Appeal No 84 of 1958
Appeal by special leave from the judgment and order dated December 2223 1955 of the Calcutta High Court in ITR No 24 of 1953
N C Chatterjee D P Pal and D N Mukherjee for the appellant
Hardayal Hardy and D Gupta for the respondent
January 17
The Judgment of the Court was delivered by SHAH J
Messrs
National Cement Mines Industries Ltd hereinafter referred to as the appellants are a public limited company incorporated to  carry on the 65 504 business of cement and lime manufacture and also of limestone supply and for the purposes of such businesses to acquire rights and concessions pertaining to limestone coal and surface lands from the Dewar khand Karanpura Mines and Industries Ltd and also to  work mines or quarries and to find win get work etc or otherwise deal with clay and bauxite Dewarkhand Karanpura Mines and Industries Ltd hereinafter called the  Karanpura Company  had obtained three leases on November 29 1930 first for mining limestone from Maharaja Pratap Narain Udai Nath Shah Deo from limestone beds in certain villages in Dewarkhand second from Maharaj Kumar Nand Kishore Nath Shah Deo of the surface rights neces
sary to exercise the powers and privileges in respect of the first lease and the third from Maharaj Kumar Raj Kishore Nath Shah Deo of surface rights in respect of Hoyer village
The period in each of the three leases was thirty years
On March 17 1932 the Karanpura Company conveyed the rights and options under the three leases to the appellants
On September 30 1934 the appellants acquired the limestone and surface rights in respect of limestone beds in village Umedanda for 95 years from Maharaja Pratap Narain Uday Nath Shah Deo and Maharaj Kumar Raj Kishore Nath Shah Deo
On the same date the appellants entered into two agreements one with Maharaja Pratap Narain Uday Nath Shah Deo which is called the bauxite option agreement  thereby acquiring the first option to take a lease or leases of any area or areas of bauxite deposits in certain villages and another from the said Maharaja for the first option to take a lease or leases of limestone beds in the Tori District
By a fourth agreement also dated September 301934 between the Karanpura Company Maharaja Pratap Narain Udai Nath Shah Deo acting with the consent of Maharaj Kumars Raj Kishore Nath Shah Deo and Nand Kishore Nath Shah Deo the royalties reserved under the original deeds dated November 29 1930 were reduced and the periods of the leases were extended to 99 years from the date of the original leases 505 By deed dated May 71935 the appellants conveyed to Dewarkhand Cement Company Ltd which later came to be known as Associated Cement Ltd and will be referred to hereinafter by that name the benefits of the four leases and the two agreements for the unexpired periods
By this deed for a present consideration of Rs 25000  for trouble and expenses in obtaining the leases and agreements  and for further payment under several covenants which will be presently set out the appellants conveyed the rights vested in them subject to certain reservations
In the year of account June 1 1944 to May 31 1945 the appellants received from the Associated Cement Ltd under the first covenant of the deed Rs 77820 being the amount computed at the rate of 0 13 As
per ton of cement manufactured from limestone won from the lands and sold by the company
The Income tax Officer Companies District 1 Calcutta included this amount in the total assessable income of the appellants in the assessment year 1946 47
This order was confirmed in appeal by the Appellate Assistant Commissioner and by the Income tax Appellate Tribunal
At the instance of the appellants the Tribunal referred the following question with another not material for this appeal to the High Court of Judicature at Calcutta  Whether on a proper construction of the Deed of Assignment dated 7th of May 1935 and on the facts and in the circumstances of this case the Tribunal was right in holding that the sum of Rs 77820 represented a receipt of a revenue nature in the hands of the Applicant and assessable as such The following facts were held proved by the Tribunal
The principal objects of incorporation of the appellants were to carry on the business of manufacturing cement and lime and sale of limestone and the appellants were formed with the object of acquiring the rights and concessions of the Karanpura Company
By their Memorandum of Association the appellants were authorised to sell or dispose of the undertakings or any part thereof as they thought fit 506 and to sell lease mortgage dispose of turn to account or otherwise deal with all or any part of their property and rights and in pursuance of these objects the rights and concessions of the Karanpura Company were acquired and extension of leases and concessions were obtained and were transferred to the Associated Cement Ltd The appellants were therefore carrying on in the year of account 1944 45 the business for which they were incorporated
