TMI Blog1960 (3) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. By a deed of lease dated March 31, 1950, both the tea estates including the factory and all appurtenances thereto were demised to one Messrs. Hiralal Ramdas for a period of ten years with effect from January 1, 1950. The annual rents reserved in the deed was ₹ 54,000. In addition to that a premium of ₹ 2,25,000 was agreed to be paid by the lessee to the lessor. ₹ 45,000 out of the said amount of premium were payable at the time of the execution of the lease and the balance of ₹ 1,80,000 was payable in sixteen halfyearly instalments of ₹ 11,250 each on or before January 31 and July 31, every year commencing from 1952 until July 31, 1959. In the year of account in pursuance of the aforesaid terms of the lease a sum of ₹ 11,250 was paid by the lessee to the assessee company. The Income- tax Officer was of opinion that this receipt of ₹ 11,250, though described as a part of the premium, was in reality rent and, therefore, it was a receipt of a revenue nature and was liable to be taxed. This amount was thus included in the total income of the assessee. The contention of the assessee was that the receipt was of a capital nature and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for the sale of a plot of land may ordinarily be a capital receipt but if the business of the recipient is to buy and sell lands, it may be his income. These observations were referred to with approval by their Lordships of the Supreme Court in the case of Commissioner of Income-tax v. Vazir Sultan and Sons [1959] 36 I.T.R. 175, 179. Mr. Iyengar who appears for the assessee has first contended that the court should give effect to the transaction entered into between the parties. A solemn document drawn up between the parties representing the transaction should not be lightly overlooked and in the absence of anything to show to the contrary, the words of the document should be given effect to. If the parties have clothed a particular transaction in a particular form, it is not open to this court to re-write the agreement in order to tax an assessee. He contends that the document has described the amount of ₹ 2,25,000 as premium. The lessor was not carrying on the business of selling or leasing out his lands. The tea estate with the factory and all appurtenances thereto was in the nature of a capital asset of the company and if the company parted with its rights thou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that case although was payable as a royalty and was a recurring payment, still their Lordships held that it was a part of the sale consideration and thus was in the nature of a capital receipt. This case to my mind supports the contention of the assessee. The next case cited is Rajah Manyam Meenakshamma v. Commissioner of Income-tax [1956] 30 I.T.R. 286. In this case the assessee had granted two mining leases, one of which was for a period of thirty years and the other for twenty-five years. In the first lease ₹ 12,000 in a lump sum was fixed as royalty for the whole period of the lease and in the second, a sum of ₹ 23,000 in lump sum was fixed as royalty for the whole period of the lease, and both these sums had been paid to the lessor on November 19, 1946, and on consideration of the circumstances it was held by the Andhra High Court that the sums of ₹ 12,000 and ₹ 23,000 were consolidated advance payments of the amounts which would otherwise be payable periodically for the occupation of the mines and were, consequently, revenue receipts liable to be assessed to income- tax and not capital receipts. It was observed in that case as follows [1956] 30 I. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces; and in some cases the licensees were to report on the progress of work each month. In each of the four licences granted by the assessee, the period for which the licence was granted was rather short; in two cases the period was six months and in the other two, one year. In one of the licences there was a condition that the licensees could remove bauxite up to the extent of 100 tons during the term of the licence. The Tribunal held that the amounts received by the assessee were income and not capital receipts. The High Court of Patna on reference held that there was sufficient material for the Tribunal to hold that the amounts in question were income and there was no ground for holding that the amounts were capital receipts. In this case reliance was placed by the counsel for the assessee on the earlier case of the same court in Kamakshya Narain Singh v. Commissioner of Income-tax [1946] 14 I.T.R. 738. It was however distinguished on the ground that the question whether a certain amount is capital receipt or income has always to be decided on the facts and the circumstances of each case and no hard and fast rule can be laid down for the purpose. Ramaswami, J. (as he then was), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... areholders was not a distribution of profits and did not constitute income in their hands for the purposes of super-tax. This decision was reversed by Rowlatt, J. But the Court of Appeal reversed his decision which was ultimately affirmed by the House of Lords. Lord Shaw in his judgment observed as follows [1926] 10 Tax Cas. 302, 336: Upon the legal side of the matter it must not be forgotten that all the necessary resolutions, confirmations, new articles of association, etc., required to regularise the transaction have been carried through. It is a transaction in itself unassailable in law. The result of it was to negate emphatically the idea of distribution to shareholders as income; on the contrary, it was to withdraw from each shareholder the sum which might have been given to him as income, and to withdraw it definitely from an income fund. It was stamped as a capitalisation transaction. Such a transaction was within the power to the shareholders of the company, and all, including the Crown, are bound by that. It is incorrect in principle to attempt to get behind that transaction, legal and competent and regular in form, and to endeavour to construct a canon of liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant installed. The agreement was for five years, but was to continue thereafter indefinitely. It was, however, determinable at any time by either side on certain specified grounds. The tyres processed on the trader's premises were to be invoiced by the company to him at a discount off current list prices and were to be sold by him at prices fixed by the company. The question arose about the lump sum payments made under the agreements as to whether they were trading receipts. The company contended that under the agreements they were disposing of capital assets and that the sums in question were capital receipts. This constention was upheld. Wrottesley, J., observed as follows: Capital and income are not purely legal conceptions, but conceptions which arise in trade and business, and in all borrowings and lendings. Sometimes it is the easiest thing in the world to distinguish between capital and income; as for instance, in the case of simple loan at a rate per cent. of interest. On the