The Member for the Board of Agricultural Income Tax, Assam vs. Smt. Sindhurani Chaudhurani

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Civil Appeals Nos. 162 of 1955, 38-44 of 1956

Decision Date: 24 April 1957

Coram: J.L. Kapur, Natwarlal H. Bhagwati, Natwarlal H. AiyyAr, T.L. Venkatarama

In this case, the judgment dated 24 April 1957 involved the Member for the Board of Agricultural Income Tax, Assam as petitioner and Smt. Sindhurani Chaudhurani as respondent, together with connected appeals. The bench comprised Justice J. L. Kapur, Justice Natwarlal H. Bhagwati, Justice Ayyar and Justice T. L. Venkatarama. The citation of the decision is reported in 1957 AIR 729 and 1957 SCR 1019. The matter concerned the interpretation of the term “salami” under the Assam Agricultural Income-Tax Act of 1939, specifically section 2(a)(1). The headnote stated that the essential characteristics of a salami are its single, non-recurring nature and that it is paid before a tenancy is created; it is a consideration given by a tenant to obtain possession, and therefore it is a capital receipt in the hands of the landlord, not rent or revenue, and cannot be taxed as agricultural income. The Court relied on Kamakshya Narain Singh v. Commissioner of Income Tax (1943) L.R. 70 I.A. 180 and examined earlier authorities such as Birendra Kishore Manikya v. Secretary of State for India (1920) I.L.R. 48 Cal. 766, Meher Bano Khanum v. Secretary of State for India (1925) I.L.R. 53 Cal. 34, Raja Rajendra Narayan Bhanja Deo v. Commissioner of Income Tax (1929) I.L.R. 9 Pat. 1 and Commissioner of Income Tax v. K. C. Manavikramato Rajah (1945) I.L.R. 837 Mad., distinguishing them where appropriate. The Court concluded that payments described as salamis, received by zamindar assessors as consideration for granting agricultural leases that were not precarious, were made before the lease, were of a non-recurring character, and were calculated at rates varying with the nature of the lands and were chargeable on each subsequent eviction and re-letting; consequently they were correctly described as salamis, not rent or revenue within the definition of agricultural income in section 2(a)(1) of the Act, and could not be assessed to tax under that Act. The proceeding was a civil appellate jurisdiction comprising Civil Appeals Nos. 162 of 1955, 38, 39, 40, 41, 42, 43 and 44 of 1956, appealed from judgments of the Calcutta High Court dated 5 January 1953 and the Assam High Court dated 2 July 1952. Counsel for the appellants and respondents were engaged as noted, with representation for all appellants except one in CA No. 42 of 1956. The judgment was delivered on 24 April 1957.

The judgment was delivered by Kapur J. In every one of the appeals the issue to be decided was the nature and meaning of the payment described as “salami” and whether such payment fell within the definition of “agricultural income” contained in the Assam Agricultural Income-Tax Act (Ass. IX of 1939), hereinafter referred to as the Act. Civil Appeal No. 162 of 1955 challenged the judgment of the Calcutta High Court dated 15 January 1953, while Civil Appeals Nos. 38 to 44 of 1956 were filed against the judgment of the Assam High Court dated 2 April 1952. All of these matters had been heard together in the Assam High Court and had been disposed of by a single judgment. Civil Appeal No. 162 of 1955 concerned the assessment year 1941-42. The assessee in that case was a one-eighth-nine-annas co-sharer in a zamindari estate known as the Parbatjoar Estate in Assam. The original assessee, Jyotindra Narayan Chowdhury, died on 25 January 1953 and, upon his death, his widow Shrimati Sindhurani Chowdhurani and other parties were substituted as assessors.

The total agricultural income of the assessee was reported as Rs 89,633. In addition, income from salami amounted to Rs 9,331-9-4, which had been received from the settlement of 414 distinct holdings; of these holdings, 278 were classified as virgin lands and 136 were described as auction-purchase lands. From the gross salami income, a deduction of fifteen per cent was allowed as collection charges, leaving a disputed amount of Rs 7,934. The Agricultural Income-Tax Officer had held that this sum constituted “agricultural income” by an order dated 10 November 1941, a determination that was affirmed on appeal to the Assistant Commissioner of Agricultural Income Tax. A revision petition filed under section 27 of the Act before the Commissioner was dismissed. Consequently, the assessee sought the opinion of the High Court on two questions: (1) whether a single, non-recurring premium or salami paid to the landlord-assessee once only as consideration for the settlement of agricultural land at the time of granting a lease could be treated as income within the meaning of the Act; and (2) whether such a single, non-recurring premium or salami, paid as consideration for the settlement of agricultural land at the time of granting a lease and not dependent on the rent rate charged, could be treated as income within the meaning of the Act.

