circumstance clearly cannot affect the character which for present purposes must be ascribed to the payments. If the sum payable is not in the nature of revenue expenditure, it cannot be made so by permitting it to be paid by annual instalments. These payments by instalments in respect of monopoly value have not the annual quality of the payments for the grant of the annual excise licence, but are of a different character altogether.'
Dealing with the argument that the payments were periodical payments and not of permanent nature, it was observed as follows :
'It appears to me that there can be no difference in principle between a payment out-and-out for monopoly value and a payment in respect of a term. Each licence granted for a term must stand by itself, since an application for its renewal falls to be treated as an application for a new licence. This is what I mean when I say that there is a false appearance of periodicity about these payments. Whenever a licence is granted for a term, the payment is made as on a purchase of a monopoly for that term. When a licence is granted for a subsequent term, the monoply value must be paid in respect of that term, and so on. The payments are recurrent if the licence is renewed; they are not periodical, so as to give them the quality of payments which ought to be debited to revenue account. The thing that is paid for is of a permanent quality, although its permanence, being conditioned by the length of the term, is short-lived. A payment of this character appears to me to fall into the same class as the payment of a premium on the grant of a lease which is admittedly not deductible. In the case of such a premium it is nothing to the point to say that the parties, if they had chosen, might have suppressed the premium and made a corresponding increase in the rent. No doubt, they might have done so, but they did not, in fact, do so. The lesse purchases the term for the premium. There is no revenue quality in a payment made to acquire such an asset as a term of years.'
Merely because a lease is for a term, it cannot be said that the payment is of a revenue nature. The lessee pays for getting some right which has a permanent quality, though, as pointed out in the above case, its duration may be limited. For the period of the lease the lessee acquires all the rights of the lessor and he has agreed to pay the sum of Rs. 2,25,000 for the acquisition of that right and not for carrying on certain activities on the land or premises after the acquisition of the said right. The fact that the payment is spread over the whole period of the lease and the lessee agrees to pay by instalments the amount so agreed will not change the nature of the payment.
In the case of Commissioners of Inland Revenue v. Adam the respondent as a carting contractor had to remove and dispose of earth, slag, etc. For this purpose he entered into an eight years agreement by which he undertook to deposit on certain land a minimum 80,000 cubic yards of material at the rate of 10,000 yards a year. The consideration payable to the land owner was a sum of 3,200 pound payable by half-yearly instalments of 200, pound and in addition a sum of 4s. for every 5 cubic yards of materials deposited in excess of 80,000. He contended that for income-tax purposes the yearly payments were an expense of his business which should be deducted in computing his assessable profits. The Crown contended that the sum of 3,200 pound was capital expenditure. The contention of the Crown was accepted.
In the case of commissioners of inland revenue v. British Salmson Aero Engines Ltd. an English company acquired a licence for a period of ten years for selling aeroplan engines made by a French company in consideration of the sum of 25,000 pound (payable as to 15,000 pound on the signing of the agreement and as to the balance by two payments of 5,000 pound at intervals of six months) and, in addition, of sums of 2,500 pound payable as royalty during each year of the currency of the licence. The company in the assessment proceedings contended that all the payments were instalments of a capital sum which was the purchase price of a capital asset and that the company was not assessable to income-tax in respect of any of the payments. It was held that the payment of 25,000 pound was a capital payment. Finlay, J., dealing with the payment of 25,000 pound observed that - 'it requires no argument because it is clear - that it is quite possible that a licence may be granted or, for the matter of that, property may be sold partly in rescept of a lump sum and pratly in respect of annuity or annual payment for royalty or anything of that sort; and in the event, of course, income-tax is attracted by that part of the payment which is an annuity or royalty and is not attracted by the lump sum which is in the nature of capital.'
The case of Member for the Board of Agricultural Income-tax, Assam v. Sindhurani Chaudhurani was a case where the zamindar assessee received payments described as salami as a consideration for granting agricultural leases and those receipts were held to be of capital nature. After considering the various authorities their Lordships of the Supreme Court observed as follow :
'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.
