Demonetization special: Validity of submission that high denomination notes were savings from his personal allowance,

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Demonetization special: Validity of submission that high denomination
notes were savings from his personal allowance

SRI SRI NILKANTHA NARAYAN SINGH vs. COMMISSIONER OF INCOME
TAX
HIGH COURT OF PATNA
Ramaswami & Sarjoo Prosad, JJ.
Misc. Judl. Cases Nos. 231 of 1949 and 49 of 1950
10th April, 1951
(1951) 19 CCH 0049 PatHC
(1951) 20 ITR 0008
Legislation Referred to
Section 4
Case pertains to
Asst. Year –
Decision in favour of:
Assessee Partly, Revenue Partly
Income from undisclosed sources Addition Encashment of high denomination
notes There was no material before Tribunal to presume that a Home Chest
Account was maintained Tribunal ought not to have drawn an adverse inference
because no such account was produced No onus upon assessee to indicate from

whom each note was received No material to justify the assessment of amount
representing the value of high denomination notes
Held :
PER RAMASWAMI, J.
There was no material before the Tribunal to suggest that a Home Chest Account was
maintained and the Tribunal ought not to have drawn an adverse inference because no such account was produced. There is no onus thrown upon R to indicate from whom each note to the value of Rs. 10,000 was received and no adverse inference ought to have been drawn by the Tribunal against the assessee. There is no material to justify the assessment of Rs. 84,000 representing the value of high denomination notes which the assessee
encashed.—CIT vs. Bombay Trust Corporation (1936) 4 ITR 323 (PC) : TC39R.1128 relied
on.
PER SARJOO PROSAD, J.
The finding of the Tribunal are not adequate to lead to an inference that the said sum
represented some secret profits of the assessee and was, therefore, taxable as income from undisclosed sources. The assessee had submitted his accounts from which it appeared that the assessee had, during the last seven years, drawn from his serishta various sums of
money representing the income from his estate and had from time to time given back to the serishta according to his requirement certain sums of money, and the difference between the two sums represented a balance of Rs. 1,82,000 and odd which amount would be more than sufficient to cover and explain the sum of Rs. 84,000 representing the value of the high denomination notes. These figures have not been contested by the Department, and in fact they have been accepted by the Revenue authorities. Now the various sources of the assessee's income are all stated in the accounts, and if the accounts are held to be genuine, as they have been held to be genuine, one does not see how it can be inferred that this money came from any different source during the period in question. The Revenue authorities appear to have presumed that there was some home chest account kept by the assessee which the latter has failed to produce, and, therefore, the presumption must be raised against him. There is no legal foundation for such a presumption as there is no basis for assuming that there was a home chest account maintained by the assessee. There was no justification for the assessment of the said Rs. 84,000.
Income—Capital or revenue receipt—Rent from mining lease—Predecessor of
assessee leasing out coalfields on long term basis under an indenture of
lease—Right to collect rents and royalties for certain period assigned to a company
in consideration of an outright payment—Same is revenue receipt liable to tax
Held :
PER RAMASWAMI, J.
It is true that the parties have described the contracts as "indentures of leases", the lump sum payment of Rs. 2 lakhs as "salami" and the small annual payment of Rs. 10 or Rs. 15 as "rent". But in the application of the law relating to income-tax, the principle is well-
established that the name given to transaction by the parties does not necessarily decide
the nature of the transaction. It is the substance and not the form of the contract that should be regarded. In analysing the transaction it is not necessary that the documents should be construed from the purely legal aspect. It is manifest that the transaction, though in form a sub-lease was in substance an assignment by the Raja of his right to realise royalties and rents for a term of 10 to 15 years. As consideration for the contract the Raja received the lumpsum which it is plain, is nothing but advance payment of royalty. No other right except the right to collect royalty and rent from the original lessees is transferred by the assessee to B. The assessee has not parted with any interest in the land but has merely assigned his contractual right. The amount of Rs. 2 lakhs which was paid by B to the assessee in consideration of the so-called indentures of lease was a taxable income.—IRC vs. 36/49 Holdings, Ltd., (in Liquidation) (1943) 25 Tax Case 173 and Van den Berghs Ltd. vs. Clark (1935) 3 ITR 17 (SUPP) (HL) : TC38R.770#1 applied; IRC vs. Thomas Nelson & Sons (1938) 22 Tax Cases 175 and Constantinesco vs. Rex (1927) 11 Tax Cases 730 relied on; CIT vs. Visheshwar Singh (1939) 7 ITR 536 (Pat) : TC38R.1086, Raja Shiva Prasad Singh vs. The Crown (1924) ILR 4 Pat 73 and IRC vs. British Salmson Aero Engines Ltd. (1939) 7 ITR 245 (Cal) : TC38R.1039 distinguished.

Conclusion :
Where the right to collect rents and royalties were conveyed by the lessor to a company in
lieu of an outright payment, consideration received is a revenue receipt.

Counsel appeared:
Mahabir Prasad, S. K. Mazumdar & J. M. Ghose, for the Assessee : S. N. Dutt, for the
Revenue
RAMASWAMI, J.#SARJOO PROSAD, J.
These references are made by the Tribunal under s. 66 of the IT Act.

2. The assessee Raja Nilkantha Narayan Singh of Nowagarh is the proprietor of a big
zamindari within the ambit of which coal fields are situated. The predecessor of the
assessee had leased out the coal fields on long term basis to three different parties. The
average annual income of royalty and rents from these lessees was about Rs. 50,000 a
year. The accounting year is 1352 Bengal Sambat which ends with the corresponding
English date of 14th April, 1946. In the accounting year the assessee had executed three
documents termed "indenture of lease" in favour of Bengal Discount Co. Ltd. conveying his right to collect royalties and rents from these three lessees. In lieu of this the assessee was paid an immediate amount of Rs. 1,00,000, Rs. 40,000 and Rs. 60,000 for the three "indentures of lease". The annual rent reserved was Rs. 10, Rs. 5 and Rs. 5. In the first case the term of the  lease was 11 years, in the second case 10 years and in the third case 15 years. It was stipulated that after the expiry of the period the right of the assessee will be revived in each case and the assessee would be entitled to collect from the original lessees the amount of royalties and rent as before.

