Commissioner of Income-Tax, Assam Vs.
The Panbari Tea Co. Ltd.  INSC 114 (19 April 1965)
19/04/1965 SUBBARAO, K.
CITATION: 1965 AIR 1871 1965 SCR (3) 811
R 1972 SC 80 (4,5)
Indian Income-tax Act (11 of
1922)--"Premium" and "rent"-Distinction--Premium paid in installments--Whether
capital gains or revenue receipts.
The assessee leased out its tea estates for a
period of ten years in consideration of a sum as and by way of premium and an
annual rent to be paid by the lessor to the assessee.
As premium apart the sum was paid at the time
of the execution of the lease and the balance was spread over in ten annual installments;
and the annual rent was payable in monthly installments. The annual installment
paid as premium was taxed by the Income Tax authorities as revenue receipt of
the assessee. On reference, the High Court held to be capital gains. In appeal
HELD: The annual installment paid as premium
was capital gains.
When the interest of the lessor is parted for
a price the price paid is premium or salami. But the periodical payments made
for the continuous enjoyment of the benefits under the lease are in the nature
of rent. The former is a capital income and the latter a revenue receipt. There
may be circumstances where the parties may camouflage the real nature of the
transaction by using clever phraseology. In some cases, the so-called premium
is in fact advance rent and in others rent is a deferred price. It is not the
form but the substance of the transaction that matters. The nomenclature used
may not be decisive or conclusive but it helps the court, having regard to the
other circumstances, to ascertain the intention of the parties. Premium can be
paid in a single payment or by installments. The real test is whether the said
amount paid in a lump sum or in installments is the consideration paid by the
tenant for being let into possession.. [813 H; 814 E-G] Raja Bahadar Kamakshya
Narain Singh of Ramgarb v. Commissioner of Income-tax, Bihar and Orissa, (1943)
11 I.T.R. 513, Member for the Board of Agriculture Income-tax Assam v.
Sindhurani Chaudhurani, (1957) 32 I.T.R. 169, and Chintamani Saran Nath Sah Deo
v. Commissioner of Income- tax, Bihar and Orissa, (1961)41 I.T.R. 506, applied.
The parties, who were businessmen well-versed
in their trade, must be assumed to have ,known the difference between the two
expressions "premium" and 'rent , and they had designedly used those
two expressions to connote two different payments. The annual rent fixed was a
considerable sum of Rs. 54,500/- and the premium, when spread over 10 years
would work out to Rs. 22,500/- a year. There was no reason, therefore, to
assume that the parties camouflaged their real intention and fixed a part of
the rent in the shape of premium. The L/P(D)5SCII--13 812 mere fact that the
premium was made payable in installments could not obviously be decisive of the
question, for that might have been to accommodate the lessee. [815 B, C] The
construction based on the clause in the lease deed that on the default in the
payments of the installments of the premium or rent, the lessor shall be
entitled to recover the balance of the unpaid premium and not the entire
balance of the premium, really ignores the main terms of the lease.
In the context of the other clauses, this
clause could not be so construed as to override or come into conflict with the
main terms of the lease deed. [815 H, 816B]
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 150 of 1964.
Appeal from the judgment and order dated
March 22, 1960, of the Assam High Court in Income-tax Reference No. 7 of 1959.
N.D. Karkhanis and R.N. Sachthey, for the
Sampat Ayyangar and J.P. Goyal, for the
The Judgment of the Court was delivered by
Subba Rao, J. By a registered lease deed dated March 31, 1950, the
assessee-company, respondent herein, leased out two tea estates named
"Panbari Tea Estate" and "Barchola Tea Estate", along with
machinery and buildings owned and held by it, in Darrang, in the State of
Assam, to a firm named Messrs. Hiralal Ramdas for a period of ten years
commencing from January 1, 1950. The lease was executed in consideration of a
sum of Rs. 2,25,000/as and by way of premium and an annual rent of Rs. 54,000/-
to be paid by the lessee to the lessor. The premium was made payable as
follows: Rs. 45,000/- to be paid in one lump sum at the time of the execution
of the lease deed' and the balance of Rs. 1,80,000/in 16 half yearly installments
of Rs. 11,250/- on or before January 31 and July 31 of each year. The annual
rent of Rs. 54,000/- was payable as follows: Rs. 1,000/- per month to be paid
on or before the last day of each month, making in all Rs. 12,000/- per year,
and the balance of Rs. 42,000/- on or before December 31 of each year. On
February 25, 1957, for the assessment year 1952-53, the Income-tax Officer made
the assessment treating the installment of Rs. 11,250/- paid towards the
premium in the relevant accounting year as a revenue receipt of the assessee. On
appeal, the Appellate Assistant Commissioner confirmed the order of the
Income-tax Officer. On further appeal, the Income-tax Appellate Tribunal also
held that the premium was really the rent payable under the lease deed and,
therefore, it was chargeable to income-tax. At the instance of the assessee,
the Tribunal referred the following question to the High Court under s. 66(1)
of the Income-tax Act, 1922, herein after called the Act:
"Whether on the facts and in the
circumstances of the case and upon the construction of the terms of the lease,
dated 31st March 1950, the sum of Rs. 11,250/- received by the assessee during
the year of account is revenue or capital receipt".
