National Cement Mines Industries, Ltd.
Vs. Commissioner, of Income-Tax, West Bengal, Calcutta  INSC 15 (17
CITATION: 1961 AIR 1032 1961 SCR (3) 502
Income-tax-Conveyance with reservation of
rights-Category of-Receipts under the conveyance, if income or capital.
The appellants were carrying on the business
of cement and lime manufacture and supply thereof. By a deed dated May 7' 1935,
the appellants conveyed to the Associated Cement Ltd.
the rights which had vested in them under an
earlier conveyance made in their favour by a company known as Karanpura Cod
Under the deed the appellants reserved to themselves the right to receive from
the Associated Cement Company a sum equal to thirteen annas in respect of every
ton of cement sold by it which shall have been manufactured from the limestone
won by it from the lands transferred and comprised in the leases and
Pursuant to this stipulation in the year of
account, the appellants I received from the Associated Cement Ltd. Rs.
77,820. The Income-tax Officer included this
amount in the total assessable income of the appellants in the assesment year
and his order was confirmed by the Appellate Assistant Commissioner and by the
Income-tax Appellate Tribunal. The contention of the appellants before the High
Court in a reference under s. 66 of the Indian Income-tax Act that on a proper
construction of the deed and on the facts and circumstances of the case the sum
of Rs' 77,820 did not represent receipt of a revenue nature in the hands of the
appellants and was not assessable as such, was negatived.
Held, that the deed did not incorporate a
transaction of either sale or lease. The conveyance was subject to several
restrictions and the appellants retained in part, rights in the land conveyed.
The transaction was substantially a transaction for sharing the profits of the
commercial activities of the Associated Cement Ltd. and the receipt under cl. 1
of the deed was of the nature of income and not capital and as such assessable
503 Foley v. Fletcher, (1858) 3 H. & N.
769, Secretary of State in Council of India v. Andrew Scoble,  A.C. 299,
Oswald v.. Kirkcaldy Magistrates,  S.C. 147, Commissioners of Inland
Revenue v. N Ramsay, (1935) 20 T.C.
79, State of Bihar v. Sir Kameshwar Singh,
 21 I.T.R.
382, Captain Maharajkumar Gopal Saran v.
Commissioner of Income-tax, Bihar & Orissa,  3 I.T.R. 237 (P.C.) and
Chadwick v. Pearl Life Assurance CO.,  2 K.B. 507, considered and
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 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 contract in the light of the surrounding 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
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 84 of 1958.
Appeal by special leave from the judgment and
order dated December 22/23, 1955, of the Calcutta High Court in I.T.R. No. 24
N. C. Chatterjee, D. P. Pal and D. N.
Mukherjee for the appellant.
Hardayal Hardy and D. Gupta, for the
1961. January 17. The Judgment of the Court
was delivered by SHAH, J.-Messrs. National Cement Mines Industries Ltd.-
hereinafter referred to as the appellants-are a public limited company
incorporated to " carry on the 65 504 business of cement and lime
manufacture and also of limestone supply and for the purposes of such
businesses to acquire rights and concessions pertaining to limestone, coal and
surface lands from the Dewar khand Karanpura Mines and Industries Ltd."
and also to " work mines or quarries and to find, win, get, work, etc. or
otherwise deal with clay and bauxite." Dewarkhand Karanpura Mines and
Industries Ltd. hereinafter called the " Karanpura Company "-had
obtained three leases on November 29, 1930, first for mining limestone from
Maharaja Pratap Narain Udai Nath Shah Deo from limestone beds in certain
villages in Dewarkhand, second from Maharaj Kumar Nand Kishore Nath Shah Deo of
the surface rights neces. sary to exercise the powers and privileges in respect
of the first lease and the third from Maharaj Kumar Raj Kishore Nath Shah Deo
of surface rights in respect of Hoyer village. The period in each of the three
leases was thirty years. On March 17, 1932, the Karanpura Company conveyed the
rights and options under the three leases to the appellants. On September 30,
1934, the appellants acquired the limestone and surface rights in respect of
limestone beds in village Umedanda for 95 years from Maharaja Pratap Narain
Uday Nath Shah Deo and Maharaj Kumar Raj Kishore Nath Shah Deo. On the same
date, the appellants entered into two agreements, one with Maharaja Pratap
Narain Uday Nath Shah Deo which is called the ,bauxite option agreement "
thereby acquiring the first option to take a lease or leases of any area or
areas of bauxite deposits in certain villages, and another from the said
Maharaja for the first option to take a lease or leases of limestone beds in
the Tori District.
