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PETITIONER: MAHARAJA CHINTAMANI SARAN NATH SAH DEO

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX, BIHAR & ORISSA

DATE OF JUDGMENT: 30/11/1960

BENCH: KAPUR, J.L. BENCH: KAPUR, J.L. HIDAYATULLAH, M. SHAH, J.C.

CITATION:  1961 AIR  732            1961 SCR  (2) 790  CITATOR INFO :  R          1965 SC1871  (3)

ACT: Income  Tax--Capital or Revenue receipt--Prospecting licence for  bauxite--Licensee’s  right to  appropriate  samples  in --reasonable  quantities--Grant  of right to  a  Portion  of capital--Payments to licensor--Liability to tax.

HEADNOTE: In 1945 the appellant who was a Zamindar granted licences to different  parties to prospect bauxite.  Under  the  licence the  licensee  had  the  right to enter  upon  the  land  to prospect,  dig and prove all bauxite lying in or within  the land and to take away and appropriate samples of bauxite  in reasonable   quantities  not  exceeding  100  tons  in   the aggregate.   In  consideration  of  the  premium  paid,  the licensees  could,  at their option, after  giving  necessary notice  and on payment of a further sum, get a mining  lease for a term of thirty years.  The income-tax authorities were of the view that the licensees were not granted any interest in land and that the amounts received by the appellant  from the licensees were revenue receipts and, therefore,  assess- able to income-tax. Held, that on its true construction the transaction of  1945 did  not amount merely to a grant of the use of the  capital of  the  licensor  but was really a grant of a  right  to  a portion  of the capital.  Accordingly, the amounts  received by  the appellant were capital receipts and, therefore,  not liable to income-tax. Raja  Bahadur  Kamakshya  Narain Singh of  Ramgarh  v.  Com- missioner  of Income-tax, Bihar and Orissa, (1943)  L.R.  70 I.A.  180,The Member for the Board of  Agricultural  Income- tax,  Assam  v. Smt.  Sindurani Chaudhurani, [1957]  S  C.R. 1019  and  Commissioner of Income-tax, Bihar and  Orissa  v. Raja  Bahadur Kamakshya Narain Singh, [1946] 14 I.T.R.  738, considered.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No.424 of 1957.

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Appeal  by special leave from the judgment and  order  dated January 25, 1955, of the Patna High Court in Misc.  Judicial Case No. 621 of 1953. N. C. Chatterjee and R. C. Prasad, for the appellant. K. N. Rajagopal Sastri and D. Gupta, for the respondent. 791 1960.  November 30.  The Judgment of the Court was delivered by KAPUR,  J.-This is an appeal by special leave’  against  the judgment and order of the High Court at Patna answering  the question referred to it by the Income-tax Appellate Tribunal against  the assessee who is the appellant before  us.   The appeal  relates to three assessments made on  the  appellant for  the  respective assessment years 1945-46,  1946-47  and 1947-48. The   appellant   is  a  Zamindar  and   owns   considerable properties.  In the accounting years he granted licences  to different parties to prospect for Bauxite.  The  particulars of the licences are: Received from   Date of the  Period of Assess-   Amount                   Licence     Licence  ment year Received.                                                     Rs. 1.Aluminium Corporation ofIndia Ltd.  20-1-1945    6 months    1945/46     15,290/-. 2.Indian Aluminium Co.Ltd.        26-5-945     1 year    1946/47   1,24,789/-. 3.Dayanand Modi.      7-5-1945    6 months     1947/48       1,500/-. 4.Indian Aluminium Co.Ltd.   14-8-1945    1 year       1947/48      70,146/-. The Income-tax Officer held that these amounts were received as  revenue payments and were therefore taxable.  On  appeal to  the  Appellate Assistant Commissioner the  amounts  were -held to be capital receipts but this order was set aside by the Income-tax Appellate Tribunal which held the amounts  to be revenue receipts and taxable as such.  At the instance of the appellant the case was referred to the High Court  under s.  66(1) of the Income-tax Act and the  following  question was stated for the opinion of the Court:- "Whether  in the facts and circumstances of these cases  the sums  of Rs. 15,209, Rs. 1,24,789, Rs. 1,500 and Rs.  70,146 received by the assessee are income assessable to tax  under the Indian Income-tax Act?" 792 The  question was answered in the affirmative and  the  High Court held that there was material to support    the finding of  the  Tribunal, and it was a finding of  fact;  that  the amounts received by the appellant were revenue receipts  and not  capital receipts.  Against this judgment the  appellant has come in appeal to this court by special leave. The question that falls for decision is whether the  amounts received by the assessee are capital or revenue receipts and for  that purpose it is necessary to investigate the  nature of the grants made by the appellant.  Under the licence  the licensee  was  granted  the sole  and  exclusive  right  and liberty to (a)  to enter into and upon, to prospect, search  for,  mine quarry, bore, dig and prove all Bauxite lying and being  in, under or within the said lands. (b)  For  the  purposes aforesaid  and  all  other  purposes incidental thereto dig, drive, make and maintain such  pits, shafts,  borings,  inclines,  admits  levels,  drifts,   air courses drains, water courses, roads and ways and to set up, erect and construct such temporary engines, machinery  sheds

