Chintamani Saran Nathsahdeo versus C.I.T. Bihar & Orissa

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CfllNTAMANl SARAN NATH SAH DEO

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l '.

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C.I.T. BIHAR & ORISSA

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August 5, 1971

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[K.S. HEGDE AND A.N. GROVER, JJ.]

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}ik.'OIIle-tax- Prelllit/111 for mining Jease- fl' r £'1'£'111/e vr capital receipt:Priw:iples for determining.

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The assessee had granted a prospecting, lease of his land to a com. pa ny in 1941 for a period of one y_ear. In 1944 he granted ~~ h.:asc or mining rights to the sa me company m respect of a part of the la nd for a c period of 30 years. T~e assessee took a large amount by way of pre. mium bul charg;ed a sl1ghtly lesser amouru than what he had charged ·in the prospect1ng lease, by way of royalty. The assessee had also HTantcd other leases and the prem ium per acre in the case of those leases ~as very much less than the premium per acre in the 1944-lease.

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On the questi on whether the premium or· a pJrt of it was in the nature D of a revenue receipt. the High Co urt on reference, held against the . assessee.

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In appectl to this Co un ,

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·IIELD: (I) When the interest of the l ~ssor is parted for a price, the price paid is premium or sal am i but the periodical payme nts made ror the continuous enjoyment of th e benefits under the lease are in the £ nature or rent. The former is capitC:J l receipt and the Iauer a revenue receipt. ln finding the real natLtre of th e transac ti on it is not th e nomcndature or fonn but th e circumstances of th e transaction that matter. The onus. however. is upon the Income-tax ;tuthorities to show that there exist racts an LI circ umsta nces whi ch would make payment or what has been called salam i. income. l 39E-Hl

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Commissioner o/" lncome-nrx. Assam v. The Pcmbari Tl!a Co. Ltd. F f 19651 3S.C. R. 811 ~ fo ll owed .

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(2) The terms of 1941-lease wl1ich was only for one year and which was for the enti re ly di ffei·ent purpose of prospecting would not afford any reasonable basis for hold·i,,g that the ·terms of J 944-lease. which ·was a mining lease for 30 years, were fixed in such a manner that pa rt pf the proceeds of the royalty were included in the figure of the sala11 i . G When the lessor creates a lease for a lonu IJeriod it is leo-iti mate for h 1111 ~ e to charge more amount by way of premium as he is transferring posscs., ion or the demi sed land and he may cl1arge -royalty at a slightly l csc-r rate. The mere !'act that the amou nt taken on account or prcnuulll was su bstamial and on the face of it looked considerably large would not . iu~ til ·y the view that the amoun t represe nted ca pi ta lised royalty. _ J.40H . .t I .L-E] J1 . _t}) The fact th at th e prem.ium was approximately equ al to _,~~~~ -IJikrcnce betWC'C ll the total ll1 0 Uilt S or royalt y (a)cu!Htel ~ ( the J,li - Jll the 194 1-lcasc and the "1 944-.lea c, wo uld not justify :tn Jnfc rt.: J lC tll.lt

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f

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CHlNTAMANI V. C.l.T. (Grover, J.) 37

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A the amount was taken in exchange of. royalty because, the assessee could ·not have known how much mineral could be extracted from the areas :11 the time of granting the 1944-lease. [ 43A-C]. ·

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.

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(4) It was open to the Departmental authorities to have examined

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the assessee or his representative and discovered all the reasons for the terms in the various ·leases being different. The Department could

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B l'!)so have ascertained the details of the quantity of mineral which could be extracted from the areas covered by the l1ther leases and discharged the onus which lay on the Revenue to show that the payment of premium was in fact of royalty. But the same was not done.[ 42E-G] .

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CIVIL APPELLATE JURISDICTION : Civill Appeal No. c 1732 of 1967.

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Appeal from the judgment and order dated December 22, 1965 of the Patna High Court in Misc. Judicial Case No. 101 of 1962.

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M. C. Chagla and B. P. Singh. for the appeii~nt.

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D

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Jagadish Swarup' Solicitor-General J. R{lmamurthi. R.N. Sachthey and B. D. Sharma for the respondent.

