Appeal No424 of 1957
Appeal by special leave from the judgment and order dated January 25 1955 of the Patna High Court in Misc
Judicial Case No 621 of 1953
N C Chatterjee and R C Prasad for the appellant
K N Rajagopal Sastri and D Gupta for the respondent
791 1960
November 30
The Judgment of the Court was delivered by KAPUR J
This is an appeal by special leave  against the judgment and order of the High Court at Patna answering the question referred to it by the Income tax Appellate Tribunal against the assessee who is the appellant before us
The appeal relates to three assessments made on the appellant for the respective assessment years 1945 46 1946 47 and 1947 48
The appellant is a Zamindar and owns considerable properties
In the accounting years he granted licences to different parties to prospect for Bauxite
The particulars of the licences are Received from Date of the Period of Assess Amount Licence Licence ment year Received
Rs 1Aluminium Corporation ofIndia Ltd 20 1 1945 6 months 194546 15290 
2Indian Aluminium CoLtd 26 5 945 1 year 194647 124789 
3Dayanand Modi
7 5 1945 6 months 194748 1500 
4Indian Aluminium CoLtd
14 8 1945 1 year 194748 70146 
The Income tax Officer held that these amounts were received as revenue payments and were therefore taxable
On appeal to the Appellate Assistant Commissioner the amounts were held to be capital receipts but this order was set aside by the Income tax Appellate Tribunal which held the amounts to be revenue receipts and taxable as such
At the instance of the appellant the case was referred to the High Court under section 661 of the Income tax Act and the following question was stated for the opinion of the Court Whether in the facts and circumstances of these cases the sums of Rs 15209 Rs 124789 Rs 1500 and Rs 70146 received by the assessee are income assessable to tax under the Indian Income tax Act 792 The question was answered in the affirmative and the High Court held that there was material to support the finding of the Tribunal and it was a finding of fact that the amounts received by the appellant were revenue receipts and not capital receipts
Against this judgment the appellant has come in appeal to this court by special leave
The question that falls for decision is whether the amounts received by the assessee are capital or revenue receipts and for that purpose it is necessary to investigate the nature of the grants made by the appellant
Under the licence the licensee was granted the sole and exclusive right and liberty to a to enter into and upon to prospect search for mine quarry bore dig and prove all Bauxite lying and being in under or within the said lands
b For the purposes aforesaid and all other purposes incidental thereto dig drive make and maintain such pits shafts borings inclines admits levels drifts air courses drains water courses roads and ways and to set up erect and construct such temporary engines machinery sheds and things as may be reasonably necessary for effectually carrying on the prospecting operations hereby licenced
c To remove take away and appropriate samples and specimens of Bauxite of every quality kind and description and in reasonable quantities not exceeding one hundred tons in all during the terms of this grant
d For the purposes aforesaid to clear undergrowth brushwood and to make use of any drains or water courses on the lands or for clearing sites of working from any water which may flow or accumulate thereon or therein
The periods of the licences were comparatively short 6 months in two cases and a year each in the other two
Under the covenants the licensees were to cause as little damage as possible to the surface of the land
They were to give full information regarding the progress of the operations and true copies of all borings to the licensor
The licensees were also 793 required to plug all holes made by them
The licensor convenanted to give a reasonable right of passage through and over the adjoining lands and properties and in consideration of the premium paid the licensees could at their option after giving necessary notice and on payment of a further sum get a mining The lease for a term of thirty years on the terms and conditions set out in the indenture attached as schedule 2 to the licence
The Income tax Appellate Tribunal found that the licensees were not granted any interest in land and the amounts received were revenue receipts and therefore assessable to income tax A reference to some of the cases would assist in determining the nature of the transaction which was evidenced by the documents placed on the record
In Raja Bahadur Kamakshya Narain Singh of Ramgarh vs Commissioner of Income tax Bihar  Orissa 1 the payments by way of premium were held to be capital receipts
In that case large payments by way of royalty for granting various mining leases were received by the assessee
The leases were for a period of 999 years for mining coal with liberty to search for work make merchantable and carry away the coal there found and with power to dig and sink pits
In consideration of these rights the lessees paid a sum by way of salami premium and an annual sum as royalty on the amount of coal raised subject to minimum annual royalty
