TaxTMI 
TaxTMI 
1940 (9) TMI 19
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....he contention that coal royalties were not assessable, but in the grounds of appeal to the Assistant Commissioner he took the point that coal royalty was not income and therefore not assessable. The Assistant Commissioner of Income-tax allowed the assessee to take this contention and he rejected it on the merits. When the matter came before the Commissioner he was requested to state a case for the opinion of this Court on two points: (1) Whether royalty on mines being capital revenue should not have been excluded in computing the total income determined for income-tax? (2) What should be the principle on which the cost of management in collection of royalties is to be determined when there is a combined management covering both the zamindari collection of agricultural income and royalties from the mines? The Commissioner of Income-tax has made a reference to this Court and has expressed his opinion that the sums received by way of royalty were rightly held by the Assistant Commissioner to be annual income and not capital instalments of purchase price. As to the second question, the Commissioner points out that it is a pure question of fact and that no legal question whatso....
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....as six pies per ton on dust coal or slack coal, eight annas per ton on hard coke, and six annas per ton on soft coke. There is a further provision as to payment of a sum by way of minimum royalty in the event of the royalty calculated on the coal raised and coke manufactured not amounting to that sum. All the leases further contain provisions giving the lessor a right to re-enter in case of failure to pay the rent or royalties reserved. This case first came before a Bench, and when it was opened it was apparent that counsel for the assessee desired to challenge the correctness of a number of Bench decisions of this Court. That being so, it was thought desirable that the case should be heard by a larger Bench, and this Special Bench of three Judges has been constituted in consequence. It will be convenient to deal firstly with the first question which is: "Whether royalty on mines being capital revenue should not have been excluded in computing the total income determined for income-tax?" This is framed rather too widely, because the question which has to be determined is whether the royalty payable to this assessee under the various leases granted by him or his predecessors i....
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....served: "It was said by Lord Cairns in Gowan's case (supra), that a lease of mines 'is not in reality a lease at all in the sense in which we speak of an agricultural lease. There is no fruit; that is to say, there is no sowing and reaping in the ordinary sense of the terms, and there are no periodical harvests. What we call a mineral lease is really, when properly considered, a sale out and out of a portion of the land.' I think this is a perfectly accurate statement. But the argument that no income-tax should be imposed on what is, perhaps not quite accurately, called rent reserved on a mineral lease, because it is a payment by instalments of the price of minerals forming part of the land, any more than on the price paid down in one sum for the out and out purchase of the minerals forming part of the land, is I think, untenable. " Here again Lord Blackburn points out that a mineral lease is not a lease in the sense in which that term is used in connexion with agricultural property and that the rent reserved is really a payment by instalments of the price of minerals leased. He, however, states that the argument that no income-tax should be imposed on these payments ....
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....isappear, In order to cause the latter speciality to arise, minerals must be expressly denominated, so as thus to permit of the idea of partial consumption of the subject leased. " It has been urged that this case establishes that minerals cannot be the subject matter of a lease because the essential characteristic of a lease is that the subject is one which is occupied and enjoyed and the corpus of which does not in the nature of things and by reason of the user disappear. Lord Shaw however points out that minerals may be made part of the subject-matter of a lease, and in such a case the lease would permit the idea of the partial consumption of the subject-matter leased. This decision of their Lordships of the Privy Council can in no way assist the assessee in this case, and it appears to me that the case is against the present contention, because it is expressly stated that minerals may form part of the subject-matter of a lease if it is so stated in the lease itself. Counsel for the assessee also relied on a latter case of their Lordships of the Privy Council, Bejoy Singh v. Surendra Narayan [1928] 56 Cal 1. In that case their Lordships held that a patni grant of zamindari la....
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....judgment, Mookerjee, J., did not hold that royalty was income within the meaning of the Indian Income-tax Act then in force because royalty formed the basis of taxation in England. He came to the conclusion that royalty from its nature, though in one sense repayment of capital, was received by the lessor or owner of the minerals as income. There was an appeal in this case to His majesty in Council but not on the question whether royalty was income. In In re Jyoti Prasad Singh Deo [1921] 6 Pat L.J 62; 1 ITC 103 , the question whether royalty was income was discussed by the learned Judges, who formed the Special Bench which heard that case, and it was held that income derived from rents and royalties of collieries does not fall within income derived from business under Section 5 (iv), Income-tax Act, 1918, but within income from other sources under cl. (vi) of that section. Mr. Das has contended and rightly that this case, though decided by three Judges, is not binding on the present Bench, because the question to be decided in this case was really not in issue in the previous case. In that case it appears to have been conceded that royalties were income and the issue was whether ....