3. The amount of Rs. 2,00,000 which the assessee received from the Bengal Discount Co.
was taxed by the ITO as assessable income. On appeal the AAC maintained the order of the ITO. In second appeal the Tribunal held that the sum of Rs. 2,00,000 was advance receipt of royalty and was therefore assessable to income-tax.

4. Another question was also debated before the Tribunal, viz., with regard to the sum of
Rs. 84,000 in possession of the assessee on account of the encashment of high
denomination notes. On the same date the assessee encashed notes to the extent of Rs.
95,000. The ITO assessed the whole amount as the income of the assessee from
undisclosed sources. On appeal the AAC was satisfied that notes to the extent of Rs. 11,000 were included in the amount of Rs. 2 lakhs which the Bengal Discount Co. had paid to the assessee. He therefore reduced the taxable amount to Rs. 84,000. It was argued before the Tribunal that this amount too ought not to be taxed as it was saving of the assessee from the amounts he had withdrawn for his personal expense. The Tribunal held that the explanation was not acceptable and the amount of Rs. 84,000 ought to be assessed to income-tax.

5. The following questions have been formulated by the Tribunal for the determination of
the High Court : "(1) whether on the facts and in the circumstances of this case, the
Tribunal was right in holding that the sum of Rs. 2 lakhs received from Bengal Discount Co.
Ltd. was taxable income ? and (2) whether there is any material to justify the assessment
of Rs. 84,000 representing the value of high denomination notes which were encashed on
the 21st Jan., 1946 ?"
6. As regards the first question it was argued by the learned Advocate-General on behalf of
the assessee that the documents executed in favour of the Bengal Discount Co. were
"indentures of lease" in which the outright payment of Rs. 2 lakhs has been shown as salami and the annual rent reserved has been fixed at a small amount. Learned counsel maintained that salami was a capital receipt and was not liable to income-tax. Learned counsel referred to CIT vs. Maharajadhiraj Kumar Visheshwar Singh (1939) 7 ITR 536 (Pat) and contended that the premium or salami represented whole or part of the price for the lease executed in favour of the Bengal Discount Co. and so was a capital receipt and ought not to be taxed. Learned counsel also referred to Raja Shiva Prasad Singh vs. The Crown (1924) ILR 4 Pat 73 in which the question was whether a sum of money received by the assessee by way of salami or premium for granting a mining lease was taxable. It was held by Sir Dawson Miller that the salami was the price for parting with the direct enjoyment of the property and was not taxable. But, in my opinion, the material facts of both the cases ought to be distinguished from those of the present case. In Raja Shiva Prasad Singh vs. The Crown (supra) the lease was for a period of 999 years. The amount of salami was Rs. 3 lakhs and odd. In CIT vs. Maharajadhiraj Kumar Visheshwar Singh (supra) the settlement was made for an indefinite period and the salami was Rs. 1,800 for 4 1/2 bighas of land. Upon the interpretation of the transaction in each case, the High Court held that the salami represented the price for parting with the land and was not advance rent. In CIT vs. Maharajadhiraj Kumar Visheshwar Singh (supra) Manohar Lall, J., indeed observed that it was impossible to lay down a hard and fast rule that salami can in no case be taxable, and that the question would depend on the facts and circumstances of each case.

7. In the present case, the problem is to determine what is the real nature of the
transaction between the assessee and the Bengal Discount Co. It is true that the parties
have described the contract as "indentures of leases", the lump sum payment of Rs. 2 lakhs as "salami" and the small annual payment of Rs. 10 or Rs. 15 as "rent". But in the application of the law relating to income-tax, the principle is well-established that the name given to a transaction by the parties does not necessarily decide the nature of the transaction. It is the substance and not the form of the contract that should be regarded. In analysing the transaction it is not necessary that the documents should be construed from the purely legal aspect. It is open to the High Court not merely to look at the documents but consider the surrounding circumstances so as to conclude what is the real character of the transaction.

8. The principle is stated by Lord Greene in IRCs vs. 36/49 Holdings, Ltd., (in Liquidation)
(1943) 25 TC 173. "The true nature of the sum is not necessarily its nature in law, but its nature in business or in accountancy whichever way one likes to put it, because from the legal point of view there may be no difference whatsoever as between the parties between a capital and an income sum. It may be totally irrelevant to the legal relationships into which they are proposing to enter. When, however, the tertius gaudens, in the shape of the Revenue, appears on the scene, that matter which as between the parties may have been a matter of not the slightest importance becomes immediately a matter of very great
importance, and it is necessary to examine the circumstances of each individual case,
including any documents which require to be construed, in order to ascertain what is the
character to be attributed to the payment".

9. The documents must therefore be examined in the light of this principle. Exhibit D/1 is
described as indenture of sub-leases granted by the Raja in favour of the Bengal Discount
Co. for a period of 11 years. Clauses 1 and 2 state that the premium of Rs. 1 lakh has been
paid, that the rent of the land is fixed at Rs. 10 per year. Clause 4 recites that by virtue of
the deed the company will be entitled to realise all the royalties and commission payable by
the lessee Rai Sahib Chandanmal Indrakumar by suit or amicably and the company will
have the same right as the first party in respect thereof. Clause 5 empowers the Bengal
Discount Co. to realise the surface rent from Rai Sahib Chandanmal Indrakumar. But there
is an exception that besides surface land required for colliery the Bengal Discount Co. will
have absolutely no claim to the remaining surface land. Clause 5 also states that the
assessee was giving notice to Rai Sahib Chandanaml Indrakumar to pay royalty and
commission to the Bengal Discount Co. for the period of the lease. The other documents,
Exhibits D/2 and D/3, are couched in similar terms. But in Exhibit D/5 there is the important recital that the Raja was not able to pay income-tax and road cess and was in need of further money and on this account was giving the lease in respect of his right created by the registered patta dt. 9th March, 1900, from Nowagarh Properties Ltd.