The manner in which the leases were dealt with and the fact that in no case was a non-occupancy tenant evicted and his tenure was allowed to mature into an occupancy holding shows that the leases were in practice not so precarious as was suggested by the Board, but had an element of stability and permanency attached to them. Therefore, 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 and both parties have proceeded on that basis and it could not be called revenue within the meaning of the word used in the definition of agricultural income under section 2(1)(a) of the Act because 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.'
In an earlier case of Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax their Lordships of the Supreme Court were considering the nature of certain payments made by the lessee. The lessee acquired from the Government of Assam for the purpose of carrying on the manufactured of cement a lease of certain limestone quarries for a period of twenty years for certain half-yearly rents and royalties. In addition to the rents and royalties the appellant agreed to pay the lessor annually a sum of Rs. 5,000 during the whole period of the lease as a protection fee and the lessor in consideration of the said payment undertook not to grant to any person any lease, permit or prospecting licence for limestone in a group of quarries without a condition that no limestone should be used for the manufacturing of cement. The lessee agreed to pay Rs. 35,000 annually for five years as a further protection fee. It was held that the payments of Rs. 5,000 and Rs. 35,000 to the lessor by the lessee were in the nature of a capital payment and were not deductible. All the authorities were considered in this case. The following principles laid down by Mahajan, J. (as he then was), in the case of Benarsidas Jagannath, In re, were quoted with approval by their Lordships of the Supreme Court at page 44 :
'I. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment : vide Lord Sands in Commissioners of Inland Revenue v. Granite City Steamship Co. In City of London Contract Corporation v. Styles4 Bowen, L.J., observed as to the capital expenditure as follows :
You do not use it, 'for the purpose of' your concern, which means for the purpose of carrying on your concern, but you use it to acquire the concern.
2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantages for the enduring benefit of a trade : vide Viscount Cave, L.C., in Atherton v. British Insulated and Helsby Cables Ltd. If what is got rid of by a lump sum payment is an annual business expenses chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. Thus, if labour saving machinery was acquired, the cost of such acquisition cannot be deducted out of the profits by claiming that it relieves the annual labour bill : the business has acquired a new asset, that is, machinery.
The expression enduring benefit or of permanent character were introduced to make it clear that the asset or the right acquired must have enough durability to justify its being treated as capital asset.
3. Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. Fixed capital is what the owner turns to profit by keeping it in his own possession. Circulating or floating capital is what he makes profit of by parting with it or letting it change masters. Circulating capital is capital which is turned over and in the process of being turned over yields profit or loss. Fixed capital, on the other hand, is not involved directly in that process and remains unaffected by it.'
The Supreme Court held that this synthesis attempted by the Full Bench of the Lahore High Court truly enunciates the principles which emerge from the authorities. The question has all along been considered to be a question of fact to be determined by the income-tax authorities on an application of the broad principles laid down in various authorities. Dealing with the expression used by Lord Dunedin 'once and for all' it was observed by the Supreme Court as follow :
'Whether a payment be in a lump sum or by instalments, what has got to be looked to is the character of the payment. A lump sum payment can as well by made for liquidating certain recurring claims which are clearly of a revenue nature, and on the other hand payment for purchasing a concern which is prima facie an expenditure of a capital nature may as well be spread over a number of years and yet retain its character as a capital expenditure.'
In the case of Anglo-Persian Oil Co. Ltd. v. Dale the words 'enduring benefit' have been interpreted by Romer, L.J., as meaning enduring in the way that fixed capital endures. In the case of Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation Latham, C.J., observed as follows :
'When the words permanent or enduring are used in this connection it is not meant that the advantage which will be obtained will last for ever. The distinction which is drawn is that between more or less recurrent expenses involved in running a business and an expenditure for the benefit of the business as a whole... e.g.,... enlargement of the goodwill of a company-permanent improvement in the material or immaterial assets of the concern.'
In the case of Withers v. Nethersole it was held that the amount paid for the assignment of the copyright was of a capital nature.