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The Judgment of the Court was delivered by

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£ • Grover, J. This is an appeal from a judgment of the Patna High Court in a reference made to it under s. 66(1) of the Income-tax Act, 1922, by the AppelJate Tribunal by which the following question of law was referred for\ietetmination by the High Court:-

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F · "Whether on the facts artd' circumstances of this case, the Tibunal was right' in ho1d'itlg that the sum of Rs. 2,20,000/- was the incotne· of the assessee assessale to tax underthe provisions of the lncome-tax A:ct ?"

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G The otiginal assessee was Maharaja· Partap. U gainath . Sah D . .!o~ the holder of an impaTtible ·estate: Oh January 22, 1944 the- as-s.essee. gt'anted a lease of certai~ mini 1g riglits to Aluminium Production Company 'ttti. in resptct of 1'11·03·. acres of land for a period of 30'. years~ Tl1~>: H main terms wete as fo11'ows-: -

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(i)· Salami (i-nclusive of Mt>harkari,and .. Bewani' Negi amounthig to . Rs.S,OOO/·· R~: 2,25,600/-..

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38	SUPREMECOURT REPORTS	[1972] 1S.C.R.
(ii)	Rent	-/8/- peracre
(iii)	Royalty	-/6/- perton.
(iv)	Minimum royalty	Rs.22/- per acre.

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Previously the asses ~ ee had granted a prospecting lease B of 311 acres of land to the same Company on March 20, 1941 for a period of one year. The area covered by that lease though larger included substantially the area leased out subsequently. The terms of the 1941-lease were that sa1amj was payable at the rate of Rs. 100/- per acre and royalty at the rate of -/8/- annas per ton. c

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\Vhile making the assessment for the year 1944-45 the Incorne-tax Officer took the view that the assessee had c-hosen to ake large sum by way of salami while granting the lease in the year 1944 and had accepted Jesser 0 rate of royalty, the salami represented an advance paymem of royalty. He treated Rs. 5,000 out of the sum of Rs. 1,25,000 as Dewani Negi and Moharkari and the balance of Rs. 2,20,000 was treated by him as income of th-: assessee, and the assessment was made accordingly. On appeal the Appe1Iate Assistant Commissioner held F. that the amount of Rs. 2,20,000 was paid by the Company to the assessee as salami and as such it was a capital ' receipt and not taxable. On appeal by the Revenue the Appellate Tribunal by an order dated August 7, 1952 remanded the case to the Appellate Assistant Commissioner for finding whether there were circumsta:r:ces to indi1< cate that the salami was really receipt of income. The Appellate Assistant Commissioner made a report dated April 12, 1956. He gave a finding that the assessee had intentionally accepted lower royalty and taken higher salami and therefore the major portion of the sum of Rs. 2,20,000 had ben taken in exchange of royalty that would have acG crued during the period of lease. The Tribunal by an order dated July 26, 1956 allowed the appeal of the Revenue and restored the order of the Income-tax Officer. The High Court held that out of the sum ofRs. 2,20, 000 the amount which could be regarded to be salami and treated as a capi~ tal receipt could reasonably be estimated at a sum of H Rs. 20,000 which was not assessable to tax -:but,the remaining amount of Rs. 2, 00,000 was revenue teceipt and was

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f

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CHINTAMANI V. C.I.T. (Grover, J.)

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A taxable as such. The question referred was reframed as follows:-

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"Whether on the facts and the circumstances of this case, the Tribunal was right in holding B 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 Incometax Act ?"

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c It was answered partly in favour of the assessee but substantially in favour of the Revenue.

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The principles on which the courts have acted when-

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ever a question has arisen whether a payment described as a salami is capital or revenue receipt are well settled.