10. It is manifest that the transaction, though inform a sub-lease was in substance an
assignment by the Raja of his right to realise royalties and rents for a term of 10 to 15
years. As consideration for the contract the Raja received a lump sum of Rs. 2 lakhs, which
it is plain, is nothing but advance payment of royalty. No other right except the right to
collect royalty and rent from the original lessees is transferred by the assessee to the
Bengal Discount Co. The assessee has not parted with any interest in the land but has
merely assigned his contractual right.
11. Reference may be made in this context to IRCs vs. Thomas Nelson & Sons (1938) 22 TC
175 in which the assessee company had lent a sum of money to an Indian company under
an agreement which provided that interest was to be paid at 3 per cent. per annum and
that on repayment of the principal sum or any part thereof there should also be paid a
premium varying with the date of repayment. The premiums prescribed by the agreement
for each of the ten years of the currency of the loan are set out in the agreement; the first
of them is at the rate of 2 per cent. ; the second is at 4 per cent. ; in each of the next five
years there is an increase of 2 1/2 per cent. in arithmetical progression and for the last
three years of the ten the rate of increase per annum is 3 per cent. The full amount of the
loan was ultimately repaid to the assessee together with the accrued interest and the
premiums payable under the agreement. The contention raised by the assessee was that
the premiums were part of the principal sums repaid and were capital payments. The Lord President decided the question as a question posed on the particular terms of the contract.
In his opinion the premiums were in the nature of annual profits or gains being part of the
consideration given by the borrowers for the use of the capital lent to them, and part of the
creditor’s share of the profit which the borrower is presumed to make from the use of the
money and he observed:—"It is not irrelevant to notice that the agreement provides for a
payment by way of premium which may be made in each year of the currency of the loan,
and that, taken along with the stipulated interest, the effect of this provision is to give the
lenders a return on their capital varying between 5 per cent. in the earlier years and
something over 5 1/2 per cent. in later years, a rate which can only be regarded as a
reasonable return for the use of their capital and not as to any extent an accretion to it". It was, however, pointed out that "the fact that the borrowers would, under the contract, pay
a premium only when they chose to make a capital payment does not necessarily have the
effect of making the premium a capital payment, any more than the lender’s waiver of their
right to exact payment of interest each year as the effect of converting the payment of
arrears of interest into a capital payment".

12. On behalf of the assessee the argument was addressed that income connoted a
periodical monetary return, that in the present case the amount of Rs. 2 lakhs being a lump sum payment cannot be classed as income. Reference was made to CIT vs. Shaw, Wallace &
Co. (1932) 59 IA 206 in which at page 212 Sir George Lowndes observed: "The object of
the Indian Act is to tax ‘income, a term which it does not define. It is expanded, no doubt,
into ‘income, profits and gains’, but the expansion is more a matter of words than of
substance. Income, their Lordships think, in this Act connotes a periodical monetary return
‘coming in’ with some sort of regularity, or expected regularity, from definite sources. The
source is not necessarily one which is expected to be continuously productive, but it must
be one whose object is the production of a definite return, excluding anything in the nature
of a mere windfall. Thus income has been lickened pictorially to the fruit of a tree, or the
crop of a field. It is essentially the produce of something, which is often loosely spoken of as
‘capital’. But capital, though possibly the source in the case of income from securities is in
most cases hardly more than an element in the process of production". But this passage
must be read in the context of the material facts of that case. The question before the
Judicial Committee was not whether there was a periodical monetary return but whether the
sums received by the respondent were taxable income under s. 6(iv) of the Indian IT Act. It was held by the Judicial Committee that the fundamental idea of "business" as a source of
taxable income under s. 6(iv) was the continuous exercise of an activity that there must be
a business "carried on" by the assessee and that the sums received by the respondents in
the case were not the produce nor the result of carrying on the agencies of the oil
companies in the year in which the sums were received and so the sums were not liable to
be taxed. The authority of the definition given by Sir George Lowndes is shaken by the
subsequent decision of the Judicial Committee in Raja Bahadur Kamakshya Narain Singh vs. CIT (1943) 11 ITR 513 (PC) in which Lord Wright held that mine royalties were clearly
income and not capital and were assessable to income-tax. At page 723 Lord Wright
criticised the definition of Sir George Lowndes in the Shaw Wallace case (supra) : "It is not in their Lordships" opinion correct to regard as an essential element in any of these or like
definitions a reference to the analogy of fruit, or increase or sowing or reaping or periodical
harvests. Lord Cairns (loc. cit) used these expressions because he was distinguishing
mineral leases from agricultural leases. Sir George Lowndes (loc. cit) speaks of ‘income’
being likened pictorially to the fruit of a tree or the crop of a field. But it is clear that such
picturesque similes cannot be used to limit the true character of income in general, and
particularly when it is constituted by mining rent or royalties. These are periodical
payments, to be made by the lessee under his covenants in consideration of the benefits
which he is granted by the lessor. At page 724 Lord Wright states: "There is, therefore, in
their Lordships’ judgment, no real justification for treating the royalties as capital payments. They think that they are ‘income’ within the meaning of the Act, whatever may be the exact
definition of that word in the Act. Its applicability may, in particular cases, differ because
the circumstances, though similar in some respects, may be different in others. Thus the
profit realised on a sale of shares may be capital if the seller is an ordinary investor
changing his securities, but in some instances at any rate it may be income if the seller of
the shares is an investment or an insurance company. Income is not necessarily the
recurrent return from a definite source, though it is generally of that character. Income
again may consist of a series of separate receipts, as it generally does in the case of
professional earnings. The multiplicity of forms which ‘income’ may assume is beyond
enumeration".