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.... [1927] 6 Pat 29; 2 ITC 281 ., in which it was held that income derived from nimak sair (i.e., income from the settlement of the right to collect a particular kind of earth in a particular area during a particular season for the purpose of extracting saltpetre) is indistinguishable from the rents or royalties arising from the letting of coal or other minerals in the earth, and, therefore, is income from "other sources" within the meaning of Section 12, Income-tax Act. The same view was taken in a more recent case of this Court, Janki Kaur v. Commissioner of Income-tax [1931] 10 Pat 275; 5 ITC 42, in which it was held that sums received on account of royalties for preparing bricks are assessable to income-tax just as royalties on quarries or royalties on coal. Dealing with the observation of Lord Halsbury in Scoble's case (supra), Courtney-Terrell, C.J., at page 277 observed: "That part of the passage which relates to the taxation of rent derived from coal together with the contention that coal is as far as income is concerned the subject of special legislation in England is what is relied upon by the assessee. But an examination of the English Income-tax Act shows that the only ....
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....ense a part of this annual sum may be regarded as the price of the coal actually removed; but what is paid to the lessor is paid not only for the coal and the right to remove it but also for the other rights granted to him by the lease. No attempt is made in the lease as regards annual payments to differentiate between what is paid merely for the coal or what is paid for the other rights such as the rights to erect buildings, make railways, erect coke ovens and manufacture coke. What is paid is paid for the whole of the rights granted and that is salami and an annual sum payable year after year until the lease comes to an end by effluxion of time or by any other means. It would be very difficult to argue that the minimum royalty payable under these leases is the price of coal, because such would be payable even if no coal was gotten and would be payable even if the royalty calculated on the amount of coal gotten did not amount to the sum fixed as the minimum royalty. Counsel for the assessee conceded that where no coal was raised the minimum royalty would have to be regarded as income and assessable to income-tax. He however contended that the moment any coal was raised the actu....
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....could properly be regarded as a capital receipt and therefore not assessable to income-tax. Such a transaction would amount to the exchange of one form of capital for another. The consideration for such a sale however, need not be in the form of capital. A vendor might secure by the terms of the sale an income for himself, and such would undoubtedly be assessable to income-tax. Such was the case in Gopal Saran Narain Singh v. Commissioner of Income-tax [1935] 14 Pat 552; 3 ITR 237. In that case the assessee transferred an estate in consideration of (a) the payment of a lump sum, (b) the discharge of certain debts and (c) the payment to him for life of an annuity of Rs. 2,40,000. By a separate deed the payment of the annuity was made a charge on the lands transferred. The taxing authorities held that this annuity was income and assessable to income-tax. It was held by their Lordships of the Privy Council that this annuity was not a capital sum payable in instalments, but income in the hands of the vendor. In that case it had been strenuously argued that these yearly payments were in the nature of payments by instalments of the purchase price; but their Lordships, uphelding the view ....
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.... underground coal rights in two mauzas within the respondent's zamindari, and if within two months they failed to do so, "except for the reason of the want of the lessor's title to the said mauzas," a salami of Rs. 34,440 which they had paid, was to be forfeited. After the contract, it appeared that, at some unknown date, an ancestor of the respondent had made Brahmottar grants of the mauzas. The appellants called for production of copies of the grants in order that they might be satisfied that they did not include the minerals. The respondent being unable to produce copies, the appellants refused to take the lease, and sued to recover the salami. There was no evidence that the Brahmottardars had ever claimed subsoil rights. It was held that, under the contract, the appellants could recover the salami, upon proof that the title to the subject of the lease was not free from reasonable doubt, the text being the same as under Section 25(b), Specific Relief Act, 1877, upon a suit by a lessor for specific performance, and [that the suit failed as they had not discharged that onus; it was not shown that respondent had failed, or was not in a position to perform any of the obligat....
