G. N. PRASAD, J. - Under section 66(1) of the Income-tax Act, 1922, the Appellate Tribunal, Patna Bench, has drawn up a statement of the case and formulated the following question of law for determination by the High Court :
"Whether, on the facts and circumstances of this case, the Tribunal was right in holding that the sum of Rs. 2,20,000 was the income of the assessee assessable to tax under the provisions of the Income-tax Act ?"
The original assessee was Maharaja Pratap Udai Nath Sah Deo, the holder of an impartible estate. By an indenture of lease dated the 22nd January, 1944, the assessee granted a lease of certain mining rights to Messrs. Aluminum Production Company Ltd., in respect of 171.03 acres of land for a period of thirty years on, inter alia, the following terms :
Salami (inclusive of Moharkarai and Dewai Negi amounting to Rs. 5,000)
0-8-0 per acre.
0-6-0 per ton.
Rs. 22 per acre.
Previous to this, on the 20th March, 1941, the assessee had granted a prospecting lease of 311 acres of land to the said company for a period of one at a premium or salami of Rs. 100 per acre and royalty of 0-8-0 annas per ton. The question relates to the assessment year 1944-45.
The Income-tax Officer took the view that as the assessee had chosen to take a very large sum by vary of premium and a lower rate in respect of royalty, the premium or salami represented advance payment of royalty which was a revenue receipt and assessable to income-tax as such.
On appeal, the Appellate Assistant Commissioner held that the sum of Rs. 2,20,000 which represented the salami was a capital receipt and was, therefore, not taxable. Against that order, the department preferred an appeal to the Appellate Tribunal which by its order dated the 7th August, 1952, remanded the case to the Appellate Assistant Commissioner for a finding whether there were circumstances to indicate that the salami was really in the nature of an income receipt. In pursuance of this order, the Appellate Assistant Commissioner admitted certain additional evidence on the record and submitted his finding to the Tribunal agreeing with the view of the Income-tax Officer that a major part of the premium of Rs. 2,25,000 was taken in exchange of the royalty that would accrue to the assessee in future years and therefore, it was a taxable revenue receipt.
On receipt of this finding, the Appellate Tribunal recorded its final decision in favour of the department, holding that the sum of Rs. 2,20,000 received by the assessee by way of salami or premium was, in substance, an advance payment of royalty. Accordingly, the Tribunal set aside the order of the Appellate Assistant Commissioner and restored the order of the Income-tax officer. At the instance of the assessee, the present reference has been made by the Appellate Tribunal.
Mr. K. B. N. Singh, appearing on behalf of the assessee has contended before us that the Appellate Tribunal was in error in holding that the sum of Rs. 2,20,000 was a revenue receipt representing an advance payment of royalty. It was urged that it was a payment for the mining rights which the assessee had granted to the lessee for a period of thirty years, and as such it was a payment on capital account which is not taxable. In support of his contention, learned counsel relied upon the following decisions :
Province of Bihar v. Maharaja Pratap Udai Nath Sahi Deo Kamakshya Narain Singh v. Commissioner of Income-tax, Member for the Board of Agricultural Income-tax v. Sindhurani Chaudhurani, Chintamani Saran Nath Sah Deo v. Commissioner of Income-tax and Commissioner of Income-tax v. Panbari Tea Co. Ltd.
The principle of law laid down by a Special Bench of this court in Maharaja Pratap Udai Nath Sahi Deos case was that salami cannot be regarded as income as a matter of law. Salami may in certain cases be regarded as advance payment of rent and in such cases the salami can rightly be regarded as income. But where salami cannot be regarded as payment of rent in advance, it cannot be regarded as income and would, therefore, not be taxable, It was further held by the Special Bench that the onus lies upon the income-tax authorities to show that there do exist facts which would make the salami income. But, upon the facts of that particular case, it had not been shown that the salami received by the assessees constituted part of their income.
In Kamakshya Narain Singhs case the Privy Council drew a distinction between premium and rent in the following terms :
"It (salami) is a single payment made for the acquisition of the right of the lessees to enjoy the benefits granted to them by the lease. That general right may properly be regarded as a capital asset, and the money paid to purchase it may properly be held to be a payment on capital account. But the royalties are on a different footing."
In Sindhuranis case the Supreme Court 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."