13. On behalf of the assessee the argument was stressed that the payment of Rs. 2 lakhs
was made to the assessee in a lump sum and so the amount ought not to be classed as
taxable income. But there is no magic in the distinction between a lump sum and a
periodical sum and the only material question in the case is what is the true nature of the
sum. In Rustproof Metal Window Co. Ltd. vs. IRCs (1948) 16 ITR (Suppl) 57, a patentee
entered into a contract conferring on a licensee the right to manufacture up to a stated
number of articles in accordance with the patent on condition that the licensee paid a lump
sum down and a royalty of so much per article. It was held by Lord Greene, M.R., that the
lump sum payment was an income, and not a capital receipt, and so was liable to excess
profits tax and that the division of the price into separate elements did not by itself have the effect of turning the lump sum into a capital receipt.

14. The observation of Lord Macmillan in Van den Berghs Ltd. vs. Clark (1935) 3 ITR Eng
Cas 17 (HL) is apposite : "Now what were the appellants giving up ? They gave up their whole rights under the agreements for 13 years ahead. These agreements are called in the stated case ‘pooling agreements’, but that is a very inadequate description of them, for they
did much more than merely embody a system of pooling and sharing profits. If the
appellants were merely receiving in one sum down the aggregate of profits which they
would otherwise have received over a series of years, the lump sum might be regarded as
of the same nature as the ingredients of which it was composed". Again, in North Fleet Coal & Ballast Co.’s case (1927) 12 TC 1102 there was a contract, subsisting for ten years for the
sale of chalk and also for the building of wharf. It was agreed between the quarry company
and the purchaser that in consideration of the payment of £ 900 yearly for the remaining
four years of the term the purchaser should be relieved of his liability; subsequently the
company accepted a lump sum payment of £ 3,000 in lieu of the annual payments. Rowlatt,
J., held that the payment of £ 3,000 was chargeable to excess profits duty as a trading
profit as it represented profits in a new form and it was tantamount to income.
The case of Constantinesco vs. Rex (1927) 11 TC 730 is materially in point. In that case an
award of £ 70,000 was made by the Royal Commission on Award to Inventors in respect of
the user by the British Government during the war of certain gear invented by the assessee
for enabling a bullet to be fired : between the propeller of an aeroplane. It was held by the
CIT that the lump sum payment was simply royalty for four years and that income-tax
should be deducted. The decision was affirmed by the House of Lords who agreed that in
the circumstances of the case the lump sum payment did not constitute a capital sum but
was royalty paid in respect of the user of the patent and was liable to be taxed. At page 746
Viscount Cave states: "The payment was made in respect of the use of the invention over a
period of time. The claim put in was a claim as for royalty in respect of the successive uses
of the invention. In the case of patented inventions it was the practice of the Commission,
as appears from their Report which has been cited on behalf of the appellant, to take as a
basis of their award a fair royalty as between a willing licensor and a willing licensee, and I have little doubt that that basis was accepted in the present case, subject, no doubt, to
certain deductions. Lastly, the patent itself, that is the corpus of the patent, was not taken
away from the appellant and his partner but still remains in them. In view of all the facts I
am satisfied that the sum awarded is to be treated as profits or gains, and annual profits or
gains, within the meaning of the IT Act". Viscount Dunedin was also emphatic: "I think, on
the real merits of the case, the case was scarcely arguable. This was a patent which
remains this man’s property. He, in the old days, got royalties for it, and those were the
profits of his property. He had taken, by the Crown, the same licence of user as private
persons had before, and to say that the payments which the Crown make lose their
character as income and suddenly become capital is, I think, as all the Courts have
understood the case, one of the most hopeless contentions I have ever heard urged at your
Lordships’ Bar".

