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TMI Blog1955 (12) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... and for the purposes of such businesses to acquire rights and concessions pertaining to limestone, coal and surface lands from the Dewarkhand Karanpura Mines and Industries Limited. Among the other objects which I need mention here was one to work mines or quarries and to find, win, get, work, etc. or otherwise deal with clay and bauxite. The statement of the case says that the business of the company is to manufacture limestone which is not easy to understand, but there can be no question that the company is a manufacturing and trading concern, producing and dealing with lime, coal and mineral substances of various kinds. The rights and concessions of the Dewarkhand Karanpura Mines and Industries Ltd. which, for brevity's sake, I shall hereafter call the Karanpura Company, were such rights and concessions under three deeds, all executed on the 29th November, 1930. It appears that, on that date, the Karanpura Company acquired a mining lease which has been called the Limestone Lease from one Maharaja Pertap Narain Udai Nath Shah Deo in respect of limestone beds in certain villages in Dewarkhand with the rights, privileges and liberties mentioned in the relevant deed. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ext document, on the construction of which the answer to the question debated before us depends. On the 7th May, 1935, the assessee executed a deed in favour of a company called the Dewarkhand Cement Company Ltd., the Kararpura Company joining the assessee as a confirming party, and by that deed the assessee transferred to the Dewarkhand Cement Company Ltd., its rights and privileges under all the leases and agreements which I have already recited. Thus, the subject-matter of the transfer was four leases and two agreements, namely, the Limestone Lease of the 20th November, 1930, the two surface leases of the same date, the Umedanda Lease of the 30th September, 1934, and the Bauxite Option and the Tori Option agreements of the same date. The benefit of the agreements for the reduction of the royalty payable under the limestone lease and for an extension of the period of that lease was also transferred. The transfers of the leases and agreements were for the unexpired period with all the rights, liberties and obligations attached thereto. It appears that some time later, on the 21st June, 1935, to be precise, the transaction was approved of and accepted by the original lessor, the Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he did not desire to press the question. Nothing further need therefore be said about it. The other receipt was of a sum of ₹ 77,820 which the Associated Cement Co. had paid to the assessee company under the first of the purchasers' covenants, providing for a payment of 13 annas per ton of cement manufactured from the limestone obtained from the lands and sold. The assessee contended that the receipt was of a capital nature and therefore not liable to tax, but it was concurrently held by the Income- tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal that the receipt was an income receipt. The assessee was not prepared to accept that decision and asked for a reference to this Court. The question which has been referred reads as follows: Whether on a proper construction of the deed of assignment dated 7th May, 1935, and on the facts and in the circumstances of this case, the Tribunal was right in holding that the sum of ₹ 77,820 represented a receipt of a revenue nature in the hands of the applicant and assessable as such? The assessee's contention before the Tribunal was that the transaction of the 7th May, 1935, was a sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and consequently is not comparable. Besides these references to the character of the transaction which seem to me to contain an assumption rather than a decision, we derive no assistance from either the appellate order or the statement of the case as to the grounds on which the Tribunal regarded the transaction as partaking of the nature of a lease. I may add that not only has the Tribunal not given any reason in support of its view, but both parties agreed that the statement of facts given by it, both in paragraph 8 of the appellate order and paragraph 6 of the statement of the case, was utterly confused. Before us, Dr. Pal conceded that if the transaction of the 7th May, 1935, could be said to be a lease, his client would be out of Court at once, because the amount received by it would come directly within the principle of the decision in Kamakshya Narain Singh v. Commissioner of Income-tax, Bihar and Orissa [1943] 11 I.T.R. 513. His first task, therefore, he submitted, would be to establish that the transaction was not a lease. Dr. Pal proceeded to submit that after excluding a lease and discharging the negative burden, he would proceed to establish his positive case and try ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he second covenant, the purchaser undertakes not to sell any fluxstone won by it from the lands concerned to the Tata Iron and Steel Co. Ltd. at a price less than Re. 1-14-0 per ton f. o. r. By the third, it covenants to pay to the vendor one-half of the profit, if any, which it shall make by selling fluxstone to the Tata Iron and Steel Co. Ltd., or to any other person. The fourth, again, is a restrictive covenant by which the purchaser undertakes not to grant the Tata Iron and Steel Co. Ltd. any right to quarry and remove fluxstone from the lands concerned at a royalty of less than ten annas per ton. The latter part of the covenant is of an affirmative character and thereby the purchaser undertakes to pay the vendor one-half of any royalty which it may receive from the Tata Iron and Steel Co. Ltd. Then follows a covenant securing certain minimum payments to the vendor. The