After reciting the prefatory clauses it was stated in the deed WHEREAS it was agreed inter alia that the Purchaser should pay to the Vendor the sum of Rupees twenty five thousand for trouble and expenses in obtaining the leases and agreements dated the thirtieth day of September one thousand nine hundred and thirty four hereinbefore recited and hereinafter expressed to be hereby transferred and Whereas the Purchaser hath paid to the Vendor the said sum of rupees twenty five thousand as the Vendor doth hereby acknowledge NOW THIS INDENTURE WITNESSETH that in con
sideration of the covenants on the part of the Purchaser hereinafter contained the Vendor hereby grants assigns and transfers unto the Purchaser and the Karanpura Company at the request and by the direction of the Vendor hereby grants assigns transfers and confirms unto the Purchaser
The deed then proceeds to set out the description of the various leases and concessions and agreements and the covenants which the Associated Cement Ltd undertook in favour of the appellants
These covenants are 1 That it will pay to the Vendor a sum equal to thirteen annas in respect of every ton of cement sold by it which shall have been manufactured from the limestone won by it from the lands hereby transferred and comprised in the hereinbefore recited leases and agreements
2 That it will not sell any Fluxstone won by it from the said lands to the Tata Iron and Steel Company Ltd at a price less than Rupees one and annas 507 fourteen per ton F O R the siding nearest to the quarry or place from which it shall be won without the consent of the Vendor
3 That it shall pay to the Vendor one half the profit if any which it shall make by selling Fluxstone to the Tata Iron  Steel Company Ltdor to any other person such profits to be ascertained after deduction from the price received all costs charges and expenses including the royalty payable to the Maharaja in respect thereof but before educting overhead charges
Such accounts to be closed and adjusted on the thirtieth day of June and the thirty first day of December in each and every year
4 That it will not grant to the Tata Iron  Steel Company Ltd the right to quarry and remove Fluxstone from the lands hereby transferred at a royalty of less than ten annas per ton and will pay to the Vendor one half of any royalty so charged and received
5 That in the event of the payments made under clauses one three and four above in any one year not amounting to the minimum hereinafter set out the Purchaser shall pay in lieu and in full discharge there for the following minimum a During the first year to be computed from the first day of January one thousand nine hundred and thirty five rupees ten thousand
b During the second year rupees thirty thousand
c During every subsequent year rupees fifty thousand
Out of the above minimum payment of rupees fifty thousand per year for the purposes of account the sum of rupees twenty thousand shall be deemed to have been paid in respect of payment under clause three above
6 That the Purchaser or the persons deriving title under the Purchaser will at all times from the date hereof duly pay all rents royalties and payments becoming due under the four hereinbefore recited Indenture of Lease subject as regards the Limestone lease to the modifications effected by the agreement for 508 reduction of royalty dated the thirtieth day of September one thousand nine hundred and thirty four hereinabove recited in respect of the premises agreements options rights or benefits hereby assigned and transferred and observe and perform the covenants agreements stipulations and conditions therein contained and henceforth on the part of the Lessee or grantee to be observed and performed in respect of the aforesaid premises or under the said Bauxite agreement or under the said Tori Option agreement or under the said agreement for reduction of royalty And also will at all times from the date hereof save harmless and keep indemnified the Vendor its successors and assigns from and against all proceedings costs claims and expenses on account of any omission to pay the said rent royalty or payments or any breach of any of the said covenants agreements stipulations and conditions
7 That the Purchaser will not work raise remove or use stone or clay in the properties comprised in the leases and agreements hereby transferred to it for making lime
8 That the Purchaser shall not by any of its actions or omissions cause leases and agreements mentioned above and in respect of properties hereby transferred to be determined or the rights thereunder including the right of renewal to be prejudiced