16. To the same effect is the decision in Mills vs. Jones (1929) 14 TC 769 in which an award
was made by the Royal Commission on Awards to Inventors in respect of the user, past,
present and future, by the British Government (including user by way of selling for use,
licensing or otherwise) of the Mills bomb. Over 75 millions of these bombs had been made
during war and large stocks were still in existence. The appellant, as patentee of certain
improvements to this bomb, received sums representing the major part of this award, and
was charged to income-tax thereon. The General Commissioners on appeal held that the
sums received by the appellant were annual profits or gains chargeable to income-tax under
Schedule D. The House of Lords held that the assessee was rightly charged to income-tax
and that the principle of Constantinesco’s case (supra) was applicable. At page 786 Lord
Buckmaster proceeded to base the decision on the finding of fact of the CITs that the
amount of the future user included in the payment was negligible. Lord Dunedin agreed with
Lord Buckmaster’s opinion and significantly added "I think the finding of fact is conclusive".
My learned brother has referred to IRCs vs. British Salmson Aero Engines, Ltd. (1938) 7 ITR 245 (CA), but, in my opinion, the ratio of that case is different. In that case the assessee by
a certain agreement granted to the licensees, an exclusive right for a period of ten years to
construct, use and sell in a certain territory Salmson Aero Engines. The consideration for the
licence was that the licensees were to pay a fixed sum of £25,000 payable in three
instalments and, in addition to these payments, and as royalty, a sum of £ 2,500 and a like
sum each twelve months during the following nine years. The Crown contended that all
these payments were income and the assessee insisted, on the contrary, that all these
payments were in the nature of capital receipts. The Special Commissioners decided that
the fixed sum of £ 25,000 was capital receipt and the payments of royalty of £ 2,500 were
assessable to income-tax. The decision of the Special Commissioners was affirmed by the
Court of Appeal. In pronouncing judgment Lord Greene, Master of the Rolls, treated the
question whether a lump sum payment was a capital payment or income payment as a
question of fact to be determined in the context of each particular case: "It seems to me
that in the case of patents, as in the case of any other matters, the fundamental question
remains in respect to any particular payment: is it capital or is it income ?, and that
question has to be decided, as it has to be decided in reference to other subject-matters,
upon the particular facts of each case, including in those facts the contractual relationships
between the parties. It has been said that the question is one of fact, and it is, when one
gets to the bottom of it, an accountancy question. In saying that it is a question of fact, one
does not mean that, in deciding it, questions of law may not have to be discussed and
decided. For example, the construction of a contract may be one of the elements which
must be takan into consideration in deciding that question ; there may be cases where the
construction of the contract is of itself the really decisive matter in answering the question."
At page 48 Lord Greene again states: "I do not propose to add anything by way of
expression of my own views on the principles on which that question ought to be determined. It is a question which has been investigated very carefully in a number of
different connections, and different matters of fact have been regarded in different cases as
of importance and of weight. It seems to me, on all the facts of this case, including the
terms of the contract itself, which is the important and, indeed, the essential fact in the
case, that the CITs were perfectly entitled to come to the conclusion to which they did
come, that this class of payment was not of an income nature, but of a capital nature. I can
find nothing in the facts of the case, or in the construction of the documents, which would
justify me in saying that the CITs’ conclusion is wrong in law; and in my judgment their
conclusion is the right one". Scott, L. J., in his concurring judgment emphasised that in so far as the Special Commissioners came to the conclusion that a particular payment had "the accountancy quality" of capital payment, that was a view which the Court of Appeal was entitled and ought to give great weight. At page 49 Scott, L. J., states: "In my view, that
kind of weight ought to be attached to the findings of the CITs in the present case. It is
quite true that they put before us the whole of their material, and that that material, in
substance, consists of an agreement made between the licensees and the patentees, and
nothing more. But they have taken the view, without hesitation evidently, that these lump
sum payments were in the nature of capital payments. If there were any doubt from the
purely legal point of view, which I do not think there is, that opinion of the CITs ought to
weigh in the balance, and, in my opinion, this is an additional reason for upholding their
findings". In my opinion this is the proper legal principle of this decision and only on such a principle can the decision be reconciled with Mills’ case (supra) and Constantintesco’s case
(supra).
17. Reference should be made to Glasson vs. Rougier (1944) 26 TC 86, in which the
assessee, who was admittedly carrying on the vocation of authoress, had entered into three
agreements with a publishing company in 1925, 1932 and 1935, respectively, whereby she
granted limited publishing rights in respect of three books written by her in consideration of
payments based on the number of copies sold. In 1940 these agreements were cancelled
and the same limited publishing rights were transferred outright to the publishing company
in consideration of a lump sum payment. On appeal against an assessment to income-tax it
was contended that the lump sum payment was a capital receipt. Macnaghten, J., rejected
the contention, holding that the payment in question formed part of the annual profits and
gains of the assessee, and was rightly taxed.
18. My learned brother has referred to the fact that in Salmson Aero Engines’ case (supra),
the decision of Lord Greene was also based on the circumstance that "in the agreement
there was a fundamental difference in the nature of the two classes of sums, in this sense
that the former class starts off by being a lump sum payment definite and fixed, which is
then payable by instalments. The other class is not of that description; no lump sum
payment is referred to; it is on the face of it, nothing but an undertaking to pay yearly sums
as royalty." But this passage must be read in the context of the whole judgment and the
decision of Lord Greene in a subsequent case shows that the circumstances is by no means
decisive of the matter. In Rustproof Metal Window Co. Ltd. vs. IRCs (supra) a patentee had
entered into a contract conferring on a licensee the right to manufacture up to a stated
number of articles in accordance with the patent on condition that the licensee paid a lump
sum down and a royalty of so much per article. Even so Lord Greene held that the lump
sum payment was an income and not a capital receipt and so was liable to excess profits tax
and that the division of the price into separate elements did not by itself have the effect of
turning the lump sum into a capital receipt. At page 66 Lord Greene states: "The only
considerations on the other side, once the company’s arguments above discussed are
rejected, are that the parties themselves call the £ 3,000 a capital payment and the
agreement separate the £ 3,000 from the payments which are described as royalties. I
cannot attach to these considerations sufficient importance to outweigh those on the other side. The fact that parties call the £ 3,000 a capital sum cannot make it a capital sum if it is
not. The word capital is a mere label attached to the £ 3,000 with an eye, no doubt, to tax
considerations. The fact that the agreement separates the £ 3,000 from the royalties is
nothing more than a drafting necessity, having regard to the fact that the latter are based,
on the actual number of boxes treated with the process, while the former is paid for the
right to apply the process to any number of boxes up to 75,000. If a patentee negotiating
with an intending licensee who wishes to obtain the right to manufacture up to a stated
number of articles in accordance with the patent states his terms to be a lump sum down
and a royalty of so much per article, I can see no reason why the mere division of the price
into those two separate elements should by itself necessarily produce the result that the
sum down must be regarded for tax purposes as a capital receipt."

19. It was contended on behalf of the assessee that if the premium in this case is held to be
an income receipt it ought to follow as a logical result that the price for an outright sale of
the royalties should be classed as income and not as a capital receipt, that such as a
conclusion was opposed to common sense. But it is not the business of the Court to
demarcate the boundary between two categories in a mathematical sense. The indication of
the boundary need only be sufficiently distinct for the immediate problem in hand. In this
connection reference should be made to Hobbs vs. L. & S. W. Railway (1875) LR 10 QB 11,
in which Lord Blackburn observed of the rule in Hadley vs. Baxendale (1854) 9 Exch 341 :
"It is a vague rule, and as Bramwell, B., said, it is something like having to draw a line
between night and day; there is a great duration of twilight when it is neither night nor day;
but on the question now before the Court, though you cannot draw the precise line, you can say on which side of the line the case is".

