TMI Blog1951 (4) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... ,00,000, ₹ 40,000 and ₹ 60,000 for the three indentures of lease . The annual rent reserved was ₹ 10, ₹ 5 and ₹ 5. In the first case the term of the lease was 11 years, in the second case 10 years and in the third case 15 years. It was stipulated that after the expiry of the period the right of the assessee will be revived in each case and the assessee would be entitled to collect from the original lessees the amount of royalties and rent as before. The amount of ₹ 2,00,000 which the assessee received from the Bengal Discount Co. was taxed by the Income-tax Officer as assessable income. On appeal the Appellate Assistant Commissioner maintained the order of the Income-tax Officer. In second appeal the Appellate Tribunal held that the sum of ₹ 2,00,000 was advance receipt of royalty and was therefore assessable to income-tax. Another question was also debated before the Appellate Tribunal, viz., with regard to the sum of ₹ 84,000 in possession of the assessee on account of the encashment of high denomination notes. On the same date the assessee encashed notes to the extent of ₹ 95,000. The Income-tax Officer assessed the wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was for a period of 999 years. The amount of salami was ₹ 3 lakhs odd. In Commissioner of Income-tax v. Maharajadhiraj Kumar Visheshwar Singh [1939] 7 I.T.R. 536; I.L.R. 18 Pat. 805 the settlement was made for an indefinite period and the salami was ₹ 1,800 for 4 bighas of land. Upon the interpretation of the transaction in each case, the High Court held that the salami represented the price for parting with the land and was not advance rent. In Commissioner of Income-tax v. Maharajadhiraj Kumar Visheshwar Singh* Manohar Lall, J., indeed observed that it was impossible to lay down a hard and fast rule that salami can in no case be taxable, and that the question would depend on the facts and circumstances of each case. In the present case, the problem is to determine what is the real nature of the transaction between the assessee and the Bengal Discount Company. It is true that the parties have described the contracts as indentures of leases , the lump sum payment of ₹ 2 lakhs as salami and the small annual payment of ₹ 10 or ₹ 15 as rent . But in the application of the law relating to income-tax, the principle is well-established that the name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar to pay royalty and commission to the Bengal Discount Co. for the period of the lease. The other documents, Exhibits D/2 and D/3, are couched in similar terms. But in Exhibit D/5 there is the important recital that the Raja was not able to pay income-tax and road cess and was in need of further money and on this account was giving the lease in respect of his right created by the registered patta dated 9th March, 1900, from Messrs. Nowagarh Properties Limited. It is manifest that the transaction, though in form a sub-lease was in substance an assignment by the Raja of his right to realise royalties and rents for a term of 10 to 15 years. As consideration for the contract the Raja received a lump sum of ₹ 2 lakhs, which it is plain, is nothing but advance payment of royalty. No other right except the right to collect royalty and rent from the original lessees is transferred by the assessee to the Bengal Discount Co. The assessee has not parted with any interest in the land but has merely assigned his contractual right. Reference may be made in this context to Commissioners of Inland Revenue v. Thomas Nelson Sons [1938] 22 Tax Cas. 175 in which the assessee company had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 lakhs being a lump sum payment cannot be classed as income. Reference was made to Income-tax Commissioner v. Shaw, Wallace Co. [1932] 59 I.A. 206 in which at page 212 Sir George Lowndes observed: The object of the Indian Act is to tax 'income', a term which it does not define. It is expanded, no doubt, into 'income, profits and gains', but the expansion is more a matter of words than of substance. Income, their Lordships think, in this Act connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something, which is often loosely spoken of as 'capital'. But capital, though possibly the source in the case of income from securities is in most cases hardly more than an element in the process of production . But this passage must be read in the context of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit realised on a sale of shares may be capital if the seller is an ordinary investor changing his securities, but in some instances at any rate it may be income if the seller of the shares is an investment or an insurance company. Income is not necessarily the recurrent return from a definite source, though it is generally of that character. Income again may consist of a series of separate receipts, as it generally does in the case of professional earnings. The multiplicity of forms which 'income' may assume is beyond enumeration . On behalf of the assessee the argument was stressed that the payment of ₹ 2 lakhs was made to the assessee in a lump sum and so the amount ought not to be classed as taxable income. But there is no magic in the distinction between a lump sum and a periodical sum and the only material question in the case is what is the true nature of the sum. In Rustproof Metal Window Co. Ltd. v. Inland Revenue Commissioners [1948] 16 I.T.R. Suppl. 