In an earlier Bench decision of this court in Commissioner of Income-tax v. Visweshwar Singh it was, however, pointed out by Manohar Lal J. that it is impossible to lay down a hard and fast rule that salami can in no case be taxable, and that the question whether the salami represented a capital receipt or an advance payment of rent would depend upon the facts and the circumstances of that particular case. The same view was reiterated by his Lordship in Commissioner of Income-tax v. Raja Bahadur Kamakshya Narain Singh, where it was laid down that the question whether salami in a particular case is in reality payment of rent in advance or a lump sum payment for transfer of some interest in the property is a question of fact which can only be determined after a full investigation of all facts relating to the settlement by which the salami or nazrana was paid. That this is the correct legal position appears to be clear from the decision of their Lordships of the Supreme Court in Chintamanis case. In that case, it was pointed out that the question as to what receipts are revenue and what are capital has to be decided on the nature of the grant. If the sum is received for the user of capital assets, it is a revenue receipt, but if it is received for the realisation of capital assets, then it is a capital receipt. Applying this test, their Lordships held after consideration of the terms of the convenient in that particular case that the receipts were on capital account and not revenue. The same legal principle was also applied in the case of Panbari Tea Co. Ltd. In that case, their Lordships pointed out the distinction between a price paid for a transfer of a right to enjoy the property and the rent to be paid periodically to the lessor. The former is a capital income and the latter a revenue receipt. Their Lordships pointed out that there may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology, and that in some cases, the so-called premium is in fact advance rent and in others rent is deferred price. Therefore, "It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the court, having regard to the other circumstances, to as certain the intention of the parties." In the light of the aforesaid principles, their Lordships scrutinised the lease deed in that particular case and came to the conclusion that there were no materials on the record, either direct or circumstantial, to displace the description given in the lease deed to the disputed amounts as premium so as to enable their Lordships to hold that they were not in fact premium but only rent.
The principles which emerge from these decisions are, therefore, not in doubt and may be summarised as follows : premium or salami cannot be regarded as income as a matter of law. But there may be cases where the facts and the circumstances may indicate that the salami, though ostensibly a capital receipt, is in truth an advance payment of rent or royalty in whole or in part. In order to determine as to whether the salami has or has not an element of revenue receipt in the shape of advance payment of royalty or rent, the true nature of the grant has to be looked into and an enquiry has to made as to whether there are any materials on the record, either direct or circumstantial, to displace the description given in the lease deed to the amount in dispute as salami and premium. If there are such materials available on the record, then it is open to the taxing authorities to go into the true nature of the receipt and to hold that it has the character of a revenue receipt, being an advance payment of royalty or rent. Of course, the onus lies upon the taxing authorities to show that there do exist facts and circumstances which justify the conclusion that salami, which, prima facie, is a capital receipt, is reality a revenue receipt, in whole or in part. It would not be correct to say that salami is a capital receipt merely because it has been described today that salami is capital receipt merely because it has been described as such in the lease deed. It must follow that the taxing authorities in the case were justified in scrutinising the terms of the lease dated wind January, 1944, granted by the assessee to the Aluminium Production Company and also to take into consideration other facts and circumstances relevant to the question as to be the true character of the sum of Rs. 2,20,000 mentioned as salami in the indenture of lease.
The Income-tax Officer has given an elaborate consideration to the relevant terms of the lease dated the 22nd January, 1944, in the light of certain other transaction entered into by the assessee in regard to mining rights. He has referred to the prospecting lease dated the 20th March, 1941, which had been granted by the assessee to the same lessee company, namely, Aluminium Production Company, for a period of one year in respect of bauxite in an area of 300 acres. In the prospecting lease, the salami was stipulated to be Rs. 100 per acre and the royalty was 0-8-0 annas per ton. The Income-tax Officer has calculated that in the lease of the 22nd January, 1944, the salami has been raised from Rs. 100 per acre to Rs. 1,284 per acre, whereas the raising royalty has been lowered from 0-8-0 annas to 0-6-0 annas per ton. The Income-tax Officer has also compared the terms of the lease dated the 22nd January, 1944, with the terms of four other leases granted by the assessee in respect of mining rights in different years between 1933 and 1945. Each of these four leases was for a period of thirty years. Two of them was in favour of Aluminium Corporation Ltd., one in favour of Laterite Syndicate Ltd. and another in favour of one Dharamchand Saraogi. The relevant terms of these four leases were as follows :
Name of the lessee with year of grant.Area. Acre-Dec
Raising royalty per ton.