The Calcutta High Court, in its judgment dated 12 April 1945, held that these receipts were “agricultural income.” An appeal against that judgment was taken to the Privy Council; however, following the abolition of the Privy Council’s jurisdiction, the appeal was transferred to the Federal Court and heard as Civil Appeal No. 30 of 1949. The Federal Court set aside the High Court’s judgment and remitted the case to the High Court for further consideration, directing that the matter be dealt with after ascertaining and evaluating additional factors likely to reveal the true nature of the receipts described as salami.

After the case was remanded, the Court directed that the true character of the receipts described as “salami” be examined by taking into account several additional factors. The first factor to be considered was the number of settlements of waste lands and abandoned holdings that occurred during the accounting year, together with the maximum and minimum extents of land settled and the amount of salami received for each. The second factor required an inquiry into whether the amount of salami varied according to the quality of the land, the availability of irrigation facilities, and other favourable conditions. The third factor focused on the number of tenants who had been evicted under section 69 of the Goalpara Tenancy Act during the accounting year and the length of time each tenant had occupied the land before such eviction. The fourth factor asked whether salami was received when lands were re-let after an eviction. In response to these queries, the Member of the Assam Board of Agricultural Income Tax, Dr Goswami, provided the following information. First, a total of 414 settlements were made during the year; the largest settlement covered 59 bighas, 2 cottahs and 10 dhurs, for which a salami of Rs 161-8-61 was received, while the smallest settlement involved 15 cottahs and yielded a salami of Rs 2-11-9. Second, the rate of salami was shown to depend on land quality, with a fixed rate of Rs 7 per bigha for jungle land and Rs 10 per bigha for non-jungle land. Third, no tenants were removed under section 69 of the Goalpara Tenancy Act, although action was taken in many cases under section 68 of the same Act. Fourth, salami was indeed collected when lands were re-let after an eviction. Fifth, it was explained that salami was not a present-gift but a compulsory payment made by the tenant to the landlord at the inception of the tenancy.

The Board further characterized the zamindar’s occupation as the business of letting out holdings in exchange for payment. The landholdings were described as extensive, and the zamindar let them out in small parcels to various tenants on the condition that each prospective tenant first paid a fee, which the landlord preferred to call “salami,” and subsequently paid an annual rent. The Board concluded that this fee was not a windfall; rather, it arose directly from the landlord’s commercial activity of leasing land. Because the receipt of salami was regular and periodic, the Board held that it satisfied the legal test for income and therefore qualified as agricultural income under section 2(a)(1) of the Act. After reviewing the facts uncovered by the Board and referring to the judgments of several courts, the Calcutta High Court held that the amounts received as salami did not constitute agricultural income. The Board appealed that decision, filing appeal C.A. No. 162 of 1955. The Assam Appeals also involved large tracts of land; in the case of the Parbatjoar estate, total income was Rs 1,15,510, while in the Mechpara estate the total income amounted to a higher sum.

In the case of the Mechpara estate the total amount received from all co-sharers was Rs 2,82,106, an amount that was divided among the various co-sharers. The rates at which salami was assessed differed from one estate to another. In the Parbatjoar estate the salami rate ranged from Rs 7 per bigha for forest land to Rs 10 per bigha for other types of land, the variation depending on the quality of the land. In the Mechpara estate the rates were even more varied. In the hilly tracts the salami for good-quality “sail” land was fixed between Re 1 and Rs 2, while for other classes of land it ranged from Re 1 to Rs 6. In the plains the rates for good-quality “sail” land were between Rs 2 and Rs 3, and for other lands they were between Re 1 and Rs 6. Newly formed Char lands in Mechpara were assessed at rates from As 8 to Re 1 per bigha. In the Bijni Raj estate a minimum salami of Re 1 per bigha was charged, irrespective of the size of the parcel of land. In the Gauripur estate the holdings were settled by auction, and the amount of salami was determined by the demand created by the market, taking into account the quality of the land and the availability of irrigation facilities. The Chapter Trust estate also settled its holdings by auction, and the salami was accordingly determined by the same principles.