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....n, I am satisfied that the royalties received by the assessee in this case constitute income and were rightly assessed to income-tax by the taxing authorities. I would, therefore, answer the first question accordingly. The second question raises no point of law as pointed out by the Commissioner, and should be answered accordingly. I may point out that no argument of any kind was addressed to us upon this question. The assessee must pay the costs of this reference which I would assess at 20 gold mohurs. The Commissioner will also retain the sum of Rs. 100 deposited in this case. Fazl Ali, J.-This is a reference made by the Commissioner of Income-tax, Bihar, under Section 66(2), Income-tax Act, and the question of law which he has formulated for our decision is as follows:- "Whether royalty on mines being capital revenue should not have been excluded in computing the total income determined for income tax?" The question has arisen with reference to a sum of Rs. 5,32,368-2-10 said to have been received by the proprietor of Ramgarh Raj, on whose application this reference has been made, on account of royalty on coal under certain mining leases held by a number of persons from....
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....ear. The first question to be considered is whether a mineral lease is not in fact a lease but a sale and whether royalty merely represents the price of the coal taken out by the lessee. In my opinion, even though the distinction drawn by Lord Cairns between agricultural and mineral leases is by no means to be overlooked, it will be going too far to say that a mineral lease does not at all partake of the character of a lease as that term is ordinarily understood and that there is no difference between a mining lease and a sale of minerals. One of the essential points of distinction between a mining lease and a sale of coal land is that while in a mining lease the lessor has the right of reversion, there is no such right of reversion in a sale. The leases which have been printed in the paper-book of this case also contain certain clauses such as the forfeiture clause and the clause as to the surrender of the land, which are not found in a deed of conveyance. Another point of distinction is that while in a sale the consideration is the price, in a mining lease we have the price otherwise called premium and the royalty which at least outwardly bears a closer resemblance to rent than t....
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....ithin it. In Munro v. Dulcolt [1931] 59 Cal 699 Lord Atkinson, while recognizing that Lord Cairns had described the true nature of a mining lease, proceeded to hold that a document which purported to be a mining lease "was a lease within the meaning of the Natal Statute XIX of 1884." In discussing the question whether the document required registration in the Deeds Registry he observed as follows: "The objects of all registration are, among other things, to afford to the public the means of knowing to whom the ownership of the land of a country belongs, what are the interests carved out of it, and what are the charges upon and incumbrances affecting it, so that these owners may discharge the liabilities ownership entails, that those who deal with them may be protected, and in many cases that the transfer to others of their proprietary interests may be easily and inexpensively effected. All these considerations apply as directly and as forcibly to mining leases as to leases of the surface above the mines and there does not therefore seem to be any reason why the legislature should necessarily exclude mining leases from the operation of the Statute. The words used are general '....
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.... also may be price as well as "rent." It appears that as long ago as in Queen v. Westbrook 116 ER 69 Lord Denman expressed the view that royalty "was a sum which, after all such expenses were paid, the occupier could afford to render to the landlord." His observations on this point were these: "When the case is thus laid bare, there is no distinction between it and that of the lessee of coal mines, of clay pits, of slate quarries: in all these the occupation is only valuable by the removal of portions of the soil: and whether the occupation is paid for in money or kind, is fixed beforehand by the contract, or measured afterwards by the actual produce, it is equally in substance a rent: it is the compensation which the occupier pays the landlord for that species of occupation which the contract between them allows." It appears to me that, whatever may be the true nature of royalty, what has been observed in this passage represents the proper view upon which mining leases are based. Besides, as was pointed out in the course of his argument by Sir Manmatha Nath Mukerji, who appeared for the Income-tax Department, a mining lease is a somewhat complex transaction which confers upo....
