Chandurkar, J.:— The two questions which have been referred to this court at the instance of the revenue are as follows:

“(1) Whether, on the facts and in the circumstances of the case, in respect of 2½% U.P Zamindari Abolition Compensation Bonds, any income in excess of the interest at stipulated rate was realised by the assessee in the annual instalments recovered thereof?

(2) Whether, on the facts and in the circumstances of the case any income arose to the assessee in respect of U.P Zamindari Abolition Rehabilitation Grant Bonds?”

2. When the zamindari system in Uttar Pradesh was abolished and compensation had to be paid to the zamindars in respect of the abolition of the proprietary rights in the zamindari estates, the Uttar Pradesh Government did not pay compensation in cash, but the compensation was paid in the form of bonds by which the Uttar Pradesh Government was to pay a fixed sum of money every year on a specified date and for a specified number of years. These bonds were of two categories. One kind was the Zamindari Abolition Bonds by which the compensation became payable by annual instalments with interest at the rate of 2½% p.a These bonds will be referred to hereinafter as “interest bearing bonds”. The other bonds were the U.P Zamindari Rehabilitation Grant Bonds in terms, of which no interest was to be paid and the Government was liable to pay only a fixed sum of money every year on a specified day for a specified number of years. These bonds are referred to hereinafter as “non-interest bearing bonds”. The zamindars sold these bonds against cash in the open market to several investors. The assessee purchased interest bearing bonds of the face value of Rs. 10 lakhs for Rs. 4,87,500 in November, 1958. The assessee also purchased the non-interest bearing bonds of the value of Rs. 7 lakhs for Rs. 2,82,750 in November, 1960. We are here concerned with assessment years 1961–62 to 1964–65. In these years, the assessee-company showed the annual instalment received by it in respect of the interest bearing bonds by breaking it into the principal amount and the interest amount. However, the annual instalments received in respect of the non-interest bearing bonds were wholly shown as principal amount. The ITO considered the annual instalments received in respect of non-interest bearing bonds as annuities and with reference to annuity tables worked out the yield at 7.43% and accordingly brought it to tax. In respect of the interest bearing bonds, the yield was worked out at 7.40%. This action of the ITO was upheld by the AAC. In the appeal against the order of the AAC, the Judicial Member of the Appellate Tribunal took the view that in the case of interest bearing bonds only interest received as indicated in the bonds could be considered as the income of the assessee. In respect of non-interest bearing bonds, he took the view that the only advantage gained by the assessee was that it got the bonds at a lower price and if at all, it might be a case of capital gains, but the income could not be worked out on the basis of an annuity table. The Accountant Member of the Tribunal agreed with the view of the Judicial Member that interest only at the stipulated rate could be treated as income in the case of interest bearing bonds. With regard to the non-interest bearing bonds, however, he took the view that the assessee knew that it was to get back the money value of its investment and much more than that by way of instalments spread over a number of years and the excess realised as a matter of right under the bonds had all the characteristics of an income. This excess, according to the learned Accountant Member, was not an accretion to capital but a yield on the investment. In view of the difference of opinion, the matter was referred to the third Member, who, however, did not agree with the view taken by the Accountant Member and he took the view that the receipt of a large sum in annual instalments would not affect the nature of the receipt. He took the view that the bonds themselves showed that they were non-interest bearing and, therefore, it was not possible for him to infer that the annual instalments received under the bond either by the original holder of that bond or the subsequent holder contained an element of interest. By way of analogy he considered the case where a Government may itself float loans and con-eluded that from the mere fact that a lender had acquired loan certificate by payment of lesser sum than their face value, he cannot be ????? be getting higher rate of interest than what was stated in the ??? cates. Thus, according to the third Member, there was a capital accretion, but “no interest can be presumed when actually it was stated by the Government that the bonds themselves were non-interest bearing”.

3. He, therefore, agreed with the Judicial Member and held that the department was not justified in computing income in respect of the rehabilitation bonds. Consequently, in view of the majority decision, the appeals of the assessee were allowed.

4. On the findings as indicated above, the questions reproduced earlier have been referred to this court at the instance of the revenue. Mr. Joshi appearing on behalf of the revenue has argued that though in law the assessee had stepped into the shoes of the ex-zamindars in whose favour originally the bonds were issued, for the purposes of the I.T Act, we must look at the transaction of purchase of the bonds by the assessee by investing large amounts purely from the business or accountancy point of view. According to Mr. Joshi, the transaction was such that capital had been converted into a certain number of annual payments or something in the nature of an annuity and when the assessee was receiving annual instalments, he was not receiving capital alone, but he was receiving capital coupled with interest and, therefore, according to Mr. Joshi, the amount was liable to be dissected. Mr. Joshi argued that the assessee was regularly recovering more money than what he had invested and this excess is truly in the nature of income and was, therefore, liable to be taxed as income. This argument, according to Mr. Joshi, would apply both in the case of interest bearing and non-interest bearing bonds.

