Capital receipt characterization: a lease premium payable by instalments is treated as capital, not annual rent, when it buys a term of years.

The note addresses whether instalments of a lease premium are revenue or capital receipts, applying the true-nature test to the lease document and surrounding circumstances. It explains that where a premium is consideration for acquisition of a term of years and confers enduring rights, its periodic payment schedule does not convert it into rent. The reserved annual rent was distinct, and recovery provisions for unpaid instalments do not recharacterise the premium as recurring income. Outcome: the instalment of the premium is a capital receipt, not revenue, in the relevant accounting year.

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Issues: Whether the sum of Rs. 11,250 received under the lease dated March 31, 1950, and described as part of a premium of Rs. 2,25,000, is a revenue receipt (rent) or a capital receipt in the hands of the lessor for the accounting year 1951-52.

Analysis: Legal framework: Section 66(1) of the Income-tax Act, 1922 (reference) and the definition of lease under Section 105 of the Transfer of Property Act frame the inquiry; relevant authorities establish that the character of a receipt depends on its true nature judged by the document and surrounding circumstances, not merely nomenclature. Precedents illustrate that payments described as premiums or payable by instalments may be capital where they represent consideration for transfer of rights for a term (e.g., royalty-as-price, salami, premiums on leases, monopoly-value payments), and that periodicity or instalment payments do not convert a capital transaction into revenue. Facts and contract construction: the lease transferred rights in two tea estates and a factory for a ten-year term; total premium Rs. 2,25,000 with Rs. 45,000 paid on execution and the balance payable in half-yearly instalments of Rs. 11,250; annual rent separately reserved at Rs. 54,000. Contract terms treat the premium as consideration for acquisition of the lessee's rights for the term; clause relied on by Revenue regarding recovery of unpaid sums does not demonstrate that the premium was intended as annual rent. Application of principles: the premium, though payable in instalments, was consideration for assignment of a term of years and conferred enduring rights for the term; instalment payment schedule does not impart an annual or recurring income character; nothing in the document or surrounding circumstances indicates the premium was in reality deferred rent or periodic remuneration for use and enjoyment.

Conclusion: The sum of Rs. 11,250 received in the year of account is a capital receipt (in favour of the assessee) and not a revenue receipt.

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