All the authorities referred to above point to the conclusion that the character of the payment has to be determined from the document and the surrounding circumstances. Section 105 of the Transfer of Property Act defines a lease of immoveable property as 'a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms.' This definition indicates that the lease is a transfer of certain right in the property in consideration of the price of money paid for the services rendered. The premium is ordinarily the price paid by the lessee for the acquisition of the right of the lessor for a limited period and the rent which is paid annually is for the use of the property, or, in other words, it is a payment made for the services rendered. The lease in question was given in consideration of the sum of Rs. 2,25,000 as and by way of premium and an annual rent of Rs. 54,000. Paragraph 2 of the document sets out the rights which the lessee will get under the lease. Paragraph 4 sets out the mode of the payment of the permium and is as follows :
'4. The said premium of Rs. 2,25,000 (rupees two lakhs twenty-five thousand) shall be paid by the lessee to the lessor by payment of Rs. 22,500 (rupees twenty-two thousand five hundred) in every year during the term hereby granted commencing from the current year. Such annual payment of Rs. 22,500 (rupees twenty-two thousand five hundred) shall be made by the lessee in two equal instalments of Rs. 11,250 (rupees eleven thousand two hundred and fifty) payable on or before the 31st day of January and 31st day of July in each year. Such annual payment towards premium payable in the current and the next subsequent year amounting to Rs. 45,000 (rupees forty-five thousand) only will be paid by the lessee to the lessor on or before the execution of these presents, the next of such annual payment towards the premium will fall due in 1952 and the next half-yearly instalment towards such annual payment shall be made on or before 31st January, 1952, and so on.'
A sum of Rs. 45,000, the amount of the four six-monthly instalments, was paid at the time of the execution of the document and the balance of the premium money was payable in two equal instalments of Rs. 11,250 payable on or before the 31st day of July each year.
Mr. Chaudhury, who appears for the Department, contended that from the perusal of the document it will appear that wherever the amount of premium has been referred to, the amount of rent has been also referred to along with it. All the rights and liabilities in respect of the amount of rent are equally applicable to the amount of premium. It should, therefore, be inferred that the parties made no distinction between the amounts of premium and rent and as such it should be held that the amount of premium was nothing but rent. I do not think that there is any substance in this contention. It may be contended by the other side that as no distinction has been drawn between premium and rent in the document, the amount of rent is also nothing but the price of the right transferred payable in instalments. But that circumstance by itself will not show that the amount of premium was in fact rent paid by the lessee. From the statement of the case it also does not appear that the amount of rent fixed is so low that the amount of premium must necessarily be considered to be a part of the rent agreed to be paid by the lessee.
Mr. Chaudhury referred to the following sentence in paragraph 8 of the lease deed :
'It shall be lawful for the lessor immediately or at any time or times thereafter upon the demised tea estates and premises or any part thereof in the name of the whole to re-enter and thereupon this demise shall absolutely determine but without prejudice to the rights of the lessor to damages or compensation in respect of any breach of lessees covenants herein contained and all other rights and remedies including the right to recover the balance of the instalment unpaid premium or rent payable in that particular year.'
He contends that the words 'payable in that particular year' should also be interpreted to govern the unpaid instalment of premium and if the only right which the lessor had was to recover the unpaid premium of that year, the amount of premium was nothing but rent. He contends that if amount of premium is paid as a consideration for acquisition of certain right, the liability for the payment of premium accrues as soon as the lease is executed and will not depend upon the determination of the lease. As the parties under this paragraph agreed that the unpaid instalment of premium would also be recoverable for that particular year only, it shows that the amount of premium was not the price paid for the assignment of the right but was only a rent. In my opinion the interpretation put by him on clause 8 is not correct. The words 'payable in that particular year' only govern the rent and not the balance of the unpaid instalment of premium. After the execution, the entire amount of premium becomes payable. It is the amount which the lessee pays for the transfer of the right in his favour and thus it is an amount which is paid before the relation-ship of a lessor and a lessee comes into existence and is recoverable irrespective of the question of the determination of the lease. I do not think that there are any curcumstances which go to suggest that the amount of Rs. 2,25,000 payable by six-monthly instalments of Rs. 11,250 was of a revenue nature. In my opinion therefore, the sum of Rs. 11,250 received by the assessee during the year of account is a capital receipt. The question is answered accordingly. The assessee is entitled to his costs, which we assess at Rs. 200.
C. P. SINHA, C.J. - I agree.
Reference answered accordingly.