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D Salami is a single payment made for the acquisition of the right of the lessor by the lessee to enjoy the benefits

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i granted to him 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 merely because a certain amount

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E paid to the lessor is termed as salami it does not follow that no inquiry can be made to determine whether it has or has not an element of revenue receipt in the shape of advance payment of royalty or rent. The onus, however, is upon the income tax authorities to show that there exist facts and circumstances which would make payment

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F of what has been called salami, income. The position may be summed up in this way. When the interest of the lessor is parted for a price the price paid is premium or salami but the periodical payments made for the continuous enjoyment of the benefits under the lease are

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G in the nature of rent; the former is a capital receipt and the latter a revenue receipt. Parties may camouflage the real nature of the transaction by using clever phraseology and, therefore, it is not the form but the circumstances of the transaction that matter. The nomenclature used may not be decisive or conclusive but it helps the courts, having regard to the other circumstances, to

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H ascertain the intention of the parties. (See Commissioner of Income-tax, Assam etc., v. The Panbari Tea Co. Ltd.)(¹ ). (1) fl965J 3 s.c.R. st 1.

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.4-M 1245Sup. Cif71

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40 SUPREME COURT REPORTS (1972] 1S.C.R.
Now the Appellate Tribunal appears to have based its decision onlyonthe difference between the amount ofsalami and the rateofroyalty between the prospecting lease whichwasgranted in1941and the subsequent leaseof1944.This is what the Tribunal stated inlpara 7 ofitsorder:- "In1941,the assessee had granted a prospecting lease in favourofthe very lessee taking a much smaller premiumfixingthe ·royalty at-/8/- per ton. He has not shown any justifiable reason for fixing up a lower amount of-/6/-per ton by way ofroyalty in the later lease.Wefound that out- ofthe areaof171acres that was coveredbythe later lease a substantial portionofit about140 acres were comprised in the area leased outby the earlier deedof1941.A weak argumentwas attemptedbythe assessee's representative the older leasewasonly for Bauxite whereas the · later leasewasfor laterite also. Inviewof the fact that major portionofthe area thatis covered in thenewleasewasin the older lease and as in the courseofthe producing Bauxite, Laterite also becomes available,wedo notsee any justification for the assessee agreeing to take a lesser amountbywayof royalty."	A B c D E
theTribunal proceeded tosay:- "Hereinthe present case whatwefindis that the assessee had chosen to take a large amount by wayofpremium.but a lesser amountbyway ofroyalty. The patent reason for the assessee to takealesser amountbywayofroyaltywas that the amount receivedbyhim as salamiwas not taxable. There is, therefore, no doubt in this case that thesumreceivedbytheassesseeby wayofsalami or premiumwasin substance an advance paymentofroyalty.Weare, therefore, inentire agreement withtheIncome-tax Officer's order."	F G
Weare unable to appreciate howacomparisonofthe termso.fthe leaseof1941whichwasonlyfor oneyear and whichwasfor a different purpose, namely, prospect- ingcould afford a reasonable basis fordetermining	H'

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CHINTAMANI V. C,I.T. (Grover, /.) 41

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A whether the terms of the 1944 lease were fixed in such manner that part of the proceeds of royalty were included in the figure of the salami. The object of a prospecting lease is entirely different and since the period was only one year it is quite reasonable to assume that the roy-

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B alty was . fixed at a higher rate because it was not known how much quantity of mineral would be extracted during that period. The lease of 1944 was for a much longer period i.e. 30 years. When a lessor creates a lease for that period it is legitimate for him to charge more amount

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,, by way of salami or premium as he is transferring pose session of the demised land for a considerably long period. A lessor may also think that the rate of royalty need not be the same· as it was in the case of the prospecting lease and taking an over all business view royalty at a slightly less rate may be charged. The Tribunal's decision based as it was only on a comparison of the terms of the

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D leases of 1941 and 1944 does not appear to take into consideration all these relevant matters. It must not

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} be forgotten that the mere fact that the amount taken on account of salami was substantial and on the face it looked considerably large '.vould not justify the view that that amount represented capitalised royalty. ]n the Panbari

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E Tea (¹ ) case certain tea estates had been leased out for a period of 10 year. The lease was executed on a consideration of a sum of Rs. 2,25,000 as and by way of premium or salami and an annual rent of Rs. 54,000 to be paid by the lessee to the lessor. The payments were to be made by instalments. This Court declined to

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F assume that the parties had camouflaged their real intention and fixed .a part of the rent in the· shape of premium and it was observed that no material had been placed either direct or circumstantial to disbelieve the description given in the lease deed to the amount as.

