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PETITIONER: DURGA DAS KHANNA

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, CALCUTTA

DATE OF JUDGMENT: 30/01/1969

BENCH: GROVER, A.N. BENCH: GROVER, A.N. SHAH, J.C. RAMASWAMI, V.

CITATION:  1969 AIR  775            1969 SCR  (3) 462  1969 SCC  (1) 329  CITATOR INFO :  RF         1950 SC1959  (13)

ACT: Income-tax-Capital or Revenue-Thirty years lease of  cinema- Lessee  contributing  part  of  money  for  construction  of cinema-No  stipulation that it was to be treated as  advance rent or salami-Nature of receipt-Whether taxable.

HEADNOTE: On July 19, 1945 the assessee took an lease certain premises in  Calcutta on a monthly rental.  He made some  alterations in the premises so as to convert it into a cinema house  but found himself short of money.  As permitted by the terms  of his  lease  he leased the premises on February 23,  1946  to certain  parties.  According to the terms of  the  indenture the   lessees   agreed  to  pay  him  Rs.   55,2GO   towards construction  of the cinema house which would on  completion be let to them at a monthly rental of Rs. 2,100 payable with effect  from  June  1,  1946.   The  Income-tax  authorities treated the sum of Rs. 55,200 thus received as taxable  ;and the High Court on reference held the same. in appeal by  the assessee this Court had to consider whether the receipt was- taxable. HELD : (i) The departmental authorities as well as the  High Court were in error in treating the amount of Rs. 55,200  as advance  payment  of rent.  The lease by  which  the  cinema house   was  demised  did  not  contain  any  condition   or stipulation  from  which  it  could  be  inferred  that  the aforesaid amount had been paid by way of advance rent.   The transaction  embodied in the indenture of lease was  clearly business-like.  The lessees wanted the building for  running it  as  a cinema house and the lessor agreed to give  it  to them but apparently represented that he did not have  enough money to complete it in accordance with the suggestions  and requirement  of the lessees.  The lessees agreed to pay  him the aforesaid amount by way of a lump sum without making any provision  for its adjustment towards the rent or  repayment by the lessor.  On the terms of the lease and in the absence of any other material or evidence it could not be held  that the sum of Rs. 55,200 was paid by way of advance rental.[465

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G-466 B] (ii) The question whether premium is a capital or a  revenue receipt  cannot be decided as a pure question of  law.   Its decision   necessarily   depends   upon   the   facts    and circumstances  of each case.  It would not however be  wrong to say that prima facie premium or salami is not income  and it  would  be for the income-tax authorities  to  show  that facts exist which would make it a revenue receipt. [467 B] According  to the terms of the lease, in the  present  case’ the payment of rent was to commence not from the date of the lease which was February 23, 1946 but with effect from  June 1,  1946.   The lessees entered into  possession  after  the cinema house had been completed which was subsequent to  the date of the lease.  These facts coupled with the payment  of a  lump sum which was of a non-recurring nature showed  that the  amount  in question had all the characteristics  of-  a capital payment and was not revenue. [467 C-D] Henriksen  v. Grafton Hotel Ltd., 24 T.C. 453,  Commissioner of Income-tax, Bihar & Orissa v. Visweshwar, [1939] 7 I.T.R. 536 and 463 Member   for  the  Board  of  Agricultural   Income-tax   v. Sindhurani  Chaudhurani  &  Ors.,  [1957]  32  I.T.R.   169, applied.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 873 of 1966. Appeal  by special leave from the judgment and  order  dated March 26, 1965 of the Calcutta High Court in I.T. Ref.   No. 107 of 1960. Sukumr Mitra and D. N. Mukherjee, for the appellant. Niren  De,  Attorney-General,  S. C.  Manchanda  and  R.  N. Sachthey, for the respondent. The Judgment of the Court was delivered by Grover, J This is an appeal by special leave from the  judg- ment  of the Calcutta High Court in an Income tax  Reference in  which the question that had to be answered by  the  High Court was "whether on the facts and circumstance of the case the  sum  of Rs. 55,200/- was a revenue receipt  being  rent received in advance thus liable to be taxed ?" On  July 19, 1945, the assessee took on lease  premises  No. 157 Upper Circular Road, Calcutta for a term of 99 years  on a  monthly rental of Rs. 750/-.  It was stipulated  internal that  the lessee could assign the lease with the consent  of the lessor.  He could after the structures on the  premises so  as, to convert them into a cinema if necessary.   After expending  Rs. 35,000/- on some alterations to the  premises the assessee felt the necessity of having some more money in order  to  convert the building into a cinema.   He  entered into  a  lease  on February 23,  1946  with  three  persons, namely,  Nani.  Gopal Dutt, Makhan Lal Dutt and  Shiv  Kumar Khanna.   By  this  lease, the  building  which  was  called ’Khanna Cinema house’ at 157, Upper Circular Road,  Calcutta was  demised to the lessees for a period of 30  years.   The lessees  agreed to pay under the indenture of lease  Rs.  55 200/-  to the lessor towards the cost of erecting  the  said cinema.   The  rent  which was agreed to  be  paid  was  Rs. 2,100/- per month.  It was payable with effect from June  1, 1946.   It is necessary to set out the relevant  portion  of the lease               "And whereas the lessor obtained sanction from               the   Corporation   of  Calcutta   and   other               necessary   authorities  and   commenced   the

