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TMI Blog1966 (8) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of the amount received by the assessee under the two documents dated February 21, 1950, and November 20, 1956. The question is whether in the hands of the assessee it is a capital receipt or revenue receipt. The facts of the case may be shortly stated: One Nagasuri Veeraraghavaiah, son of Raghavulu Chetty, took lease of a mica mine at Cherambodi from the Government of Madras and the registered owners of the lands, the Malayalam Plantations Ltd., for a period of 20 years with effect from May 30, 1945, on payment of a sum of Rs. 60,000. He along with two others formed a partnership firm and worked the mine, under the name and style of Messrs. Nilgiri Mica Mining Company, for a few years. The firm does not appear to have fared well, and was subsequently dissolved. The lessee thereafter on February 21, 1950, entered into an agreement with Jajodias Ltd., purporting to assign his rights, as the mineral owner and lessee, obtained by him under the document of 30th day of May, 1945, for a period of 12 years for a consideration of Rs. 60,000. This amount was, as per the terms of the agreement, to be paid in three short equal instalments : Rs. 20,000 were to be paid on the date of exec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eraraghavaiah informed the Income-tax Officer on November 15, 1950, that he leased out his mines to Messrs. Jajodias Ltd. It appears that no returns were submitted presumably on the basis that there was no taxable income of the assessee within the territorial limits of the Income-tax Officer. In 1952 also he sent a letter dated September 5, 1952, to the Income-tax Officer to the same effect. Similarly, he informed on February 16, 1953, that he had no business or income for the year 1952-53. Thereafter Veeraraghavaiah died on November 27, 1954. The Income-tax Officer so far did not demand the details of the lease amount. It was in June, 1955, after the death of Veeraraghavaiah that he wrote a letter enquiring as to the annual lease amount for which the mining rights were leased. N. Raghaveswara Rao sent his reply on June 13, 1956, that it was leased for 12 years for a sum of Rs. 60,000, i.e., Rs. 5,000 per year and the whole amount was paid at the beginning of the agreement. The Income-tax Officer thereupon issued notices for the assessment years 1950-51 and 1951-52, one in the name of Raghaveswara Rao as the karta and the other in his name as the son and heir of Veeraraghavaiah. Ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x have escaped assessment for any year, or have been under-assessed, or assessed at too low a rate, or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed, he may, in cases falling under clause (a) at any time and in cases falling under clause (b) at any time within four years of the end of that year, serve on the assessee, or, if the assessee is a company, on the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 22 and may proceed to assess or reassess such income, profits or gains or recompute the loss or depreciation allowance ; and the provisions of this Act, shall, as far as may be, apply accordingly as if the notice were a notice issued under that sub-section. It is manifest that section (1)(a) would be attracted only when the income had escaped assessment or full assessment by reason of the omission or failure on the part of the assessee either to make a return of his income under section 22 for the concerned year or to disclose fully and truly all material facts necessary for the assessment for that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce there is no business or income for me in your area. I request that my name may be deleted from your list of assessees." Then again he sent a letter on September 3, 1952, to the Income-tax Officer wherein he said: I already informed you on November 15, 1950, by registered post that I leased out my mines to M/s. Jajodias Ltd., Cherambadi, head Office 40/42, Mookar Nallamuthu Chetty Street, Madras-1, on February 21, 1950. I am the proprietor for the Nilagiri Mica Mining Company. My address is " N. Veeraraghavaiah, Mica Miner, Nilagiri Mica Mining Company, Kavali, Nellore District ". I was assessed in the office of the Nellore Income-tax Officer. My head office is at Kavali in Nellore District. Now I have not any business in Cherambadi or in Kavali...." On February 16, 1953, he sent a letter to the Additional Income-tax Officer, Nellore, informing him of the sub-lease that he made to Messrs. Jajodias Ltd., and made it clear that he had already intimated the Income-tax Officer, Ootacamund, on November 15, 1952, by registered post and that he had no business and no income. He further enclosed his profit and loss statement to the said Income-tax Officer. Admittedly, the inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax Act. Section 34(1)(a) is express and explicit. Omission on the part of the assessee to make a return of the income would justify the Income-tax Officer to take proceedings under section 34(1) provided he has reason to believe that the income, profits or gains had escaped assessment or under-assessed, etc., thereby. Therefore, the first question must be answered in the affirmative. Then we advert to the next question which is of great moment. The question is whether the amounts received under the documents dated February 21, 1950, and November 