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PETITIONER: CHINTAMANI SARANNATH SAH DEO

       Vs.

RESPONDENT: C.I.T. BIHAR & ORISSA

DATE OF JUDGMENT05/08/1971

BENCH: GROVER, A.N. BENCH: GROVER, A.N. HEGDE, K.S.

CITATION:  1972 AIR   80            1972 SCR  (1)  36  1971 SCC  (2) 521

ACT: Income-tax-Premium  for mining lease-If revenue  or  capital receipt-Principals for determining.

HEADNOTE: The assessee had granted a prospecting lease of his land  to a  company  in 1941 for a period of one year.   In  1944  he granted  a lease, of mining rights to the same  company  in respect of a part of the land for a period of 30 years.  The assessee took a large amount by way of premium but charged a slightly  lesser  amount  than what he had  charged  in  the prospecting lease, by way of royalty.  The assessee had also granted other leases and the premium per acre in the case of those leases was very much less than the premium per acre in the 1944 lease. On  the question whether the premium or a part of it was  in the  nature  of  a  revenue  receipt.,  the  High  Court  on reference, held against the assessee. in appeal to this Court, HELD  : (1) When the interest of the lessor is parted for  a price, the  price  paid  is  premium  or  salami  but  the periodical payments made for the continuous enjoyment of the benefits  under  the lease are in the nature of  rent.   The former is capital receipt and the latter a revenue  receipt. In finding the real nature of the transaction it is not  the nomenclature   or   form  but  the  circumstances   of   the transaction  that matter.  ’The onus. however, is  upon  the Income-tax  authorities to show that there exist  facts  and circumstances  which  would make payment of  what  has  been called salami, income. [39E-H] Commissioner  of  Income-tax, Assam v. The Panbari  Tea  Co. Ltd. [1965] 3S.C.R. 81 1, followed. (2)The terms of 1941 lease which was only for one year and which was for the entirely different purpose of  prospecting would  not afford any reasonable basis for holding that  the terms of 1944 lease, which was a mining lease for 30  years, were fixed in such a manner that part of the proceeds of the royalty  were included in the figure of the  salami.   ’When the  lessor  creates  a  lease  for  a  long  period  it  is legitimate for him to charge more amount by way of  premium as he is transferring possession of the demised land and  he may charge royalty at a slightly lesser rate.  The mere fact

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that the amount taken on account of premium was  substantial and  on the face of it looked considerably large  would  not justify  the,view  that the amount  represented  capitalised royalty. [40H, 41 A-E] (3)The  fact that the premium was approximately  equal  to the   difference  between  the  total  amounts  of   royalty calculated  at  the rates in the 1941-lease  and  the  1944- lease, would not justify an inference that 37 The  amount  was  taken was taken  in  exchange  of  royalty because, the assessee Could not have known how Much  mineral Could  be extracted from the areas it the time  of  granting the 1944-lease. [43A-C] (4)It  was  open to the Departmental authorities  to  have examined  lie assessee or his representative and  discovered all  the reasons for the terms in the various  leases  being different.   The Department Could also have ascertained  the details of the quantity of mineral which could be  extracted from  the areas covered by the other leases  and  discharged the  onus which lay on the Revenue to show that the  payment of  premium  was in fact of royalty.  But the same  was  not done.[ 42E-G]