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and  things as may be reasonably necessary  for  effectually carrying on the prospecting operations hereby licenced. (c)  To  remove,  take  away  and  appropriate  samples  and specimens of Bauxite of every quality, kind and  description and in reasonable quantities not exceeding one hundred  tons in all during the terms of this grant. (d)   For  the  purposes  aforesaid  to  clear   undergrowth brushwood and to make use of any drains or water courses  on the  lands or for clearing sites of working from  any  water which may flow or accumulate thereon or therein. The  periods  of  the licences were  comparatively  short  6 months in two cases and a year each in the other two.  Under the  covenants the licensees were to cause as little  damage as  possible to the surface of the land.  They were to  give full  information regarding the progress of  the  operations and  true  copies  of  all borings  to  the  licensor.   The licensees were also 793 required  to  plug  all holes made by  them.   The  licensor convenanted  to give a reasonable right of  passage  through and  over  the  adjoining  lands  and  properties     and in consideration  of the premium paid, the licensees could,  at their  option, after giving necessary notice and on  payment of  a  further  sum, get a mining The lease for  a  term  of thirty  years  on the terms and conditions set  out  in  the indenture  attached  as  schedule 2  to  the  licence.   The Income-tax Appellate Tribunal found that the licensees  were not  granted any interest in land and the  amounts  received were  revenue receipts and therefore, assessable to  income- tax A reference to some of the cases would assist in determining the  nature  of the transaction which was evidenced  by  the documents  placed on the record.  In Raja Bahadur  Kamakshya Narain Singh of Ramgarh v. Commissioner of Income-tax, Bihar & Orissa (1) the payments by way of premium were held to  be capital  receipts.   In that case large payments by  way  of royalty for granting various mining leases were received  by the assessee.  The leases were for a period of 999 years for mining   coal  with  liberty  to  search  for,  work,   make merchantable  and carry away the coal there found  and  with power  to  dig  and sink pits.  In  consideration  of  these rights the lessees paid a sum by way of salami (premium) and an  annual  sum  as royalty on the  amount  of  coal  raised subject to minimum annual royalty.  The lessor had the right to  reenter in case of failure to pay the royalty.   It  was contended  by the assessee there that the sums  received  as salami  and royalty were capital receipts  representing  the price of the minerals removed.  It was held that salami  was a  single payment paid for the acquisition of the  right  to enjoy  the benefits granted by the lease and was  a  capital asset  and that the two other forms of royalty-both  minimum and per ton-flowing from the covenants in the lease were not on  capital  account and fell within the  meaning  of  other income under s.12 of the Act.  Lord Wright said at p. 190:- "The salami, has been, rightly in their Lordships’  opinion, treated as a capital receipt.  It is a single (1)  (1943), L.R. 70 I.A. 186. 794 payment made for the acquisition of the right of the lessees to enjoy the benefits granted to them by the    lease.  That general  right may properly be regarded as a capital  asset, and the money paid to purchase it may properly be held to be a  payment  on capital account. But the royalties are  on  a different footing."