20, 1956, are in the hands of the assessee capital receipts or income. If it is capital, it is not liable to tax. The case would be different if it is income in view of what section 3 enjoins. The term "income" has nowhere been defined in the Income-tax Act, nor is, the term " capital ". However, the Judicial Committee in the case of Shaw Wallace Co. has attempted to define the term "income " and referred to the word " capital " in that connection in the following words : 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50, and the other of November 29, 1956, and the covenants in both are substantially the same. We have already noticed that one N. Veeraraghavaiah had obtained lease of a mica mine from Messrs. Malayalam Plantations Ltd., and the Government for carrying on mining operations for a period of 20 years. He was a businessman and the mica mine was intended to be one of the sources of his income. He planned first to work the mine himself by forming a partnership firm consisting of himself (Veeraraghavaiah), G. Malakondiah and P. Singiah under the name and style of Nilgiri Mica Mining Company, he having 12 annas share and the two others having 2 annas share each. Probably, resort to this method of exploitation did not yield appreciable profits or that there might have arisen some differences among the partners are long. Thereafter, Veeraraghavaiah did not choose to press forward and the partnership firm was dissolved. He then thought of an alternative method of exploitation which would ensure for him a dividend or income certain. He sub-leased the mine to Messrs. Jajodias (Private) Limited on agreement to pay a sum of Rs. 60,000 for a period of 12 years. The agreement dated February 21, 195 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ormed by the lessee under the document of 30th May, 1945, and they should pay the royalties payable to the Government, according to the scheduled rates, and shall abide by the rules laid down by the Government or the local bodies for working the mines and removing minerals. Whereas paragraph 1 speaks of assignment of all the rights possessed by the lessee as mineral owner and all rights granted to him under the lease, paragraph 5 contains stipulations that the mineral owner shall keep his rights as pattadar and mineral owner alive and in full force and effect during the subsistence of the said agreement and these stipulations shall bind his heirs and legal and personal representatives. Paragraph 6 says that, to the extent necessary for working the mines effectively, the mineral owner and lessee shall constitute the sub-lessee to be his agent or attorney to represent him in regard to dealings with the registered holder, Malayalam Plantations Ltd., and the Government of Madras. Paragraph 7 relates to the fixtures, fittings and all mining equipment, implements, tools and other materials. Paragraph 8 reads thus : "The sub-lessees shall have an option of renewing the mining lease for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the work of mining may be effectively carried on. The term sub-lessee used to denote Jajodias Ltd., also indicates that the parties treated the transaction as a sub-lease. Then again, though the consideration paid is shown as premium it is, in reality, consolidated rent for 12 years paid in advance. The words " enhanced premium calculated at Rs. 1,000 year " used in clause (8) of the document must give clue to the true intention of the parties that what they had fixed as consideration payable in three instalments as provided in paragraph 1 was in fact the advanced payment of rent of 12 years calculated at Rs. 5,000 per year. All these salient features of the transaction which bear the impress of a transaction of sub-lease leave no room for doubt that it is not a transaction of sale of the capital asset or of totality of interests of the assessee in the land or mineral wealth. We shall have to deal with this aspect and also with the nature of payment at greater length in the later parts of this judgment. For the present, suffice it to notice that this mine was a capital asset in the hands of Veeraraghavaiah as he took it for purposes of profit making business. He exploited the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accountancy point of view and accordingly a decision has to be reached as to the character of the payment. We may with advantage refer here to the principle stated by Lord Green M.R. in Commissioners of Inland Revenue v. 36/49, Holdings Ltd., which is in the following terms : "The true nature of the sum is not necessarily its nature in law, but its nature in business or in accountancy whichever 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 relationships 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. That is why I say that I personally find very little assistance from examining the circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rowlatt J. in Jones v. Commissioners of Inland Revenue, has said: " A man may sell his property for a sum which is to be paid in instalments, and when that is the case the payments to him are not income :....Or a man may sell his property for an annuity. In that case the Income-Tax Act applies. Again, a man may sell his property for what looks like an annuity but which can be seen to be not a transmutation of a principal sum into an annuity but is in fact a principal sum payment of which is being spread over a period and is being paid