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....oyalty, however, is according to him always price for the coal taken out. In my opinion it is difficult to accept this view, because the leases before us nowhere state that where the coal is extracted within the limits for which only the minimum royalty is payable, the minimum royalty shall include the price of the coal, nor does it state at what rate the so-called price is to be charged in such cases. In my opinion the more logical view seems to be that the royalty which is payable over and above the minimum royalty is to all intents and purposes a payment of the same nature and category as the minimum royalty. I am also of the opinion that it is difficult for anyone to find how much of "royalty" represents "price " in the true sense of the term and how much is "money rendered to the landlord" in consideration of the lessee's occupation of the land and exercising the manifold rights without exercising which mining operations cannot be successfully carried out. I have discussed these points because the learned counsel for the assessee had argued them at considerable length but truly speaking the real question to be considered is whether the payments made in the shape of roya....
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....g any. thing in the nature of a windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something, which is often loosely spoken of as "capital." But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process of production. " In my opinion royalty is income, because it is a periodical monetary return coming in with some sort of regularity from a definite source. The mere fact that if the transaction is minutely dissected by a student of political economy, he may say that royalty is merely a form of capital, will not conclude the matter. In fact the distinction made in Section 105, Transfer of Property Act, between premium (otherwise called the price) and rent is also a some-what artificial one, because in one sense the premium may be regarded as advance rent and rent may similarly be regarded as deferred price. It must be admitted that if royalty is to be regarded as income, then in producing this income a portion of the property is destroyed. That is also not conclusive because capital "is hardly more than an element in the proc....
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....all, but in the nature of a sale of a part of the earth appertaining to assessee's zamindari, in other words, that it was a transfer of one kind of capital into another, namely, the transfer of this particular sort of earth into money. It if, however, of a recurring nature and it is not casual and in such cases it seems to me it is quite impossible to distinguish the rents or royalties, whatever they may be called, arising from the source, from the rents or royalties arising from the letting of coal or other minerals in the earth, or income which arises from the produce of the earth whether it be that on the surface or whether it be that beneath the surface, provided that it is not non-recurring or casual, and provided that it is not in the nature of a sale ". I respectfully agree with these observations and I would like to emphasize that if we apply the rough and ready test which has to be applied in the administration of the Income-tax Act which is by no means cast on logical lines, it is difficult to hold that royalty is not income. It must be pointed out that notwithstanding the observations made by Lord Cairns and other Judges in England as to the true nature of a minin....
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....as income and is as such liable to be taxed. In India "royalty on mines" must be regarded as "income from other sources" within the meaning of that expression as used in Section 6 of the Act, because though properly speaking it is income received in relation to property, yet Section 9 of the Act suggests that the tax levied under the head "property" must be confined to property "consisting of any buildings or lands appurtenant thereto". In this respect there is a distinction between the English and the Indian Income-tax Acts, but as I have already indicated, under both the Acts royalty is income. I thus find myself in complete agreement with my Lord the Chief Justice and I also agree to the proposed order as to costs. Manohar Lall, J.This is a reference made by the Commissioner of Income-tax, Patna, on 23rd December 1938, under the provisions of Section 66(2) of the Income-tax Act (XI of 1922), hereinafter referred to as the Act, asking for the opinion of the Court on the two questions formulated in the letter of reference, namely (1) whether royalty on mines being capital revenue should not have been excluded in computing the total income determined for income tax, and (2) what....
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....y the coal there found" on paying therefor by monthly payments in each year a royalty on all coal and coke raised and despatched at the rate of four annas per ton with the provisions for the payment of a minimum royalty at the rate of Rs. 5 per annum per standard bigha of land whether coal shall be raised or not. The argument advanced before this Court was that what is called a lease of coal land is in reality the sale of coal belonging to the assessee and therefore the royalty thus received by the assessee under the terms of these leases is merely the purchase price of his coal and not income which can be assessed to income-tax. It was admitted that the authorities in the Calcutta High Court and this Court ever since the case in Manindra Chandra Nandi v. Secretary of State [1907] 34 Cal 257 have taken a contrary view but Mr. P. R. Das, who appeared for the assessee, seriously challenged the correctness of those decisions on grounds which will be examined hereafter. This Full Bench has been constituted to consider this question. In arguing the case before this Court Mr. Das ignored the warning by Sir George Lowndes when delivering the judgment of their Lordships of the Judicial ....