By a fourth agreement also dated September
30,1934, between the Karanpura Company, Maharaja Pratap Narain Udai Nath Shah
Deo acting with the consent of Maharaj Kumars Raj Kishore Nath Shah Deo and
Nand Kishore Nath Shah Deo, the royalties reserved under the original deeds
dated November 29, 1930, were reduced and the periods of the leases were
extended to 99 years from the date of the original leases, 505 By deed dated
May 7,1935, the appellants conveyed to Dewarkhand Cement Company Ltd. (which
later came to be known as Associated Cement Ltd. and will be referred to
hereinafter by that name) the benefits of the four leases and the two
agreements for the unexpired periods. By this deed, for a present consideration
of Rs. 25,000 " for trouble and expenses in obtaining the leases and
agreements " and for further payment under several covenants which will be
presently set out, the appellants conveyed the rights vested in them subject to
certain reservations. In the year of account June 1, 1944, to May 31, 1945, the
appellants received from the Associated Cement Ltd. under the first covenant of
the deed, Rs. 77,820 being the amount computed at the rate of 0-13 As. per ton
of cement manufactured from limestone won from the lands and sold by the
company. The Income-tax Officer, Companies District 1, Calcutta, included this
amount in the total assessable income of the appellants in the assessment year
1946-47. This order was confirmed in appeal by the Appellate Assistant
Commissioner and by the Income-tax Appellate Tribunal. At the instance of the
appellants, the Tribunal referred the following question with another not
material for this appeal to the High Court of Judicature at Calcutta:
" Whether on a proper construction of
the Deed of Assignment dated 7th of May, 1935, and on the facts and in the
circumstances of this case, the Tribunal was right in holding that, the sum of
Rs. 77,820 represented a receipt of a revenue nature in the hands of the
Applicant and assessable as such The following facts were held proved by the
Tribunal. The principal objects of incorporation of the appellants were to
carry on the business of manufacturing cement and lime and sale of limestone
and the appellants were formed with the object of acquiring the rights and
concessions of the Karanpura Company. By their Memorandum of Association, the
appellants were authorised to sell or dispose of the undertakings or any part
thereof as they thought fit, 506 and to sell, lease, mortgage, dispose of, turn
to account or otherwise deal with all or any part of their property and rights
and in pursuance of these objects the rights and concessions of the Karanpura
Company were acquired and extension of leases and concessions were obtained and
were transferred to the Associated Cement Ltd. The appellants were therefore
carrying on in the year of account 1944-45 the business for which they were
After reciting the prefatory clauses, it was
stated in the deed:
"WHEREAS it was agreed inter alia that
the Purchaser should pay to the Vendor the sum of Rupees twenty five thousand
for trouble and expenses in obtaining the leases and agreements dated the
thirtieth day of September one thousand nine hundred and thirty four
hereinbefore recited and hereinafter expressed to be hereby transferred and
Whereas the Purchaser hath paid to the Vendor the said sum of rupees twenty
five thousand as the Vendor doth hereby acknowledge NOW THIS INDENTURE WITNESSETH
that in con. sideration of the covenants on the part of the Purchaser
hereinafter contained the Vendor hereby grants assigns and transfers unto the
Purchaser and the Karanpura Company at the request and by the direction of the
Vendor hereby grants assigns transfers and confirms unto the Purchaser:".
The deed then proceeds to set out the
description of the various leases and concessions and agreements and the
covenants which the Associated Cement Ltd. undertook in favour of the
appellants. These covenants are:
(1) That it will pay to the Vendor a sum
equal to thirteen annas in respect of every ton of cement sold by it which
shall have been manufactured from the limestone won by it from the lands hereby
transferred and comprised in the hereinbefore recited leases and agreements.
