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PETITIONER: COMMISSIONER OF INCOME-TAX, ASSAM ETC.

       Vs.

RESPONDENT: THE PANBARI TEA CO. LTD.

DATE OF JUDGMENT: 19/04/1965

BENCH: SUBBARAO, K. BENCH: SUBBARAO, K. SHAH, J.C. SIKRI, S.M.

CITATION:  1965 AIR 1871            1965 SCR  (3) 811  CITATOR INFO :  R          1972 SC  80  (4,5)

ACT:     Indian  Income-tax  Act  (11  of  1922)--"Premium"   and "rent"-Distinction--Premium  paid  in   instalments--Whether capital gains or revenue receipts.

HEADNOTE:     The assessee leased out its tea estates for a period  of ten years in consideration of a sum as and by way of premium and an annual rent to be paid by the lessor to the assessee. As  premium  a  part the sum was paid at  the  time  of  the execution  of the lease and the balance was spread  over  in ten  annual instalments; and the annual rent was payable  in monthly  instalments. The annual instalment paid as  premium was taxed by the Income Tax authorities  as  revenue receipt of  the  assessee. On reference, the High Court held  to  be capital gains. In appeal by certificate.     HELD:  The  annual  instalment  paid  as   premium   was capital gains.     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  a capital  income and the latter a revenue receipt. There  may be  circumstances where the parties may camouflage the  real nature  of the transaction by using clever  phraseology.  In some  cases, the so-called premium is in fact  advance  rent and  in others rent is a deferred price. It is not the  form but  the  substance  of the transaction  that  matters.  The nomenclature  used may not be decisive or conclusive but  it helps  the court, having regard to the other  circumstances, to  ascertain the intention of the parties.  Premium can  be paid  in a single payment or by instalments.  The real  test is  whether  the  said  amount paid in  a  lump  sum  or  in instalments  is  the consideration paid by  the  tenant  for being let into possession.. [813 H; 814 E-G]     Raja  Bahadar  Kamakshya  Narain  Singh  of  Ramgarb  v. Commissioner  of  Income-tax, Bihar and  Orissa,  (1943)  11 I.T.R.  513, Member for the Board of Agriculture  Income-tax Assam  v. Sindhurani Chaudhurani, (1957) 32 I.T.R. 169,  and

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Chintamani  Saran  Nath  Sah Deo v. Commissioner of  Income- tax, Bihar and Orissa, (1961)41 I.T.R. 506, applied.     The  parties, who were businessmen well-versed in  their trade, must be assumed to have ,known the difference between the  two  expressions  "premium" and ’rent ,  and  they  had designedly  used  those  two  expressions  to  connote   two different payments. The annual rent fixed was a considerable sum  of  Rs. 54,500/- and the premium, when spread  over  10 years  would work out to Rs. 22,500/- a year. There  was  no reason,  therefore, to assume that the  parties  camouflaged their  real  intention and fixed a part of the rent  in  the shape of premium. The L/P(D)5SCII--13 812 mere  fact that the premium was made payable in  instalments could  not obviously be decisive of the question,  for  that might have been to accommodate the lessee. [815 B, C]     The  construction based on the clause in the lease  deed that  on the de.fault in the payments of the instalments  of the premium or rent, the lessor shall be entitled to recover the balance of the unpaid premium and not the entire balance of the premium, really ignores the main terms of the  lease. In the context of the other clauses,  this  clause could not be  so construed as to override or come into  conflict  with the main terms of the lease deed. [815 H, 816B]

