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TMI Blog1949 (3) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... x) of four annas for every ton of coal raised. Messrs. Choonilal Manilal purchased these rights in order to float the assessee company, and in the Articles of Association of the company the consideration agreed upon to be paid to Goverdhandas was set out in the following manner. Goverdhandas was to get in respect of the consideration for shares of the value of ₹ 25,000500 preference shares of ₹ 50 each and the dividend on these preference shares was to be a fixed cumulative preferential dividend equivalent to four annas per ton of coal (whether coal was of steam, rubble or slack but not shale) raised and raised and relied in each year. When this draft Articles of Association were sent to Goverdhandas forhis approval, he approved the draft and wrote a letter dated the 24th October, 1939m where he drew pointed attention to what was the real nature of the transaction between himself and Messrs. Choonilal Manilal Limited. He pointed out that all that all that he was anxious to secure was that he should get annas four per ton permanently on all coals dispatched from the colliery every year, without any hindrance whatsoever, irrespective of any loss or gain to the company. Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence shares to Goverdhandas, a fresh agreement was entered into on the 6th of March, 1941, an the effect of this agreement was this : that two important alterations were made in the consideration fixed for the purchase of Goverdhandas' undertaking by the assessee company. Goverdhandas agreed to give up all the dividends to which he was entitled on these preference shares up to the date of the agreement, namely, 6th of March, 1941, and he also agreed to permit the preference shares which he held to be converted into ordinary shares; and in consideration of this, the company agreed to pay commission to Goverdhandas, with retrospective effect from the 22nd October, 1939, at the rate of four annas per ton of steam and rubble coal and three annas per ton of slack coal raised form Kolhia Colliery and sold and rented by the company from the colliery. pursuant to this agreement, the assessee company paid a sum of ₹ 7,469 in respect of the account year 1940 and ₹ 9,849 in respect of the account year 1941. In this reference we are concerned with the sum of ₹ 9,849 paid by the assessee company to Goverdhandas is a capital sum or expenditure. The Tribunal took the view t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ump sum or it may be payable by instalments. The mare fact that a capital sum is payable by instalments spread over a certain length of time will not convert the nature of that payment from a capital expenditure into a revenue expenditure; but the payment of instalments would always have some relationship to the actual price fixed for the sale of the particular undertaking. Now, in this case the most significant and outstanding fact is that apart from the sum of a lakh of rupees, no specific sum is fixed as being added to the price of ₹ 1,00,000 and payable by instalments or by a particular mode or by a particular mode or method. Therefore, we are left this position that the parties merely fixed the sum of ₹ 1,00,000 as the specific price of the sale under the agreement and the parties also agreed that an indefinite sum for an indefinite period should be paid by the purchaser to the vendor so long as the collieries were in a working condition. Now, on these facts the question arises whether the payment of commission every year by the assessee company to the purchaser is in the nature of a capital expenditure or in the nature of a revenue expenditure. Various cases ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration certain minutes which were extraneous to the documents in order to ascertain what was the real nature of the transaction between the parties; and in coming to the conclusion that the payment made by the assessee company in respect of the sum of 1 shilling for each bicycle and 1 in respect of a mechanically propelled bicycle was not in the nature of a capital expenditure but was a revenue expenditure. Lord Greene dissects the contract and says that it is divisible in two parts. He says that it is a sale of assets for a purchase price built up by two groups of elements, one group quite obviously of a capital nature and the other group of a periodical nature; and then dealing with the second element, he first emphasised the fact that payment are to be made in perpetuity, and the learned Master of the Rolls expressed his difficulty to class under the category of capital s perpetual payment. The next element to considers is that the payments in respect of the second group are related to the turnover and the sums are not fixed in reference to costs; and the last point that the learned Master of the Rolls observed is that the sums payable which vary under that rule are not tied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received as salami and royalty did not constitute income but were capital receipts representing the price of the minerals removed. The Privy Council held that the minimum royalty being a species of annual guarantee was income flowing form the covenants in the lease and was in no sense a payment on capital account; and it further held that it was fallacious to envisage the royalty payable every year under the terms of the lease as merely the price of the actual tons of coal. The Privy Council further held that it was more of a compensation which the lessees paid the lessor for that species of occupation which the contract between them allowed and it was, therefore, income from other sources within the meaning of Section 12 of the act. Of course it is to be noted that in this case the Privy Council was looking at the matter from the point of view of the vendor and not from the point of view of the purchaser, and what was held was that a royalty received by the vendor of his mining rights was income in his hands and not capital. We are rather concerned in this case to consider what the nature of the payment is when the purchaser pays to the vendor a commission which may be likened to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that seems to have been one factor which led the Privy Council to the conclusion that in this particular agreement what was received by the assessee was not royalty in the sense in which royalty is ordinarily understood where certain cash is paid on the basis of production. The second aspect of the case is that their Lordships themselves frankly admit that the case they were deciding was not without its difficulties, and they were really affirming the unanimous decision of the Supreme Court of Canada; and finally, as I have pointed out with regard to the earlier royalty cases, the Privy Council was considering not whether the delivery of 10 per cent. of oil by the company to the assessee was capital or revenue expenditure as far as the company was concerned but whether it was capital or revenue income in the hand of the assessee. There may easily be cases where, although in the hands of the vendor a particular receipt may be capital receipt yet qua the purchaser it may be a revenue expenditure. It is also important to note that this case was relied upon by the Patna High Court in the case reported in Commissioner of Income-tax v. Gopal Saran Narain Singh, (1934) 2 ITR 264; ..... X X X X Extracts X X X X X X X X Extracts X X X X
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