5. Mr. Palkhivala appearing on behalf of the assessee, however, contended that the instant case is a clear case of accretion to capital and what is being received by way of annual instalments by the assessee was capital invested by the assessee along with accretion to it and there was no element of any income in the instalments received. According to Mr. Palkhivala, the U.P Government was also discharging a capital liability and the instalments paid to the assessee being in discharge of this capital liability by the U.P Government and, therefore, tied up with the gross amount of the capital, the receipt must be treated as being on capital account.

6. The crucial question which, therefore, will have to be decided in order to effectively answer the questions raised in this reference is, what is the nature of the transaction or the investment which has been made by the assessee when it purchased the interest bearing bonds and the non-interest bearing bonds at a lesser price. There can be no dispute that this was in ??? of an investment made by the assessee. Indeed, according to ???, the Tribunal has, as a matter of fact, found that the assessee ??? Therefore, the purchase of the bonds at a lesser price ??? value is accepted as being by way of investment. There is also no doubt that so far as the legal relationship between the Uttar Pradesh Government and the assessee is concerned, the assessee has stepped into the shoes of the ex-zamindar in whose favour the bonds have been issued. The question, however, is whether it is this legal relationship which alone should be taken into account for determining the nature of the receipt of the instalment amount by the assessee. According to Mr. Palkhivala, the instalment which is received by the assessee must be treated on the same footing as it would have been treated if it had been received by the original holder of the bond, namely, the ex-zamindar because the assessee has now legally stepped into the shoes of the ex-zamindar and the right to receive the annual instalment amount which originally vested in the ex-zamindar, now stands assigned to him by virtue of the transfer of the bonds in his favour. If this was the proper test, there would not be much difficulty in answering the questions referred. It cannot be seriously disputed on behalf of the revenue that so far as the ex-zamindar was concerned, the amounts under the bonds being payable to him as compensation for his property taken possession of by the State, it would clearly be a capital receipt in the hands of the ex-zamindar. What is, however, contended by Mr. Joshi is that whatever may be the legal relationship between the U.P Government, which paid the annual instalment due under the bond, and the assessee, for the purposes of the provisions of the I.T Act what has to be looked at is really the nature of the transaction on account of which the assessee has come to acquire the right to receive the annual instalments payable under the bonds. The nature of this transaction, according to Mr. Joshi, as already pointed out, has to be looked at from the commercial point of view.

7. It is now well known that so far as the fiscal provisions of the I.T Act are concerned, whenever there is a receipt of an amount by an assessee, it is not the nature of the receipt under the general law that determines its nature for the purposes of the I.T Act, but we have to consider that receipt under the provisions of the I.T Act from the commercial point of view. The bond is nothing more than an agreement to pay an annual instalment to the holder thereof. It is this right which the assessee has acquired, but it has not acquired it by investing an amount equal to the face value of the bonds. It has acquired it by investing a much lesser amount and it is from this angle that the transaction of investment in bonds will have to be considered.

8. What should be the approach adopted in such cases has been exhaustively dealt with by the Calcutta High Court in National Cement Mines Industries Ltd. v. CIT, [1956] 29 ITR 629. In that case, the assessee-company, which carried on business of manufacture of cement and lime and supply of limestone and of obtaining mineral rights and exploiting them, had acquired certain rights and concessions pertaining to limestone and other mineral substances by way of lease. The assessee-company had transferred all its rights for the unexpired term of the lease to another company. Under this agreement, the purchaser-company undertook (i) to pay the assessee-company 13 annas for every ton of cement sold by it, (ii) to sell fluxstone from the land to the Tata Iron & Steel Co. Ltd. at a specified price, (iii) to pay the assessee-company one-half of the profits from the sale of fluxstone, (iv) not to grant any right to the Tata Iron & Steel Co. Ltd. to remove fluxstone from the land below a specified rate, and (v) to pay the assessee-company one-half of the royalty received from the Tata Iron & Steel Co. Ltd. There was also a covenant for certain immediate payments to the assessee-company. The purchaser-company was to pay all rents, royalty, etc., due under the leases. There were other terms of the transaction which are not material. The question was whether the amount received by the assessee-company under the covenant providing for 13 annas per ton of the cement manufactured by the purchaser was of the nature of capital or income. It was held in that case that the nature of the transaction was that the assessee having obtained certain rights and concessions relating to mineral substances by transfer and otherwise and, while carrying on business on the same lines on its own account under other leases and concessions, transferred the former in the course of its business operations and by way of turning them to account provide for itself certain periodical receipts which would come to it as the share of the profits of the transferee's business, if any profits were made or as a part of the royalty, if royalties were received, or as an amount computed at a certain rate on the sale of cement, if any cement was sold, and, therefore, the amount received by the assessee was of an income character. What was argued before the Calcutta High Court was that the amounts received by the assessee-company were only a part of the consideration for the sale and the receipt had not ceased to be of a capital nature. Dealing with the question as to how the nature of the transaction was to be ascertained the Calcutta High Court observed as follows (p. 644):