JUDGMENT: CIVIL APPELLATE JURISDICTION:CiVil Appeal No. 150 of 1964.     Appeal from the judgment and order dated March 22, 1960, of  the  Assam High Court in Income-tax Reference No.  7  of 1959.     N.D.  Karkhanis  and R.N. Sachthey, for  the  appellant. Sampat Ayyangar and J.P. Goyal, for the respondent. The Judgment of the Court was delivered by     Subba  Rao, J.  By a registered lease deed  dated  March 31,  1950, the assessee-company, respondent  herein,  leased out two tea estates named "Panbari Tea Estate" and "Barchola Tea  Estate", along with machinery and buildings  owned  and held  by  it, in Darrang, in the State of Assam, to  a  firm named  Messrs.  Hiralal  Ramdas for a period  of  ten  years commencing  from January 1, 1950. The lease was executed  in consideration  of  a sum of Rs. 2,25,000/as and  by  way  of premium and an annual rent of Rs. 54,000/- to be paid by the lessee  to  the  lessor. The premium  was  made  payable  as follows: Rs. 45,000/- to be paid in one lump sum at the time of  the execution of the lease deed’ and the balance of  Rs. 1,80,000/in 16 half yearly instalments of Rs. 11,250/- on or before January 31 and July 31 of each year. The annual  rent of  Rs.  54,000/- was payable as follows:  Rs.  1,000/-  per month  to be paid on or before the last day of  each  month, making in all Rs. 12,000/- per year, and the balance of  Rs. 42,000/- on or before December 31 of each year. On  February 25,  1957, for the assessment year 1952-53,  the  Income-tax Officer made the assessment treating the  instalment of  Rs. 11,250/- paid towards the premium in the relevant accounting year  as a revenue receipt of the assessee. On  appeal,  the Appellate Assistant Commissioner confirmed the order of  the Income-tax  Officer.  On  further  appeal,  the   Income-tax Appellate Tribunal also held that the premium was really the rent  payable  under the lease deed and, therefore,  it  was chargeable  to income-tax. At the instance of the  assessee, the  Tribunal  referred the following question to  the  High Court  under  s. 66(1) of the Income-tax Act,  1922,  herein after called the Act:

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                 "Whether   on   the  facts  and   in   the               circumstances   of  the  case  and  upon   the               construction of the terms of the lease,  dated               31st  March  1950,  the sum  of  Rs.  11,250/-               received  by the assessee during the  year  of               account is revenue or capital receipt".               813                   The  High Court held that the said sum  of               Rs.  11,250/- received by the assessee  during               the year of account was a capital receipt  and               answered   the  question  accordingly.  On   a               certificate  issued  by the High  Court,  this               appeal  has been filed by the Revenue  in  his               Court.                   The  short  question that arises  in  this               appeal  is  whether the  amount  described  as               premium in the lease deed is really rent  and,               therefore,  a revenue receipt. Before we  look               at  the  lease deed it will be  convenient  to               notice  briefly  the  law  pertaining  to  the               concept of premium, which is also described as               salami.                   The  distinction between premium and  rent               was  brought out by the Judicial Committee  in               Raja   Bahadur   Kamakshya   Narain  Singh  of               Ramgarh v. Commissioner of Income-tax, Bihar &               Orissa (1) thus:                   "It (salami) is a single payment made  for               the acquisition of the right of the lessee  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     It is true that in that case the leases were granted for 999  years; but, though it was one of the circumstances,  it was not a decisive factor ,in the Judicial Committee  coming to the conclusion  that the salami paid under the leases was a  capital  asset.  This Court in Member for  the  Board  of Agriculture Income-tax, Assam v. Sindhurani Chaudhurani  (2) defined "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." It  is  true  that in that case the payment was  paid  in  a single  lump  sum, but that was not a conclusive  test,  for salami  can be paid in a single payment or  by  instalments. The real test is whether the said amount paid in a lump  sum or  in instalments is the consideration paid by  the  tenant for   being  let  into  possession.  This  Court  again   in Chintamani Saran Nath Sah Deo v. Commissioner of Income-tax, Bihar  & Orissa(1) considered all the relevant decisions  on the  subject  in  the context of  licences  granted  to  the assessee to (1) [1943] 11 I.T.R. 513, 519. (2) [1957] 32 I.T.R. 169. 814 prospect  for  bauxite  in some cases for 6  months  and  in others for a year or two and observed:     "The definition of salami was a general one, in that  it