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This case was sought to be distinguished by counsel for  the respondent  on  the  ground that the lease was  for  a  long period  of 999 years but the observations above quoted  were not  based  on this consideration but on the nature  of  the right  which was conveyed.  In Commissioner  of  Income-tax, Bihar & Orissa v. Raja Bahadur Kamakshya Narain Singh (1)  a coal  company  had  been  given by  the  Court  of  Wards  a prospecting licence in respect of certain coal bearing lands with  the option of renewal and also to take a mining  lease on  certain terms and conditions.  The  prospecting  licence was  subsequently  extended  on four  occasions.   When  the assessee attained majority he claimed that the giving of the licence  was ultra vires the Court of Wards but there was  a settlement  between the licencee and the assessee  by  which the   latter  agreed  to  accept  the  various   prospecting licences,  their extensions and leases in  consideration  of which he received by way of salami Rs. 5,25,000 and  capital lump  sum of Rs. 40,000 and some other payments in  lieu  of cesses.  The question arose whether the amounts were capital or  revenue and it was held that the amount of Rs.  5,25,000 received  as salami and the amounts received as cesses  were capital receipts and therefore not taxable.  Manohar Lal, A. C.  J.,  held  that  the  amount  was  received  by  way  of settlement and not by way of salami but S. K. Das, J. (as he then was) held that salami was a lump sum payment for rights which were being given to the licensee, namely, the right to prospect for a certain number of years and also the right to get  mining  leases  and therefore salami  in  question  was undoubtedly a capital receipt. In  The Province of Bihar v. Maharaja Pratap Udai Nath  Sahi Deo  of Ratugarh (2) it was contended that payments  in  the nature of premium or salami were (1) [1946) 14 I.T.R. 738. (2) [1941] 9 I.T.R. 313. 795 not  part of the income of the assessee and  were  therefore not  taxable  and it was held that salami  may,  in  certain cases,  be regarded as a payment of rent in advance  and  it would  in  those cases be regarded as income  but  where  it could  not  be  so  regarded it  would  not  be  income  and therefore  not taxable.  It was also  held that  prima facie salami is not income. In  The  Member for the Board of  Agricultural  Income  Tax, Assam v. Smt.  Sindurani Chaudhurani (1) this Court  defined as salami as follows: The  indicia  of  salami are (1)  its  single  non-recurring character  and  (2)  payment prior to the  creation  of  the tenancy.   It  is the consideration paid by the  tenant  for being  let  into  possession and can  be  neither  rent  nor revenue  but  is  a  capital receipt in  the  hands  of  the landlord. Thus  if  it is a consideration paid by the  tenant  or  the licensee  for being let into possession with the  object  of obtaining  a tenancy or as in this case with the  object  of obtaining  a right to remove minerals, it cannot  be  termed rent  or revenue but is a capital receipt.   In  Sindurani’s case (1) salami was a lump sum payment as consideration  for what  the  landlord was transferring to  the  tenant,  i.e., parting  with his right, under the lease, of a holding.   In the instant case the terms of the covenant quoted above show that  the  payment  has a close analogy to  the  payment  in Sindhurani’s   case(1).    That  case  was  sought   to   be distinguished by the respondent on the ground that there was a  transfer of a tenancy which was capable of ripening  into an  occupancy holding but that was not the ground  on  which