“Indeed from the point of view of the income-tax law, it is hardly-necessary to decide finally the true legal character of a transaction or the character in law of a payment. As has often been pointed out, what has to be seen when a question under the income-tax law comes to be decided is the character of the transaction or the payment from a business or accountancy point of view. If when looked at from that point of view, it appears that what had been done was that an asset had been sold for an ascertained or ascertainable total consideration and only the payment of the consideration had been spread over a number of years, the receipt will be a receipt of a capital nature. If, on the other hand, an asset had been used in order to provide for an income or even where there was a sale, the consideration had been applied for the purchase of a periodic payment spread over a number of years, the receipt would be a receipt of an income character. It is not necessary to go further and decide the ultimate character of the transaction in law.”

9. Mr. Joshi has relied on these observations and has contended that the investment made by the assessee by the purchase of the bonds was in order to provide for an income, while Mr. Palkhivala has contended that the payment by annual instalments in question is nothing more than what would normally be an annual instalment of the purchase price of an asset sold and would, therefore, be of a capital nature. As pointed out by the Calcutta High Court, when it has to be decided whether a receipt as a result of a transaction is of an income nature or of a capital nature, the whole transaction should be looked at not with a view to discovering what its true legal character is but with a view to ascertaining its true nature and effect from a business or accountancy point of view. To use the words of Evershed, M.R, in Mitchell (H.M Inspector of Taxes) v. Rosay, [1954] 35 TC 496 (CA) one must see, to begin with, what the “look of the thing” is. In that case, the question which fell to be considered was, what was the nature of certain receipts received by the assessee in respect of earlier rights which the assessee had acquired to exhibit or otherwise exploit a film in the United Kingdom, Eire, the Channel Islands and the Isle of Man. The agreement provided, inter alia, that the receipts from the exploitation of, the film should be divided equally between the assessee and the other party to the agreement. These rights were assigned by the assessee by an agreement in favour of a company and the gross receipts were to be shared in the proportion of 30 per cent, to the company and 70 per cent, to the assessee. What was contended by the assessee was that the sums received by her under the agreement with the company were proceeds of the sale of all the rights which she had in the film and that no part of these sums represented profits or gains assessable to tax. While taking the view that the sums received by the assessee under the agreement were assessable to income-tax, Evershed M.R observed (p. 504):

“The matter falls to be decided after taking into account all the circumstances of the case, including the documents which must be properly interpreted and when all those facts are considered the question which is posed in substance is—to use a phrase which, I think, I used myself during the argument,’ according to the look of the thing ‘— is this, and I again repeat Lord Normand's phrase: ‘… a means of obtaining income by use of an asset’?”

10. Lord Normand's observations referred to were from Trustees of Earl Haig v. IRC, [1939] 22 TC 725 at 731. Mr. Palkhivala and Mr. Joshi have both relied on certain observations made by the Calcutta High Court in National Cement Mines Industries' case, [1956] 29 ITR 629. These observations are (p. 656):

“If such payments be instalments of price as such, they are undoubtedly capital receipts. But in deciding whether they are such instalments or only income amounts, the question whether there is a gross lump sum as the agreed consideration to which such payments are related is always a pertinent consideration, although in certain exceptional cases it may not be determinative. The payments may be arranged for in various forms. They may be portions of a lump sum which was agreed to as the price. In such a case the payments will be payments of portions of a contractual debt and obviously capital receipts, but they may also be fixed shares of the profits made by the transferee in the course of using or exploiting the asset or they may have to be computed by reference either to the number or the quantity of the products or the gross receipts for sales. When they are in the latter forms and are not tied to some agreed gross sum and the arrangement is not that by the periodic payments such gross sum shall gradually be paid off, they will normally have to be taken as income receipts.”

11. According to Mr. Palkhivala, the concluding part of the observations is very much in favour of the assessee than in favour of the department. What is urged is that the annual instalments are very much tied to a gross sum of compensation or the value of the bonds and this is not a case where “the arrangement is not that by the periodic payments, such gross sum shall be gradually paid off” and, therefore, according to Mr. Palkhivala, no part of the annual instalments can be treated as income.