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was  a  consideration paid by a tenant for  being  let  into possession for the purpose of creating a new tenancy." Applying  that test this Court held in that case that  under the said licences there was a grant of a right to a  portion of  the  capital of the licensor in the shape of  a  general right to the capital asset.     In view of these three decisions it is not necessary  to multiply citations.     Under s. 105 of the Transfer of Property Act, a lease of immovable  property  is a transfer of a right to  enjoy  the property  made for a certain time, express or implied or  in perpetuity, in consideration of a price paid or promised, or of  money, a share of crops, service or any other  thing  of value, to be rendered periodically or on specified occasions to  the  transferor  by  the  transferee,  who  accepts  the transfer  on  such  terms.  The  transferor  is  called  the lessor,  the transferee is called the lessee, the  price  is called  the premium, and the money, share service  or  other thing  to be so rendered is called the rent.   The  section, therefore,  brings out the distinction between a price  paid for a transfer of a right to enjoy the property and the rent to be paid periodically to the lessor. When the interest  of the  lessor  is parted with 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 a capital income and the latter a revenue receipt.  There may be circumstances  where the   parties   may  camouflage     the   real   nature   of transaction by using clever phraseology.  In some cases, the so-called premium is in fact advance rent and in others rent is deferred price.  It is not the form but the substance  of the transaction that matters.  The nomenclature used may not be  decisive  or conclusive but it helps the  Court,  having regard   to  the  other  circumstances,  to  ascertain   the intention of the parties.     Bearing  the said principles in mind let  us  scrutinize the  lease deed dated March 31, 1950.  Under  that  document interest  in two large tea estates comprising 320 acres  and 305 acres respectively under tea, along with the  bungalows, factory  buildings, houses, godowns, cooly lines  and  other erections  and structures, was parted by the lessor  to  the lessee for a period of 10 years; and during that period  the lessee  could  enjoy  the said tea  estates  in  the  manner prescribed in the document.  Under the document,  therefore, there  was a transfer of substantive interest of the  lessor in the estates to the lessee and a conferment of a right  on the  lessee to use the said estates by exploiting the  same. Under cl. 4 of the lease deed for the transfer of the  right a premium of Rs. 2,25,000/- had to be 815 paid to the lessor and for using the estates the lessee  had to  pay. an annual rent of Rs. 54,000/-.  Both  the  premium and  the  rent  were payable in instalments  in  the  manner provided  in  the document.  The  parties  were  businessmen presumably well-versed in the working of tea estates.   They must be assumed to have known the difference between the two expressions  "premium" and "rent"; and they  had  designedly used   those  two  expressions  to  connote  two   different payments.   The annual rent fixed was a considerable sum  of Rs.  54,000/-  and the premium, when spread over  10  years, would work out to Rs. 22,500/- a year.  There is no  reason, therefore, to assume that the parties camouflaged their real intention  and  fixed  a part of the rent in  the  shape  of premium.  The mere fact that the premium was made payable in instalments  cannot obviously be decisive of  the  question,