fifth convenant is to the effect that if, in any year, the payments under the first, third and fourth covenants fall short of the graduated minima thereinafter set out, the purchaser shall pay, in lieu of payments provided for by those clauses, certain minimum sums. Such sums are, during the first year to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merely assuring all concerned that the leases or grants in which it was interested are still in full force, unforfeited and unsurrendered. The document ends with the recital of an option given to the purchaser and it says that if the limestone within the areas comprised in the leases transferred by the document is exhausted, the purchaser will be entitled to determine this indenture on giving to the vendor six months' notice in writing, in which case the purchaser, if so required, will retransfer the leases and agreements aforesaid . The very last recital in the deed is not material, for it merely charges the payments under the first, third and fourth of the purchaser's covenants as security for a certain advance of ₹ 1,25,000 which the purchaser appears to have made to the vendor. As regards the nature of the transaction, the only provision in the document, round which the argument before us mainly turned, was the provision by which an option is given to the purchaser to determine the indenture. It was said that one determined a lease, but determination of a sale was unknown. Dr. Pal admitted that the language used in the document was certainly not very happy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asehold rights were immovable property. The next step of his reasoning was that the restraints had been imposed for the purpose of securing the beneficial enjoyment of the immovable property which the vendor had in the very same lands and, accordingly, they were both valid and consistent with an absolute transfer of the subject-matter of the six leases and agreements. In my view, the immovable property contemplated by the second paragraph of section 11 of the Transfer of Property Act can hardly be said to be an incorporeal right as contended for by Dr. Pal and I do not think that the difficulty of construing the transaction as an out and out sale was adequately met by the explanation offered by him. Nevertheless, I find it extremely difficult to hold that the transaction amounted to a lease. It purports to be an assignment and uses words appropriate to a transaction of that character. The provision for determination undoubtedly suggests that it might be a lease, but in view of the other clauses in the other provisions in the document and the explanation offered by Dr. Pal, I do not think that the provision is a decisive indication that the transaction is a lease. At the same tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd decide the ultimate character of the transaction in law. Certain principles have now come to be regarded as fundamental. They were first summarised in a convenient form in the, decision of Rowlatt, J., in the case of Jones v. Commissioners of Inland Revenue [1920] 1 K.B. 711 and although that decision is not the first in point of time, it is generally regarded as the root authority from which all subsequent statements of the law have mainly sprung. In that decision the principles were thus stated: 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 profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 other cases. In some of them a particular feature has appeared which the Court has regarded as turning the scale one way or another. In other cases, that feature may have been absent, but another feature was present and so on. Nothing can be more misleading than to take cases previously decided on the basis of the presence of a particular factor and to argue from that that the cases where that factor is absent ought to be decided the other way. To those words of caution may be added the words of Romer, L.J., in the case of Commissioners of Inland Revenue v. Ramsay [1935] 20 Tax Cas. 79 at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between a case where there was an agreement for good consideration to pay a fixed gross amount and to pay it by instalments and the case where there was an agreement for good consideration not to pay any fixed gross amount, but to make a certain or uncertain number of annual payments. Having pointed out that distinction, the learned judge asked himself if the annual payments were really instalments of the price, what the gross amount payable was. As he found none and as it transpired that the annual payment reserved was precisely the equivalent of the rent which the plaintiff used to receive formerly from sub-lessees of the property, the learned judge held that the payments received by the plaintiff were not payments of a capital but of an income nature. It seems to me , observed the learned judge, to make no difference whether the contract to make the annual payments is entered into in consideration of money paid or in consideration of property assigned. The ground on which the learned judge proceeded, therefore, was that although a particular payment might be the consideration for the assignment of property, it might still partake of the nature of income in the hands of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncerns a novel by Rudyard Kipling which the assessee had with the permission dramatised. In 1914, she entered into an agreement with the author by which the latter was given the right to enter into contracts on her behalf, so far as her rights in the dramatised version of the novel was concerned and she was to get one-third of the sums received for film rights in the novel of the play. In pursuance of that agreement, the rights were granted by Mr. Kipling to a certain party and the assessee was duly paid her one-third share of the receipts. There appears to have been a further agreement