(2) That it will not sell any Fluxstone won
by it from the said lands to the Tata Iron and Steel Company Ltd., at a price
less than Rupees one and annas 507 fourteen per ton F. O. R. the siding nearest
to the quarry or place from which it shall be won without the consent of the
(3) That it shall pay to the Vendor one-half
the profit( if any) which it shall make by selling Fluxstone to the Tata Iron
& Steel Company Ltd.,or to any other person such profits to be ascertained
after deduction from the price received all costs, charges and expenses
including the royalty payable to the Maharaja in respect thereof but before
educting overhead charges. Such accounts to be closed and adjusted on the
thirtieth day of June and the thirty-first day of December in each and every
(4) That it will not grant to the Tata Iron
& Steel Company Ltd., the right to quarry and remove Fluxstone from the
lands hereby transferred at a royalty of less than ten annas per ton, and will
pay to the Vendor one-half of any royalty so charged and received.
(5) That in the event of the payments made
under clauses one, three and four above in any one year not amounting to the
minimum hereinafter set out the Purchaser shall pay in lieu and in full
discharge there for the following minimum:
(a) During the first year to be computed from
the first day of January one thousand nine hundred and thirty-five, rupees ten
(b) During the second year rupees thirty
(c) During every subsequent year rupees fifty
Out of the above minimum payment of rupees
fifty thousand per year for the purposes of account, the sum of rupees twenty
thousand shall be deemed to have been paid in respect of payment under clause
(6) That the Purchaser or the persons
deriving title under the Purchaser will at all times from the date hereof duly
pay all rents, royalties and payments becoming due under the (four)
hereinbefore recited Indenture of Lease (,subject as regards the Limestone
lease to the modifications effected by the agreement for 508 reduction of
royalty dated the thirtieth day of September one thousand nine hundred and
thirty-four hereinabove recited) in respect of the premises agreements options
rights or benefits hereby assigned and transferred and observe and perform the
covenants agreements stipulations and conditions therein contained and
henceforth on the part of the Lessee or grantee to be observed and performed in
respect of the aforesaid premises or under the said Bauxite agreement or under
the said Tori Option agreement or under the said agreement for reduction of
royalty And also will at all times from the date hereof save harmless and keep
indemnified the Vendor its successors and assigns from and against all
proceedings costs claims and expenses on account of any omission to pay the
said rent, royalty or payments or any breach of any of the said covenants
agreements stipulations and conditions.
(7) That the Purchaser will not work raise
remove or use stone or clay in the properties comprised in the leases and
agreements hereby transferred to it for making lime.
(8) That the Purchaser shall not by any of
its actions or omissions cause leases and agreements, mentioned above and in
respect of properties hereby transferred, to be determined, or the rights there
under, including the right of renewal, to be prejudiced.
(9) That in areas comprised in the leases and
agreements hereinabove expressed to be hereby assigned and not containing
limestone the Vendor's rights under leases and agreements from the Maharaja of
Chotanagpur or Maharaj Kumar Nand Kishore Nath Shah' Deo other than the leases
and agreements above referred to shall not be jeopardised or affected by this
(10) That the clay and shales lying within
areas, which do not contain Limestone, can be removed and utilised by the
Vendor for all purposes except that of cement manufacture.
The deed then proceeded after setting out
certain other covenants:
509 " AND IT IS HEREBY EXPRESSLY AGREED
AND DECLARED that if the Limestone within the areas comprised in the Leases
hereby transferred available for manufacturing cement is exhausted the
Purchaser will be entitled to determine this Indenture on giving to the Vendor
six months' notice in writing in which case the Purchaser, if so required, will
retransfer the leases and agreements aforesaid." By clauses (1), (3) and
(4), the Associated Cement Ltd.
undertook to make certain payments to the
appellants. By cl. (1) they agreed to pay 0-13 As. for every ton of cement
manufactured from the limestone won from the lands and sold;
by el. (3), the Associated Cement Ltd. agreed
to pay half the profits which they made by selling Fluxstone to the Tata Iron
& Steel Co., or to any other person; and by el. (4), they agreed to pay
half the royalty received from the Tata Iron & Steel Company for the right
to quarry and remove flux stone from the lands. By clause (5), provision was
made for minimum payment in the event of the aggregate under cis.