with interest calculated in a way familiar to actuaries--in such a case income-tax is not payable on what is really capital :....On the other hand, a man may sell his property nakedly for a share of the profits of the business. In that case the share of the profits of the business would be the price, but it would bear the character of income in the vendor's hands." Thus in short, if the character of payment has to be ascertained it has to be from the nature of the transaction as determined from the document and if necessary from the surrounding circumstances and all this from business or accountancy point of view for that is the main concern of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... btaining income with the help of that asset ? If the answer to the last part of the question is in the affirmative, it cannot but be said that the payment of Rs. 60,000 which was paid in instalments, even it it had been paid in lump sum, would be income in the hands of the lessee. In this connection we may also refer to the letter dated June 13, 1956, sent by the son of the lessee, which reads thus : " My father, late Sri N. Veeraraghavaiah, sub-leased the mica mines at Cherambadi, Nilgiris District, to Messrs. Jajodias Ltd., under registered document dated February 21, 1950, for Rs. 60,000 (rupees sixty thousand) for 12 years, that is, Rs. 5,000 per year. The whole amount was paid at the beginning of the agreement." Even Jajodias Ltd., in their letter dated January 5, 1958, stated that the sum of Rs. 60,000 paid for 12 years is adjustable at the rate of Rs. 5,000 and has been so adjusted in the books. That again gives a clue to the nature of the transaction that, even though the sums were paid in lumpsum, they represented the consolidated sum by way of compensation or rent which the sub-lessee paid to the lessee for the use and occupation as provided by the contract between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when earned, precarious, as depending on the health of the earner." If, therefore, the payment of Rs. 60,000 for 12 years in the hands of the assessee-lessee is nothing but a consolidated amount of advance rent for 12 years, it is liable to tax being an income. What is contended for on behalf of the assessee is that it is not rent but a premium or a " salami ", being the price of the capital asset, hence not income. The distinction between " premium " and " rent " has been brought out in several decisions of the Privy Council and the Supreme Court. In Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income-tax, the Judicial Committee said thus : " 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. " In Member for the Board of Agricultural Income-tax, Assam v. Sindhurani Chaudhurani, Kapur J., who delivered the judgment of the Supreme Court, observed thus : " The payments by way of salami were made by the prospective less ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intended to be such. The subsequent conduct of the parties also shows that it was treated as such. In the circumstances of the case, it cannot be said that the assessee resorted to this transaction as a means of realising the asset. In that case the transaction would have been different and the totality of his interests would have been wiped out. It was not at all a sale of capital asset. The payment received by him for the use and occupation of the asset for the period fixed was intended to be rent. It was paid in lump sum, the rate being Rs. 5,000 per year, as it is implicit in the terms of the document itself. It is therefore " income ". Much reliance has been placed on the decision of this court in Rajendra Mining Syndicate v. Commissioner of Income-tax, and the judgment of the Supreme Court in Pingle Industries Ltd. v. Commissioner of Income-tax. The facts in the first mentioned case make it abundantly clear that it was out and out a sale of the capital asset. There, the assessee, Messrs. Rajendra Mining Syndicate, Guntur, a registered firm having three mining leases and one prospecting licence for varying terms for certain plots in the Kondapalli Reserve Forest area, enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aken not to allow any other person to excavate stones in those areas. There was also another similar lease taken from the Government for a period of five years under which the appellant had to pay Rs. 9,000 per year in monthly instalments of Rs. 750 each. The question was whether the amounts paid by the assessee to the jagirdar and the Government each year, were revenue expenditure allowable under section 12(2)(xv) of the Hyderabad Income-tax Act corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922. It was held that the stones in the site were not his stock-in-trade in a business sense but a capital asset from which after extraction he converted the stones into his stock-in-trade. The payment was neither rent nor royalty, but a lump payment in instalments for acquiring a capital asset of enduring benefit to his trade. The amounts were outgoings on capital account and were not allowable deductions. The facts of this case are also different from the facts of the case with which we are concerned. What was acquired by the lessee was a capital asset and the expenses incurred for acquiring the same could not be an expenditure on capital of enduring character. The resul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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