in 1930 to which no reference is necessary. In 1939, the widow of Mr. Kipling made a fresh grant of the film rights to an American company for a period often years for a consideration of a sum of 8,000 and the assessee was paid one-third of that amount, namely 2,666. It was the nature of that amount as the receipt in her hands which fell to be considered. The case went through all the courts, ultimately reaching the House of Lords, and the assessee's contention throughout was that what she had received was a capital sum. It appeared that the grant covered the right to adopt and change the pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount deducted as income-tax. The facts were that the plaintiffs, who were foreigners resident abroad, sold a secret process to the assignors of the defendants, upon the terms that the purchasers, their successors and assigns, should, for a period of forty years, pay to them annually a sum equal to 8 per cent of the gross receipts on the sale of articles made by the secret, process. In making the payment for the relevant accounting year, the defendants who were purchasers from the transferees of the plaintiffs, deducted a certain amount as income-tax under section 40 of the Income- tax Act of 1853. The question being whether the amount would be a capital receipt in the hands of the plaintiffs, it was answered by Philimore, J., in the negative. Reference was again made to the fact that there was no first ascertainment of a lump sum and that the sum payable fluctuated within no definite limits with the fluctuations in the business of the transferees. The recent-most case which was cited at the Bar was the case of Mitchell (H.M. Inspector of Taxes) v. Rosay [1954] 35 Tax Cas. 496, an extremely instructive decision of the Court of Appeal. The facts were that under an agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. The facts were that the executors under the will of Earl Haig allowed the late Mr. Duff Cooper, who was engaged in writing a biography of the Field Marshal, to make use of his diaries for the purposes of the projected work and gave him the right to extract and publish what he thought fit from the diaries. For that right Mr. Cooper was to pay not a capital sum but a share of the proceeds of the publication. Nevertheless, it was held by the Court that the amounts received from Mr. Cooper were of a capital nature, because what the trustees had done was not to provide for obtaining an income by the use of an asset but to dispose of an asset in a way which they thought would be best for the persons concerned under the trust. Evershed, M.R., distinguished the case on the ground that the trustees were charged with the duty of realising the assets of the estate of the deceased Earl and that since, once published by Mr. Duff Cooper, the future value of the diaries for the estate would be almost negligible, the transaction had really been regarded as a sale; and since the trustees had not been carrying on any trade or business, it had been held that the form they had chosen for the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt of Appeal held that the annual sums paid under the agreement would be instalments of capital and therefore the amount of 886 was not admissible as a deduction in the computation of the assessee's taxable profits. The reason given by Lord Wright, M.R., as also Romer and Greene, L.JJ., was that, throughout, the parties had contemplated and had arranged the transaction on the footing that there was a lump sum in respect of the purchase money. The 15,000, observed the learned Master of the Rolls, is not an otiose figure; it is a figure which permeates the whole of the contract, and upon which the whole contract depends. Similarly it was observed by Romer, L.J., that the consideration bargained for was a lump sum and by Greene, L.J., that it was quite impossible to say that the sum of 15,000 had no real existence. Once again the deciding factor was taken to be the lump sum character of the consideration, although payment of a part of it was adjusted to the fluctuating fortunes of the transferee's business. As against the above decisions, some of which Dr. Pal very fairly himself cited, reliance was placed on the assessee's behalf on the decision of the Privy C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax, Bombay City v. Kolhia Hirdagayh Co. Ltd. Bombay [1949] 17 I.T.R. 545., which was cited before us as containing an elucidation of the decisions in Commissioners of Inland Revenue v. 36/49 Holdings Ltd. [1943] 25 Tax Cas. 173, and the Canadian cases [1933] A.C. 684. Unfortunately I do not find the Bombay decision to be of any assistance in appreciating the true meaning and effect of those two cases. The Bombay High Court had to consider the nature of a payment in relation to the payer. There also, there was an agreement between the proprietor of a colliery and a third party by which it was agreed to promote the assessee company for the purpose of acquiring and carrying on the colliery. The purchase price was originally fixed in a certain form, but there were some subsequent changes and ultimately in discharge of a part of the consideration, the company agreed to pay a commission to the vendor at the rate of four annas per ton of steam and rubble coal and three annas per ton of slack coal raised from the colliery and sold and rented by the company therefrom. The question being whether the sum representing the commission paid by the assessee company to the vendor was a revenue exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business so as to be chargeable to excess profits tax. Rowlatt, J., did indeed say in the case referred to by the judicial Committee that the receipt then before him was an instalment of the price, but he did so, because the transferors were the liquidators of a company who were not trading but only realising its assets. The decision