Manohar Lall, A.C.J:— At the instance of She Commissioner of Income-tax the Appellate Tribunal has referred to us the following questions for decision:
“1. In the circumstances of the case is the amount of Rs. 5,25,000 received as salami by the assessee taxable?
2. In the circumstances of the case is the amount of Rs. 1,76,306 received on account of cess by the assessee taxable?”
2. For the assessment year 1941–1942 Raja Bahadur Kamakshya Narain Singh, the assessee, was assessed on a total sum of Rs. 21, 65-265. The Income tax Officer included in this sum Rupees 5,25,000 which was received by the assesses because in his opinion this so called salami was nothing but an advance payment of income. He also included a sum of Rs. 1,74,545 (the figure in the question sent to the High Court is 1,76,306 and is agreed to be the correct figure) in the assessable income on the view that this amount was received from the lessees. Anderson Wright & Co. and the destination thereof after it was earned was immaterial, namely, that it went to reimburse the assessee.
3. In appeal, the Appellate Assistant Commissioner, Mr. P.K Sen Gupta, in a careful order came to the conclusion that the amount of salami was capital receipt and not taxable. He also came to the same conclusion regarding the amount of cess.
4. The Income-tax Officer went up in appeal to the Appellate Tribunal contending that the amount received as salami and the amount recovered as cess should not have been deducted out of the assessable income. The Appellate Tribunal agreed with the Appellate Assistant Commissioner. It is now necessary to give the facts shortly in order to trace the origin and nature of fie two sums in question which were admittedly received by the assessee in the previous year. On 26-11-1907 the then Raja Bahadur of Ramgarh gave a prospecting license to Bokaro Coal Syndicate on receiving a salami of Rs. 1,00,000. The period of license was three years but the licensee was given the option to have a renewal for another two years. The licensee also advanced to the Raja Bahadur a sum of Rs. 7,00,000 by way of loan on certain conditions mentioned in the document. The licensee was at liberty to transfer, assign or sub-let the whole or any part of his rights and interest. By cl. (7) the licensee or his nominees were given the light to take a coal mining lease or leases of the whole or any portion of the coal fields covered by the license upon certain terms, namely, salami at the rate of Rs. 40 per standard bigha but not to exceed thirty thousand standard bighas except in certain events. After the expiry of one year from the date of the license, a minimum royalty at the rate of Rs. 8000 per anuuni was to be paid by the licensee to the Raja and in case the mining lease or leases were taken by the licensee this minimum royalty was payable so long as the miunuum royalty payable under the lease or leases did not reach the figure of Rs. 8000 per annum. Over and above that a further minimum royalty of one rupee per bigha on all lands actually taken up over and above an area of eight thousand standard bighas was also payable. The other terms are not important.
5. On 6-9-1911 the prospecting license was extended for seven years. The Raja Bahadur died on 26-1-1913 and the Court of Wards assumed charge on behalf of the minor Raja. On 13-12-1917 the prospecting license was extended for another five years. On 10-4-1919 the then Raja Bahadur, who was the father of the present assessee, died, and as the assessee was then a minor, the Court of Wards continued to remain in charge of the estate. On 30-4-1922 the license was extended for another five years, and again on 22-12-1926 it was extended for another five years. On 18-7-1932 the Court of Wards again extended the license for a period of ten years. The assessee attained his majority on 10-8-1987.
6. On 9-3-1939 a notice was served on behalf of the assessee upon Anderson Wright & Co., as the Managing Agents of Bokaro Ltd., asserting that under the provisions of the Court of Wards Act it was not within the power of the Court of Wards to grant a prospecting license and therefore, the terms of the prospecting license dated 18-7-1932, the period of which was still unexpired, was not binding upon the assessee. It was also asserted that the leases which had been taken in the meanwhile based on the license were ultra vires, and although he was legally justified in repudiating these leases but as royalty or minimum royalty was being paid on those leases, he was not repudiating them. Accordingly the assessee interned Anderson Wright & Co. that he was entitled to make under ground settlement of any portion of the Bokaro and Ramgarh coal fields other than the portion which was in their possession under the leases which were not being repudiated. A further claim was made on behalf of the assessee that he should be reimbursed in respect of the cess and income-tax which was paid on his behalf to the Government during the relevant period and be laid a claim at about Rs. 5,00,000 on account of cess and about Rs. 28,00,000 on account of income-tax and super-tax.
