Case: National Cement Mines Industries Ltd Vs. The Commissioner of Income Tax, West Bengal, Calcutta

Cas 310: 1920-1 KB 71 or a mineral royalty depending upon the quantity of minerals raised, Kamakshya Narain Singh v. Commr. of Income-tax, B. and O., 70 Ind App 180: (AIR 1943 PC 153 ) or computed on sales of manufactured articles-Commissioners of Inland Revenue v. 36/49 Holdings Ltd., (1944) 25 Tax Cas 173 or a percentage of gross profits made in the exploitation of a secret process - Delage v. Nugget Polish Co., Ltd., (1905) 21 TLR 454 is income and taxable. 13. Counsel for the appellants submited that the receipt under cl. (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.14. In Minister of National Revenue v. Catherine Spooner, 1933 AC 684: (AIR 1933 PC 211 ) 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 Supreme Court of Canada held that the sum so received was not an annual profit or gain within the meaning of S. 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. 15. In Trustees of Earl Haig v. Commrs. of Inland Revenue, (1939) 22 Tax Cas 725, 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 though 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 as 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 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. 16. In Nethersole v. Withers, (1948) 28 Tax Cas 501, N who had acquired under an agreement the exclusive right to dramatise 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 the 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. 17. The case of Commrs. of Inland Revenue v. Marine Steam Turbine Co., Ltd., (1920) 12 Tax Cas 174 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. 18. 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.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]It a 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 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, inabliity to ascribe to the transaction of definite category is of little consequence. It is not the nature of the receipt under the general law but in commerce that is materialThe judgment lays down no new principle; it proceeded merely upon interpretation of the document in the light of the circumstances18. 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 capital9. 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. 25,000 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 cl. (5).It a 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 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 thex Act, inabliity to ascribe to the transaction of definite category is of little consequence. It is not the nature of the receipt under the general law but in commerce that is. 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 incharacter 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 imperceptible10. Where capital is repaid in instalments, it is not liable to; 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 tov. Fletcher, (1858) 3N. 769, Secy. of State in Council of India v. Scoble, 1903 ACd v. Kirkcaldy Magistrates, 1919 SCCommissioners of Inland Revenue11. But where property is conveyed in consideration of what in truth is annuity payable for definite or a definable period, the annuity is not payment on capital account and is taxablesee, State of Bihar v. Sir Kameshwar Singh,1 ITR 382: (AIR 1952 Pat 417  ), Gopal Saran Narain Singh v. Commr. of3 ITR 237: (AIR 1935 PC 143  ), Chadwick v. Pearl Life Assurance Co., (1905) 2 KB 50712. Again, if propety is conveyed in consideration of periodical payments, the payment being a share of profits of a business or profession(1920) 7 Tax Cas 310:71 or a mineral royalty depending upon the quantity of minerals raised, Kamakshya Narain Singh v. Commr. of, B. and O., 70 Ind App 180: (AIR 1943 PC 153  ) or computed on sales of manufactureds of Inland Revenue v. 36/49 Holdings Ltd., (1944) 25 Tax Cas173 or a percentage of gross profits made in the exploitation of a secret processe v. Nugget Polish Co., Ltd., (1905) 21 TLRAs 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 circumstancesThat decision proceeded upon the special character of the agreement 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 principleThat was a case in which N had wholly sold and disposed of the 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 transactionIn 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.