Maharaja Chintamani Saran Nath Sah Deo vs The Commissioner Of Income-Tax, Bihar and...
Rewritten Version Notice: This is a rewritten version of the original judgment.
Court: supreme-court
Case Number: Civil Appeal No. 424 of 1957
Decision Date: 30 November 1960
Coram: J.L. Kapur, M. Hidayatullah, J.C. Shah
In this matter the appellant, identified as Maharaja Chintamani Saran Nath Sah Deo, challenged a decision of the Commissioner of Income‑Tax, Bihar. The case was heard by a three‑judge bench of the Supreme Court of India consisting of Justice J L Kapur, Justice M Hidayatullah and Justice J C Shah. The appeal, numbered Civil Appeal No 424 of 1957, was filed by special leave against a judgment and order dated 25 January 1955 issued by the Patna High Court in Miscellaneous Judicial Case No 621 of 1953. The appellant was represented by counsel for the appellant and counsel for the respondent. The judgment was delivered on 30 November 1960.
The substantive dispute arose from three assessments made against the appellant for the assessment years 1945‑46, 1946‑47 and 1947‑48. The appellant, a zamindar possessing extensive land holdings, had in the relevant years granted licences to various parties for the prospecting of bauxite within his estates. The licences were as follows: the Aluminium Corporation of India Ltd. obtained a licence on 20 January 1945 for a period of six months covering the assessment year 1945‑46 and paid Rs 15,290; the Indian Aluminium Co. Ltd. received a licence on 26 May 1945 for a period of one year covering the assessment year 1946‑47 and paid Rs 1,24,789; Mr Dayanand Modi was granted a licence on 7 May 1945 for six months covering the assessment year 1947‑48 and paid Rs 1,500; and the Indian Aluminium Co. Ltd. again obtained a licence on 14 August 1945 for one year covering the assessment year 1947‑48 and paid Rs 70,146. The Income‑Tax Officer initially held that these receipts were revenue in nature and therefore taxable. On appeal, the Appellate Assistant Commissioner reversed that view, characterising the sums as capital receipts. However, the Income‑Tax Appellate Tribunal set aside the Commissioner’s finding and reinstated the view that the amounts were revenue receipts liable to tax. Consequently, under section 66(1) of the Income‑Tax Act, the appellant sought a reference to the High Court, which framed the question: “Whether in the facts and circumstances of these cases the sums of Rs 15,209, Rs 1,24,789, Rs 1,500 and Rs 70,146 received by the assessee are income assessable to tax under the Indian Income‑Tax Act?” The High Court answered affirmatively, observing that the Tribunal’s determination was based on material facts and constituted a finding of fact, concluding that the payments were revenue receipts rather than capital receipts. The appellant then appealed this decision to the Supreme Court by special leave. The principal issue before the Court was to decide whether the sums received by the appellant should be classified as capital or revenue receipts, which required an examination of the nature of the licences. The licences conferred upon the licensees the sole and exclusive right to enter the lands, to prospect, search, mine, quarry, bore, dig and, for purposes incidental thereto, to dig, drive, make and maintain pits, shafts, borings, inclines, levels, drifts, air‑courses, drains, water‑courses, roads and ways, and to erect temporary engines, machinery and sheds as may be reasonably necessary for the effective conduct of the prospecting operations. The Court ultimately held that the payments represented the acquisition of a capital right under the lease and therefore constituted a capital receipt.
The licence authorised the holder to prove all bauxite that lay in, under or within the specified lands and, for that purpose and for any incidental activities, to dig, drive, make and maintain pits, shafts, borings, inclines, adits, levels, drifts, air courses, drains, water courses, roads and ways, and to set up, erect and construct temporary engines, machinery, sheds and any other things reasonably necessary for effectively carrying on the prospecting operations authorised by the licence. The licence further permitted the holder to remove, take away and appropriate samples and specimens of bauxite of every quality, kind and description, provided that the total quantity removed during the term of the grant did not exceed one hundred tons.