JUDGMENT: CIVIL  APPELLATE  JURISDICTION : Civill Appeal No.  1732  of 1967. Appeal  from the judgment and order dated December 22,  1965 of  the Patna High Court in Misc.  Judicial Case No. 101  of 1962. M. C. Chagla and B. P. Singh. for the appellant. Jagadish Swarup’ Solicitor--General J. Ramamurthi. R.   N. Sachthey and B. D. Sharma for the respondent. The Judgment of the Court was delivered by Grover,  J. This is an appeal from a judgment of  the  Patna High  Court in a reference made to it under s. 66(1) of  the Income-tax Act, 1922, by the Appellate Tribunal by which the following question of law was referred for determination  by the High Court:-               "Whether  on  the facts and  circumstances  of               this  case, the Tribunal was right in  holding               that the sum of Rs. 2,20,000/- was the  income               of  the assessee assessable to tax  under  the               provisions of the Income-tax Act ?" The  original assessee was Maharaja Partap Udainath Sah  Deo the  holder 1 of an impartible estate.  On January 22,  1944 the  assesses  granted a lease of certain mining  rights  to Aluminium Production Company Ltd. in respect of 171-03 acres of  land for a period of 30 years.  The main terms  were  as follows:               (i)   Salami   (inclusive  of  Moharkari   and               Dewani   Negi  amounting  to  Rs.5,000/-   Rs.               2,25,000/- 38      (ii) Rent                        /8/- per acre      (iii) Royalty                    /6/- per ton.      (iV) Minimum royalty           Rs. 22/- per acre. Previously  the assessee had granted a prospecting lease  of 311 acres of land to the same Company on March 20, 1941  fox a period of one year.  The area covered by that lease though larger   included   substantially  the   area   leased   out subsequently.  The terms of the 1941-lease were that  salami was payable at the rate of Rs. 100/- per acre and royalty at the rate of /8/- annas per ton.

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While making the assessment for the year 1944-45 the Income- tax  Officer took the view that the assessee had  chosen  to take large sum by way of salami white granting the lease  in the  year 1944 and had accepted lesser rate of royalty,  the salami  represented  an  advance  payment  of  royalty.   He treated  Rs. 5,000 out of the sum of Rs. 2,25,000 as  Dewani Negi  and  Moharkari  and the balance of  Rs.  2,20,000  was treated by him as income of the assessee, and the assessment was  made  accordingly. on appeal  the  Appellate  Assistant Commissioner  held that the amount of Rs. 2,20,000 was  paid by the Company to the assessee as salami and as such it  was a capital receipt and not taxable.  On appeal by the Revenue the  Appellate  Tribunal by an order dated  August  7,  1952 remanded  the case to the Appellate  Assistant  Commissioner for  finding  whether there were circumstances  to  indicate that the salami was really receipt of income.  The Appellate Assistant  Commissioner made a report dated April 12,  1956. He  gave  a  finding that  the  assessee  had  intentionally accepted   lower.  royalty  and  taken  higher  salami   and therefore  the major portion of the sum of Rs. 2,20,000  had been  taken in exchange of royalty that would  have  accrued during  the  period’-of lease.  The Tribunal   by  an  order dated  July-26, 1956 allowed the appeal of the  Revenue  and restored  the  order of the Income-tax  Officer.   The  High Court  held that out of the sum of Rs. 2,20, 000 the  amount which could be regarded to be salami and’ treated as a capi- tal  receipt  could  reasonably be estimated at  a  sum  Rs. 20,000  which  was not assessable to tax but  the  remaining amount of Rs. 2, 00,000 was revenue ’receipt and was 39 taxable  as  such.  The question referred  was  reframed  as follows:-               "Whether on the facts and the circumstances of               this  case the Tribunal was right  in  holding               that  the sum of Rs. 2,20,000 or  any  portion               thereof was the income of the assessee assess-               able  to  tax  under  the  provisions  of  the               Income-tax Act ?" It  was  answered  partly  in favour  of  the  assessee  but substantially in favour of the Revenue. The  principles  on which the courts have acted  whenever  a question has arisen whether a payment described as a  salami is capital or revenue receipt are well settled.  Salami is a single payment made for the acquisition of the right of  the lessor by-the lessee to enjoy the benefits granted to him 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  merely because  a  certain amount paid to the lessor is  termed  as salami  it  does not follow that no inquiry can be  made  to determine  whether it has or has not an element  of  revenue receipt in the shape of advance payment of royalty or  rent. The  onus,  however, is upon the income tax  authorities  to show  that there exist facts and circumstances  which  would make  payment of what has been called salami,  income.   The position may be summed up in this way.  When the interest of the  lessor is parted for a price the price paid is  premium or  salami  but the periodical payments made  for  the  con- tinuous enjoyment of the benefits under the lease are in the nature  of  rent; the former is a capital  receipt  and  the latter  a revenue receipt.  Parties may camouflage the  real nature  of the transaction by using clever phraseology  and, therefore,  it is not the form but the circumstances of  the transaction  that matter.  The nomenclature used may not  be decisive  or  conclusive  but it helps  the  courts,  having