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....ated in those sections to decide the question in controversy before their Lordships, I therefore propose to answer the question without any reference to the English and the Scotch decisions but by reference to the Indian Statutes only. It cannot be denied that the object of the Indian Act is to tax income, a term which it does not define. It would be useful to bear in mind the observations made by Sir George Lowndes in Commissioner of Income-tax, Bengal v. Shaw Wallaced Co [1932] 59 Cal 1343; 6 ITC 211., that "an income in this Act connotes a periodical monetary return 'coming in' with some sort of regularity, or expected regularity, from definite sources. The source is not necessarily one which is expected to be continuously productive, but it must be one whose object is the production of a definite return, excluding anything in the nature of a mere windfall. Thus income has been likened pictorially to the fruit of a tree, or the crop of a field. It is essentially the produce of something, which is often loosely spoken of as "capital". But capital, though possibly the source in the case of income from securities, is in most cases hardly more than an element in the process ....
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....er hand contested this claim on the ground that the lessor of the coal company had no right to grant a lease authorising the company to work coal. Lord Macmillan who delivered the judgment of their Lordships made this observation at page 35 which is very germane to the present discussion: "In considering the character and effect of acts of possession in. the case of a mineral field, it is necessary to bear in mind the nature of the subject and the possession of which it is susceptible. Owing to the inaccessibility of minerals in the earth, it is not possible to take actual physical possession at once of a whole mineral field: it can be occupied only by extracting the minerals and until the whole minerals are exhausted the physical occupation must necessarily be partial." The question in the form in which it was argued by Mr. Das was argued boldly by the learned counsel for the appellants in H.V. Low d Co. Ltd.'s case (supra) a case not cited at the bar. The facts of that case were that by a contract in writing the company were to take a lease for 999 years of the subjacent coal rights in two villages within the zamindary of the respondent and if within two months they failed ....
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....is called a coal-mining lease in England is really in the nature of an out and out sale. However attractive this description of the coal-mining lease may be in England and in Scotland or in the language of economists, I am content to rely upon the decisions of their Lordships of the Judicial Committee where they have authoritatively held that a coal-mining lease in India is governed by Ss. 105 and 108, Transfer of Property Act, IV of 1882. In Abhiram Goswami v. Shyama Charan Nandi [1909] 36 IA 148, the question which arose inter alia for decision was whether the suit which was instituted to eject the defendants from the possession of under-ground rights of a village which was granted in mukarrari by the preceding mahant was or was not barred by limitation. Sir Andrew Scoble in delivering the judgment of the Board made this important observation at page 166: "Statutes of limitation, like all others, ought to receive such a construction as the language, in its plain meaning imports". Luchmee Buksh Roy v. Runjeet Ram [1874] 13 Beng LR 177 at p 182." Now, what is the plain meaning of the words "purchased for a valuable consideration"? They mean that the ownership of the property ....
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.... succeeding lines are perused where it was stated that the intention of the parties as to what was the subject and extent of the lease must depend upon the true construction of the terms of the grant and that it did not contain any reference to minerals or to the subsoil or to the right to excavate for making bricks and there was nothing to suggest in the lease that the land included therein was to be put to any use other than that to which the zamindari lands were subject at the time of the lease. Upon a consideration of all the terms of the lease his Lordship came to the conclusion that "it was not intended by the parties that the grantee should be entitled to use the lands for the purpose of making bricks." It will be seen, therefore, that a lease can be granted where a lessee intends to use the land for the purpose of making bricks. Now the use of the land for the purpose of making bricks must in the very nature of things result in the destruction of the things used and would cause subsequent damage and deterioration to the property leased. In this view it will be perhaps unnecessary to refer to the other cases but as Mr. Das strongly relied upon the case in Thakur Giridh....
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....e substance of the matter must be regarded. It matters not whether in the contract it is, or is not, called an annuity. If in truth and in fact it is an annuity no dressing of the transaction can alter its character. Stripped of its form, the transaction is a method of saving up money for future use." But it is impossible for a Court to ignore altogether the form in which the parties have chosen to express their contract. In Helby v. Mathews [1895] AC 471, at page 475 Lord Herschell, L.C, stated: "My Lords, it is said that the substance of the transaction evidenced by the agreement must be looked at, and not its mere words. I quite agree. But the substance must, of course, be ascertained by a consideration of the rights and obligations of the parties, to be derived from a consideration of the whole of the agreement." In Inland Revenue Commissioners v. Adam [1928] 14 Tax Cas 34, Lord President Clyde made this important observation, at page 41: "A great deal has been said about form and substance. I think that, in a question of this sort, both form and substance must be considered; because the form of the transaction by which the respondent acquired the right to dump wast....
