TMI Blog1946 (2) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... lease of that property to the Bengal Nagpur Coal Co., Ltd., upon, inter alia, these terms:- (1)The lease to be for period of 20 years from date; (2)The lessees would have the right of raising coal from the hinds for which they should pay the royalty specified in the lease; (3)The lessees should be at liberty to abandon the lands at any time before the period of the lease expired, provided they paid up in full the rents and royalty of every description due to the lessor at the time of abandonment; (4)The lessees to keep coal pillars of specified dimensions and at stated intervals in the mines; and (5)The lessees had an option to renew the lease at its expiration on the same terms, if coal still was unfinished. On the 12th February, 1919, the lessees assigned the lease to the Bengal Coal Co., Ltd., with the sanction and approval of the lessor. Thereafter, that Company raised coal from the lands and paid the stipulated royalty to the lessor and, later to the manager of the Court of Wards when the estate came under its jurisdiction. During the currency of the lease of 1916, an agreement, dated the 24th April, 1933, was mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ights; they had paid the required salami; formal permission had not been given but the Company contended that permission should be considered as having been granted immediately the salami was paid and they had commenced pillar-cutting; this was being done in a manner which had not been approved by Mr. Carver, (apparently the Court of Wards' Consulting Engineer) as the method was unsound and dangerous as it would render Hathnol unworkable; the Company was depillaring the area in spite of protests and the only way to stop this being done was by means of costly litigation; after consulting the Maharaja, Mr. M.M. Mukherjee had been appointed to take up the matter for a settlement, favourable to the estate, out of Court. Elsewhere in the letter the manager wrote that the Company undertook to continue to hold the leases and the areas demised and to be bound by the terms and conditions of the original pattah so long as coal remained workable and the agreement provided that in the event of relinquishment whilst coal still remained unworked for any reason whatsoever, royalty would be payable to the estate for the coal left unworked. The letter adds that, with a view to escaping liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bandoned coal in the collieries at the time the company ceased to work there, that sum is properly assessable to income-tax under Section 12. He contended, however, that the payment was not made for royalty but was for the purchase of the right to relinquish the lease and agreement and this is the price for the relinquishment. As such, he argued, it is either a capital receipt or is a casual receipt within the contemplation of Section 4(3)(vii) of the Income-tax Act and, in either event, it is not liable to be assessed to tax. The question whether receipts and payments are attributable to capital or to yearly trading or income has been the subject of several decisions many of which were mentioned and to some I propose to refer. In the case of Vanden Berghs Ltd. v. Clark (H.M. Inspector of Taxes) [1943] 19 Tax Cas 390; 3 ITR Eng. Cas. 17 there was an agreement between two rival manufacturers of margarine for friendly alliance between them and for sharing their respective profits; the House of Lords held that such agreement was not an ordinary commercial contract usually made to carry on their trade and a receipt by one party from the other in consideration of the terminatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resent case. Under the lease of 1916 the lessees were entitled to abandon the colliery lands at any time during its currency provided they paid all royalties and rents due at the time of relinquishment or abandonment; the lessor could not require any payment beyond the amount due under the lease, as consideration for its termination. Before the expiration of the 1916 lease and, it would follow, before the lessees had exercised the option to continue, which was contained in that lease, the agreement of 1933 was made which as I see it, in effect was a fresh demise upon the terms contained in the earlier lease subject to certain modifications expressed in the later agreement. The period of the later grant was not expressed in terms of years but was for a period during which coal remained in the lands which could be worked. One of the terms, in clause 6 of the agreement, is that the company, who are the lessees, undertook, notwithstanding anything to the contrary contained in the lease of 1916, to continue to hold the lease and areas thereby demised so long as any coal remained workable. Dr. Pal argued that this term cancels or expressly negatives the term in the lease entitling the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the lease, continued that right which was one enuring to them under the agreement but there was an additional liability, in the event of it being exercised, namely, payment of royalty in respect of the coal still remaining in the mines. In my opinion, the agreement, instead of specifying its term by a period of years, was for such time during which coal remained to be worked. The word undertakes, in clause 6, did not prevent the lessees from availing themselves of the term of the lease embodied in the agreement, to terminate at any time. But if they did so they were required under the agreement to pay for abandoned coal as well as to pay the dues in respect of royalties which were recoverable at the time. In those circumstances the lessor was not in a position to require a payment in consideration of or for permission for, earlier termination of the agreement. The lessees had that right, provided they fulfilled the terms in the lease, to leave at any time and having that right there was no need for them to purchase that right. The circumstances in the present case are clearly distinguishable from those in Mallett's case [1928] 13 Tax Cas. 772. There, there was no r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Mukherji's