Durga Das Khanna Vs. Commissioner of
Income-Tax, Calcutta  INSC 16 (30 January 1969)
30/01/1969 GROVER, A.N.
CITATION: 1969 AIR 775 1969 SCR (3) 462 1969
SCC (1) 329
CITATOR INFO :
RF 1950 SC1959 (13)
Income-tax-Capital or Revenue-Thirty years
lease of cinema- Lessee contributing part of money for construction of
cinema-No stipulation that it was to be treated as advance rent or
salami-Nature of receipt-Whether taxable.
On July 19, 1945 the assessee took an lease
certain premises in Calcutta on a monthly rental. He made some alterations in
the premises so as to convert it into a cinema house but found himself short of
money. As permitted by the terms of his lease he leased the premises on February
23, 1946 to certain parties. According to the terms of the indenture the
lessees agreed to pay him Rs. 55,2GO towards construction of the cinema house
which would on completion be let to them at a monthly rental of Rs. 2,100
payable with effect from June 1, 1946. The Income-tax authorities treated the
sum of Rs. 55,200 thus received as taxable ;and the High Court on reference
held the same. in appeal by the assessee this Court had to consider whether the
receipt was- taxable.
HELD : (i) The departmental authorities as
well as the High Court were in error in treating the amount of Rs. 55,200 as
advance payment of rent. The lease by which the cinema house was demised did
not contain any condition or stipulation from which it could be inferred that the
aforesaid amount had been paid by way of advance rent. The transaction embodied
in the indenture of lease was clearly business-like. The lessees wanted the
building for running it as a cinema house and the lessor agreed to give it to
them but apparently represented that he did not have enough money to complete
it in accordance with the suggestions and requirement of the lessees. The
lessees agreed to pay him the aforesaid amount by way of a lump sum without
making any provision for its adjustment towards the rent or repayment by the
lessor. On the terms of the lease and in the absence of any other material or
evidence it could not be held that the sum of Rs. 55,200 was paid by way of
advance rental.[465 G-466 B] (ii) The question whether premium is a capital or
a revenue receipt cannot be decided as a pure question of law. Its decision
necessarily depends upon the facts and circumstances of each case. It would not
however be wrong to say that prima facie premium or salami is not income and it
would be for the income-tax authorities to show that facts exist which would
make it a revenue receipt. [467 B] According to the terms of the lease, in the
present case' the payment of rent was to commence not from the date of the
lease which was February 23, 1946 but with effect from June 1, 1946. The
lessees entered into possession after the cinema house had been completed which
was subsequent to the date of the lease. These facts coupled with the payment
of a lump sum which was of a non-recurring nature showed that the amount in
question had all the characteristics of- a capital payment and was not revenue.
[467 C-D] Henriksen v. Grafton Hotel Ltd., 24 T.C. 453, Commissioner of
Income-tax, Bihar & Orissa v. Visweshwar,  7 I.T.R.
536 and 463 Member for the Board of
Agricultural Income-tax v. Sindhurani Chaudhurani & Ors.,  32 I.T.R.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 873 of 1966.
Appeal by special leave from the judgment and
order dated March 26, 1965 of the Calcutta High Court in I.T. Ref. No. 107 of
Sukumr Mitra and D. N. Mukherjee, for the
Niren De, Attorney-General, S. C. Manchanda
and R. N. Sachthey, for the respondent.
The Judgment of the Court was delivered by
Grover, J This is an appeal by special leave from the judg- ment of the
Calcutta High Court in an Income tax Reference in which the question that had
to be answered by the High Court was "whether on the facts and
circumstance of the case the sum of Rs. 55,200/- was a revenue receipt being rent
received in advance thus liable to be taxed ?" On July 19, 1945, the
assessee took on lease premises No.
157 Upper Circular Road, Calcutta for a term
of 99 years on a monthly rental of Rs. 750/-. It was stipulated internal that
the lessee could assign the lease with the consent of the lessor. He could
after the structures on the premises so as, to convert them into a cinema if
necessary. After expending Rs. 35,000/- on some alterations to the premises the
assessee felt the necessity of having some more money in order to convert the
building into a cinema. He entered into a lease on February 23, 1946 with three
persons, namely, Nani. Gopal Dutt, Makhan Lal Dutt and Shiv Kumar Khanna. By
this lease, the building which was called 'Khanna Cinema house' at 157, Upper
Circular Road, Calcutta was demised to the lessees for a period of 30 years.
The lessees agreed to pay under the indenture of lease Rs. 55 200/- to the
lessor towards the cost of erecting the said cinema. The rent which was agreed
to be paid was Rs.
2,100/- per month. It was payable with effect
from June 1, 1946. It is necessary to set out the relevant portion of the lease
"And whereas the lessor obtained sanction from the Corporation of Calcutta
and other necessary authorities and commenced the erection of a Cinema House
the estimated total cost of which is about Rs. 1,00,000/(Rupees one lac). And
whereas the lessees agreed to pay to the lessor a sum of Rs. 55,200/- (Rupees
Fifty five thousand and two hundred) towards the cost of the erection of the
said cinema house according to their suggestion and other charges and expenses
464 incurred therefore by the lessor. And whereas the construction of the said
Cinema House is almost complete and is expected to be completed by the end of
March, One Thousand Nine Hundred and Forty six and whereas the lessee have
called upon the lessor to grant to them a lease of the said Cinema House which
the lessor has agreed to do upon payment by the lessees of the said agreed sum
55,2,00/- (Rupees fifty five thousand and two
hundred), towards the costs of building the said Cinema House and whereas the
lessees have paid to the-lessor the said sum of Rs. 55,200 (Rupees Fifty five
thousand and two hundred) for which separate receipt has been granted by the
lessor." After the Cinema House had been completed the lessees entered
into possession and started exhibiting shows there.
