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TMI Blog1951 (4) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee was paid an immediate amount of ₹ 1,00,000, ₹ 40,000 and ₹ 60,000 for the three "indentures of lease". The annual rent reserved was ₹ 10, ₹ 5 and ₹ 5. In the first case the term of the lease was 11 years, in the second case 10 years and in the third case 15 years. It was stipulated that after the expiry of the period the right of the assessee will be revived in each case and the assessee would be entitled to collect from the original lessees the amount of royalties and rent as before. The amount of ₹ 2,00,000 which the assessee received from the Bengal Discount Co. was taxed by the Income-tax Officer as assessable income. On appeal the Appellate Assistant Commissioner maintained the order of the Income-tax Officer. In second appeal the Appellate Tribunal held that the sum of ₹ 2,00,000 was advance receipt of royalty and was therefore assessable to income-tax. Another question was also debated before the Appellate Tribunal, viz., with regard to the sum of ₹ 84,000 in possession of the assessee on account of the encashment of high denomination notes. On the same date the assessee encashed notes to the extent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Raja Shiva Prasad Singh v. The Crown [1924] I.L.R. 4 Pat. 73 the lease was for a period of 999 years. The amount of salami was ₹ 3 lakhs odd. In Commissioner of Income-tax v. Maharajadhiraj Kumar Visheshwar Singh [1939] 7 I.T.R. 536; I.L.R. 18 Pat. 805 the settlement was made for an indefinite period and the salami was ₹ 1,800 for 4½ bighas of land. Upon the interpretation of the transaction in each case, the High Court held that the salami represented the price for parting with the land and was not advance rent. In Commissioner of Income-tax v. Maharajadhiraj Kumar Visheshwar Singh* Manohar Lall, J., indeed observed that it was impossible to lay down a hard and fast rule that salami can in no case be taxable, and that the question would depend on the facts and circumstances of each case. In the present case, the problem is to determine what is the real nature of the transaction between the assessee and the Bengal Discount Company. It is true that the parties have described the contracts as "indentures of leases", the lump sum payment of ₹ 2 lakhs as "salami" and the small annual payment of ₹ 10 or ₹ 15 as "rent". ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emaining surface land. Clause 5 also states that the assessee was giving notice to Rai Sahib Chandanmal Indrakumar to pay royalty and commission to the Bengal Discount Co. for the period of the lease. The other documents, Exhibits D/2 and D/3, are couched in similar terms. But in Exhibit D/5 there is the important recital that the Raja was not able to pay income-tax and road cess and was in need of further money and on this account was giving the lease in respect of his right created by the registered patta dated 9th March, 1900, from Messrs. Nowagarh Properties Limited. It is manifest that the transaction, though in form a sub-lease was in substance an assignment by the Raja of his right to realise royalties and rents for a term of 10 to 15 years. As consideration for the contract the Raja received a lump sum of ₹ 2 lakhs, which it is plain, is nothing but advance payment of royalty. No other right except the right to collect royalty and rent from the original lessees is transferred by the assessee to the Bengal Discount Co. The assessee has not parted with any interest in the land but has merely assigned his contractual right. Reference may be made in this context to Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee the argument was addressed that income connoted a periodical monetary return, that in the present case the amount of ₹ 2 lakhs being a lump sum payment cannot be classed as income. Reference was made to Income-tax Commissioner v. Shaw, Wallace & Co. [1932] 59 I.A. 206 in which at page 212 Sir George Lowndes observed: "The object of the Indian Act is to tax 'income', a term which it does not define. It is expanded, no doubt, into 'income, profits and gains', but the expansion is more a matter of words than of substance. Income, their Lordships think, in this Act connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something, which is often loosely spoken of as 'capital'. But capital, though possibly the source in the case of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xact definition of that word in the Act. Its applicability may, in particular cases, differ because the circumstances, though similar in some respects, may be different in others. Thus the profit realised on a sale of shares may be capital if the seller is an ordinary investor changing his securities, but in some instances at any rate it may be income if the seller of the shares is an investment or an insurance company. Income is not necessarily the recurrent return from a definite source, though it is generally of that character. Income again may consist of a series of separate receipts, as it generally does in the case of professional earnings. The multiplicity of forms which 'income' may assume is beyond enumeration". On behalf of the assessee the argument was stressed that the payment of ₹ 2 lakhs was made to the assessee in a lump sum and so the amount ought not to be classed as taxable income. But there is no magic in the distinction between a lump sum and a periodical sum and the only material question in the case is what is the true nature of the sum. In Rustproof Metal Window Co. Ltd. v. Inland Revenue Commissioners [1948] 16 I.T.R. Suppl. 