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

1. M/s. National Cement Mines Industries Ltd.- hereinafter referred to as the appellants - are a public limited company incorporated to carry on the businesses of cement and lime manufacture and also of limestone supply and for the purposes of such business to acquire rights and concessions pertaining to limestone, coal and surface lands from the Dewarkhand 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 bauxite2. 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 necessary 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 30, 1934, between the Karanpura Company, Maharaja Pratap Narain Udai Nath Shah Deo acting with the consent of Maharaj Kumar 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 leases3. By deed dated May 7, 1935, 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. 25,000 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. 77,820 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 I, 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. 77,820 represented a receipt of a revenue nature in the hands of the applicant and assessable as such?4. 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, 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.

Court's reasoning:
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.