The Court observed that the salami received by the assessee had rightly been treated as a capital receipt. It described the salami as a single payment made for the acquisition of the right of the lessee to enjoy the benefits granted by the lease. That general right could properly be regarded as a capital asset, and the money paid to purchase it could appropriately be characterised as a payment on capital account, whereas royalties were of a different character. (1) (1943), L.R. 70 I.A. 186. Counsel for the respondent attempted to distinguish this observation on the ground that the lease in question was granted for a term of 999 years; however, the Court noted that the observations were based not on the length of the lease but on the nature of the right that was conveyed.
In the earlier decision of Commissioner of Income‑tax, Bihar and Orissa v. Raja Bahadur Kamakshya Narain Singh, a coal company had been granted by the Court of Wards a prospecting licence over certain coal‑bearing lands, together with an option of renewal and the right to obtain a mining lease on specified terms. The prospecting licence was extended on four occasions. After the assessee attained majority, he contended that the granting of the licence was ultra vires the Court of Wards. Nevertheless, a settlement was reached between the licencee and the assessee whereby the latter agreed to accept the various prospecting licences, their extensions and leases. In consideration of this settlement, the assessee received a salami of Rs 5,25,000, a capital lump sum of Rs 40,000 and additional payments in lieu of cesses. The issue before the Tribunal was whether these amounts were capital or revenue receipts. The Tribunal held that the Rs 5,25,000 received as salami and the payments received as cesses were capital receipts and therefore not taxable. While Manohar Lal, A.C.J., regarded the amount as received by way of settlement rather than as a salami, S.K. Das, held that the salami constituted a lump‑sum payment for the rights granted to the licencee, namely the right to prospect for a specified number of years and the right to obtain mining leases, and consequently the salami was unquestionably a capital receipt. (2) [1941] 9 I.T.R. 313, and therefore not part of the assessee’s taxable income.
In this matter the Court observed that a payment termed salami could, in certain circumstances, be treated as rent paid in advance and therefore would constitute assessable income; however, where the payment could not be characterised as rent, it would not be regarded as income and consequently would not be taxable. The Court further noted that, on its face, salami is not income. Referring to the decision of The Member for the Board of Agricultural Income Tax, Assam v. Smt. Sindurani Chaudhurani (1), the Court reproduced the definition of salami advanced by that judgment. According to that definition, the hallmarks of a salami payment are (i) its single, non‑recurring nature and (ii) its being made before the tenancy is created. Such a payment represents the consideration given by a tenant for being allowed possession and therefore is neither rent nor revenue; it is a capital receipt in the hands of the landlord. Accordingly, when the consideration is paid by a tenant or a licencee for being let into possession with the purpose of obtaining a tenancy, or, as in the present case, for obtaining a right to extract minerals, the payment cannot be described as rent or revenue but must be regarded as a capital receipt.
The Court explained that, in Sindurani’s case (1), the salami was a lump‑sum payment representing the consideration for the landlord’s transfer of his right under the lease of a holding. The Court found that the covenant terms in the present case bear a close similarity to the payment described in Sindurani’s case (1). Although the respondent attempted to distinguish the present case on the ground that a tenancy capable of maturing into an occupancy holding had been transferred, the Court held that this distinction was irrelevant to the determination of salami. The defining characteristic of salami, as reaffirmed, is that it is consideration paid by a tenant for being let into possession for the purpose of creating a new tenancy.
The Court also referred to Raja Bahadur Kamakshya Narain Singh’s case (2), in which the Privy Council articulated a general definition of salami and identified its essential features without reference to the specific nature of the lease involved. Responding to the argument advanced by counsel for the appellant, the respondent’s counsel, Mr. Rajagopal Sastri, contended that the pivotal question was whether the licensor had permitted the licensee to take the capital itself or merely to use the capital. He suggested that if the former were true, the receipts would be capital in nature, whereas if the latter were true, they would be revenue receipts. The respondent asserted that the latter view applied because the licensee was merely allowed to enter the land and make use of the assets belonging to the licensor.