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             erection of a Cinema House the estimated total               cost  of which is about  Rs.  1,00,000/(Rupees               one  lac).  And whereas the lessees agreed  to               pay  to the  lessor a sum  of  Rs.               55,200/-  (Rupees Fifty five thousand and  two               hundred)  towards the cost of the erection  of               the  said  cinema  house  according  to  their               suggestion and other charges and expenses               464               incurred therefore by the lessor.  And whereas               the  construction of the said Cinema House  is               almost   complete  and  is  expected   to   be               completed  by the end of March,  One  Thousand               Nine  Hundred  and Forty six and  whereas  the               lessee have called upon the lessor to grant to               them  a lease of the said Cinema  House  which               the  lessor has agreed to do upon  payment  by               the  lessees  of the said agreed  sum  of  Rs.               55,2,00/- (Rupees fifty five thousand and  two               hundred),  towards the costs of  building  the               said Cinema House and whereas the lessees have               paid to the-lessor the said sum of Rs.  55,200               (Rupees  Fifty five thousand and two  hundred)               for which separate receipt has been granted by               the lessor." After  the  Cinema  House had  been  completed  the  lessees entered into possession and started exhibiting shows there.  For the assessment year 1947-48 the corresponding  account- ing year being the financial year ending March 31, 1947, the Income  tax Officer sought to treat the sum of  Rs.  55,200/ received  by the assessee as his income.  The contention  of the assessee was that the aforesaid amount should be treated as  capital receipt.  Alternatively if it was to be  treated as  salami  (premium)  and was to be  taxed as  a  revenue receipt it should be distributed evenly over the entire term of the lease i.e. 30 years.  The Income tax Officer did  not ’accept  either of the contentions of the assessee.  It  was held  by  him  that  the lease was  pot  permanent  but  was temporary and that the salami had been fixed as an  advance payment  of  rent  and not as payment for  transfer  of  the lease-hold  interest.   According  to  him  the  system   of accountancy  for this source of income being on, cash  basis the whole of the receipt of salami was liable to be taxed as one year’s income in the year of the receipt.  The  assessee appealed to the Appellate Assistant Commissioner who  agreed with  the Income tax Officer.  In his view the lessees  were under no legal obligation to contribute towards the cost  of construction of the cinema house and the sum of Rs. 55,200/- constituted payment of advance rent.  The assessee  appealed to the Tribunal which held that the receipt of the aforesaid amount  was in the nature of advance payment of  rent  since the  assessee was short of funds at the time the lease  was entered  into  and that the lease was for a short  term  and that  the amount in question represented  consolidated  rent for  thirty years paid in advance.  The High Court  answered the  question  which was refer-red in  the  affirmative  and against the assessee.  According to the High Court the  only object  of the payment of the sum of Rs. 55,200 could be  to advance  the  cost of construction or to meet  the  existing liabi lities  of  the  assessee for  completing  the  cinema house.  It was observed:- 465               "Further it should be noted that the period of               lease is only for 30 years and the  assessee’s               investment on the Cinema is about Rs. 60,000/-

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             , Rs. 35,000/- being the costs of construction               and Rs. 25,000/- being costs of machinery with               a liability to pay Rs. 750/- rent to the owner               of the plot.  As a result of this lease he has               got  a  rent of Rs. 2,100/- for a term  of  30               years.   Thus there is no question of  payment               of  any  salami as no further  inducement  for               grant  of  the  lease was  necessary.   It  is               obvious  that if the cost of  construction  of               the  Cinema House would have been met  in  its               entirely by the assessee and thereafter if the               assessee  would have granted the lease to  the               lessee,  the  rent would certainly  have  been               much  higher.   Thus,  the  said  sum  of  Rs.               55,200/- in the absence of a different recital               can  only  be deemed to have been paid  as  an               advance  rent  in respect of the  said  Cinema               House." On  behalf of the appellant-assessee it has been urged  that he  sum  of Rs. 55,200/ was paid to the lessor in  lump  for completing  the cinema house without which the lessee  could not  have  used the building for the purpose  of  exhibiting cinematograph films.  According to the recitals in the  deed which  must be given due effect the lessees agreed  to  give this  amount  towards the cost ,if erection  of  the  cinema house according to their suggestion and ’or defraying  other charges  and  expenses.  The payment of rent  was  expressly stipulated at the rate of Rs. 2,100/-per month and there was no  indication whatsoever that any different or higher  rate of  rent was agreed to.  It is further submitted that  there was no material or evidence on which it could be found  that the cinema would have fetched, any higher rent, the admitted cost   of   construction   being   about   Rs.   1,00,000/-. Alternatively the sum of Rs. 55,200/- could be regarded only as  payment of salami (premium) and could not be treated  as revenue  receipt,  the  payment  being  of  a  non-recurring nature. It seems to us that the departmental authorities as well  as the  High Court were in error in treating the amount of  Rs. 55,200/as  advance payment of rent.  The lease by which  the cinema  house was demised did not contain any  condition  or stipulation  from  which  it  could  be  inferred  that  the aforesaid amount had been paid by way of advance rent.   The transaction  embodied in the indenture of lease was  clearly business-like.  The lessees wanted the building for  running it  as  a cinema house and the lessor agreed to give  it  to them but apparently represented that he did not have  enough money to complete it in accordance with the suggestions and requirement  of the lessees.  The lessees agreed to pay  him the aforesaid amount by way of a lump sum without 466 making any provision for its adjustment towards the rent  or repayment  by the lessor.  The essential question,  however, is  whether on the terms of the lease and in the absence  of any other material or evidence could it be hold that the sum of  Rs. 55,200/was paid by way of advance rental ? The  view which  has been expressed by the Tribunal as also  the  High Court that the lease was for a comparatively short period of thirty years and that the aforesaid amount had to be  spread over that period by way of rent in ’addition to a rental of Rs.  2,100/- per month cannot be sustained as no  foundation was  laid  for it by any cogent  evidence  The  departmental authorities can well be said to have based their decision on mere   conjectures  as  there  was  nothing  whatsoever   to substantiate  the suggestion that the real rental  value  of