813 The High Court held that the said sum of
Rs. 11,250/- received by the assessee during the year of account was a capital
receipt and answered the question accordingly. On a certificate issued by the
High Court, this appeal has been filed by the Revenue in his Court.
The short question that arises in this appeal
is whether the amount described as premium in the lease deed is really rent
and, therefore, a revenue receipt. Before we look at the lease deed it will be
convenient to notice briefly the law pertaining to the concept of premium,
which is also described as salami.
The distinction between premium and rent was
brought out by the Judicial Committee in Raja Bahadur Kamakshya Narain Singh of
Ramgarh v. Commissioner of Income-tax, Bihar & Orissa (1) thus:
"It (salami) is a single payment made
for the acquisition of the right of the lessee to enjoy the benefits granted to
them by the lease. That general right may properly be regarded as a capital
asset, and the money paid to purchase it may properly be held to be a payment
on capital account. But the royalties are' on a different footing It is true
that in that case the leases were granted for 999 years; but, though it was one
of the circumstances, it was not a decisive factor ,in the Judicial Committee
coming to the conclusion that the salami paid under the leases was a capital asset.
This Court in Member for the Board of Agriculture Income-tax, Assam v.
Sindhurani Chaudhurani (2) defined "salami" as follows:
"The indicia of salami are (1) its
single non-recurring character and (2) payment prior to the creation of the
tenancy. It is the consideration paid by the tenant for being let into
possession and can be neither rent nor revenue but is a capital receipt in the
hands of the landlord." It is true that in that case the payment was paid
in a single lump sum, but that was not a conclusive test, for salami can be
paid in a single payment or by installments.
The real test is whether the said amount paid
in a lump sum or in installments is the consideration paid by the tenant for
being let into possession. This Court again in Chintamani Saran Nath Sah Deo v.
Commissioner of Income-tax, Bihar & Orissa(1) considered all the relevant
decisions on the subject in the context of licences granted to the assessee to
(1)  11 I.T.R. 513, 519.
(2)  32 I.T.R. 169.
814 prospect for bauxite in some cases for 6
months and in others for a year or two and observed:
"The definition of salami was a general
one, in that it was a consideration paid by a tenant for being let into
possession for the purpose of creating a new tenancy." Applying that test
this Court held in that case that under the said licences there was a grant of
a right to a portion of the capital of the licensor in the shape of a general
right to the capital asset.
In view of these three decisions it is not
necessary to multiply citations.
Under s. 105 of the Transfer of Property Act,
a lease of immovable property is a transfer of a right to enjoy the property
made for a certain time, express or implied or in perpetuity, in consideration
of a price paid or promised, or of money, a share of crops, service or any
other thing of value, to be rendered periodically or on specified occasions to
the transferor by the transferee, who accepts the transfer on such terms. The
transferor is called the lessor, the transferee is called the lessee, the price
is called the premium, and the money, share service or other thing to be so
rendered is called the rent. The section, therefore, brings out the distinction
between a price paid for a transfer of a right to enjoy the property and the
rent to be paid periodically to the lessor. When the interest of the lessor is
parted with for a price, the price paid is premium or salami. But the
periodical payments made for the continuous enjoyment of the benefits under the
lease are in the nature of rent. The former is a capital income and the latter
a revenue receipt. There may be circumstances where the parties may camouflage
the real nature of transaction by using clever phraseology. In some cases, the
so-called premium is in fact advance rent and in others rent is deferred price.
It is not the form but the substance of the transaction that matters. The
nomenclature used may not be decisive or conclusive but it helps the Court,
having regard to the other circumstances, to ascertain the intention of the parties.
Bearing the said principles in mind let us
scrutinize the lease deed dated March 31, 1950. Under that document interest in
two large tea estates comprising 320 acres and 305 acres respectively under
tea, along with the bungalows, factory buildings, houses, godowns cooly lines
and other erections and structures, was parted by the lessor to the lessee for
a period of 10 years; and during that period the lessee could enjoy the said
tea estates in the manner prescribed in the document. Under the document,
therefore, there was a transfer of substantive interest of the lessor in the
estates to the lessee and a conferment of a right on the lessee to use the said
estates by exploiting the same.
Under cl. 4 of the lease deed for the
transfer of the right a premium of Rs. 2,25,000/- had to be 815 paid to the
lessor and for using the estates the lessee had to pay. an annual rent of Rs.
