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TMI Blog1943 (5) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... computing the total income determined for income-tax? (2) What should be the principle on which cost of management in collection of royalties is to be determined when there is a combined management covering both the zamindari collection of agricultural income and royalties of mines? The Commissioner of Income-tax was of the opinion that the second question raised no question of law and should not be answered by the High Court. In fact, no argument was addressed by the assessee to the High Court thereon, and the High Court concurred in the opinion of the Commissioner of Income-tax. No further reference to that question need therefore be made. The assessee, Kumar Kamakshya Narain Singh Bhadur, is and was at all material times the proprietor of a revenue paying estate known as the Ramgarh Raj, bearing tauzi No. 28, in the Collectorate of Hazaribagh, being impartible and governed by the rule of primogeniture. At the time of the assessment which is the subject-matter of this appeal, the estate was under the management of the Court of Wards the assessee being a minor. On 10th August 1937, the assessee attained his majority and the estate was released from the management of the Court of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain fixed rate per ton of coal extracted, the aggregate of such payments must not be less than a minimum sum in any year. This minimum has to be paid even if no coal is extracted. From this it follows that royalty is not the price of coal taken as the assessee contends." The assessment was confirmed. By a petition under Section 33 of the Act to the Commissioner of Income-tax the assessee prayed that the Commissioner should send for the record and that the order of the Assistant Commissioner be set aside and a fresh assessment be made, which petition was rejected. By an application under Section 66(2) of the Act the assessee required the Commissioner of Income-tax to refer the two questions set out above for decision of the High Court. On 23rd December 1938, the Commissioner of Income-tax drew up a statement of the case exhibiting a specimen of the mining leases concerned referring these questions to the High Court, and expressed his own opinion upon them, which was, as regards the first question: (a) Receipts under leases in the terms of the exhibit were rightly held by the appellate officer to be annual income and not capital instalments of a purchase price. The High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thousand nine hundred and fifteen the royalty on all coal and coke raised gotten manufactured and despatched from the said lands hereby demised at the rates following that is to say:- Four annas per ton on all steam coal, three annas per ton on all rubble coal and two annas per ton an all dust coal raised and despatched and eight annas per ton on all hard coke and six annas per ton on all soft coke manufactured and despatched." The lease provided for payment of minimum royalty at the end of any year in which royalties on coal raised and despatched should be less than a certain amount. It also contained usual covenants and in particular that the lessees undertook to deliver up the mines in good order and condition at the end or sooner determination of the term. It included a covenant by the lessor for quiet enjoyment and the lessees were granted liberty to determine the lease on certain terms. The lessors were further entitled to enter upon the demised premises and to determine the lease on specified conditions if the royalties were not duly paid. The other leases were in terms similar for all purposes material to this appeal to the lease just referred to. The appellant's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39; covenants to pay them, and hence royalties fall under "other sources." The appellant's substantial argument is that the coal on his land is capital, and that the sums which he receives from time to time for each ton raised and despatched is a capital receipt, being the price given in exchange for the capital asset, as and when the property in each ton vests in the lessee. He supports this contention also on what he terms are the realities and equities of the position. These, as he urges, arise from the circumstance that the coal is a wasting property and is being gradually exhausted as each ton is raised and disposed of. He has also submitted, though not perhaps very strenuously, that whereas under English Acts mines and income from them are expressly dealt with and are clearly therefore subjected to the tax, the position under the Indian Act is different in the respect that mining royalties are not expressly specified as taxable. He has also contended that their peculiar characteristics make the general words "income, profits and gains" inapplicable to them, at least in the absence of their being expressly mentioned. The issue depends on the true int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lordships' judgement, for reasons which will now be explained, constitute income, as the High Court at Patna has held in upholding the assessment. The appellant's case was primarily based on certain observations made by Lord Cairns in Gowan v. Christie [1873] 2 Scotch App. 273, at p. 283. Lord Cairns said: "for although we speak of a mineral lease, or a lease of mines, the contract is not, in reality, a lease at all in the sense in which we speak of an agricultural lease. There is no fruit; that is to say, there is no increase, there is no sowing or reaping in the ordinary sense of the term, and there are no periodical harvests. What we call a mineral lease is really, when properly considered, a sale out and out of a portion of land. It is liberty given to a particular individual for a specific length of time, to go into and under the land and to get certain things there if he can find them, and to take them away, just as if he had bought so much of the soil." Lord Cairns was there not considering the question whether royalties under such a lease were capital or income for purposes of taxation. The question was whether the lessee was entitled to be relieved fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is true that Lord Blackburn was dealing with the English statutes which were clearly different from the Indian Act. Under the latter Act, the tax is on "income." Mines are not specially mentioned as they are in the English Act. But if income is in fact derived from mines, it is to be taxed as much as "income" from any other source. The general term covers the specific instances. The grounds on which the appellant contends that the royalties are not "income" are that they are capital receipts from a wasting property. In principle, in their Lordships' opinion, both these points are disposed of by Lord Blackburn's words, which depend on general principles, not on rules peculiar to the English Acts. Income, it is true, is a word difficult and perhaps impossible to define in any precise general formula. It is a word of the broadest connotation. Its definition has, however, been approached in recent decisions of this Board. The fist to which their Lordships think it is desirable to refer is Commissioner of Income-tax, Bengal v. Shaw Wallace & Co. [1932] 59 I.A. 206 Sir George Lowndes in delivering the judgement of the Board once more wisely empha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neral, and particularly when it is constituted by mining rent or royalties. These are periodical payments, to be made by the lessee under his covenants in consideration of the benefits which he is granted by the lessor. What these benefits may be is shown by the extract from the lease quoted above, which illustrates how inadequate and fallacious it is to envisage the royalties as merely the price of the actual tons of coal. The tonnage royalty is indeed only payable when the coal or coke is gotton and despatched: but that is merely the last stage. As preliminary and ancillary to that culminating act, liberties are granted to enter on the land and search, to dig and sink pits, to erect engines and machinery, coke ovens, furnaces and form railways and roads. All these and the like liberties show how fallacious it is to treat the lease as merely one for the acquisition of a certain number of tons of coal, or the agreed item of royalty as merely the price of each ton of coal. The contract is in truth much more complex. The royalty is "in substance a rent ; it is the compensation which the occupier pays the landlord for that species of occupation which the contract between them all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties, are wasting assets is irrelevant. The English cases are sufficiently collected and explained by the Court of Appeal in Alianza Co., Ltd. v. Bell [1905] 1 K.B. 184, affirmed in the House of Lords in 1906 A.C. 18 [1906] 5 Tax Cas. 172. That case states principles which are generally applicable in India as well as in England. If the receipts are income, it is not material for tax purposes that that for which they are paid comes from a wasting property. If the payment ceases because the source ceases, so does the tax. Once it is established that the royalties are income within the meaning of the Act it is not material that the mines are in course of being exhausted unless there is provided in the Act that there should be a deduction from the income on that particular ground. But there is under the Indian Act no provision for allowance for amortisation in respect of the minerals being exhausted. Indeed, whereas here the lease is for 999 years, an attempt to quantify the appropriate allowance would be scarcely practicable. However, Section 12(2) already quoted in this judgment, expressly excludes allowances in respect of capital expenditure. Any ordinary expenditure incurred by the ..... 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