The High Court observed that the factual material plainly showed that the salami rates varied with the quality of land in each estate and that such rates had no connection with a fixed rent, which by definition is invariable. The Court noted that the lands were generally settled in small plot sizes. The highest amount of salami recorded in a single transaction during the relevant years was in Parbatjoar, where a sum of Rs 621 was received for a settlement covering an area of 88 bighas, 14 khotis and 15 dhanis. In Mechpara an area measuring 165 bighas, 16 khotis and 12 dhanis was settled for Rs 318. The smallest area settled in a single transaction was also in Mechpara, where land measuring only 2 khotis was settled for a salami of Rs 3 ½ 0. These examples demonstrated the range of area sizes and corresponding salami receipts. The Court further recorded that there were no evictions under section 69 of the Assam Tenancy Act for non-occupancy tenants, although ejectments did occur and actions were taken under section 68 of the same Act. After the case was restated on the lines suggested by the Federal Court, the Assam High Court held that “salami” is not rent but revenue derived from land and consequently constitutes income. The pivotal question before the Court was whether the amounts received as salami should be classified as rent or as revenue within the meaning of “agricultural income,” and thus whether they were liable to agricultural income tax. The earlier Calcutta judgment dated 12 May 1945, reported in C.A. No. 162 of 1955, had concluded that salamis were a normal and regular feature of the estates and that they were received periodically. When the issue was reconsidered before the Federal Court, the learned Chief Justice expressed the view that a receipt described merely as “salami” could not, without further description, be treated as a capital receipt exempt from tax, nor could it automatically be deemed income subject to income tax. Mahajan J., who was then the Chief Justice, articulated this opinion.

In its discussion, the Court observed that a payment termed salami could take two different forms. It could be a recurring or periodical fee when it functioned as an annually levied charge on the holder of a rent-free tenure, akin to a quit-rent. Alternatively, the payment could be a one-time gratuity or offering made when a lease was granted, when revenue was settled, or when any real or implied favour was received. The Court reasoned that in the former situation the receipt should be treated as agricultural income, whereas in the latter situation it represented a capital receipt, being the price for the slight “modicum of ownership” that the landlord transferred to the tenant. Referring to the Assam cases, Justice Ram Labhaya explained that by settling the lands and accepting salami the landlord relinquished the right of immediate occupation. The Court noted that the characteristics of salami, as derived from the case records, showed it to be a lump-sum, non-recurring payment made by a landlord’s tenant before any settlement of the holding. In the cited appeal, C.A. No. 162 of 1955, the amount varied from Rs 7 to Rs 10 per bigha and was lower in other instances, while the landlord could also charge a fixed periodic sum of eleven annas per bigha per annum. Salami was demanded whenever a fresh settlement occurred, whether on virgin land or on a purchase obtained at auction. Consequently, salami functioned as a payment by the tenant to the landlord prior to the creation of the landlord-tenant relationship, essentially compensating the tenant for the right to take possession of the land for cultivation under the lease. In all the cases under appeal, the leases were oral and their duration and conditions were governed by the Assam Tenancy Act. The Court emphasized that salami was not a recurring fee nor a fine levied at regular intervals for the same holding. Moreover, no party had argued, nor had the Federal Court suggested, that salami constituted capitalised rent; the Federal Court expressly found it was not rent. In consideration of the salami, the landlord transferred an estate in land to the tenant, the tenant initially obtaining a non-occupancy tenancy that could evolve into an occupancy tenancy over time. However, none of the appeals involved action under section 69 of the Assam Tenancy Act, which deals with rights and liabilities of non-occupancy tenants, and no tenant was ejected from such a tenancy. Whenever action for non-payment of rent and ejectment was required, it was pursued under section 68 of the Goalpara Tenancy Act, which provides that a permanent tenure-holder, a raiyat at fixed rates, or an occupancy tenant shall not be liable to ejectment for rent arrears, but that the holding may be sold in execution of a decree for the rent, with the rent constituting a first charge on the estate.