of the judicial Committee, if there was any decision at all, seems to rest on the basis that in view of the fact that the lady was not trading and had parted with all her interest in the lands once and for all, the transaction was a sale and that the oil consideration was also price, notwithstanding that it was a percentage of the raisings by the company; and that since the lady took the consideration in kind in the form of a portion of the very thing which had been her own property and which she had parted with, there was no trading and no profit and, therefore, no profit or gain within the meaning of section 40 of the Canadian Act. The Canadian Act mentions only profit or gain , but not also income and their Lordships seem to have considered it sufficient to find that in taking back a part of one's own property, no profit or gain could be ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion had taken another form. The question arises generally in the case of periodic payments. If such payments be instalments of price as such, they are undoubtedly capital receipts. But in deciding whether they are such instalments or only income amounts, the question whether there is a gross lump sum as the agreed consideration to which such payments are related is always a pertinent consideration, although in certain exceptional cases it may not be determinative. The payments may be arranged for in various forms. They may be portions of a lump sum which was agreed to as the price. In such a case the payments will be payments of portions of a contractual debt and obviously capital receipts, but they may also be fixed shares of the profits made by the transferee in the course of using or exploiting the asset or they may have to be computed by reference either to the number or the quantity of the products or the gross receipts for sales. When they are in the latter forms and are not tied to some agreed gross sum and the arrangement is not that by the periodic payments such gross sum shall gradually be paid off, they will normally have to be taken as income receipts. But, as I pointe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had itself acquired to a third company as early as in 1935. As I have pointed out, it did not cease carrying on its manufacturing activities and business, because the deed of 1935 itself shows that it held other leases and the assessment order shows that it is in active business as a manufacturer of lime or limestone. Indeed, it had other business interests in the very lands which it was transferring to the Dewarkhand Cement Company Limited and Dr. Pal even made it a point that it was for the purpose of protecting those interests that certain reservations had been made in the deed. It would appear that under the arrangements entered into, the assessee company and its transferee would be carrying on business on parallel lines on different parts of the lands covered by the leases, those containing limestone being exploited by the transferee and the other areas being exploited by the assessee company and the assessee company would also be entitled to remove clay and shales from any part of the lands and to use them for all purposes except that of cement manufacture. In my view, the transaction of 1935 must be viewed against the background of those business objects and operations of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he present case was equally a capital receipt in the hands of the assessee. I do not think that the analogy drawn by Dr. Pal from Spooner's case [1933] A.C. 684; 1 I.T.R. 299 will work. The thing by which the consideration fell to be determined and measured in Spooner's case* was a part of the very thing transferred, whereas the standard in the present case is not even the manufactured product but the quantum of such product brought under the business operation of sale. It has clearly a reference to the trading activity of the transferee and to use again a phrase of Rowlatt, J., it is liable to rise or fall with the chances of the transferee's business. I am not forgetting that in Ramsay's case [1935] 20 Tax Cas. 79, Lord Wright thought that Rowlatt, J., could not have intended to set it up as a universal proposition that whenever a consideration was made to depend upon the fluctuating fortunes of a business, it would necessarily be a capital receipt in the hands of the transferee, but he really distinguished the case on the ground that, in the case before him, there was a Jump sum consideration of 15,000 and it permeated the whole of the contract, although provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in the course of its business operations and by way of turning them to account to the transferee company, providing for itself certain periodical receipts which would come to it as the share of the profits of the transferee's business, if any profits were made, or as a part of the royalty if royalties were received or as an amount computed at a certain rate on the sale of cement, if any cement was sold. In my opinion, the view taken by the Tribunal that the transaction represented a business arrangement which the assessee company had entered into with the Dewarkhand Cement Company for the purpose of an exploitation of the mines and that it was providing for receipts of income which the nature of the receipts stipulated for clearly showed to be their character, is entirely justified. In my view, not only is that conclusion forced on one by the background of the facts, by the circumstances surrounding the transaction and by the nature of the receipts provided for, but the transaction is also a clear instance of the company turning into account some of its assets for a business purpose and receiving thereout a business income. In somewhat similar circumstances, where a company, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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