57, a patentee entered into a contract conferring on a licensee the right to manufacture up to a stated number of articles in accordance with the patent on condition that the licensee paid a lump sum d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable to be taxed. At page 746 Viscount Cave states: The payment was made in respect of the use of the invention over a period of time. The claim put in was a claim as for royalty in respect of the successive uses of the invention. In the case of patented inventions it was the practice of the Commission, as appears from their Report which has been cited on behalf of the appellant, to take as a basis of their award a fair royalty as between a willing licensor and a willing licensee, and I have little doubt that that basis was accepted in the present case, subject, no doubt, to certain deductions. Lastly, the patent itself, that is the corpus of the patent, was not taken away from the appellant and his partner but still remains in them. In view of all the facts I am satisfied that the sum awarded is to be treated as profits or gains, and annual profits or gains, within the meaning of the Income-tax Act . Viscount Dunedin was also emphatic: I think, on the real merits of the case, the case was scarcely arguable. This was a patent which remains this man's property. He, in the old days, got royalties for it, and those were the profits of his property. He had taken, by the Crown, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt and the payments of royalty of 2,500 were assessable to income-tax. The decision of the Special Commissioners was affirmed by the Court of Appeal. In pronouncing judgment Lord Greene, Master of the Rolls, treated the question whether a lump sum payment was a capital payment or income payment as a question of fact to be determined in the context of each particular case: It seems to me that in the case of patents, as in the case of any other matters, the fundamental question remains in respect to any particular payment: is it capital or is it income?, and that question has to be decided, as it has to be decided in reference to other subject-matters, upon the particular facts of each case, including in those facts the contractual relationships between the parties. It has been said that the question is one of fact, and it is, when one gets to the bottom of it, an accountancy question. In saying that it is a question of fact, one does not mean that, in deciding it, questions of law may not have to be discussed and decided. For example, the construction of a contract may be one of the elements which must be taken into consideration in deciding that question; there may be cases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authoress, had entered into three agreements with a publishing company in 1925, 1932 and 1935, respectively, whereby she granted limited publishing rights in respect of three books written by her in consideration of payments based on the number of copies sold. In 1940 these agreements were cancelled and the same limited publishing rights were transferred outright to the publishing company in consideration of a lump sum payment. On appeal against an assessment to income-tax it was contended that the lump sum payment was a capital receipt. Macnaghten, J., rejected the contention, holding that the payment in question formed part of the annual profits and gains of the assessee, and was rightly taxed. My learned brother has referred to the fact that in Salmson Aero Engines' case [1938] 22 Tax Cas. 29: 7 I.T.R. 245, the decision of Lord Greene was also based on the circumstance that in the agreement there was a fundamental difference in the nature of the two classes of sums, in this sense that the former class starts off by being a lump sum payment definite and fixed, which is then payable by instalments. The other class is not of that description; no lump sum payment is referre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a logical result that the price for an outright sale of the royalties should be classed as income and not as a capital receipt, that such a conclusion was opposed to common sense. But it is not the business of the Court to demarcate the boundary between two categories in a mathematical sense. The indication of the boundary need only be sufficiently distinct for the immediate problem in hand. In this connection reference should be made to Hobbs v. L. S.W. Railway [1875] L.R. 10 Q.B. 111, in which Lord Blackburn observed of the rule in Hadley v. Baxendale [1854] 9 Exch. 341: It is a vague rule, and as Bramwell, B., said, it is something like having to draw a line between night and day; there is a great duration of twilight when it is neither night nor day; but on the question now before the Court, though you cannot draw the precise line, you can say on which side of the line the case is . For the reasons given I am definitely of opinion that the amount of ₹ 2 lakhs which was paid by the Bengal Discount Co. to the assessee in consideration of the so-called indentures of lease was a taxable income. This question must therefore be answered against the assessee. As regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 29,534. The Tribunal remarked that there was no evidence that there was a ₹ 10,000 note in any of these receipts and that the Raja and his employees had not disclosed from whom the notes of the value of ₹ 10,000 each were obtained. In my opinion there is no onus thrown upon the Raja to indicate from whom each note to the value of ₹ 10,000 was received, and no adverse inference ought to have been drawn by the Tribunal against the assessee. In this context reference should be made to Income-tax Commissioner, Bombay Presidency and Aden v. Bombay Trust Corporation [1936] 4 I.T.R. 323; 63 I.A. 408., in which B, a company registered and carrying on business in British India, was assessed to income-tax in respect of the year of assessment 1928-29 as agent of H, a company registered and carrying on business outside India. On a reference to the High Court it was held that there was no evidence that in 1927 H received from B any sums as interest on money lent, and that H was not therefore in receipt of the profits or gains taxable under Section 42, sub-section (1), and Section 43 of the Indian Income-tax Act. At page 418 the report states: In their Lordships ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeared that the assessee had, during the last seven years from 1346 to 1352 B.S., drawn from his serishta various sums of money representing the income from his estate and had from time to time