The lessor had the right to reenter in case of failure to pay the royalty
It was contended by the assessee there that the sums received as salami and royalty were capital receipts representing the price of the minerals removed
It was held that salami was a single payment paid for the acquisition of the right to enjoy the benefits granted by the lease and was a capital asset and that the two other forms of royalty both minimum and per ton flowing from the covenants in the lease were not on capital account and fell within the meaning of other income under s12 of the Act
Lord Wright said at p 190 The salami has been rightly in their Lordships  opinion treated as a capital receipt
It is a single 1 1943 LR 70 IA 186
794 payment made for the acquisition of the right of the lessees 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
 This case was sought to be distinguished by counsel for the respondent on the ground that the lease was for a long period of 999 years but the observations above quoted were not based on this consideration but on the nature of the right which was conveyed
In Commissioner of Income tax Bihar  Orissa vs Raja Bahadur Kamakshya Narain Singh 1 a coal company had been given by the Court of Wards a prospecting licence in respect of certain coal bearing lands with the option of renewal and also to take a mining lease on certain terms and conditions
The prospecting licence was subsequently extended on four occasions
When the assessee attained majority he claimed that the giving of the licence was ultra vires the Court of Wards but there was a settlement between the licencee and the assessee by which the latter agreed to accept the various prospecting licences their extensions and leases in consideration of which he received by way of salami Rs 525000 and capital lump sum of Rs 40000 and some other payments in lieu of cesses
The question arose whether the amounts were capital or revenue and it was held that the amount of Rs 525000 received as salami and the amounts received as cesses were capital receipts and therefore not taxable
Manohar Lal A C J held that the amount was received by way of settlement and not by way of salami but section K Das J as he then was held that salami was a lump sum payment for rights which were being given to the licensee namely the right to prospect for a certain number of years and also the right to get mining leases and therefore salami in question was undoubtedly a capital receipt
In The Province of Bihar vs Maharaja Pratap Udai Nath Sahi Deo of Ratugarh 2 it was contended that payments in the nature of premium or salami were 1 1946 2 795 not part of the income of the assessee and were therefore not taxable and it was held that salami may in certain cases be regarded as a payment of rent in advance and it would in those cases be regarded as income but where it could not be so regarded it would not be income and therefore not taxable
It was also held that prima facie salami is not income
In The Member for the Board of Agricultural Income Tax Assam vs Smt
Sindurani Chaudhurani 1 this Court defined as 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
Thus if it is a consideration paid by the tenant or the licensee for being let into possession with the object of obtaining a tenancy or as in this case with the object of obtaining a right to remove minerals it cannot be termed rent or revenue but is a capital receipt
In Sindurani s case 1 salami was a lump sum payment as consideration for what the landlord was transferring to the tenant ie parting with his right under the lease of a holding
In the instant case the terms of the covenant quoted above show that the payment has a close analogy to the payment in Sindhurani s case1
That case was sought to be distinguished by the respondent on the ground that there was a transfer of a tenancy which was capable of ripening into an occupancy holding but that was not the ground on which this court decided the case of salami
The definition of salami was agener alone in that it was a consideration paid by a tenant for being let into possession for the purpose of creating a new tenancy
In Raja Bahadur Kamakshya Narain Singh s case 2 also the Privy Council laid the definition of salami in general terms and described the characteristics of a payment by way of salami without any reference to the nature of the lease
In reply to the argument of counsel for the appellant Mr Rajagopal Sastri for the respondent argued 1  2 1943 LR 70 IA 180
796 that the question was whether the licensor had allowed the licensee to take his capital or he had allowed him to use the capital
If it was the former the receipts were in the nature of capital receipts and if latter they were in the nature of revenue
His contention was that it wag really the latter because all that the licensee was allowed to do was to enter on the lands and make use of the assets belonging to the appellant
This in our opinion is not a correct approach to the question