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for  that might have been to accommodate the lessee. Nor  is cl. 8 of the lease deed, on which strong reliance is  placed by  the  learned counsel for the Revenue, a pointer  to  the contrary. It reads:                  "(1)  If any of the  aforesaid  instalments               towards  the  premium  or  annual  rent  shall               remain  unpaid for two months  after  becoming               payable (whether formally demanded or not)  or               if the lessee shall make default in payment to               the  Lessor any other sum or any part  thereof               in due dates or in observing or performing any               of  the covenants, conditions or  stipulations               hereinbefore contained and on the part of  the               Lessee  to be paid, observed and performed  or               if  the Lessee’s firm is dissolved except  for               reconstruction  or if any of the  partners  of               the  Lessee is adjudicated insolvent then  and               in  any such cases it shall be lawful for  the               Lessor  immediately  or at any time  or  times               thereafter  upon the demised Tea  EStates  and               premises  or any part thereof in the  name  of               the  whole  to re-enter  and   thereupon  this               demise shall absolutely determine but  without               prejudice  to  the  rights of  the  Lessor  to               damages  or  compensation in  respect  of  any               breach  of Lessee covenants  herein  contained               and  all other rights and  remedies  including               the  right  to  recover  the  balance  of  the               instalment  unpaid premium or rent payable  in               that particular year." The argument is that in the case of default contemplated  in this  clause it shall be lawful for the lessor  to  re-enter and in that event in terms of cl. 8 he will be entitled only to  recover the balance of the instalment of unpaid  premium and   not   the  entire  balance  of   the   premium.   This construction,  though  it appears to be plausible  at  first sight,  really  ignores  the main terms of  the  lease.  The default  clause is pressed into service to destroy the  main term of the lease.  Under el. 1 of the lease deed the sum of Rs. 2,25,000/- is the consideration by way of premium to  be paid  by the lessee to the lessor. Under cl. 4  thereof  the said entire premium has to be 816 paid  in instalments; under cl. 8 the lessor has the  option to  terminate  the lease and re-enter the  premises  in  the circumstances mentioned therein without prejudice to all his rights under the document.  One of his rights is to  recover the premium in instalments. The fact that one of the  rights saved is his right to recover the balance of the  instalment of  unpaid  premium cannot possibly deprive him of  all  his _other  rights  which are also expressly  saved  thereunder. The  drafting  of the clause is not artistic and  is  rather confused; but in the context of the other clauses it  cannot be so construed as to override. or come into conflict  with, the main terms of the lease deed.     Thirdly, it was contended that the income the lessor was getting  under  the  lease  after  1950,  i.e.,  after   the execution  of  the  lease  deed,  viz.,  the  total  of  the instalments  of  premium and rent, was not higher  than  the profits  he  was getting before the lease and  that  was  an indication  that  what  was rent really was  split  up  into premium  and rent for ulterior purposes.  This  argument  is based  upon the following data collected from the  published accounts of the assessee-company: Year ended       Profit   Deprecia-   Net            Divided

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                         tion       Profit       (tax free)        (1)       (2)       (3)         (4)           (5)                             Rs.      Rs.      Rs.        % 31st March 1947    ......   60,186   8,665    51,521     9 31st March 1948    ......   33,118   7,872    23,246     9 31st March 1949    ......   31,581   7,475    24,106     6 31st March 1950  ......     47,734   17,868   29,866    12 31st March 1951    ......   71,888   17,726   54,162     6 31st March 1952    ......   33,213   15,527   17,686     6 31st March 1953    ......   69,550   15,410   54,140     6     In the accounts of the year to 31st March 1952 there are the following three items of expenditure:--                                                    Rs.      Transit charges     .........               10,605      Legal Expenses  .........                   7,518      Gratuity to Managing Director  ......       10,000                                              --------------                                                  28,123 Before  comparing  the figures given for  the  two  periods, i.e.,   the  period  before  March  1950  and   the   period thereafter, it is necessary to add back the said three items of expenditure totalling 817 Rs.  28,123/- to the net profit of the year ended with  31st March,  1952; if they were added, instead of  Rs.  17,585/-, the profit would be Rs. 45,809/-. A comparative study of the said figures discloses a higher return in the second  period than  during the earlier period. But an attempt is  made  to show  that  the figures of the later  period  include  other items  and  if  they are deducted the net  profit  would  be comparable with that in the earlier period, but there is  no agreed  data for this attempt and it is not possible on  the material placed before us to scrutinize the figures. In  the absence  of  the  relevant material it is  not  possible  to accept the argument built upon the said figures.     The  result is that there is no material  placed  before us,  either  direct  or  circumstantial,  to  displace   the description  given in the lease deed to the said amounts  as premium  and to hold that they are not in fact  premium  but only  rent.   Indeed,  the  circumstances  mentioned   supra confirm the said description.     In  the result we hold that the High Court has  given  a correct  answer  to  the question submitted  to  it  by  the Income-tax Appellate Tribunal. The appeal is dismissed  with costs. Appeal dismissed. 818