Section 68 of the Goalpara Tenancy Act provides that an occupancy tenant shall not be subject to ejectment for rent arrears, but that the tenant’s holding may be sold to satisfy a decree and that the outstanding rent shall constitute a first charge on the sale proceeds. When decrees for rent arrears were executed, the lands occupied by the tenants were put up for sale; in every instance the purchaser was the landlord himself. Consequently, to recover the unpaid rent, the landlord was compelled to auction the tenant’s right, title and interest in the land, after which he repurchased that right and subsequently re-let the land to a new tenant upon receipt of the salami. This sequence demonstrates that the landlord relinquished a portion of his interest in the land, a relinquishment that cannot be characterized as precarious because it occurred in exchange for the salami, which is a single, non-recurring payment made by the lessee to acquire the leasehold rights. The Board contends that such salami forms part of “agricultural income,” a term defined in section 2(a)(i) of the Income-Tax Act as any rent or revenue derived from land used for agricultural purposes and either assessed to land revenue in Assam or subject to a local rate collected by government officers. Since salami is not rent, it does not fall within this definition unless it qualifies as revenue. Sir George Lowndes, speaking for the court in Commissioner of Income Tax v. Shaw Wallace & Co., described income as “a periodical monetary return coming in with some sort of regularity, or expected regularity, from definite sources.” In Captain Maharaj Kumar Gopal Saran Narain Singh v. The Commissioner of Income Tax, Bihar & Orissa, Lord Russell of Killowen, relying on that definition, held that a life annuity paid out of an estate constitutes income (1932 L.R. 59 I.A. 206, 212; 1935 L.R. 62 I.A. 207). Lord Wright, speaking in Kamakshya Narain Singh v. The Commissioner of Income Tax, characterized salami as a capital receipt, stating that it is a single payment made for the acquisition of the lessee’s right to enjoy the lease benefits and that such a right may be regarded as a capital asset, with the money paid to purchase it being a payment on capital account. The emphasis on “the money paid to purchase it” underscores that the payment secures the lessee’s lease rights rather than generating periodic income. In Commissioner of Income Tax v. Maharajadhiraj Kumar Visheshwar Singh, an area of forty-one bighas was settled for an indefinite period on a yearly rent, further illustrating the distinction between recurring rent and a one-time salami payment.

In the circumstances described, the lease provided that if the lessee failed to pay two successive instalments, the lessee could be dispossessed and would also become liable for additional penalties. The land had been allotted to the lessee so that he could construct a “gola house” and a platform for a rice mill. The lease was characterised as being of a permanent nature, and the Court held that the salami constituted the price for parting with the land rather than being merely an advance rent. Because the salami was not a recurring payment, it did not fall within the definition of “income” as articulated in Commissioner of Income Tax v. Shaw Wallace & Co. (4). Justice Manoharlal, delivering a concurrent judgment, explained at page 824 that salami is the sum of money which a landlord “insists on receiving as a condition precedent for parting with the land in favour of the lessee.” He further observed that salami, as cited in (1) (1943) L.R. 70 I.A. 180, 190; (2) (1924) I.L.R. 4 Patna 73; (3) (1939) I.L.R. 18 Patna 805; and (4) (1932) L.R. 59 I.A. 206, 212, could not be treated as a revenue receipt because it was received by the landlord “not because of the use of the land but before the land was put into use by the assessee.” The same court, in Province of Bihar v. Maharaja Protap Udai Nath Sahi Deo (1), adopted the definition of “salami” given in the Kumar Visheshwar Singh case. Chief Justice Harries held that where salami cannot be regarded as payment of rent in advance, it is not income and therefore is not taxable. He stated, “prima facie, salami is not income, and it is impossible upon the facts as stated to say that salamis received… constitute part of his income.” Chief Justice Rankin, in Re Gooptu Estate Limited (2), ruled that a payment of one lakh rupees as salami was not income. In that case the amount was demanded and paid in respect of the resettlement of a lease that still had forty-eight years to run but had been forfeited for non-payment of rent. The decision cited (2) (1929) 50 C.L.J. 375 and (3) (1920) I.L.R. 48 Cal. 766, and held that the amount was exempt from income-tax under section 2(a)(i) of the Indian Income Tax Act. The assessee argued that the sums were “agricultural income.” The proposition that a smaller salami results in a higher rent and vice-versa was not accepted by the Federal Court when the present matter was before it on remand (C.A. No. 30 of 1949). In Meher Bano Khanum v. Secretary of State for India (1), “salami” was defined as an amount received by the landlord for the recognition of the transfer of a non-transferable holding, paid because of the landlord’s ownership of the land. The Court held that such amount was “agricultural income” since it constituted “rent or revenue” within that expression. The Standing Counsel appearing for the Secretary of State was involved in that portion of the proceedings.

The State, in the case under discussion, admitted that the amount in question was not revenue. However, it argued that the sum was not revenue arising from the land itself; rather, it was an incident of the transfer of the property and not of any tenancy, and consequently it did not flow from the land. Neither in this case nor in the earlier authorities was any argument advanced as to whether a salami constituted a revenue receipt or a capital receipt. In the Full Bench decision of the Patna High Court in Raja Rajendra Narayan Bhanja Deo v. Commissioner of Income Tax (2), mutation fees were held to be agricultural income, but that decision concerned a payment made after the landlord-tenant relationship had already been established. In a similar vein, the judgment in Commissioner of Income Tax v. K. C. Manavikraman Rajah (3) held that monies paid for the renewal of leases fell within the meaning of agricultural income pursuant to section 2(1)(a) of the Indian Income Tax Act. Again, those monies were paid not to create the landlord-tenant relationship but to continue it after it had come into existence.