(1), (3) and (4) not reaching the sums specified
Clauses (2), (4), (7), (8) and (9) were in
the nature of restrictive covenants. By cl. (2), the Associated Cement Ltd.
were prohibited from selling any fluxstone won from the lands to the Tata Iron
& Steel Company for less than Re. 1- 14 As. per ton F. O. R. By cl. (4), an
obligation not to convey the right to quarry and remove fluxstone for royalty
less than 0-10 As. per ton was imposed. By el. (7) the Associated Cement Ltd.
undertook not to remove or use or allow any one to raise work, remove or use
stone or clay in the lands. By cl. (8), the Associated Cement Ltd. undertook
not to do any acts or omissions causing the leases and agreements to be
determined or the rights there under to be prejudiced. By cl. (9), rights of
other persons under leases and agreements in lands not containing limestone
were not to be affected. By el. (10), the right of the appellants to utilise
clay and shale lying within the areas not containing limestone except for the
purpose of manufacturing cement was retained, There were certain exceptions 510
to this and the ninth clause whereby the Associated Cement Ltd. were entitled
to excavate, use or remove all kinds of clays in and from the areas within the
boundary lines marked in the plan and they were also authorised to make
permanent structures and use certain strips of lands. By el. (6) the Associated
Cement Ltd. agreed to pay rent stipulated under the original leases and
agreements and also undertook to keep indemnified the appellants from and
against all proceedings, costs, claims and expenses on account of any omission
to pay the rent royalty or payments or any breach of any of the covenants
agreements and the leases.
There was also the covenant authorising the
Associated Cement Ltd. to terminate the deed in the event of limestone in the
land comprised in the leases being exhausted. The appellants undoubtedly did
not part with all their rights in favour of the Associated Cement Ltd. by this
deed dated May 7, 1935. The consideration under the deed consisted of a fixed
component and annual payments fluctuating with the business activity of the
Associated Cement Ltd. A fixed amount of Rs. 25,000 was paid " for trouble
and expenses in obtaining the leases and agreements " and additional
payments were to be made under cls. (1), (3) and (4) subject to the minimum
prescribed by el. (5). It is difficult to categorise a transaction of this
character. It is not a conveyance of all the rights of the appellants nor can
it be regarded as a sale even of the rights which were conveyed.
Numerous restrictions were imposed by the
deed upon the rights of the transferee which were inconsistent in their very
nature with the character of a sale, and the covenant authorising termination
of the deed in the event of the limestone being exhausted removes all doubt in
Nor is it a lease : it is not a transfer of a
right to enjoy property for a certain time in consideration of periodical
payments. It also does not evidence a transaction in the nature of a joint
venture between the appellants and the Associated Cement Ltd. Cement was to be
manufactured by the Associated Cement Ltd, out of limestone to be won from the
lands 511 and in consideration of the rights conveyed, payments at specified
rates were agreed to be made out of the price to be obtained by sale of cement,
fluxstone and limestone. The appellants had no control over the production of
limestone and manufacture of cement, or on the sale of fluxstone and limestone.
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 installments 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 installments. No single test of universal application can be
discovered for 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 contract in
the light of the surrounding 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 imperceptible.
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
(1), Secretary of State in Council of India v. Andrew Scoble (2), Oswald v. Kirkcaldy
Magistrates and Commissioners of Inland Revenue v. Ramsay (4).
(1) (1858) 3 H. & N. 769? (2)  A.C.
299 (3)  S.C. 147.
(4) (1935) 20 T.C. 79.
66 512 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 Kameshwar Singh (1), Captain Maharajkumar Gopal Saran v.
Commissioner of Income- tax, Bihar and Orissa (2), Chadwick v. Pearl Life
Assurance Co. (3).
Again, if property is conveyed in
consideration of periodical payments, the payment being a share of profits of a
business or profession-(William John) Jones v. Commissioners of Inland
Revenue(4), or a mineral royalty depending upon the quantity of minerals raised
Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of Income- tax,
Bihar and Orissa (5), or computed on sales of manufactured
articles-Commissioners of Inland Revenue v. 36149 Holdings, Ltd. (6), or a
percentage of gross profits made in the exploitation of a secret process-Delage
v. Nugget Polish Co., Ltd. (7), is income and taxable.
