TMI Blog1979 (1) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... to pay a fixed sum of money every year on a specified date and for a specified number of years. These bonds were of two categories. One kind was the Zamindari Abolition Bonds by which the compensation became payable by annual instalments with interest at the rate of 21% p.a. These bonds will be referred to hereinafter as " interest bearing bonds". The other bonds were the U.P. Zamindari Rehabilitation Grant Bonds in terms of which no interest was to be paid and the Government was liable to pay only a fixed sum of money every year on a specified day for a specified number of years. These bonds are referred to hereinafter as " non-interest bearing bonds ". The zamindars sold these bonds against cash in the open market to several investors. The assessee purchased interest bearing bonds of the face value of Rs. 10 lakhs for Rs. 4,87,500 in November, 1958. The assessee also purchased the non-interest bearing bonds of the value of Rs. 7 lakhs for Rs. 2,82,750 in November, 1960. We are here concerned with assessment years, 1961-62 to 1964-65. In these years, the assessee-company showed the annual instalment received by it in respect of the interest bearing bonds by breaking it into the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment of lesser sum than their face value, he cannot be considered to be getting higher rate of interest than what was stated in the loan certificates. Thus, according to the third Member, there was a capital accretion, but " no interest can be presumed when actually it was stated by the Government that the bonds themselves were non-interest bearing ". He, therefore, agreed with the Judicial Member and held that the department was not justified in computing income in respect of the rehabilitation bonds. Consequently, in view of the majority decision, the appeals of the assessee were allowed. On the findings as indicated above, the questions reproduced earlier have been referred to this court at the instance of the revenue. Mr. Joshi appearing on behalf of the revenue has argued that though in law the assessee had stepped into the shoes of the ex-zamindars in whose favour originally the bonds were issued, for the purposes of the I.T Act, we must look at the transaction of purchase of the bonds by the assessee by investing large amounts purely from the business or accountancy point of view. According to Mr. Joshi, the transaction was such that capital had been converted into a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is received by the assessee must be treated on the same footing as it would have been treated if it had been received by the original holder of the bond, namely, the ex-zamindar because the assessee has now legally stepped into the shoes of the ex-zamindar and the right to receive the annual instalment amount which originally vested in the ex-zamindar, now stands assigned to him by virtue of the transfer of the bonds in his favour. If this was the proper test, there would not be much difficulty in answering the questions referred. It cannot be seriously disputed on behalf of the revenue that so far as the ex-zamindar was concerned, the amounts under the bonds being payable to him as compensation for his property taken possession of by the state, it would clearly be a capital receipt in the hands of the ex-zamindar. What is, however, contended by Mr. Joshi is that whatever may be the legal relationship between the U.P. Government, which paid the annual instalment due under the bond, and the assessee, for the purposes of the provisions of the I.T. Act what has to be looked at is really the nature of the transaction on account of which the assessee has come to acquire the right to rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ton of the cement manufactured by the purchaser was of the nature of capital or income. It was held in that case that the nature of the transaction was that the assessee having obtained certain rights and concessions relating to mineral substances by transfer and otherwise and, while carrying on business on the same lines on its own account under other leases and concessions, transferred the former in the course of its business operations and by way of turning them to account provide for itself certain periodical receipts which would come to it as the share of the profits of the transferee's business, if any profits were made or as a part of the royalty, if royalties were received, or as an amount computed at a certain rate on the sale of cement, if any cement was sold, and, therefore, the amount received by the assessee was of an income character. What was argued before the Calcutta High Court was that the amounts received by the assessee-company were only a part of the consideration for the sale and the receipt had not ceased to be of a capital nature. Dealing with the question as to how the nature of the transaction was to be ascertained the Calcutta High Court observed as foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e divided equally between the assessee and the other party to the agreement. These rights were assigned by the assessee by an agreement in favour of a company and the gross receipts were to be shared in the proportion of 30 per cent. to the company and 70 per cent. to the assessee. What was contended by the assessee was that the sums received by her under the agreement with the company were proceeds of the sale of all the rights which she had in the film and that no part of these sums represented profits or gains assessable to tax. While taking the view that the sums received by the assessee under the agreement were assessable to income-tax, Evershed M.R. observed : " The matter falls to be decided after taking into account all the circumstances of the case, including the documents which must be properly interpreted; and when all those facts are considered the question which is posed in substance-- is to use a phrase which, I think, I used myself during the argument, 'according to the look of the thing '-- is this, and I again repeat Lord Normand's phrase : '... a means of obtaining income by use of an asset ' ? " Lord Normand's observations referred to were from Trustees of Ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt for the purpose of the Income-tax Act, inability to ascribe to the transaction a definite category is of little consequence. It is not the nature of the receipt under the general law but in commerce that is material. It is often difficult to distinguish whether an agreement is for payment of a debt by instalments or for making annual payments in the nature of income. The court has, on an appraisal of all the facts, to assess whether a transaction is commercial in character yielding income or is one in consideration of parting with property for repayment of capital in instalments. No single test of universal application can be discovered for a solution of the problem. The name which the parties may give to the transaction which is the source of the receipt and the characterization of the receipt by them are of little moment, and the true nature and character of the transaction have to be ascertained from the covenants of the contract in the light of the surrounding circumstances. The decision of the question is, however, not left to the application of any arbitrary standards. There are certain broad principles which guide the determination of the character of the receipt. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstalments. The compensation payable by the U.P. Government was in lieu of expropriation of the zamindar's estate by the Zamindari Abolition Legislation. The zamindar is now out of the picture. Legally, it is the assessee who has stepped into his shoes, but that would be for the limited purpose of enforcing the payment under the bonds. What we have to consider is the nature of the transaction of purchase of these bonds at a price which is much less than their face value. The assessee has invested large sums of money in purchasing these bonds. It is obvious that the assessee thought it fit to invest large sums of money only because it would get a regular substantial return on these investments. A commercial activity is normally intended to earn profits and more so by a company whose business consists of investing funds. It is no doubt true that in a given case, capital may be invested with an eye on accretion to that capital after some interval of time. But the usual commercial activity of an investor is normally intended to make an investment in order to earn a return on it. The assessee knew well that the amounts under the bond were payable monthly and by the purchase of bonds of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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