9 That in areas comprised in the leases and agree
ments hereinabove expressed to be hereby assigned and not containing limestone the Vendor s rights under leases and agreements from the Maharaja of Chotanagpur or Maharaj Kumar Nand Kishore Nath Shah  Deo other than the leases and agreements above referred to shall not be jeopardised or affected by this Indenture
10 That the clay and shales lying within areas which do not contain Limestone can be removed and utilised by the Vendor for all purposes except that of cement manufacture
The deed then proceeded after setting out certain other covenants 509  AND IT IS HEREBY EXPRESSLY AGREED AND DECLARED that if the Limestone within the areas comprised in the Leases hereby transferred available for manufacturing cement is exhausted the Purchaser will be entitled to determine this Indenture on giving to the Vendor six months  notice in writing in which case the Purchaser if so required will retransfer the leases and agreements aforesaid
 By clauses 1 3 and 4 the Associated Cement Ltd undertook to make certain payments to the appellants
By cl
1 they agreed to pay 0 13 As
for every ton of cement manufactured from the limestone won from the lands and sold by el
3 the Associated Cement Ltd agreed to pay half the profits which they made by selling Fluxstone to the Tata Iron  Steel Co or to any other person and by el
4 they agreed to pay half the royalty received from the Tata Iron  Steel Company for the right to quarry and remove fluxstone from the lands
By clause 5 provision was made for minimum payment in the event of the aggregate under cis
1 3 and 4 not reaching the sums specified therein
Clauses 2 4 7 8 and 9 were in the nature of restrictive covenants
By cl
2 the Associated Cement Ltd were prohibited from selling any fluxstone won from the lands to the Tata Iron  Steel Company for less than Re
1 14 As
per ton F O R By cl
4 an obligation not to convey the right to quarry and remove fluxstone for royalty less than 0 10 As
per ton was imposed
By el
7 the Associated Cement Ltd undertook not to remove or use or allow any one to raise work remove or use stone or clay in the lands
By cl
8 the Associated Cement Ltd undertook not to do any acts or omissions causing the leases and agreements to be determined or the rights thereunder to be prejudiced
By cl
9 rights of other persons under leases and agreements in lands not containing limestone were not to be affected
By el
10 the right of the appellants to utilise clay and shale lying within the areas not containing limestone except for the purpose of manufacturing cement was retained There were certain exceptions 510 to this and the ninth clause whereby the Associated Cement Ltd were entitled to excavate use or remove all kinds of clays in and from the areas within the boundary lines marked in the plan and they were also authorised to make permanent structures and use certain strips of lands
By el
6 the Associated Cement Ltd agreed to pay rent stipulated under the original leases and agreements and also undertook to keep indemnified the appellants from and against all proceedings costs claims and expenses on account of any omission to pay the rent royalty or payments or any breach of any of the covenants agreements and the leases
There was also the covenant authorising the Associated Cement Ltd to terminate the deed in the event of limestone in the land comprised in the leases being exhausted
The appellants undoubtedly did not part with all their rights in favour of the Associated Cement Ltd by this deed dated May 7 1935
The consideration under the deed consisted of a fixed component and annual payments fluctuating with the business activity of the Associated Cement Ltd A fixed amount of Rs 25000 was paid  for trouble and expenses in obtaining the leases and agreements  and additional payments were to be made under cls
1 3 and 4 subject to the minimum prescribed by el
It is difficult to categorise a transaction of this character
It is not a conveyance of all the rights of the appellants nor can it be regarded as a sale even of the rights which were conveyed
Numerous restrictions were imposed by the deed upon the rights of the transferee which were inconsistent in their very nature with the character of a sale and the covenant authorising termination of the deed in the event of the limestone being exhausted removes all doubt in that behalf
Nor is it a lease  it is not a transfer of a right to enjoy property for a certain time in consideration of periodical payments