57, a patente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The decision was affirmed by the House of Lords who agreed that in the circumstances of the case the lump sum payment did not constitute a capital sum but was royalty paid in respect of the user of the patent and was liable to be taxed. At page 746 Viscount Cave states: "The payment was made in respect of the use of the invention over a period of time. The claim put in was a claim as for royalty in respect of the successive uses of the invention. In the case of patented inventions it was the practice of the Commission, as appears from their Report which has been cited on behalf of the appellant, to take as a basis of their award a fair royalty as between a willing licensor and a willing licensee, and I have little doubt that that basis was accepted in the present case, subject, no doubt, to certain deductions. Lastly, the patent itself, that is the corpus of the patent, was not taken away from the appellant and his partner but still remains in them. In view of all the facts I am satisfied that the sum awarded is to be treated as profits or gains, and annual profits or gains, within the meaning of the Income-tax Act". Viscount Dunedin was also emphatic: "I think, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng nine years. The Crown contended that all these payments were income and the assessee insisted, on the contrary, that all these payments were in the nature of capital receipts. The Special Commissioners decided that the fixed sum of £ 25,000 was capital receipt and the payments of royalty of £ 2,500 were assessable to income-tax. The decision of the Special Commissioners was affirmed by the Court of Appeal. In pronouncing judgment Lord Greene, Master of the Rolls, treated the question whether a lump sum payment was a capital payment or income payment as a question of fact to be determined in the context of each particular case: "It seems to me that in the case of patents, as in the case of any other matters, the fundamental question remains in respect to any particular payment: is it capital or is it income?, and that question has to be decided, as it has to be decided in reference to other subject-matters, upon the particular facts of each case, including in those facts the contractual relationships between the parties. It has been said that the question is one of fact, and it is, when one gets to the bottom of it, an accountancy question. In saying that it is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision and only on such a principle can the decision be reconciled with Mills' case [1929] 14 Tax Cas. 769 and Constantinesco's case [1927] 11 Tax Cas. 730. Reference should be made to Glasson v. Rougier [1944] 26 Tax Cas. 86, in which the assessee, who was admittedly carrying on the vocation of authoress, had entered into three agreements with a publishing company in 1925, 1932 and 1935, respectively, whereby she granted limited publishing rights in respect of three books written by her in consideration of payments based on the number of copies sold. In 1940 these agreements were cancelled and the same limited publishing rights were transferred outright to the publishing company in consideration of a lump sum payment. On appeal against an assessment to income-tax it was contended that the lump sum payment was a capital receipt. Macnaghten, J., rejected the contention, holding that the payment in question formed part of the annual profits and gains of the assessee, and was rightly taxed. My learned brother has referred to the fact that in Salmson Aero Engines' case [1938] 22 Tax Cas. 29: 7 I.T.R. 245, the decision of Lord Greene was also based on the circumstance tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle, I can see no reason why the mere division of the price into those two separate elements should by itself necessarily produce the result that the sum down must be regarded for tax purposes as a capital receipt." It was contended on behalf of the assessee that if the premium in this case is held to be an income receipt it ought to follow as a logical result that the price for an outright sale of the royalties should be classed as income and not as a capital receipt, that such a conclusion was opposed to common sense. But it is not the business of the Court to demarcate the boundary between two categories in a mathematical sense. The indication of the boundary need only be sufficiently distinct for the immediate problem in hand. In this connection reference should be made to Hobbs v. L.&S.W. Railway [1875] L.R. 10 Q.B. 111, in which Lord Blackburn observed of the rule in Hadley v. Baxendale [1854] 9 Exch. 341: "It is a vague rule, and as Bramwell, B., said, it is something like having to draw a line between night and day; there is a great duration of twilight when it is neither night nor day; but on the question now before the Court, though you cannot draw the precise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 10,000 each and the rest of ₹ 1,000 each. The Income-tax Officer had asked the Raja to show any lump sum payment of above ₹ 10,000. The Raja actually showed three such receipts, the first dated 15th March, 1943, for ₹ 25,565, the second dated 10th February, 1945, for ₹ 45,000 and the third dated 24th September, 1945, for ₹ 29,534. The Tribunal remarked that there was no evidence that there was a ₹ 10,000 note in any of these receipts and that the Raja and his employees had not disclosed from whom the notes of the value of ₹ 10,000 each were obtained. In my opinion there is no onus thrown upon the Raja to indicate from whom each note to the value of ₹ 10,000 was received, and no adverse inference ought to have been drawn by the Tribunal against the assessee. In this context reference should be made to Income-tax Commissioner, Bombay Presidency and Aden v. Bombay Trust Corporation [1936] 4 I.T.R. 323; 63 I.A. 408., in which B, a company registered and carrying on business in British India, was assessed to income-tax in respect of the year of assessment 1928-29 as agent of H, a company registered and carrying on business outsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessed by the revenue officer as the assessee's income from undisclosed sources. The findings of the Tribunal on that point are not adequate to lead to an inference that the said