20. For the reasons given I am definitely of opinion that the amount of Rs. 2 lakhs which
was paid by the Bengal Discount Co. to the assessee in consideration of the so-called
indentures of lease was a taxable income.

21. This question must therefore be answered against the assessee.

22. As regards the second question it was argued for the assessee that there was no
material upon which the ITO could regard the amount of Rs. 84,000 as income from
undisclosed source. Mr. Dutt pointed out that three reasons were given by the Tribunal in
support of the inference that the sum of Rs. 84,000 was taxable. In the first place it was
stated that the assessee did not produce any Home Chest Account though it was his case
that the high denomination notes were savings from his personal allowance. In the next
place it was pointed out that the assessee could not save any money since in the indenture
of lease, Exhibit D/3, there is a recital that the assessee was in need of money to pay the
income-tax and road cess for the properties. Lastly it was observed by the Tribunal that the
assessee was not in a position to say wherefrom the notes of the value of Rs. 10,000 each
were obtained and his failure to do so led to the conclusion that he was unwilling to disclose
the source. On behalf of the assessee it was argued that no Home Chest Account was
maintained by the assessee and the Tribunal had no warrant for drawing an adverse
inference. In my opinion the contention of the assessee is correct. There was no material
before the Tribunal to suggest that a Home Chest Account was maintained and the Tribunal
ought not to have drawn an adverse inference because no such account was produced. As
regards the recital in Exhibit D/3, learned counsel for the assessee stated that the accounts
of the amounts withdrawn by the Raja for seven years were produced before the Tribunal,
that the accounts showed that the Raja had a balance of Rs. 1,84,000. These account books
were accepted by the Tribunal as genuine and there was hence no material upon which the
Tribunal could reach the inference that the high denomination notes were not the saving of

the Raja out of his personal allowance which he had drawn. It appears that the amount of
Rs. 84,000 consisted of three notes to the value of Rs. 10,000 each and the rest of Rs.
1,000 each. The ITO had asked the Raja to show any lump sum payment of above Rs.
10,000. The Raja actually showed three such receipts, the first dt. 15th March, 1943, for Rs.
25,565, the second dt. 10th Feb., 1945, or Rs. 45,000 and the third dt. 24th Sept., 1945,
for Rs. 29,534. The Tribunal remarked that there was no evidence that there was a Rs.
10,000 note in any of these receipts and that the Raja and his employees had not disclosed
from whom the notes of the value of Rs. 10,000 each were obtained. In my opinion there is
no onus thrown upon the Raja to indicate from whom each note to the value of Rs. 10,000
was received, and no adverse inference ought to have been drawn by the Tribunal against
the assessee.

23. In this context reference should be made to CIT, Bombay Presidency and Aden vs.
Bombay Trust Corporation (1936) 4 ITR 323 in which B, a company registered and carrying
on business in British India, was assessed to income-tax in respect of the year of
assessment 1928-29 as agent of H, a company registered and carrying on business outside
India. On a reference to the High Court it was held that there was no evidence that in 1927
H received from B any sums as interest on money lent, and that H was not therefore in
receipt of the profits or gains taxable under s. 42, sub-s. (1), and s. 43 of the Indian IT Act.
At page 418 the report states: "In their Lordships’ opinion the High Court at Bombay have
rightly answered in the negative the question referred to them. However sceptical the
attitude which the IT authorities may think fit to adopt towards the declarations offered and
the entries made in the Bombay Company’s books, it is necessary, if the assessment made
is to be supported, that there shall be some evidence to show that in 1927 the loan from
the Hong Kong Company continued, and that interest ‘accrued or arose’ to that company
thereon. If the entries in the books show no payment to the Hong Kong Company, and
nothing due to the Hong Kong Company, the IT authorities cannot, without evidence, insist
upon a right to treat entries showing a tael loan of six and a half-crores made by a
Shanghai Company, and interest calculated in taels paid thereon, as evidence that a
somewhat similar amount was due from and was being paid by the Bombay Company, to
the Hong Kong Company".

24. In the result I hold that there is no material to justify the assessment of Rs. 84,000
representing the value of high denomination notes which the assessee encashed on 24th
Jan., 1946. This question must accordingly be answered in favour of the assessee.