It also does not evidence a transaction in the nature of a joint venture between the appellants and the Associated Cement Ltd Cement was to be manufactured by the Associated Cement Ltd out of limestone to be won from the lands 511 and in consideration of the rights conveyed payments at specified rates were agreed to be made out of the price to be obtained by sale of cement fluxstone and limestone
The appellants had no control over the production of limestone and manufacture of cement or on the sale of fluxstone and limestone
But in assessing the true character of the receipt for the purpose of the Income tax Act inability to ascribe to the transaction a definite category is of little consequence
It is not the nature of the receipt under the general law but in commerce that is material
It is often difficult to distinguish whether an agreement is for payment of a debt by instalments or for making annual payments in the nature of income
The court has on an appraisal of all the facts to assess whether a transaction is commercial in character yielding income or is one in consideration of parting with property for repayment of capital in instalments
No single test of universal application can be discovered for solution of the problem
The name which the parties may give to the transaction which is the source of the receipt and the characterization of the receipt by them are of little moment and the true nature and character of the transaction have to be ascertained from the covenants of the contract in the light of the surrounding circumstances
The decision of the question is however not left to the application of any arbitrary standards
There are certain broad principles which guide the determination of the character of the receipt
The distinction between a capital receipt and revenue receipt though fine is real
The dividing line may be thin and often at first sight imperceptible
Where capital is repaid in instalments it is not liable to income tax for instance when a person sells his property and agrees to receive the price stipulated in instalments by whatever name such instalments are called they are not liable to income tax see Foley vs Fletcher 1 Secretary of State in Council of India vs Andrew Scoble 2 Oswald vs Kirkcaldy Magistrates and Commissioners of Inland Revenue vs Ramsay 4
1  2  3 4 66 512 But where property is conveyed in consideration of what in truth is annuity payable for a definite or a definable period the annuity is not payment on capital account and is taxable see State of Bihar vs Sir Kameshwar Singh 1 Captain Maharajkumar Gopal Saran vs Commissioner of Income tax Bihar and Orissa 2 Chadwick vs Pearl Life Assurance Co 3
Again if property is conveyed in consideration of periodical payments the payment being a share of profits of a business or profession William John Jones vs Commissioners of Inland Revenue4 or a mineral royalty depending upon the quantity of minerals raised Raja Bahadur Kamakshya Narain Singh of Ramgarh vs Commissioner of Income tax Bihar and Orissa 5 or computed on sales of manufactured articles Commissioners of Inland Revenue vs 36149 Holdings Ltd 6 or a percentage of gross profits made in the exploitation of a secret process Delage vs Nugget Polish Co Ltd 7 is income and taxable
Counsel for the appellants submitted that the receipt under clause 1 of the terms of the deed dated May 7 1935 was in the nature of capital payment and relied upon certain decisions in support of that submission
In Minister of National Revenue vs Catherine Spooner8 decided by the Judicial Committee of the Privy Council in an appeal from the Supreme Court of Canada the respondent Catherine Spooner had sold her rights title and interest in land owned by her in freehold to a company in consideration of a certain sum in cash besides shares of the company and an agreement to deliver 10 of oil produced from the land on which the company covenanted to carry out drilling and if oil was found pumping operations
These were described as royalties
Oil was struck in the lands and the respondent was paid 10 of the gross proceeds of the oil produced in lieu of oil
The 1 5 1943 LR 70 IA 180
2 6 3 7 1906 2r Times Law Reports 454
4 10 8  513 Supreme Court of Canada held that the sum so received was not an annual profit or gain within the meaning of section 3 of the Income War Tax Act but a receipt of a capital nature and therefore not chargeable to tax
According to the Judicial Committee there was between the respondent and the company no relation of lessor or lessee the transaction was one of sale and purchase and the transaction had taken the form which it did because of the uncertainty whether oil would be found by the purchaser
As the value of the land depended on this contingency the price not unnaturally was made to depend in part on the event of oil being struck
The judgment lays down no new principle it proceeded merely upon interpretation of the document in the light of the circumstances
