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
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:
“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
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,
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
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