25. As the assessee has succeeded in part I do not propose to make any order as to costs of the hearing.
I agree with my learned brother in the answer proposed by him to the second question
under reference, namely, that there was no material to justify the assessment of Rs. 84,000
representing the value of high denomination notes which were encashed on the 21st Jan.,
1946. But as I am going to indicate, I have felt considerable difficulty and hesitation in
according my assent to the answer given by him to the first question under reference,
namely, whether on the facts and in the circumstances of the case the Tribunal was right in
holding that the sum of Rupees two lakhs received from the Bengal Discount Co. Ltd. was a
taxable income.
2. The sum of Rs. 84,000 had been assessed by the Revenue officer as the assessee’s
income from undisclosed sources. The findings of the Tribunal on that point are not
adequate to lead to an inference that the said sum represented some secret profits of the
assessee and was, therefore, taxable as income from undisclosed sources. The assessee had submitted his accounts from which it appeared that the assessee had, during the last seven years from 1346 to 1352 B.S., drawn from his serishta various sums of money representing
the income from his estate and had from time to time given back to the serishta according
to his requirement certain sums of money, and the difference between the two sums
represented a balance of Rs. 1,82,000 and odd which amount would be more than sufficient
to cover and explain the sum of Rs. 84,000 representing the value of the high denomination
notes. These figures have not been contested by the Department, and in fact they have
been accepted by the Revenue Authorities. The case of the Department, however, is that
this amount must have been spent by the assessee in view of the fact that he entered into
the transactions with the Bengal Discount Co. for the purpose of raising money to satisfy his
needs. If the view of the Department is correct, then the money must have been spent
before the 21st April, 1945, when the assessee first entered into a transaction with the
aforesaid company and the income aforesaid must have been received by the assessee
between this 21st April, 1945, and the 21st Jan., 1946, when the high denomination notes
appear to have been cashed. Now the various sources of the assessee’s income are all
stated in the accounts, and if the accounts are held to be genuine, as they have been held
to be genuine, I do not see how it can be inferred that this money came from any different
source during the period in question. The Revenue Authorities appear to have presumed
that there was some home chest account kept by the assessee which the latter has failed to
produce, and, therefore, the presumption must be raised against him. In my opinion, there
is no legal foundation for such a presumption as there is no basis for assuming that there
was a home chest account maintained by the assessee. My learned brother has elaborately
gone into this question, and it would not serve any useful purpose for me to repeat the
reasons given by him for coming to the conclusion that there was no justification for the
assessment of the said Rs. 84,000.
3. The difficulty, however, arises when dealing with the first question: whether the Revenue
Authorities were justified in assessing the sum of rupees two lakhs received by the assessee
from the Bengal Discount Co. This amount represented the salamis received by the
assessee on account of three different leases executed by the former in favour of the said
company. The documents are described as indentures of leases and the lump sum payment
of rupees two lakhs has been specifically mentioned as salami, while there are small annual
payments of Rs. 10 or Rs. 15 mentioned in the documents by way of rent. The documents
also indicate that they are to operate for the periods of 11, 10 and 15 years respectively.
The subject-matter of the lease as mentioned in the documents is a certain area of land
being about 323 acres or 544 bighas. The documents proceed to recite that by virtue of the
lease in question the lessee will be entitled to realise all the royalties and commissions
payable to the lessor by one Rai Sahib Chandanmal Indrakumar who had already taken
settlement of the mining rights in the lands from the lessor. The lessee was also given the
right to realise rent on account of certain surface rights from the said Raj Sahib, but he had
no right whatsoever to the remaining surface lands. The lessee was further placed in the
same position as the lessor in regard to the right to realise rents, royalties and commissions
from Rai Sahib Chandanmal during the operation of the lease. The document further
provided that if during the said period the lessee auction-purchased for arrears of royalties
and commissions the interest of Rai Sahib Chandanmal Indrakumar in the lands, then after
the expiry of the lease the purchaser lessee would have to pay the rents and royalties as
payable by Rai Sahib Chandanmal himself to the lessor. These, in short, are the material
terms of the document. It would prima facie appear on the face of the recitals that this lump
sum payable under the various leases was payable as salami and was sought to be a
distinct payment from the annual payments mentioned therein. There was thus a
fundamental difference in the nature of the two classes of sums payable under the leases in
question. The former starts off with a lump sum payment, definite and fixed; the other class
is not of that description. The latter class is indisputably nothing but an undertaking to pay

yearly sums as royalty. The parties were thus creating an obligation as between themselves
which they chose to describe as rent payable each year in respect of the fixed rate but as
salami in regard to the lump sum payment.
4. It has been held in various cases of this Court that salami is really in the nature of a
premium paid for granting a lease; in other words, it was the purchase price of a lease-hold
interest; but so far as annual rent or royalty is concerned, it being an annual increment to
the income, it was taxable as such. Normally, therefore, salami would be regarded as a
capital receipt unless the Revenue Authorities showed that there was something in the
circumstances of the case to indicate that it was not a capital receipt but a payment made in
lieu of the periodical income or a payment in advance of rent or royalty; see, for instance,
Sri Sri Raja Shiva Prasad Singh vs. The Crown (1924) ILR 4 Pat 73 and CIT vs.
Maharajadhiraj Kumar Visheshwar Singh (1939) 7 ITR 536. There is thus a vital difference
between a single payment made at the time of the settlement and recurring payments
made during the period of the enjoyment of the property. The parties have themselves
chosen to clothe the transaction in that form and the question is whether the presence of
tertius gudens, in the shape of the Revenue, on the scene would make any material
difference to the real nature of the transaction.
5. It has been argued on behalf of the Department that the Court in construing a document
must look to the substance of the transaction; in other words, the Court must tear off the
veil and look in the face of the transaction itself. It is pointed out that the substance of the
transaction in the present case is more or less this: that a lump sum of royalty is being paid
in advance to the assessee for the period of the lease, and the document does not really
transfer any right in the corpus of the property itself but merely a right to realise royalty.
Speaking for my self, I do not see why the document cannot be regarded as a transfer of
interest in immoveable property itself. It is true that the lessor had at the time only the
right to receive the royalty from Rai Sahib Chandanmal but at the same time continued to
be the owner of the lands in question, and he purported to transfer a parcel of this right as
owner in favour of the lessee which for the time being was demonstrated by his right to
realise rents and royalties. Then again the premium or salami paid cannot be assumed
necessarily to be a lump sum payment of the royalty in advance. In that case every
premium can be treated as a consolidated. amount of the rental paid in advance. It goes
without saying that premium or price is always fixed after taking into consideration the
amount of annual rent which the lessee is to pay to the lessor, and this ratio of the premium
to the annual rent varies almost in each case in the inverse proportion. It is true that the
lessee here gets the right to collect the royalty during this period, but then the position is
that for the period of the lease the lessor cannot enforce this right as against Rai Sahib
Chandanmal, and it is on account of parting with this right that the lessor-assessee has
received the consideration of the premium in question. Besides, the royalty actually
realisable by the lessee from Rai Sahib Chandanmal from year to year is a variable and an
unknown quantity (though, of course, the minimum royalty may be indicated). Therefore,
there is nothing to connect the premium paid with the proportion of the royalty realisable by
the lessee himself after the leases began to operate. For all these reasons I was inclined to
think that this, salami was not an advance payment of the annual rent or royalty for the
period of the lease; although it must be conceded that the period during which the lease is
to be operative varies from 10 to 15 years only, and the annual rental payable is a very
small amount.
6. I do not find it easy to distinguish the present case from the ratio decidendi in IRC vs.
British Salmson Aero Engines, Ltd.(1928) 7 ITR 245 (CA). In that case the assessee by a
certain agreement granted to the licensees an exclusive right for a period of ten years to