Rs. As. Ps.
1. Laterite Syndicate Ltd.,
0 8 0 1938.
2. Dharamchand Saraogi Ltd., 1933.
0 9 0
3. Aluminium Corporation Ltd., 1938.
0 8 0
4. Aluminium Corporation per acre. Ltd., 1945.
0 12 0
The Income-tax Officer noticed that in the case of all those other leases the royalty varied between 8 annas to 12 annas per ton and the salami or premium varied from Rs. 100 to Rs. 130 per ton, whereas under the lease of the 22nd January, 1944, the raising royalty per ton had been reduced to 6 annas per ton while the salami or premium had been raised to Rs. 1,284 per acre. It was mainly in the light of these materials that the Income-tax Officer came to the conclusion that the sum of Rs. 2,20,000 which had been mentioned as salami in the lease in question was nothing but receipt in advance of the expected royalty income from this source, and on that footing he has taxed the entire amount of Rs. 2,20,000.
Mr. K. B. N. Singh has urged that the Income-tax Officer or the Tribunal was not justified in comparing the terms of the 1944 lease with those of the prospecting lease of 1941 which was for a period of one year only, because though they were in favour of the same lessee, the two transactions were not continuous, inasmuch as the lease of 1944 was taken by the Aluminium Production Company Ltd., nearly two years after the expire of one year stipulated for the purpose in the prospecting lease of March, 1941. There is no force in this connection. The two transactions might not have been continuous but they were undoubtedly related. A considerable portion of the land covered by both the leases was common. Evidently, as the Appellate Assistant Commissioner has pointed out in his remand report, the lessee, after doing some prospecting, had exercised its choice to take a regular mining lease in respect of such plots which appeared to it to contain rich bauxite. By way of example, the Appellate Assistant Commissioner has pointed out that out of plot No. 29 of village Hisri, only 3.05 acres where taken for prospecting, but in the final lease an area of 35.30 acres was included. In village Bhusar, the company had taken prospecting lease of 54.56 acres and the whole of this area was taken by the final lease. The Appellate Assistant Commissioner has rightly repelled the argument put forward before him that the fact that some new plots were included in the second lease went against his contention rather than in his favour. In this context the taxing authorities were naturally impressed with the circumstance that the raising royalty which was 8 annas per ton in the prospecting lease had been reduced to 6 annas per ton in the subsequent mining lease, and it was held that a part of the future royalty was capitalised and included in the salami. On behalf of the assessee no reasonable explanation has been furnished as to why the royalty was reduced to 6 annas per ton in the 1944 lease. A suggestion was made by Mr. K. B. N. Singh that the reason for this reduction might have been that the 1944 lease was in respect of bauxite which is a mineral of a superior kind as well as of aluminious laterite which is a mineral of an inferior quality, whereas the prospecting lease was in respect of bauxite only, and that might have been the reason for reducing the royalty by 2 annas per ton in the 1944 lease. This very argument was also advanced on behalf of the assessee before the Tribunal and it was rejected with the following observation.
"In view of the fact that major portion of the area that is covered in the new lease was in the older lease and as in the course of producing the bauxite, laterite also becomes available we do not see any justification for the assessee agreeing to take a lesser amount by way of royalty."
In my opinion, the view taken by the Tribunal cannot be said to be unreasonable or perverse. The Tribunal has found that out of the area of 171 acres that was covered by the 1944 lease, an area of about 140 acres was included in the earlier lease of 1941. It was also contended by Mr. Singh that the amount of royalty agreed upon was a matter of bargain between the lessor and lessee and, therefore, merely because a reduction was made in the royalty in the 1944 lease, it would not necessarily follow that a part of the future royalty had been capitalised and included in the premium. This contention also is entirely without force. It will be noticed from the chart which I have given in paragraph 12 of this judgment that in the very next year (1945), the assessee had granted a mining lease to the Aluminium Corporation Ltd., whereby the rising royalty had been fixed at 0-12-0 annas per ton. It has not been shown that there were any exceptional circumstances on account of which the assessee has agreed to accept the raising royalty of 0-6-0 annas per ton under the 1944 lease. Therefore, the taxing authorities and the Tribunal had ample material for coming to the conclusion that a part of the royalty had been capitalised and included within the salami which, on that account had been considerably raised to Rs. 1,284 per acre as against the average amount of Rs. 100 to Rs. 130 per acre. In other words, a considerable portion of the salami received by the assessee was in substance an advance payment of royalty.