other hand it is sometimes a matter of the greatest difficulty to say whether any particular receipt or expenditure is in the nature of capital or revenue. For the purposes of income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ank of India [1936] 4 I.T.R. 239 the Privy Council affirmed the decision of the Calcutta High Court and held that by the transactions in question no income, profits or gains accrued or arose or were received by the trustees under section of the Indian Income-tax Act and the trustees were not liable to be assessed to income-tax in respect of the debentures. It was observed by their Lordships of the Privy Council that the personal motive or purpose of the individual shareholders, even if they hold a controlling interest in the company, is irrelevant, if it is made out that the company has in fact capitalised the accumulated profits. The observations of Lord Sumner in Fisher's case [1926] 10 Tax Cas. 302 which I have already referred to earlier were approved. These cases have been cited by the counsel for the assessee for the proposition that the motive of the party is not to be taken into consideration in deciding as to the nature of the receipt in the hands of the assessee. The transaction has got to be taken, if valid and in accordance with the law, on its face value and in the absence of anything to show that the transaction was different from what it is represented to be unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence in principle between a payment out-and-out for monopoly value and a payment in respect of a term. Each licence granted for a term must stand by itself, since an application for its renewal falls to be treated as an application for a new licence. This is what I mean when I say that there is a false appearance of periodicity about these payments. Whenever a licence is granted for a term, the payment is made as on a purchase of a monopoly for that term. When a licence is granted for a subsequent term, the monoply value must be paid in respect of that term, and so on. The payments are recurrent if the licence is renewed; they are not periodical, so as to give them the quality of payments which ought to be debited to revenue account. The thing that is paid for is of a permanent quality, although its permanence, being conditioned by the length of the term, is short-lived. A payment of this character appears to me to fall into the same class as the payment of a premium on the grant of a lease which is admittedly not deductible. In the case of such a premium it is nothing to the point to say that the parties, if they had chosen, might have suppressed the premium and made a correspond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was the purchase price of a capital asset and that the company was not assessable to income-tax in respect of any of the payments. It was held that the payment of ? 25,000 was a capital payment. Finlay, J., dealing with the payment of ? 25,000 observed that-- it requires no argument because it is clear -that it is quite possible that a licence may be granted or, for the matter of that, property may be sold partly in respect of a lump sum and pratly in respect of an annuity or annual payment or payment for royalty or anything of that sort; and in the event, of course, income tax is attracted by that part of the payment which is an annuity or royalty and is not attracted by the lump sum which is in the nature of capital. The case of Member for the Board of Agricultural Income-tax, Assam v. Sindhurani Chaudhurani [1957] 32 I.T.R., 169,179 was a case where the zamindar assessee received certain payments described as salami as a consideration for granting agricultural leases and those receipts were held to be of capital nature. After considering the various authorities their Lordships of the Supreme Court observed as follow [1957] 32 I.T.R., 169,179: Thus all these definitions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 185, were quoted with approval by their Lordships of the Supreme Court at page 44: 1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment: vide Lord Sands in Commissioners of Inland Revenue v. Granite City Steamship Co. [1927] 13 Tax Cas. 1, 14. In City of London Contract Corporation v. Styles [1887] 2 Tax cas. 239, 243 Bowen, L.J., observed as to the capital expenditure as follows: 'You do not use it, for the purpose of your concern, which means for the purpose of carrying on your concern, but you use it to acquire the concern.' 2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantages for the enduring benefit of a trade: vide Viscount Cave, L.C., in Atherton v. British Insulated and Helsby Cables Ltd. [1929] 10 Tax Cas 155 If what is got rid of by a lump sum payment is an annual business expenses chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the way that fixed capital endures. In the case of Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation 61 C.L.R. 337 Latham, C.J., observed as follows: When the words 'permanent' or 'enduring' are used in this connection it is not meant that the advantage which will be obtained will last for ever. The distinction which is drawn is that between more or less recurrent expenses involved in running a business and an expenditure for the benefit of the business as a whole...e.g.,... enlargement of the goodwill of a company--permanent improvement in the material or immaterial assets of the concern. In the case of Withers v. Nethersole [1948] 16 I.T.R. (Suppl.) 92 it was held that the amount paid for the assignment of the copyright was of a capital nature. All the authorities referred to above point to the conclusion that the character of the payment has to be determined from the document and the surrounding circumstances. Section 105 of the Transfer of Property Act defines a lease of immoveable property as a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m has been referred to, the amount of rent has been also referred to along with it. All the rights and liabilities in respect of the amount of rent are equally applicable to the amount of premium. It should, therefore, be inferred that the parties made no distinction between the amounts of premium and rent and as such it should be held that the amount of premium was nothing but rent. I do not think that there is any substance in this contention. It may be contended by the other side that as no distinction has been drawn between premium and rent in the document, the amount of rent is also nothing but the price of the right transferred payable in instalments. But that circumstance by itself will not show that the amount of premium was in fact rent paid by the lessee. From the statement of the case it also does not appear that the amount of rent fixed is so low that the amount of premium must necessarily be considered to be a part of the rent agreed to be paid by the lessee. Mr. Chaudhury referred to the following sentence in paragraph 8 of the lease deed: It shall be lawful for the lessor immediately or at any time or times thereafter upon the demised tea estates and premises ..... X X X X Extracts X X X X X X X X Extracts X X X X
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