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the cinema house was in the region of Rs., 2,250/- per month and not Rs, 2,100/- which was the agreed rent. It  can equally well be said that the payment of the  amount in question to the appellant was in the nature of a  premium (salami).  In the words of Lord Greene M. R. in Henriksen V. Grafton  Hotel Ltd.(") "A payment of this character  appears to  me  to  fall into the same class as  the  payment  of  a premium  of a lease, which is admittedly not deductible.  In the  case of such, a premium it is nothing to the  point  to say  that  the  parties  if  they  had  chosen,  might  have suppressed the premium and made a corresponding increase  in the  rent.  No doubt they might have. done so, but they  did not  do  so  in  fact."  Fazl Ali  J.,(as  he  then  was  in Commissioner  of  Income  tax, Bihar &  Orissa  v.  Viswesh- war.Singh(2)  referred to the distinction between  a  single payment  made at the time of the settlement of  the  demised property  and recurring payments made during the  period  of its  enjoyment by the lessee-.  This distinction,  according to the learned Judge, is clearly recognised in s. 105 of the Transfer  of  Property Act which  defines-both  premium  and rent.  This is what was observed at page 545               "It is obvious that if the premium  represents               the whole or part of the price of the land  it               cannot  be  income.   As pointed  out  by  Sir               George  Lowndes in the Commissioner of  Income               tax,   Bengal  v.  Messrs.   Shaw  Wallace   &               Company,: income in the Indian Income-tax  Act               ’connotes a periodical monetary return, coming               in  ’with some sort of regularity or  expected               regularity from definite sources.  The premium               of salami which is paid once for. all ’and  is               not  recurring payment, hardly satisfies  this               test.  I concede that in some cases’ where the               rent  is  ridiculously  low  and  the  premium               abnormally  high, it may be possible to  argue               that the premium includes advance rent....... (1)  24 T. 453. (2) [1939] 7 I.T.R. 536. 467 It has  not beep even remotely suggested in the present case that the rent of Rs. 2100 per month was ridiculously low  as compared  with the, amount of Rs. 55,200 paid in  lump  sum. It  is true that the question whether premium is a  capital, or a revenue receipt cannot be decided as a pure question of law.   Its decision necessarily depends upon the  facts  and circumstances of each case.  It would not, however, be wrong to say that prima facie premium or salami is not income  and it  would  be for the income tax authorities  to  show  that facts exist which would make it a revenue receipt.  There is another  factor  which is of substantial importance  in  the present  case.   According  to the terms of  the  lease  the payment  of  rent was to commence not from the date  of  the lease which was February 23, 1946, but with effect from June 1,  1946.  It is also not disputed that the lessees  entered into possession after the cinema house had been completed which  was subsequent to the date of the lease. these  facts coupled  with the payment of a lump sum which was of a  non- recurring nature showed that the amount in question had  all the  characteristics  of  a  capital  payment  and  was  not revenue.  This would be. in accord with the principles  laid down  by this Court in Member for the Board of  Agricultural Income tax v. Sindhurani Chaudhu. rani & Others(1) which was a  case of settlement of agricultural land but in which  the principles  governing the payment of premium or salami  have been fully discussed.

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For the reasons given above we hold that the question  which was  referred to the High Court ought to have been  answered in  the negative and in favour of the assessee.  The  appeal is  accordingly  allowed. with costs in this Court  and  the High  Court  and the answer returned by the  High  Court  is hereby discharged. G.C.                                Appeal allowed. (1) [1957] 32 I.T.R 169 468