Mr. K. B. N. Singh tried to justify the increase in the amount of the salami with reference to the fact that Messrs. Laterite Syndicate Ltd., who had taken a lease from the assessee in 1938 for a term of thirty years (item No. 1 of the chart in paragraph 12 of this Judgment), had assigned their rights to this very lessee, namely, Aluminium Production Company Ltd., on the 20th August, 1941, for a consideration of Rs. 2,75,000. It was urged that in this context the assessee might have thought that the mining rights were of such considerable value that the lessee, the Aluminium Production Company Ltd., would agree to offer to him a larger amount by way of salami. There would have been some force in this contention if this factor had stood by itself. But had this been a reason for taking a larger salami, then there would not have been a simultaneous reduction in the amount of the raising royalty. It is to be noticed that even in the 1938 lease granted to Messrs. Laterite Syndicate Ltd., the raising royalty fixed was 0-8-0 annas per ton. Therefore, the two factors, namely, the increase in the amount of the salami and a simultaneous reduction in the raising royalty, which are the characteristics of the 1944 lease, appear to me to amply justify the conclusion of the taxing authorities and the Tribunal that a part of the future royalty was capitalised and included in the salami.
In this connection I would also refer to the remand report of the Appellate Assistant Commissioner which shows that a report was called for from the Mines Superintendent which showed that the area included in the 1944 lease contained commercial grade bauxite of about 13,00,000 tons. The Appellate Assistant Commissioner has calculated that on the basis of the estimated reserve of 13,00,000 tons of bauxite under the 1941 lease, the assessee would have realised Rs. 17,230 by way of premium and Rs. 6,50,000 on account of royalty. But under the terms of the 1944 lease, the amounts receivable by the assessee work out as under :
Salami (inclusive of Moharkarai and Dewani Negi)
Royalty at the rate of 0-6-0 annas per ton
From this calculation also, it is clear, as pointed out by the Appellate Assistant Commissioner, that "the major part of the premium of Rs. 2,25,000 has been taken in exchange of the royalty that would accrue in future years."
From the aforesaid discussions it is abundantly clear that the taxing authorities and the Tribunal had before them ample facts and circumstances to come to the conclusion that the sum of Rs. 2,20,000 was not entirely a payment on capital account, but that a considerable portion of it was the capitalised value of future royalty which undoubtedly was a revenue receipt and assessable to tax as such. I am, however, unable to endorse the conclusion of the taxing authorities and the Tribunal that the whole of the amount of Rs. 2,20,000 was in the nature of revenue receipt. Some part of it undoubtedly was by way of price paid for the transfer of the right to enjoy the property, though the major part was on account of advance payment of royalty. On the basis of the four other lessees mentioned in paragraph 12 of this judgment, it would be reasonable to conclude that the amount of capital receipt included within the sum of Rs. 2,20,000 was in the neighbourhood of Rs. 20,000. The actual amount of salami for 171 acres at the rate of Rs. 100 per acre works out at Rs. 17,100. But Mr. Tarkeshwar Prasad, appearing on behalf of the Commissioner of Income-tax, has conceded before us that the amount of salami which would be a capital receipt may reasonably be estimated at the round sum of Rs. 20,000. This sum of Rs. 20,000 being in the nature of capital receipt is obviously not assessable to tax. The remaining sum of Rs. 2,00,000 is, however, a revenue receipt and taxable as such. Having regard to this consideration, it becomes necessary to reframe the question of law which has been referred by the Tribunal to this court. I would, therefore, reframe the question in the following terms :
"Whether, on the facts and in the circumstances of this case, the Tribunal was right in holding that the sum of Rs. 2,20,000 or any portion thereof was the income of the assessee assessable to tax under the provisions of the Income-tax Ac ?"
And having reframed the question, I would answer it as follows :
On the facts and in the circumstances of this case, a sum of Rs. 20,000 included within the disputed sum of Rs. 2,20,000 was a payment on capital account and as such not assessable to income-tax, whereas the remaining sum of Rs. 2,00,000 was a revenue receipt of the assessee and assessable to income-tax as such.
In the result, the question referred to this court is answered partly in favour of the assessee but substantially in favour of the department. Since the assessee has substantially failed, he must pay the costs of this reference to the Commissioner of Income-tax; hearing fee Rs. 250.
UNTWALIA J., -
I entirely agree.