In H. H. Maharaja Sir Bir Bikram Kishore Manikya Bahadur v. The Province of Assam (1), a matter arising under the Act, Justice Harries referred to the earlier decision in Kamakshya Narain Singh’s case (5) and held that each case must be decided on its own factual matrix because the nature of the transaction giving rise to the receipt was not known. The Orissa High Court, in S. M. Bose v. Secretary, Board of Revenue (1), held that salami is neither an advance rent nor income but a capital receipt. Counsel for the respondent contended that the Privy Council, in Kamakshya Narain Singh’s case (2), had based its decision on the wasting nature of the assets subject to lease. The Court observed, however, that Lord Wright’s definition is a general description of the characteristics of a salami payment and does not refer to the nature of the leased assets. Across all the appeals before the Court, the assessors derived substantial sums from agricultural holdings; although the exact number of holdings was not disclosed, it was inferred to be large. By contrast, the number of settlements was relatively small, comprising only a few hundred and involving both virgin and auction-purchase lands, and these settlements were not derived from the same holdings at regular intervals. The factual findings therefore negated the notion of “regularity and periodicity” in the payment of salami and also rejected the view that such payments arose out of the business of letting out land. The payments identified as salami were made by prospective lessees before the landlord-tenant relationship was constituted.

The Court explained that the payment described as salami represented the price that the landlord received for relinquishing his rights in an agricultural holding to the prospective tenant, establishing a landlord-tenant relationship. In the work Principles of Mohamadan Law by Macnaughton, salami was defined as “a free gift by way of compliment or in return of a favour.” Wilson’s Glossary gave a similar meaning, describing it as “a complimentary present, a douceur… a present to a superior upon being introduced to him; a gratuity or offering on receiving a lease.” This definition was cited in A.I.R. 1955 Orissa 288 and in the case reported at (1943) L.R. 70 I.A. 180, 190. The Arabic-English Dictionary by Johnson rendered the term as “a present on being introduced to a superior; earnest money; a free gift from a farmer to Government on taking lands.” Further, volume I of Baden Powell’s Land Systems of British India (page 543) noted that a Zamindar, to raise money, had sold many taluks or under-farms for “salami” or fees paid down. All of these authorities demonstrated that salami was a payment made by the tenant either as a present or as the price for the landlord’s parting with his rights under the lease of the holding. It was therefore a lump-sum consideration for the transfer of what the landlord conveyed to the tenant. The Court observed that the manner in which the leases were dealt with showed that no non-occupancy tenant was evicted and every tenancy was allowed to mature into an occupancy holding, indicating that the leases possessed an element of stability and permanence contrary to the Board’s suggestion that they were precarious. Consequently, when a tenant paid salami, the payment was intended to secure an estate in the land owned by the Zamindar; it was not rent and could not be classified as revenue within the meaning of the term used in the definition of agricultural income under section 2(1)(a) of the Act. The payment therefore possessed all the attributes of a capital receipt rather than revenue. In the result, the Court dismissed Appeal No. 162 of 1955 brought by the State of Assam with costs throughout, while it allowed the appeals filed by the assessees in Civil Appeals Nos. 38 to 44 of 1956, set aside the High Court judgment, and answered the referred questions in the negative. The assessees were ordered to receive their costs in this Court in a single set and in the lower courts, except in Appeal No. 42 of 1956 where the appellant was absent and could not be served notice of the hearing; although that appeal was allowed on a point common to the others, the parties were directed to bear their own costs in that specific appeal.

The Court directed that the costs associated with the particular appeal under consideration be awarded to the appropriate party. Regarding Appeal No. 162 of 1955, the Court concluded that the petition raised by the State of Assam could not be sustained and consequently dismissed it. The dismissal of Appeal No. 162 of 1955 was entered as a final order, terminating any further proceedings in that matter. In contrast, the Court examined the group of appeals numbered 38 through 44 filed in the year 1956 and found merit in the contentions raised therein. Having considered the arguments and evidence presented, the Court resolved to allow each of those appeals, effectively granting relief to the respective petitioners. The allowance of Appeals Nos. 38 to 44 of 1956 meant that the decisions of the lower tribunals were set aside and the matters were remanded for appropriate disposition. The orders pertaining to the allowed appeals were recorded together, ensuring that the costs and further procedural directions would be addressed in a consolidated manner. Thus, the final disposition comprised the award of costs in the specified appeal, the dismissal of Appeal No. 162 of 1955, and the granting of relief in Appeals Nos. 38 to 44 of 1956.