Counsel for the appellants submitted that the
receipt under clause (1) of the terms of the deed dated May 7, 1935, was in the
nature of capital payment and relied upon certain decisions in support of that
In Minister of National Revenue v. Catherine
Spooner(8), decided by the Judicial Committee of the Privy Council in an appeal
from the Supreme Court of Canada, the respondent Catherine Spooner had sold her
rights, title and interest in land owned by her in freehold to a company in
consideration of a certain sum in cash, besides shares of the company, and an
agreement to deliver 10% of oil produced from the land on which the company
covenanted to carry out drilling and, if oil was found, pumping operations.
These were described as royalties. Oil was struck in the lands and the
respondent was paid 10 of the gross proceeds of the oil produced in lieu of
oil. The (1)  21 I.T.R. 382. (5) (1943) L.R. 70 I.A. 180.
(2)  3 I.T.R. 237 (P.C.). (6) (1943) 25
(3)  2 K.B. 507. (7) (1906) 2r Times
Law Reports 454.
(4) (1919) 7 T.C. 3 10 (8)  A.C. 684.
 1 H.B. 711, 513 Supreme Court of
Canada held that the sum so received was not an annual profit or gain within
the meaning of s. 3 of the Income War Tax Act, but a receipt of a capital
nature and therefore not chargeable to tax. According to the Judicial
Committee, there was between the respondent and the company no relation of
lessor or lessee: the transaction was one of sale and purchase, and the transaction
had taken the form which it did because of the uncertainty whether oil would be
found by the purchaser. As the value of the land depended on this contingency,
the price, not unnaturally was made to depend in part on the event of oil being
The judgment lays down no new principle; it
proceeded merely upon interpretation of the document in the light of the
In Trustees of Earl Haig v. Commissioners of
Inland Revenue (1), the question which fell to be determined was whether a share
of the royalties received in consideration of allowing the use of the diaries
of the late Earl Haig for writing his biography were, in the hands of the
trustees under the will of Earl Haig, capital receipts. That was undoubtedly a
case in which payments received by the trustees were dependent upon the
professional activities of the author and the proceeds derived from the sales
of the biography he wrote.
By the agreement, the author was authorised
to extract and publish from the diaries what he thought fit. The diaries were
undoubtedly an asset, and after they were used by the author for publication of
the biography, their value as an asset was, if not wholly, largely exhausted
and their future value was negligible. The agreement was therefore regarded as
conveying an asset in its entirety to the author in consideration of a share in
the royalties and the receipt of this share was regarded as receipt of capital.
That decision proceeded upon the special character of the agreement and the
nature of the asset transferred and did not seek to lay down any general
In Nethersole v. Withers (2), N who had
acquired under an agreement the exclusive right to dramatise (1) (1939) 22 T.C.
(2) (1948) 28 T.C. 501.
514 a novel of Rudyard Kipling received under
an agreement with the widow of the author, a third share of a lump sum for
which the sound and film rights were granted exclusively to a film company for
a period of ten years. The film right of a comprehensive character having been
granted by the legal representative of the author against payment of the sum
stipulated, the question arose whether the payment received by N was taxable
under the Income Tax Act under Case II of Schedule D or under case VI of
Schedule D. It was held that N having ceased to be the owner of the portion of
the copyright she had assigned, the proceeds were not annual profits or gains
within the meaning of Schedule D, Case VI.
That was a case in which N had wholly sold
and disposed of a part of the property and the amount received by her was the
price paid in lump and was not in the nature of income.
That case also proceeded upon the special
character of the transaction.
The case of The Commissioners of Inland
Revenue v. The Marine Steam Turbine Co., Ltd. (1) on which reliance was sought
to be placed by counsel for the appellants needs no detailed consideration. In
that case, a company which was on the facts found not carrying on a trade or
business was held not assessable to Excess Profits Duty, because the condition
of liability was the carrying on of trade or business.
The appellants had however not sold the
entirety of the rights acquired by them from the Karanpura Company. The
conveyance was subject to several restrictions and the appellants retained in
part rights in the land conveyed.
The transaction was substantially a
commercial transaction for sharing the profits of the commercial activities of
the Associated Cement Ltd. The High Court was therefore right in holding that
the transaction dated May 7, 1935, was a commercial transaction and the payment
under cl. (1) thereof at the rate of 0- 13 as. 'per ton of cement sold was of
the nature of income and not capital.
In that view of the case, the appeal fails
and is dismissed with costs.
(1) (1919) 12 T.C. 174;  I K.B. 193.