given back to the serishta according to his requirement certain sums of money, and the difference between the two sums represented a balance of ₹ 1,82,000 and odd which amount would be more than sufficient to cover and explain the sum of ₹ 84,000 representing the value of the high denomination notes. These figures have not been contested by the Department, and in fact they have been accepted by the revenue authorities. The case of the Department, however, is that this amount must have been spent by the assessee in view of the fact that he entered into the transactions with the Bengal Discount Company for the purpose of raising money to satisfy his needs. If the view of the Department is correct, then the money must have been spent before the 21st of April, 1945, when the assessee first entered into a transaction with the aforesaid company and the income aforesaid must have been received by the assessee between this 21st of April, 1945, and the 21st of January, 1946, when the hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssions from Rai Sahib Chandanmal during the operation of the lease. The document further provided that if during the said period the lessee auction-purchased for arrears of royalties and commissions the interest of Rai Sahib Chandanmal Indrakumar in the lands, then after the expiry of the lease the purchaser lessee would have to pay the rents and royalties as payable by Rai Sahib Chandanmal himself to the lessor. These, in short, are the material terms of the document. It would prima facie appear on the face of the recitals that this lump sum payable under the various leases was payable as salami and was sought to be a distinct payment from the annual payments mentioned therein. There was thus a fundamental difference in the nature of the two classes of sums payable under the leases in question. The former starts off with a lump sum payment, definite and fixed; the other class is not of that description. The latter class is indisputably nothing but an undertaking to pay yearly sums as royalty. The parties were thus creating an obligation as between themselves which they chose to describe as rent payable each year in respect of the fixed rate but as salami in regard to the lump sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yalty in advance. In that case every premium can be treated as a consolidated amount of the rental paid in advance. It goes without saying that premium or price is always fixed after taking into consideration the amount of annual rent which the lessee is to pay to the lessor, and this ratio of the premium to the annual rent varies almost in each case in the inverse proportion. It is true that the lessee here gets the right to collect the royalty during this period, but then the position is that for the period of the lease the lessor cannot enforce this right as against Rai Sahib Chandanmal, and it is on account of parting with this right that the lessor-assessee has received the consideration of the premium in question. Besides, the royalty actually realisable by the lessee from Rai Sahib Chandanmal from year to year is a variable and an unknown quantity (though, of course, the minimum royalty may be indicated). Therefore, there is nothing to connect the premium paid with the proportion of the royalty realisable by the lessee himself after the leases began to operate. For all these reasons I was inclined to think that this salami was not an advance payment of the annual rent or roy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly sums as royalty . It was accordingly held in the case that the lump sum payment of 25,000 was a capital receipt not liable to assessment but that the further payments of 2,500 were royalties and taxable as income of the assessee. It is true that the case was a decision on its own facts but the facts are very significant. The contract was not a lease but a mere licence and the period for which it was to operate was only a period of ten years, yet the decision about the lump sum payment was to treat it as a capital payment and not income. This decision has been very strongly relied upon by Manohar Lall, J., in Commissioner of Income-tax v. Maharajadhiraj Kumar Visheshwar Singh [1939] I.L.R. 18 Pat. 805; 7 I.T.R. 536, referred to above. The term income has nowhere been defined in the Income-tax Act any more than the term capital . In the case of Shaw Wallace Co. [1932] 59 I.A. 206; I.L.R. 59 Cal. 1343 the Judicial Committee attempted to describe the term income in the following manner:- The object of the Indian Act is to tax 'income', a term which it does not define. It is expended, no doubt, into 'income, profits and gains' but the expansion is m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine that it has to be decided, as it were, by the spin of the coin. The cases relied upon on behalf of the taxing department are all cases where the lump sum payment specifically carried the attribute of the periodical payment as income and was definitely identifiable as such. It is true that the Income-tax Act is not cast on logical lines and in some cases the line has to be drawn with an arbitrary firmness. This case appears to me to be very much on the border-line, if not, as I tried to show, on the right side of it. My learned brother is very definitely of the opinion that the amount of rupees two lakhs which was paid by the Bengal Discount Company to the assessee in consideration of the so-called indentures of lease was a taxable income . His decision is in conformity with the decision of the revenue authorities and I do not propose to disturb the status quo unless the circumstances of the case were absolutely compelling and pointed definitely in a contrary direction. I have, therefore, persuaded myself eventually to adopt the answer proposed by my learned brother to the first question as well. The question whether a certain amount is capital receipt or income has always to b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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