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regard   to  the  other  circumstances,  to  ascertain   the intention  of the parties. (See Commissioner of  Income-tax, Assam etc., v. The Panbari Tea Co. Ltd.)(1). (1) [1965] 3 S.C.R. 811. M1245Sup.CI/71 40 Now  the  Appellate  Tribunal  appears  to  have  based  its decision only on the difference between the amount of salami and the rate of royalty between the prospecting lease  which was granted in 1941 and the subsequent lease of 1944.   This is what the Tribunal stated in "para 7 of its order:-               "In   1941,   the  assessee  had   granted   a               prospecting  lease  in  favour  of   the  very               lessee  taking a much smaller  premium  fixing               the  royalty  at /8/- per ton.   He  has  not               shown  any justifiable reason for fixing up  a               lower  amount  of  -/6/- per  ton  by  way  of               royalty in the later lease.  We found that out               of  the area of 171 acres that was covered  by               the  later lease a substantial portion  of  it               about  140  acres were comprised in  the  area               leased  out  by the earlier deed of  1941.   A               weak argument was attempted by the  assessee’s               representative  the older lease was  only  for               Bauxite  whereas  the  later  lease  was   for               laterite also.  In view of the fact that major               portion of the area that is covered in the new               lease  was  in the older lease and as  in  the               course of the producing Bauxite, Laterite also               becomes   available,   we  do  not   see   any               justification  for  the assessee  agreeing  to               take a lesser amount by way of royalty."               The Tribunal proceeded to say:-               "Here in the present case what we find is that               the assessee had chosen to take a large amount               by  way of premium but a lesser amount by  way               of   royalty.   The  patent  reason  for   the               assessee  to  take a lesser amount by  way  of               royalty was that the amount received by him as               salami was not taxable.  There is,  therefore,               no doubt in this case that the sum received by               the  assessee by way of salami or premium  was               in  substance an advance payment  of  royalty.               We  are, therefore, in entire  agreement  with               the Income-tax Officer’s order." We are unable to appreciate how a comparison of the terms of the lease of 1941 which was only for one year and which  was for a different purpose, namely, prospecting could afford  a reasonable basis for determining 41 whether  the  terms  of the 1944 lease were  fixed  in  such manner that part of the proceeds of royalty were included in the figure of the salami.  The object of a prospecting lease is entirely different and since the period was only one year it is quite reasonable to assume that the royalty was  fixed at a higher rate because it was not known how much  quantity of mineral would be extracted during that period.  The lease of 1944 was for a much longer period i.e. 30 years.  When  a lessor creates a lease for that period it is legitimate  for him to charge more amount by way of salami or premium as  he is  transferring  possession  of  the  demised  land  for  a considerably long period.  A lessor may also think that  the rate  of royalty need not be the same as it was in the  case of  the  prospecting lease and taking an over  all  business view  royalty at a slightly less rate may be  charged.   The