construct, use and sell in certain territory Salmson Aero Engines. The consideration for the
licence was that the licensees were to pay a fixed sum of £ 25,000 payable in three
instalments, and, in addition to these payments, and as royalty a sum of £ 2,500 and a like
sum each twelve months during the following nine years. The Crown contended that all
these payments were income and the assessee insisted, on the contrary, that all these
payments were in the nature of capital receipts. The Master of the Rolls in coming to his
decision referred to two important circumstances: "The first thing to notice about it is that it
is not merely an agreement under which the English Company receives the right to use a
patent. Under this agreement the English Company is entitled to restrain the patentees
themselves from exercising the patent in the territory, and it is, entitled to call upon the
patentees to take steps to prevent others exercising the invention within the territory. Now
these rights are, to my mind, different from the mere right of user." In the present case
even if we regard the leases not as constituting any transfer of interest in immoveable
property but as mere licence for a certain number of years to collect the rent and royalty,
the assessee has certainly parted with his right to make such collection during the period in
favour of the licensee who alone could sue for the rent and royalties in question. The other
circumstance to which the Master of the Rolls refers is that in the agreement there was a
"fundamental difference in the nature of the two classes of sums, in this sense, that the
former class starts off by being a lump sum payment, definite and fixed, which is then
payable by instalments. The other class is not of that description ; no lump sum payment is
referred to ; it is, on the face of it, nothing but an undertaking to pay yearly sums as
royalty". It was accordingly held in the case that the lump sum payment of £ 25,000 was a
capital receipt not liable to assessment but, that the further payments of £ 2,500 were
royalties and taxable as income of the assessee. It is true that the case was a decision on
its own facts but the facts are very significant. The contract was not a lease but a mere
licence and the period for which it was to operate was only a period of ten years, yet the
decision about the lump sum payment was to treat it as a capital payment and not income.
This decision has been very strongly relied upon by Manohar Lall, J., in CIT vs.
Maharajadhiraj Kumar Visheshwar Singh (supra), referred to above.
7. The term "income" has nowhere been defined in the IT Act any more than the term
"capital". In the case of Shaw Wallace & Co. (supra) the Judicial Committee attempted to
describe the term "income" in the following manner:—
"The object of the Indian Act is to tax "income", a term which it does not define. It is
expanded, no doubt, into ‘income, profits and gains’ but the expansion is more a matter of
words than of substance. ‘Income’, their Lordships think, in this Act connotes a periodical
monetary return ‘coming in’ with some sort of regularity, or expected regularity, from
definite sources. The source is not necessarily one which is expected to be continuously
productive, but it must be one whose object is the production of a definite return, excluding
anything in the nature of a mere windfall. Thus, income has been likened pictorially to the
fruit of a tree, or the crop of a field. It is essentially the produce of something which is often
loosely spoken of as ‘capital’. But capital, though possibly the source in the case of income
from securities, is in most cases hardly more than an element in the process of production."
8. This definition or description of income appears to have been substantially adopted by
Lord Russell who further amplified it in the case of Gopal Saran Narain Singh vs. CIT (1935)
3 ITR 237 (PC). Again in Kamakshya Narain Singh’s case (supra), Lord Wright in adverting
to the earlier judgments observed :—
"It is not in their Lordships’ opinion correct to regard as an essential element in any of these
or like definitions reference to the analogy of fruit, or increase or sowing or reaping for periodical harvests … Sir George Lowndes speaks of ‘income’ being likened pictorially to the
fruit of a tree or the crop of a field. But it is clear that such picturesque similes cannot be
used to limit the true character of income in general …… Income is not necessarily the
recurrent return from a definite source, though it is generally of that character. Income
again may consist of a serious of separate receipts, as it generally does in the case of
professional earnings. The multiplicity of forms which ‘income’ may assume; is beyond
enumeration."
9. This broader connotation of the word "income" makes it all the more difficult and, elusive
and it is not easy to specify and define its various characteristics.
10. There has, therefore, often been considerable embarrassment in drawing a line between what is capital receipt and what is revenue receipt or "income". It was this embarrassment
which tempted an eminent Judge to observe that in some cases the matter is so
dangerously close to the border-line that it has to be decided, as it were, by the spin of the
coin. The cases relied upon on behalf of the taxing Department are all cases where the lump
sum payment specifically carried the attribute of the periodical payment as income and was
definitely identifiable as such. It is true that the IT Act is not cast on logical lines and in
some cases the line has to be drawn with an arbitrary firmness. This case appears to me to
be very much on the border-line, if not, as I tried to show, on the right side of it. My
learned brother is very definitely of the opinion that "the amount of rupees two lakhs which
was paid by the Bengal Discount Co. to the assessee in consideration of the so-called
indentures of lease was a taxable income". His decision is in conformity with the decision of
the Revenue Authorities and I do not propose to disturb the status quo unless the
circumstances of the case were absolutely compelling and pointed definitely in a contrary
direction. I have, therefore, persuaded myself eventually to adopt the answer proposed by
my learned brother to the first question as well. The question whether a certain amount is
capital receipt or income has always to be decided on the facts and circumstances of each
case, and no hard and fast rule can be laid down for the purpose.

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