1951 (4) TMI 26 - HC - Income Tax

Tax Court: Advance payment taxable, undisclosed income assessment unjustified.

SRI SRI NILKANTHA NARAYAN SINGH Versus COMMISSIONER OF INCOME-TAX, BIHAR AND ORISSA

The court held that the Rs. 2,00,000 received from Bengal Discount Co. Ltd. was taxable income as an advance payment of royalty. However, the assessment ... - Issues Involved:1. Taxability of Rs. 2,00,000 received from Bengal Discount Co. Ltd.2. Justification for the assessment of Rs. 84,000 representing the value of high denomination notes encashed.Issue 1: Taxability of Rs. 2,00,000 received from Bengal Discount Co. Ltd.The primary question was whether the sum of Rs. 2,00,000 received by the assessee from Bengal Discount Co. Ltd. was taxable income. The assessee argued that the documents executed were 'indentures of lease' and that the lump sum payment was 'salami,' which is a capital receipt and not liable to income tax. The Appellate Tribunal, however, held that the sum was an advance receipt of royalty and thus assessable to income tax.The court examined the substance of the transaction, noting that the term 'salami' and the small annual rent were not decisive. The transaction was essentially an assignment of the right to collect royalties and rents for a term of 10 to 15 years, for which the assessee received a lump sum of Rs. 2,00,000. The court emphasized the principle that the name given to a transaction by the parties does not necessarily decide its nature; it is the substance that matters. The court cited several precedents, including *Commissioners of Inland Revenue v. 36/49 Holdings, Ltd., (in Liquidation)* and *Commissioners of Inland Revenue v. Thomas Nelson & Sons*, to support the view that lump sum payments can be considered income if they represent advance payments for the use of a right.The court concluded that the Rs. 2,00,000 received was indeed an advance payment of royalty and thus taxable. The question was answered against the assessee.Issue 2: Justification for the assessment of Rs. 84,000 representing the value of high denomination notes encashedThe second issue was whether there was any material to justify the assessment of Rs. 84,000 as income from undisclosed sources. The Appellate Tribunal had held that the explanation provided by the assessee for the sum of Rs. 84,000 was not acceptable and it ought to be assessed to income tax.The court noted that the assessee had submitted accounts showing that he had a balance of Rs. 1,84,000 from his personal allowance, which was more than sufficient to cover the Rs. 84,000. The Tribunal had drawn adverse inferences because the assessee did not produce a Home Chest Account and could not explain the source of high denomination notes. The court held that there was no material to suggest that a Home Chest Account was maintained and that the Tribunal should not have drawn an adverse inference.The court also referred to *Income-tax Commissioner, Bombay Presidency and Aden v. Bombay Trust Corporation*, where it was held that without evidence, the income tax authorities could not insist on treating certain entries as evidence of taxable income. The court concluded that there was no material to justify the assessment of Rs. 84,000 as income from undisclosed sources. This question was answered in favor of the assessee.Separate Judgments:RAMASWAMI, J.Ramaswami, J. provided a detailed analysis of both issues, ultimately concluding that the Rs. 2,00,000 received from Bengal Discount Co. Ltd. was taxable income and that there was no justification for the assessment of Rs. 84,000 as income from undisclosed sources.SARJOO PROSAD, J.Sarjoo Prasad, J. agreed with Ramaswami, J. on the second issue but expressed hesitation regarding the first issue. He elaborated on the nature of salami and its usual treatment as a capital receipt. Despite his reservations, he eventually concurred with Ramaswami, J.'s conclusion that the Rs. 2,00,000 was taxable income, primarily to maintain the status quo and avoid disturbing the decision of the revenue authorities.Conclusion:The court answered the first question against the assessee, holding that the Rs. 2,00,000 received from Bengal Discount Co. Ltd. was taxable income. The second question was answered in favor of the assessee, concluding that there was no material to justify the assessment of Rs. 84,000 as income from undisclosed sources.