In Trustees of Earl Haig vs Commissioners of Inland Revenue 1 the question which fell to be determined was whether a share of the royalties received in consideration of allowing the use of the diaries of the late Earl Haig for writing his biography were in the hands of the trustees under the will of Earl Haig capital receipts
That was undoubtedly a case in which payments received by the trustees were dependent upon the professional activities of the author and the proceeds derived from the sales of the biography he wrote
By the agreement the author was authorised to extract and publish from the diaries what he thought fit
The diaries were undoubtedly an asset and after they were used by the author for publication of the biography their value as an asset was if not wholly largely exhausted and their future value was negligible
The agreement was therefore regarded as conveying an asset in its entirety to the author in consideration of a share in the royalties and the receipt of this share was regarded as receipt of capital
That decision proceeded upon the special character of the agreement and the nature of the asset transferred and did not seek to lay down any general principle
In Nethersole vs Withers 2 N who had acquired under an agreement the exclusive right to dramatise 1 2 514 a novel of Rudyard Kipling received under an agreement with the widow of the author a third share of a lump sum for which the sound and film rights were granted exclusively to a film company for a period of ten years
The film right of a comprehensive character having been granted by the legal representative of the author against payment of the sum stipulated the question arose whether the payment received by N was taxable under the Income Tax Act under Case II of Schedule D or under case VI of Schedule D
It was held that N having ceased to be the owner of the portion of the copyright she had assigned the proceeds were not annual profits or gains within the meaning of Schedule D Case VI
That was a case in which N had wholly sold and disposed of a part of the property and the amount received by her was the price paid in lump and was not in the nature of income
That case also proceeded upon the special character of the transaction
The case of The Commissioners of Inland Revenue vs The Marine Steam Turbine Co Ltd 1 on which reliance was sought to be placed by counsel for the appellants needs no detailed consideration
In that case a company which was on the facts found not carrying on a trade or business was held not assessable to Excess Profits Duty because the condition of liability was the carrying on of trade or business
The appellants had however not sold the entirety of the rights acquired by them from the Karanpura Company
The conveyance was subject to several restrictions and the appellants retained in part rights in the land conveyed
The transaction was substantially a commercial transaction for sharing the profits of the commercial activities of the Associated Cement Ltd The High Court was therefore right in holding that the transaction dated May 7 1935 was a commercial transaction and the payment under cl
1 thereof at the rate of 0 13 as per ton of cement sold was of the nature of income and not capital
In that view of the case the appeal fails and is dismissed with costs
Appeal dismissed
1  1920 I KB 193


Summary:
Section 4 of the Bombay Rents Hotel and Lodging House Rates Control Act 1947 which provides that the Act shall not apply to premises belonging to the Government or a local authority applies not only to suits between the Government or a local authority as a landlord against the lessee but also to suits by a lessee of the Government or a local authority against his sublessee
The indemnity conferred is in respect of premises belonging to the Government or a local authority
A building site was auctioned to a person by the City Im provement Trust of Bombay with a condition that the bidder Was to put up a building of a certain description at a cost of not less than Rs 50000 and after the Completion of the building the site and the building were to be leased to the bidder for a period of 999 years at a fixed yearly rent
Held a construction of the lease deed that the building put up by the bidder belonged to the Trust and not to the bidder and a suit by the lessee against his sub lessee was not governed by the Bombay Rents Hotels and
Lodging House Rates Control Act 1947 as the premises belonged to a local authority within the meaning of section 4 1 of the Act and the suit could accordingly be instituted in the City Civil Court of Bombay
A civil Court has inherent jurisdiction to decide the question of its own jurisdiction and to entertain a suit although as a result of the inquiry it may turn out that it has no jurisdiction