54,000/-. Both the premium and the rent were payable in installments in the
manner provided in the document. The parties were businessmen presumably
well-versed in the working of tea estates. They must be assumed to have known
the difference between the two expressions "premium" and
"rent"; and they had designedly used those two expressions to connote
two different payments. The annual rent fixed was a considerable sum of Rs.
54,000/- and the premium, when spread over 10 years, would work out to Rs.
22,500/- a year. There is no reason, therefore, to assume that the parties
camouflaged their real intention and fixed a part of the rent in the shape of
premium. The mere fact that the premium was made payable in installments cannot
obviously be decisive of the question, for that might have been to accommodate
the lessee. Nor is cl. 8 of the lease deed, on which strong reliance is placed
by the learned counsel for the Revenue, a pointer to the contrary. It reads:
"(1) If any of the aforesaid installments
towards the premium or annual rent shall remain unpaid for two months after
becoming payable (whether formally demanded or not) or if the lessee shall make
default in payment to the Lessor any other sum or any part thereof in due dates
or in observing or performing any of the covenants, conditions or stipulations
hereinbefore contained and on the part of the Lessee to be paid, observed and performed
or if the Lessee's firm is dissolved except for reconstruction or if any of the
partners of the Lessee is adjudicated insolvent then and in any such cases it
shall be lawful for the Lessor immediately or at any time or times thereafter
upon the demised Tea EStates and premises or any part thereof in the name of
the whole to re-enter and thereupon this demise shall absolutely determine but
without prejudice to the rights of the Lessor to damages or compensation in
respect of any breach of Lessee covenants herein contained and all other rights
and remedies including the right to recover the balance of the installment
unpaid premium or rent payable in that particular year." The argument is
that in the case of default contemplated in this clause it shall be lawful for
the lessor to re-enter and in that event in terms of cl. 8 he will be entitled
only to recover the balance of the installment of unpaid premium and not the
entire balance of the premium. This construction, though it appears to be
plausible at first sight, really ignores the main terms of the lease. The
default clause is pressed into service to destroy the main term of the lease.
Under el. 1 of the lease deed the sum of Rs. 2,25,000/- is the consideration by
way of premium to be paid by the lessee to the lessor. Under cl. 4 thereof the
said entire premium has to be 816 paid in installments; under cl. 8 the lessor
has the option to terminate the lease and re-enter the premises in the
circumstances mentioned therein without prejudice to all his rights under the
document. One of his rights is to recover the premium in installments. The fact
that one of the rights saved is his right to recover the balance of the installment
of unpaid premium cannot possibly deprive him of all his _other rights which
are also expressly saved there under.
The drafting of the clause is not artistic
and is rather confused; but in the context of the other clauses it cannot be so
construed as to override. or come into conflict with, the main terms of the
Thirdly, it was contended that the income the
lessor was getting under the lease after 1950, i.e., after the execution of the
lease deed, viz., the total of the installments of premium and rent, was not
higher than the profits he was getting before the lease and that was an
indication that what was rent really was split up into premium and rent for
ulterior purposes. This argument is based upon the following data collected
from the published accounts of the assessee-company:
Year ended Profit Depreciation - Net Divided Profit
(tax free) (1) (2) (3) (4) (5) Rs. Rs. Rs. % 31st March 1947 ...... 60,186
8,665 51,521 9 31st March 1948 ...... 33,118 7,872 23,246 9 31st March 1949
...... 31,581 7,475 24,106 6 31st March 1950 ...... 47,734 17,868 29,866 12
31st March 1951 ...... 71,888 17,726 54,162 6 31st March 1952 ...... 33,213
15,527 17,686 6 31st March 1953 ...... 69,550 15,410 54,140 6 In the accounts
of the year to 31st March 1952 there are the following three items of
Transit charges ......... 10,605 Legal
Expenses ......... 7,518 Gratuity to Managing Director ...... 10,000
-------------- 28,123 Before comparing the figures given for the two periods,
i.e., the period before March 1950 and the period thereafter, it is necessary
to add back the said three items of expenditure totalling 817 Rs. 28,123/- to
the net profit of the year ended with 31st March, 1952; if they were added,
instead of Rs. 17,585/-, the profit would be Rs. 45,809/-. A comparative study
of the said figures discloses a higher return in the second period than during
the earlier period. But an attempt is made to show that the figures of the
later period include other items and if they are deducted the net profit would
be comparable with that in the earlier period, but there is no agreed data for
this attempt and it is not possible on the material placed before us to
scrutinize the figures. In the absence of the relevant material it is not
possible to accept the argument built upon the said figures.
The result is that there is no material
placed before us, either direct or circumstantial, to displace the description
given in the lease deed to the said amounts as premium and to hold that they
are not in fact premium but only rent. Indeed, the circumstances mentioned
supra confirm the said description.
In the result we hold that the High Court has
given a correct answer to the question submitted to it by the Income-tax
Appellate Tribunal. The appeal is dismissed with costs.