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this  court decided the case of salami.  The  definition  of salami was agener alone, in that it was a consideration paid by a tenant for being let into possession for the purpose of creating  a new tenancy.  In Raja Bahadur  Kamakshya  Narain Singh’s case (2) also the Privy Council laid the  definition of salami in general terms and described the characteristics of  a payment by way of salami without any reference to  the nature of the lease. In  reply to the argument of counsel for the appellant,  Mr. Rajagopal Sastri for the respondent argued (1) [1957] S.C.R. 1019. (2) (1943) L.R. 70 I.A. 180. 796 that  the question was whether the licensor had allowed  the licensee  to take his capital or he had allowed  him to  use the capital.  If it was the former, the receipts were in the nature  of capital receipts and if latter they were  in  the nature  of revenue.  His contention was that it  wag  really the  latter because all that the licensee was allowed to  do was  to  enter  on  the lands and make  use  of  the  assets belonging to the appellant.  This, in our opinion, is not  a correct approach to the question.  What the licence gave  to the  licensee was the right to enter upon the land to  pros- pect,  search  and  mine quarry, bore,  dig  and  prove  all Bauxite lying in or within the land and for that purpose the licensee  had the right to dig pits, shafts, borings and  to remove,  take away and appropriate samples and specimens  of Bauxite  in reasonable quantities not exceeding 100 tons  in the  aggregate.  It cannot be said that this amounts  merely to a grant of the use of the capital of the licensor but  it was really a grant of a right to a portion of the capital in the shape of a general right to the capital asset. In  support of this distinction between the use  of  capital and  the  taking away of capital, counsel  relied  upon  the following  observation  of  Lawrence,  J.,  in   Greyhound’s case(3): "The  question as to what receipts are revenue and what  are capital has given rise to much difference of opinion; but it is  clear,  in my opinion, that, if the sum in  question  is received for what is in truth the user of capital assets and not  for  their realisation, it is a  revenue  receipt,  not capital." That  may  be so but the question has to be decided  on  the nature  of  the  grant.  The terms of the  covenant  in  the present  case  which have been quoted above  show  that  the transaction was not one merely of the user of capital assets but  of  their  realisation,  By  this  test  therefore  the receipts  were on capital account and not revenue.   Counsel then referred to a judgment of the Patna High Court in R. B. H. P. Bannerji v. Commissioner of Income-tax, Bihar & Orissa (2)  where  it was held that compensation  received  by  the assessee (1) (1936) 20 T.C 373. (2) [1951] 19 I.T.R. 596. 797 for use by the military of his lands for a short period  was a  revenue receipt.  In that case the assessee purchased  13 bighas  of land for purposes of setting up a  market.   That plot  was requisitioned by the military A authorities  under the  Defence  of  India  Rules  and  the  assessee  received compensation for the use of the The land.  It was held to be a revenue receipt because it was really profit derived  from the land for the use of a capital asset. Another  case upon which counsel for the  respondent  placed reliance  is Smethurst v. Davy (1).  That was a  case  which

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was decided on the wording of s. 31(1)(d) of the Finance Act of 1948, and therefore is not of much assistance. Reference was also made to Stow Bardolph Gravel Co., Ltd. v. Poole  (2).   There the assessee company, which  carried  on business  in  sand  and  gravel,  purchased  two  un  worked deposits.   The company contended that the payments made  to acquire the deposits were deductible being expenditure which was  incurred  in  the  acquisition  of  trading  stock   or otherwise  of  revenue  character.  It  was  held  that  the company had acquired a capital asset and not stock-in-trade. The case turned upon a finding by the Special  Commissioners and  is  not  helpful.  Reliance was also  placed  on  Rajah Nanyam Meenakshamma v. Commissioner of Income-tax, Hyderabad (3).  In that case certain fixed sums of money were paid  as royalty for the whole period of the lease which were held to be revenue receipts as consolidated advance payments of  the amount which would otherwise have been payable periodically. None of these cases is of any assistance to the respondent’s case.  The question which has to be decided is what was  the nature  of  the transaction.  The covenants in  the  licence show  that the licensee had a right to enter upon  the  land and  take  away and appropriate samples of  all  Bauxite  of every kind up to 100 tons and therefore there was a transfer of the right the consideration for which would be a  capital payment. (1) [1957] 37 T.C. 593.       (2) (1954) 35 T.C. 459. (3) [1956] 30 I.T.R. 286. 101 798 In our opinion the High Court was in error and the  question referred   should  have  been  decided  in  favour  of   the appellant.   We  therefore allow the appeal, set  aside  the judgment and order of the High Court and answer the question in favour of the appellant who  will have his costs  in this Court and the High Court. Appeal allowed.