12. We shall refer to this contention later, but it is necessary to point out at this stage that the test which has been laid down by the Calcutta High Court has been approved by the Supreme Court in National Cement Mines Industries Ltd. v. CIT, [1961] 42 ITR 69. This was an appeal from the Calcutta decision referred to above. While dismissing the appeal of the assessee-company dealing with the determination of the true character of the receipt for the purposes of income-tax, the Supreme Court observed at page 77 as follows:

“But in assessing the true character of the receipt for the purpose of the Income-tax Act, inability to ascribe to the transaction a definite category is of little consequence. It is not the nature of the receipt under the general law but in commerce that is material. 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 in character 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 a 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 conntract in the light surround-ing 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 imperceptitation

13. Giving illustrations as to when a receipt may be of a capital nature or of an income nature, the Supreme Court observed as follows (p. 77):

“Where capital is repaid in instalments, it is not liable to income-tax; 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 to income-tax— see Foley v. Fletcher, [1858] 3 H & N 769, Secretary of State in Council of India v. Andrew Scoble, [1903] AC 299 (HL), Oswald v. Kirkaldy Magistrates, [1919] SC 147 and IRC v. Ramsay, [1935] 20 TC 79 (CA).

14. But where property is conveyed in consideration of what in truth is annuity payable for a definite or a definable period, the annuity is not payment on capital account and is taxable— see State of Bihar v. Sir Kamesh-war Singh, [1952] 21 ITR 382 (Pat), Maharajkumar Gopal Saran Narain Singh v. CIT, [1935] 3 ITR 237 (PC) and Chadwick v. Pearl Life Assurance Co., [1905] 2 KB 507 (KB).

15. Again, if property is conveyed in consideration of periodical payments, the payment being a share of profits of a business or profession—Jones v. IRC, [1919] 7 TC 310 (KB) or a mineral royalty depending upon the quantity of minerals raised—Raja Bahadur Kamakshya Narain Singh v. CIT, [1954] 26 ITR 563 (Pat) or computed on sales of manufactured articles— IRC v. 36149 Holdings Ltd., [1943] 25 TC 173 (CA) 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.”

16. Relying on this decision of the Supreme Court, while it is contended by Mr. Joshi that the transaction of investment by purchase of bonds at a lesser price by the assessee was clearly a transaction for the purposes of yielding income, according to Mr. Palkhivala, the annual payment is nothing more than a return of capital which is tied down to a gross sum determined at the time when the compensation bonds were issued or, in other words, the face value of the bonds. Having considered the arguments advanced by Mr. Palkhivala, it appears to us that this is not one of those cases where we can justifiably apply the analogy of an asset being sold and the price for the asset being paid in annual instalments. The compensation payable by the U.P Government was in lieu of expropriation of the zamindar's estate by the Zamindari Abolition legislation. The zamindar is now out of the picture. Legally, it is the assessee who has stepped into his shoes, but that would be for the limited purpose of enforcing the payment under the bonds. What we have to consider is the nature of the transaction of purchase of these bonds at a price which is much less than their face value. The assessee has invested large sums of money in purchasing these bonds. It is obvious that the assessee thought it fit to invest large sums of money only because it would get a regular substantial return on these investments. A ??? cial activity is normally intended to earn profits and more so by a comp?? whose business consists of investing funds. It is no doubt true that in a given case, capital may be invested with an eye on accretion to that capital after some interval of time. But the usual commercial activity of an investor is normally intended to make an investment in order to earn a return on it. The assessee knew well that the amounts under the bond were payable monthly and by the purchase of bonds of the value of Rs. 10 lakhs by the assessee for a little less than Rs. 5 lakhs, the assessee has to get a fixed return regularly every month. Same was the case when non-interest bearing bonds of the value of Rs. 7 lakhs were purchased for Rs. 2,82,750. In our view, the only intention that can be attributed to the assessee making such an investment would be that it was an investment to earn income. It is not possible for us to accept the argument that merely because the amount of the annual payments is related to the gross amount found due on the bonds, the monthly payments should partake of the nature of capital. We are dealing not with the original holder of the bonds but with an assessee who has purchased those bonds for a lesser amount and having regard to the principles laid down by the Supreme Court, we must ignore the legal status of the assessee viz-a-vis the U.P Government and we must analyse or consider the transaction from the commercial point of view or, as Evershed M.R put it, find out whether it was an investment of capital used as a means of obtaining income. It is obvious to us that (the prospect of getting a large return regularly on a comparatively small investment was responsible for the purchase of the bonds by the assessee. In the hands of the assessee, the annual instalment clearly represents a payment of capital coupled with interest. This interest receipt would clearly be of the nature of income and to the extent that the amount received by the assessee was in excess of the capital investment proportionately in respect of each year, it would be accountable as income for the purpose of assessment.

17. In this view of the law which we have taken, question No. 1 is answered in the affirmative and in favour of the revenue. Question No. 2 also is answerd in the affirmative and in favour of the revenue. We are, however, of the view that in the circumstances of the case, the proper order with regard to costs will be that there will be no order as to costs.