The Court rejected this line of reasoning. It held that the licence granted to the licensee conferred the right to enter the land for the purposes of prospecting, searching and mining, which is a grant of a substantive right to a portion of the capital asset itself rather than a mere permission to use the licensor’s capital. Consequently, the payment in question could not be characterised as revenue; it was a capital receipt.
The licence granted the holder the authority to quarry, bore, dig and prove all bauxite situated in or beneath the land. For that purpose the licence expressly permitted the holder to excavate pits, shafts and borings, and to remove, take away and appropriate samples and specimens of bauxite in reasonable quantities, provided that the total amount removed did not exceed one hundred tons in the aggregate. The Court observed that such a grant could not be characterised merely as a permission to use the licensor’s capital. Rather, it represented a conveyance of a limited portion of the capital itself, in the form of a general right to the capital asset. To support this distinction between mere use of capital and the taking away of capital, counsel cited the observation of Lawrence J in Greyhound’s case (3), wherein he explained that the question of whether receipts are revenue or capital has attracted divergent opinions, but that, in his view, if a sum is received for the true use of capital assets and not for their realisation, it constitutes a revenue receipt and not a capital receipt.
The Court noted that while the cited passage may be correct in its own context, the determination in the present matter must be based on the nature of the grant itself. The terms of the covenant, as quoted above, demonstrate that the transaction involved not merely the use of capital assets but the realisation of a portion of that capital. Accordingly, applying that test, the Court concluded that the receipts arising from the licence should be classified as capital receipts rather than revenue. Counsel further referred to the Patna High Court decision in R. B. H. P. Bannerji v. Commissioner of Income‑tax, Bihar & Orissa (2), where the High Court held that compensation received by the assessee (1) (1936) 20 T.C 373. (2) [1951] 19 I.T.R. 596. for the temporary use of his land by the military was a revenue receipt. In that case the assessee had purchased thirteen bighas of land for the purpose of establishing a market; the land was subsequently requisitioned by military authorities under the Defence of India Rules, and the assessee received compensation for the use of the land. The High Court classified that compensation as revenue because it represented profit derived from the land for the use of a capital asset. Counsel also relied on Smethurst v. Davy (1), a case decided on the wording of section 31(1)(d) of the Finance Act of 1948, which the Court found of limited relevance. Another citation was to Stow Bardolph Gravel Co., Ltd. v. Poole (2), where the assessee company, engaged in the sand and gravel business, purchased two unworked deposits and claimed that the payments made to acquire the deposits were deductible as expenses incurred in acquiring trading stock or otherwise of a revenue character. The Special Commissioners, however, held that the company had acquired a capital asset and not stock‑in‑trade, and the Court considered that finding unhelpful to the present dispute.
The respondent also relied on the decision in Rajah Nanyam Meenakshamma v. Commissioner of Income‑tax, Hyderabad, reported in [1956] 30 I.T.R. 286. In that precedent the tribunal held that certain fixed sums of money paid as royalty for the entire period of a lease were to be treated as revenue receipts because they represented consolidated advance payments of amounts that otherwise would have been payable periodically. The Court observed, however, that none of the authorities cited by the respondent—including the cases referred to earlier—provided any assistance to the respondent’s position. The central question before the Court was to determine the nature of the transaction that gave rise to the dispute. The licence under consideration contained covenants granting the licensee a right to enter the land and to remove and appropriate samples of all kinds of bauxite up to a limit of one hundred tons. Such a grant amounted to a transfer of a valuable right, and the consideration paid for that right was therefore characterized as a capital payment, rather than as ordinary revenue. The Court noted the earlier authorities, namely [1957] 37 T.C. 593, (1954) 35 T.C. 459, and [1956] 30 I.T.R. 286, and concluded that the High Court had erred in its interpretation. Accordingly, the Court allowed the appeal, set aside both the judgment and the order of the High Court, and decided the matter in favour of the appellant, awarding costs to the appellant in both this Court and the High Court. The appeal was thus allowed.