7. The assessee and the coal company entered into a settlement on 10-6-1940 by which the assessee agreed to accept the various prospecting licenses and their extensions and the leases which had been granted under the terms of those prospecting licenses and extensions. The prospecting license, was extended for a period of seven years from 26-11-1942 on the same terms as were in force on that date. The company agreed to pay to the assessee and the assessee agreed to receive Rs. 1,74,546 in settlement of all claims for cases and interest thereon up to and including March 1939. The fifth term of the settlement may be quoted here:
“In consideration of the extension of the prospecting license and validating the leases and the licenses and in full settlement of the claim for cases from 1932–1933 to 1938–1939 (all claims for prior to 1932–1933 having been foregone by you) we agree to pay to the Raj the following sums:
(i) In full settlement of the claim for salami:
(a) In respect of the said extension of the prospecting licenses … … … Rs. 5,25,000
(b) Validating the leases and licenses a capital lump sum of … … … Rs. 40,000
(ii) In full settlement of cesses from 1932–1933 up to 1938–1939 both years inclusive Rs. 1,74,545/14.”
8. It is contended on behalf of the Income-tax Department before us that the sum of Rs. 5,25,000 was nothing less than an advance royalty for seven years at the rate of Rs. 75,000 per annum. This argument is based upon the following observations by Fazl Ali J. (as he then was) in 1939 I.T.R 536.1
“I concede that in some cases where the rent is ridiculously low and the premium abnormally high, it may be possible to argue that the premium includes advance rent.”
9. In our opinion, the contention raised on behalf of the Income-tax Department is not tenable. The matter was examined at great length by Fazl Ali J. (as he then was) and by me in 1939 I.T.R 536. In the judgment we examined a number of cases and we came to the conclusion that it would be impossible to lay down any hard and fast rule that a salami can in no case be taxable. But the question must depend upon the facts and circumstances of each case. It is unnecessary to embark upon a review of those cases again. This decision was approved by Harries, C.J and Fazl Ali J. (as he then was) in 1940 I.T.R 550.2 The head-note correctly states:
“It cannot be laid down as a hard and fast rule that a salami or nazrana paid to the landlord for settlement of lands is payment of rent in advance and therefore assessable as income. In some cases it may be payment of rent in advance; in other cases it might well be a lump sum payment for transfer of the lease-hold interest, in which case it will be a capital receipt. Consequently, whether salami is a capital receipt or not can only be determined after a full investigation of all facts relating to the settlement by which the salami or nazrana was paid.”
10. A Special Bench of this Court consisting of Harries C.J, Fazl Ali J. (as he then was) and myself in 1941 I.T.R 3133 came to the same conclusion, namely:—
“Salami could not be regarded as income as a matter of law. It may in certain cases be regarded as payment of rent in advance and in such cases it could rightly be regarded as income. Where, however, salami could not be regarded as a payment of rent in advance, it could not be regarded as income and would, therefore, not be taxable. Prima facie, salami is not income, and it is for the Income-tax authorities to show that there do exist facts which would make the salami income.”
11. The question raised, therefore, is a question of fact in the main except in so far as it may be urged that on the facts found the inference in law follows that this particular salami was income.