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G premium and to hold that it was not in fact premium but only rent. The position does not seem to be different in the present case.

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A good deal of emphasis has been laid on behalf

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of the Revenue on the statement in the order of the T ribu_nal towards the conclusion that it was in entire agree-

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H ment with the Income-tax Officer's order. It is submitted that the Income tax-.:Oflicer had gone into the details of (1} P965j 3 S.C.R. 811.

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[1972] 1 S.C.R.

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42

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SUPREME COURT REPORTS

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other leases which had been granted by the assessee. of A similar nature and after a comparison of the terms of those leases the Income-tax Officer had reached the conclusion that the amount of salami represented the capitalised royalty. We cannot read the order of the Tribunal in that way. The Tribunal agreed only with the operative B part of the order of the Income-tax Officer but not with his reasoning. At any rate, the Appellate Assistant Commissioner had submitted a remand report pursuant to a previous order of the Tribunal and it does not appear that the facts given in that report were at all considered by the Tribunal although the High Court based its deci- c sion largely on them. The terms of the leases on which the High Court relied related to the years 1933, 1938 and 1945, the rate of royalty varied from 8 annas to 12 annas per ton and that of salami from Rs. 100 to Rs. 130 per acre. No attempt was made to examine anyone on be'1alf of the assessee to explain all the circumtances in D which these leases had been granted. The High Court felt that it was for the assessee to furnish an explanation as to why salami in the case of 1944 lease was raised to Rs. 1284 per acre whereas in the other ]eases the figure was much less as stated before. This approach cannot be regarded as correct. The onus was on the Revenue E to show what was stipulated in the indenture of lease as a payment by way of salami was some other kind of payment, namely, royalty, camouflaged as salami. In this situation it was open to the Appellate Assistant Commissioner at the stage of submitting the remand report to have examined the assessee or his representativ.e and disF covered all the reasons for the terms being different. AnDther factor that was relied upon was the report of the Mines Superintendent dated January 7, 1956 according to whom the area leased out in 1944 contained commercial grade Bauxite of approximately 13 lakh tons. The G Appellate Assistant Commissioner at the stage of remand worked out the amount which would be payable as roya1ty on this estimated quantity of the total reserve of Bauxite in the demised area. The total amount of royalty was calculated at Rs. 6,50,000 according to the rates fixed by the 1941 lease and at Rs. 4,87,500 H according to the rate agreed upon in the 1944 lease. The High Court was of the view that these figures showed

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CHINTAMANI V. C.I.T. (Grover, j,) 43

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}

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A that the major part of the salami of Rs 2,25,000 had been taken in exchange of the royalty that would have accrued during the period of the lease. We have already pointed out that a comparison of the terms of the prospecting lease which was only for one year with the subsequent

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8 lease of 1944 which was for 30 years could not furnish a proper basis for determining the point in dispute. Mcrcover the High Court lost sight of the fact that the report of the Mines Superintendent was made long after the date of the 1944 lease and it could not be assumed that at the time of the granting of that lease the assessee knew how much

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c quantity of the mineral could be extracted from the area which had been leased out. Even the High Court felt, in disagreement with the Tribunal, that the entire amount of the salami could not be regarded as representing the capitalised value of royalties. The High Court proceeded to assess the salami at Rs. 20,000 on the basis that

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D for the other leases the rate agreed upon was Rs. 100 per acre. We .are unable to concur in this method of computing the amount of the salami. Much more material was required for discharging the onus which lay on the Revenue to show that the assessee was bound to charge only the same amount of salami which had been

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E taken for the other leases about which the details of the quantity of minerals which could be extracted from the area covered by them were altogether lacking.

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For the reasons given above the appeal is allowed

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and the order of the High Court is set aside. The answer to

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F the question referred is returned in favour of the assessee and against the Revenue. The assessee shall be entitled to costs in this Court and in the High Court.

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V.P.S.

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Appeal a!lu~tr:d.

Chintamani Saran Nathsahdeo v. C.I.T. Bihar & Orissa

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Chintamani Saran Nathsahdeo v. C.I.T. Bihar & Orissa

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