What the licence gave to the licensee was the right to enter upon the land to pros pect search and mine quarry bore dig and prove all Bauxite lying in or within the land and for that purpose the licensee had the right to dig pits shafts borings and to remove take away and appropriate samples and specimens of Bauxite in reasonable quantities not exceeding 100 tons in the aggregate
It cannot be said that this amounts merely to a grant of the use of the capital of the licensor but it was really a grant of a right to a portion of the capital in the shape of a general right to the capital asset
In support of this distinction between the use of capital and the taking away of capital counsel relied upon the following observation of Lawrence J in Greyhound s case3 The question as to what receipts are revenue and what are capital has given rise to much difference of opinion but it is clear in my opinion that if the sum in question is received for what is in truth the user of capital assets and not for their realisation it is a revenue receipt not capital
 That may be so but the question has to be decided on the nature of the grant
The terms of the covenant in the present case which have been quoted above show that the transaction was not one merely of the user of capital assets but of their realisation By this test therefore the receipts were on capital account and not revenue
Counsel then referred to a judgment of the Patna High Court in R B H P Bannerji vs Commissioner of Income tax Bihar  Orissa 2 where it was held that compensation received by the assessee 1 2 797 for use by the military of his lands for a short period was a revenue receipt
In that case the assessee purchased 13 bighas of land for purposes of setting up a market
That plot was requisitioned by the military A authorities under the Defence of India Rules and the assessee received compensation for the use of the The land
It was held to be a revenue receipt because it was really profit derived from the land for the use of a capital asset
Another case upon which counsel for the respondent placed reliance is Smethurst vs Davy 1
That was a case which was decided on the wording of section 311d of the Finance Act of 1948 and therefore is not of much assistance
Reference was also made to Stow Bardolph Gravel Co Ltd vs Poole 2
There the assessee company which carried on business in sand and gravel purchased two un worked deposits
The company contended that the payments made to acquire the deposits were deductible being expenditure which was incurred in the acquisition of trading stock or otherwise of revenue character
It was held that the company had acquired a capital asset and not stock in trade
The case turned upon a finding by the Special Commissioners and is not helpful
Reliance was also placed on Rajah Nanyam Meenakshamma vs Commissioner of Income tax Hyderabad 3
In that case certain fixed sums of money were paid as royalty for the whole period of the lease which were held to be revenue receipts as consolidated advance payments of the amount which would otherwise have been payable periodically
None of these cases is of any assistance to the respondent s case
The question which has to be decided is what was the nature of the transaction
The covenants in the licence show that the licensee had a right to enter upon the land and take away and appropriate samples of all Bauxite of every kind up to 100 tons and therefore there was a transfer of the right the consideration for which would be a capital payment
1 2 3 101 798 In our opinion the High Court was in error and the question referred should have been decided in favour of the appellant
We therefore allow the appeal set aside the judgment and order of the High Court and answer the question in favour of the appellant who will have his costs in this Court and the High Court
Appeal allowed


Summary:
In 1945 the appellant who was a Zamindar granted licences to different parties to prospect bauxite
Under the licence the licensee had the right to enter upon the land to prospect dig and prove all bauxite lying in or within the land and to take away and appropriate samples of bauxite in reasonable quantities not exceeding 100 tons in the aggregate
In consideration of the premium paid the licensees could at their option after giving necessary notice and on payment of a further sum get a mining lease for a term of thirty years
The income tax authorities were of the view that the licensees were not granted any interest in land and that the amounts received by the appellant from the licensees were revenue receipts and therefore assess able to income tax
Held that on its true construction the transaction of 1945 did not amount merely to a grant of the use of the capital of the licensor but was really a grant of a right to a portion of the capital
Accordingly the amounts received by the appellant were capital receipts and therefore not liable to income tax
Raja Bahadur Kamakshya Narain Singh of Ramgarh vs Com missioner of Income tax Bihar and Orissa 1943 LR 70 IA 180The Member for the Board of Agricultural Income tax Assam vs Smt
Sindurani Chaudhurani 1957 S CR 1019 and Commissioner of Income tax Bihar and Orissa vs Raja Bahadur Kamakshya Narain Singh  considered