sum represented some secret profits of the assessee and was, therefore, taxable as income from undisclosed sources. The assessee had submitted his accounts from which it appeared that the assessee had, during the last seven years from 1346 to 1352 B.S., drawn from his serishta various sums of money representing the income from his estate and had from time to time given back to the serishta according to his requirement certain sums of money, and the difference between the two sums represented a balance of ₹ 1,82,000 and odd which amount would be more than sufficient to cover and explain the sum of ₹ 84,000 representing the value of the high denomination notes. These figures have not been contested by the Department, and in fact they have been accepted by the revenue authorities. The case of the Department, however, is that this amount must have been spent by the assessee in view of the fact that he entered into the transactions with the Bengal Discount Company for the purpose of raising m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the mining rights in the lands from the lessor. The lessee was also given the right to realise rent on account of certain surface rights from the said Rai Sahib, but he had no right whatsoever to the remaining surface lands. The lessee was further placed in the same position as the lessor in regard to the right to realise rents, royalties and commissions from Rai Sahib Chandanmal during the operation of the lease. The document further provided that if during the said period the lessee auction-purchased for arrears of royalties and commissions the interest of Rai Sahib Chandanmal Indrakumar in the lands, then after the expiry of the lease the purchaser lessee would have to pay the rents and royalties as payable by Rai Sahib Chandanmal himself to the lessor. These, in short, are the material terms of the document. It would prima facie appear on the face of the recitals that this lump sum payable under the various leases was payable as salami and was sought to be a distinct payment from the annual payments mentioned therein. There was thus a fundamental difference in the nature of the two classes of sums payable under the leases in question. The former starts off with a lump sum p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al but at the same time continued to be the owner of the lands in question, and he purported to transfer a parcel of this right as owner in favour of the lessee which for the time being was demonstrated by his right to realise rents and royalties. Then again the premium or salami paid cannot be assumed necessarily to be a lump sum payment of the royalty in advance. In that case every premium can be treated as a consolidated amount of the rental paid in advance. It goes without saying that premium or price is always fixed after taking into consideration the amount of annual rent which the lessee is to pay to the lessor, and this ratio of the premium to the annual rent varies almost in each case in the inverse proportion. It is true that the lessee here gets the right to collect the royalty during this period, but then the position is that for the period of the lease the lessor cannot enforce this right as against Rai Sahib Chandanmal, and it is on account of parting with this right that the lessor-assessee has received the consideration of the premium in question. Besides, the royalty actually realisable by the lessee from Rai Sahib Chandanmal from year to year is a variable and an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement there was a "fundamental difference in the nature of the two classes of sums, in this sense, that the former class starts off by being a lump sum payment, definite and fixed, which is then payable by instalments. The other class is not of that description; no lump sum payment is referred to; it is, on the face of it, nothing but an undertaking to pay yearly sums as royalty". It was accordingly held in the case that the lump sum payment of £ 25,000 was a capital receipt not liable to assessment but that the further payments of £ 2,500 were royalties and taxable as income of the assessee. It is true that the case was a decision on its own facts but the facts are very significant. The contract was not a lease but a mere licence and the period for which it was to operate was only a period of ten years, yet the decision about the lump sum payment was to treat it as a capital payment and not income. This decision has been very strongly relied upon by Manohar Lall, J., in Commissioner of Income-tax v. Maharajadhiraj Kumar Visheshwar Singh [1939] I.L.R. 18 Pat. 805; 7 I.T.R. 536, referred to above. The term "income" has nowhere been defined in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the word "income" makes it all the more difficult and elusive and it is not easy to specify and define its various characteristics. There has, therefore, often been considerable embarrassment in drawing a line between what is capital receipt and what is revenue receipt or "income". It was this embarrassment which tempted an eminent Judge to observe that in some cases the matter is so dangerously close to the border-line that it has to be decided, as it were, by the spin of the coin. The cases relied upon on behalf of the taxing department are all cases where the lump sum payment specifically carried the attribute of the periodical payment as income and was definitely identifiable as such. It is true that the Income-tax Act is not cast on logical lines and in some cases the line has to be drawn with an arbitrary firmness. This case appears to me to be very much on the border-line, if not, as I tried to show, on the right side of it. My learned brother is very definitely of the opinion that "the amount of rupees two lakhs which was paid by the Bengal Discount Company to the assessee in consideration of the so-called indentures of lease was a taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X
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