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Tribunal’s decision. based as it was only on a comparison of the terms of the leases of 1941 and 1944 does not appear  to take  into,  consideration all these relevant  matters.   It must  not  be forgotten that the mere fact that  the  amount taken  on account of salami was substantial and on the  face it looked considerably large would not justify the view that that amount represented capitalised royalty.  In the Panbari Tea  (1) case certain tea estates had been leased out for  a period   of   10  year.   The  lease  was  executed   on   a consideration  of  a sum of Rs. 2,25,000 as and  by  way  of premium  or  salami and an annual rent of Rs. 54,000  to  be paid  by the lessee to the lessor.  The payments were to  be made by instalments.  This Court declined to assume that the parties  had  camouflaged their real intention and  fixed  a part of the rent in the shape of premium and it was observed that   no  material  had  been  placed  either   direct   or circumstantial  to disbelieve the description given  in  the lease deed to the amount as premium and to hold that it  was not in fact premium but IF only rent.  The position does not seem to be different in the present case. A  good  deal  of emphasis has been laid on  behalf  of  the Revenue  on  the  statement in the  order  of  the  Tribunal towards the conclusion that it was in entire agreement  with the  Income-tax Officer’s order.  It is submitted  that  the Income tax-Officer had gone into the details of (1)  [1965] 3 S.C.R. 811. 42 other  leases  which  had been granted by  the  assessee  of similar nature and after a comparison of the terms of  those leases  the  Income-tax Officer had reached  the  conclusion that  the  amount  of  salami  represented  the  capitalised royalty.   We cannot read the order of the Tribunal in  that way.   The Tribunal agreed only with the operative  part  of the  order  of  the Income-tax Officer  but  note  with  his reasoning.   At  any  rate,  the  Appellate  Assistant  Com- missioner  had  submitted  a remand  report  pursuant  to  a previous  order of the Tribunal and it does not appear  that the-facts given in that report were at all considered by the Tribunal although the High Court based its decision  largely on  them.  The terms of the leases on which the  High  Court relied  related to the years 1933, 1938 ’and 1945, the  rate of royalty varied from 8 annas to 12 annas per ton and  that of salami from Rs. 100 to Rs. 130 per acre.  No attempt  was made to examine anyone on be half of the assessee to explain all  the  circumstances  in  which  these  leases  had  been granted.   The High Court felt that it was for the  assessee to  furnish an explanation as to why salami/ in the case  of 1944  lease was raised to Rs. 1284 per acre whereas  in  the other  leases  the figure was much less  as  stated  before. This  approach cannot be regarded as correct.  The onus  was on the Revenue to show what was stipulated in the  indenture of  lease as a payment by way of salami was some other  kind of payment, namely, royalty, camouflaged as salami.  In this situation  it  was open to the Appellate  Assistant  Commis- sioner at the stage of submitting the remand report to  have examined  the assessee or his representative and  discovered all  the  reasons for the terms being  different.   An.other factor  that  was relied upon was the report  of  the  Mines Superintendent  dated January 7, 1956 according to whom  the area  leased out in 1944 contained commercial grade  Bauxite of  approximately  13 lakh tons.   The  Appellate  Assistant Commissioner  at the stage of remand worked out  the  amount which would be payable as royalty on this estimated quantity of  the total reserve of Bauxite in the demised  area.   The total  amount  of  royalty was calculated  at  Rs.  6,50,000

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according  to the rates fixed by the 1941 lease and  at  Rs. 4,87,500  according  to  the rate agreed upon  in  the  1944 lease.   The High Court was of the view that  these  figures showed 43 that  the major part of the salami of Rs 2,25,000  had  been taken  in  exchange of the royalty that would  have  accrued during the period of the lease.  We have already pointed out that  a  comparison of the terms of  the  prospecting  lease which  was  only for one year with the subsequent  lease  of 1944 which was for 30 years could not furnish a proper basis for  determining  the point in dispute.  Moreover  the  High Court  lost sight of the fact that the report of  the  Mines Superintendent  was  made long after the date  of  the  1944 lease  and it could not be assumed that at the time  of  the granting _of that lease the assessee knew how much  quantity of  the mineral could be extracted from the area  which  had been leased out.  Even the High Court felt, in  disagreement with  the  Tribunal, that the. entire amount of  the  salami could not be regarded as representing the capitalised’ value of royalties.  The High Court proceeded to assess the salami at  Rs.  20,000 on the basis that for the other  leases  the rate  agreed  upon was Rs. 100 per acre.  We are  unable  to concur in this method of computing the amount of the salami. Much  more, material was required for discharging  the  onus which lay on the Revenue to show that the assessee was bound to,  charge  only the same amount of salami which  had  been taken  for the other leases about which the details  of  the quantity of minerals which could, be extracted from the area covered by them were altogether lacking. For  the reasons given above the appeal is allowed  and  the order  of  the High Court is set aside.  The answer  to  the question referred is returned in favour of the assessee  and against  the  Revenue.  The assessee shall  be  entitled  to costs in this Court and in the High Court. V.P.S.                                    Appeal allowed. 44