12. The facts which I have set out above are so clear that I have no hesitation in agreeing with the opinion expressed by the Appellate-Assistant Commissioner and the Tribunal. It is sufficient to state that there the salami was received not on account of any rent due to the assessee but for the settlement of his claim which he had put forward that the licenses and the leases under which the coal company was holding; the lands were invalid and ultra vires of the Court of Wards and, therefore, the assessee was requiring the coal company to vacate the premises. It is surprising that the Commissioner of Income-tax notwithstanding the clear case law laid down by this Court which appears to have been correctly applied by the Appellate Assistant Commissioner and the Appellate Tribunal to the facts of this case had thought it fit to come up to this Court. For these reasons the Appellate Tribunal has correctly treated Rupees 5,25,000 as not being assessable to tax.
13. Cess: The claim of the Income-tax; Commissioner to assess the amount of Rupees 1,76,306 is still more untenable. It will be recalled that this amount was paid to the assessee because? in the relevant period the Court of Wards had paid this sum to the Government although the liability to pay this sum was on the coal company. In other words, the assessee had been reimbursed to the extent to which he was out of pocket by the omission of the coal company to bear this burden. How can this sum be treated as an income of the assessee in the previous year? The facts have merely to be stated to show that the Appellate Tribunal in agreement with the Appellate Assistant Commissioner came to the correct conclusion. For these reasons the answers to the two questions are as follows:
Question 1.—In the circumstances of this case the amount of Rs. 525,000 received as salami by the assessee is not assessable to taxation.
Question 2.—In the circumstances of this case the amount of Rs. 1,76,306 received on account of cess by the assessee is not taxable.
14. The assessee is entitled to the costs in this Court. I would assess the hearing fee at Rupees 500.
Das, J.:— I agree that the answers to both questions should be as proposed by my Lord the Chief Justice. As to the salami of Rs. 5,25,000 it was no doubt contended before us that this had nothing to do with the settlement of the claim regarding the previous leases and licenses for which a capital lump sum of Rs. 40,000 was paid. It was contended that the salami of Rupees 5,25,000 was in respect of the extension of the prospecting license and that it was really payment of rent in advance. As has been observed by my Lord the Chief Justice, the question if salami in a particular case is in reality payment of rent in advance, or is a lump sum payment for transfer of some interest in the property is a question of fact which can only be determined after a full investigation of all facts relating to the settlement by which the salami or nazrana was paid. Even if it is conceded that the salami in this case was not paid for validating the previous leases and licenses, it does not affect the reasoning by which the Appellate Tribunal has come to the conclusion that the salami in this case was not payment of rent in advance. The Appellate Tribunal has rightly drawn attention to cl. 8 of the main indenture of 26-11-1907, where there is a provision for the payment of a sum of Rs. 8000 per annum as minimum royalty in addition to the salami; it is also stipulated that there will be a further payment of a minimum royalty of one rupee per bigha per annum in respect of each bigha of land held under mining lease in excess of eight thousand bighas, but these payments will be on account of, and not in addition to, the royalties for the time being payable under any mining lease or leases then already taken up by the licensees. These stipulations, which are also incorporated in the indenture, dated 12-3-1942, show that the salami paid in this case was not really advance payment of rent. On the contrary, it was a lump sum payment for the rights which were being given to the licensee, namely, the right to prospect the property for a certain number of years and also the right to get mining leases of the whole or such portion or portions of the lands where coal may be found, at some fixed rates; as a matter of fact, draft mining leases formed a part of the indenture of 26-11-1907. In this view of the matter, the salami in question is undoubtedly a capital receipt, and is not income.
15. In the recent case in (1945) 62 T.L.R 77,4 their Lordships of the Judicial Committee had to consider certain special grants under which exclusive rights were granted to prospect and work any number of mining locations within the area in question, and one of the questions for decision was if certain sums paid in consideration of the grants were “rents, royalties, premiums and profits arising from property” within the meaning of S. 5(f), Income-tax Ordinance of Northern Rhodesia. Their Lordships agreed with the learned Chief Justice of Northern Rhodesia that the sums received were the “fixed price paid on an outright transfer of certain benefits” and could not be regarded as “rents, royalties etc.” The same is the case here, and the salami paid is the consideration received upon a transfer of certain benefits.
D.R
16. Reference answered.