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....me to be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable." "The principal passages relied upon are from opinions of Lord Herschell and Lord Halsbury in your Lordships" House. Lord Herschell, L.C., in Helby v. Mathews [1895] AC 471 observed at page 475: "It is said that the substance of the transaction evidenced by the agreement must be looked at, and not its mere words. I quite agree", but he went on to explain that the substance must be ascertained by a consideration of the rights and obligations of the parties to be derived from a consideration of the whole of the agreement. In short, Lord Herschell was saying that the substance of a transaction embodied in a written instrument is to be found by construing the document as a whole. "Support has also been sought by the appellants from the language of Lord Halsbury, L.C, in Secretary of State in Council of India v. Scoble [1903] AC 299; 4 Tax Cas 618, at page 302. There Lord Halsbury said, " Still looking at the whole nature and substance of the transaction (and it is agreed on all sides that we must look at the na....
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....ed. And a little later he observed: "It appears to me that the only way in which you can reach the conclusion adopted by the Commissioners is by throwing aside the deeds, and I see great difficulty in throwing them aside temporarily during the time when services are rendered to the appellant, and recognizing them as valid and subsisting during all other times, whether present or future. It seems to me that, unless you are able to tear down these deeds as a cloak to shield a wholly different arrangement, you must accept them and, when you have accepted them, you have got a ease in which the covenantor has bound himself to make these annual payments to the covenantee, and the co-venantee, being the recipient, is bound etc." In the same case Slesser, L.J., stated: "But yet, as Mr. Greene has pointed out, when you have looked at the whole of the substance, you are still to look at it from the point of view of the law and and see what the effect is as a legal relation;" and Romer, L.J., said: "The legal effect of the contract as it stands must be ascertained and not what would or might be the legal effect if the words of the contract be disregarded and the substance of th....
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....ich has been considered up to now to be the leading case on the taxability of royalties on coal mines; so far as it decided the liability of the proprietor for cesses (the view has been affirmed by the Judicial Committee on an appeal from the decision). Mr. Das argued that this decision was erroneous because Mookerjee, J., failed to notice that in England royalty is made taxable expressly by statute or by the schedules of the various Income-tax Acts that have been passed from time to time. I do not wish to embark upon an investigation of the English law for the reason already stated but I am unable to hold that Mookerjee, J., based his decision merely upon the English law and the English decisions. There are a number of cases of this Court which negative the argument advanced by Mr. Das. In In re Jyoti Prasad Singh Deo [1921] 1 ITC 103; 6 Pat LJ 62, it was held that income derived as rents and royalties is not income derived from business within the meaning of Section 5 (iv). Income-tax Act. The case in Manindra Chandra Nandi v. Secretary of State [1907] 34 Cal 257 was followed. In Shiva Pasad Singh v. Emperor [1924] 4 Pat 73; 1 ITC 384, already referred to, the question which a....
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....i Kuar in consideration of the payment of a lump sum, the discharge of certain debts, and the payment to him for life of an annuity of Rs. 2,40,000, the annuity being made a charge on the lands transferred. It was contended on behalf of the assessee that the substance of the transaction and not the mere form in which it was dressed should be looked at, and that the assessee had expressly sold the zamindary and, therefore, what he was receiving in return was nothing more than the purchase price which, he had agreed with the vendee, should be paid to him in return for his zamindari. Lord Russell who delivered the judgment of their Lordships decided the case upon the construction of the indenture of the sale dated 29th March 1930 and refused to ignore its plain language and held that the transaction clearly shows that the owner of the estate had exchanged a capital asset for (inter alia) a life annuity which is income in his hands and and that it is not a case in which he has exchanged his estate for a capital sum payable in instalments. From the judgment at page 599 (of 14 Pat.) it appears that reference was made before the Board to various decisions upon the taxing Acts of other cou....