letter, that a claim in respect of wrongful working of the mines was unlikely to be established and the payment which could be demanded from the lessees would have reference only to royalty upon abandoned coal- a payment which falls within clause 7 of the agreement. In my view, the present case in covered by the latter part of the observations of Lord Macmillan in Van den Berghs, Ltd. s case (supra), where, in the course of his speech he said, as reported at page 431:- Now what were the appellants giving up ? They gave up their whole rights under the agreements for 13 years ahead. These agreements are called in the stated case 'pooling agreements', but that is a very inadequate description of them, for they did much more than merely embody a system of pooling and sharing profits. If the appellants were merely receiving in one sum down the aggregate of profits which they would otherwise have received over a series of years, the lump sum might be regarded as of the same nature as the ingredients of which it was composed. That passage has been cited with approval in Commissioner of Income-tax, Madras v. Messrs. Harveys. Ltd. [1940] 8 ITR 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the payment expressed to be with respect to the termination of the lease and agreement. The claim made was with respect to the royalty upon coal which was abandoned and that claim is included in the word claims in that part of the recital to which reference has been made. As I have said previously the substance of the bargain must be examined but even when that is done by reference to the deed of instrument, I see no reason to disagree with the findings of fact which have been expressed by the Appellate Tribunal. I would, for the reasons which I have given, answer the question of law raised in this reference in the affirmative. Ormond, J.-I agree and desire only to add certain remarks. It was contended on behalf of the assessee by Dr. Pal that after the agreement for extension of the lease made in 1933 (printed at page 29 of the Paper Book) there was no right to the Bengal Coal Co., Ltd., to terminate the lease at will. On a perusal of the original lease made in 1916 and the agreement for its extension made in 1933, I am unable to accept this construction of these documents. In my view the term expressed in the last sentence of clause 1 of the lease of 1916, v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was no right given to the company to terminate the agreement before its due date of completion. It was held that the payment received was for surrender of a capital asset and therefore not assessable as profits to income-tax in the hands of the receiving company. It was in those circumstances in those cases that the payments made for compensation for termination of agreements not terminable in themselves before due date were held to be capital payments or capital receipts respectively and not in the nature of revenue. Taking the view that we take on the documents in the present case that the mining lease was terminable at will in terms of the lease itself, it will be seen that there is an important difference between the present case and the class of cases such as the two above mentioned ; where the payment (held to be of a capital nature) was being made as compensation settled in a special agreement for termination of an otherwise non-terminable agreement. In such cases it could well be said, that by the special agreement, there was being effected, on capital account, either in certain cases (as where the party adjudicated on was making the payment), a payment to get ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid for the dues under clause 7 was, in my view, therefore, clearly a payment of royalties. In this view of the matter it is unnecessary further to consider cases such as those of Mallett v. Staveley Coal and Iron Co. Ltd. s case (supra ), and Van den Berghs, Ltd. s case (supra) , mainly relied on by Dr. Pal. I do not, however, wish to be taken to say that even if the payment had here been made not directly under the contract but as compensation fixed by special agreement for what would but for the special agreement have been its wrongful termination, it could not also, in the circumstances of the present case, have been held still to be income and not capital. As was observed by Lord Macmillan in the case of Van den Berghs Ltd. s case (supra) at page 429 :- The reported cases fall into two categories, those in which the subject is found claiming that an item of receipt ought not to be included in computing his profits and those in which the subject is found claiming that an item of disbursement ought to be included among the admissible deductions in computing his profits. In the former case the Crown is found maintaining that the item is an item of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne lakh of rupees was received by the assessee as royalty. While it is unnecessary, in the view that we take of the document in this case, to consider what, would have been the position had there been no right for the Bengal Coal Co., Ltd., to terminate the lease at will, I have referred to this single case as a mere illustration to show that it would not conclusively follow, simply because the payment was made in consideration of terminating a lease not terminable but for mutual special agreement at the time when it was being terminated, that therefore it should necessarily be held that the payment was of a capital nature. In regard to the contention of Dr. Pal for the assessee that this was a casual receipt under Section 4(3)(vii) of the Income-tax Act, on the facts in my view it is not. This payment was expressly provided for in the lease and therefore it was foreseen, known, anticipated and provided for as it was put by Dr. Gupta. It has its source in the agreement itself where it is clothed with the nature of royalty. In these circumstances it cannot be held to be a casual receipt. For these reasons besides those expressed by my learned brother I agree that t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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