For the assessment year 1947-48 the
corresponding account- ing year being the financial year ending March 31, 1947,
the Income tax Officer sought to treat the sum of Rs. 55,200/ received by the
assessee as his income. The contention of the assessee was that the aforesaid
amount should be treated as capital receipt. Alternatively if it was to be
treated as salami (premium) and was to be taxed as a revenue receipt it should
be distributed evenly over the entire term of the lease i.e. 30 years. The
Income tax Officer did not 'accept either of the contentions of the assessee.
It was held by him that the lease was pot permanent but was temporary and that
the salami had been fixed as an advance payment of rent and not as payment for
transfer of the lease-hold interest. According to him the system of accountancy
for this source of income being on, cash basis the whole of the receipt of
salami was liable to be taxed as one year's income in the year of the receipt.
The assessee appealed to the Appellate Assistant Commissioner who agreed with
the Income tax Officer. In his view the lessees were under no legal obligation
to contribute towards the cost of construction of the cinema house and the sum
of Rs. 55,200/- constituted payment of advance rent. The assessee appealed to
the Tribunal which held that the receipt of the aforesaid amount was in the
nature of advance payment of rent since the assessee was short of funds at the
time the lease was entered into and that the lease was for a short term and
that the amount in question represented consolidated rent for thirty years paid
in advance. The High Court answered the question which was refer-red in the
affirmative and against the assessee. According to the High Court the only
object of the payment of the sum of Rs. 55,200 could be to advance the cost of
construction or to meet the existing liabi lities of the assessee for
completing the cinema house. It was observed:- 465 "Further it should be
noted that the period of lease is only for 30 years and the assessee's
investment on the Cinema is about Rs. 60,000/- , Rs. 35,000/- being the costs
of construction and Rs. 25,000/- being costs of machinery with a liability to
pay Rs. 750/- rent to the owner of the plot. As a result of this lease he has
got a rent of Rs. 2,100/- for a term of 30 years. Thus there is no question of
payment of any salami as no further inducement for grant of the lease was
necessary. It is obvious that if the cost of construction of the Cinema House
would have been met in its entirely by the assessee and thereafter if the
assessee would have granted the lease to the lessee, the rent would certainly
have been much higher. Thus, the said sum of Rs. 55,200/- in the absence of a
different recital can only be deemed to have been paid as an advance rent in
respect of the said Cinema House." On behalf of the appellant-assessee it
has been urged that he sum of Rs. 55,200/ was paid to the lessor in lump for
completing the cinema house without which the lessee could not have used the
building for the purpose of exhibiting cinematograph films. According to the
recitals in the deed which must be given due effect the lessees agreed to give
this amount towards the cost ,if erection of the cinema house according to
their suggestion and 'or defraying other charges and expenses. The payment of
rent was expressly stipulated at the rate of Rs. 2,100/-per month and there was
no indication whatsoever that any different or higher rate of rent was agreed
to. It is further submitted that there was no material or evidence on which it
could be found that the cinema would have fetched, any higher rent, the
admitted cost of construction being about Rs. 1,00,000/-.
Alternatively the sum of Rs. 55,200/- could
be regarded only as payment of salami (premium) and could not be treated as
revenue receipt, the payment being of a non-recurring nature.
It seems to us that the departmental
authorities as well as the High Court were in error in treating the amount of
55,200/as advance payment of rent. The lease
by which the cinema house was demised did not contain any condition or
stipulation from which it could be inferred that the aforesaid amount had been
paid by way of advance rent. The transaction embodied in the indenture of lease
was clearly business-like. The lessees wanted the building for running it as a
cinema house and the lessor agreed to give it to them but apparently
represented that he did not have enough money to complete it in accordance with
the suggestions and requirement of the lessees. The lessees agreed to pay him
the aforesaid amount by way of a lump sum without 466 making any provision for
its adjustment towards the rent or repayment by the lessor. The essential question,
however, is whether on the terms of the lease and in the absence of any other
material or evidence could it be hold that the sum of Rs. 55,200/was paid by
way of advance rental ? The view which has been expressed by the Tribunal as
also the High Court that the lease was for a comparatively short period of
thirty years and that the aforesaid amount had to be spread over that period by
way of rent in 'addition to a rental of Rs. 2,100/- per month cannot be
sustained as no foundation was laid for it by any cogent evidence The
departmental authorities can well be said to have based their decision on mere
conjectures as there was nothing whatsoever to substantiate the suggestion that
the real rental value of the cinema house was in the region of Rs., 2,250/- per
month and not Rs, 2,100/- which was the agreed rent.
It can equally well be said that the payment
of the amount in question to the appellant was in the nature of a premium
(salami). In the words of Lord Greene M. R. in Henriksen V. Grafton Hotel
Ltd.(") "A payment of this character appears to me to fall into the
same class as the payment of a premium of a lease, which is admittedly not
deductible. In the case of such, a premium it is nothing to the point to say
that the parties if they had chosen, might have suppressed the premium and made
a corresponding increase in the rent. No doubt they might have. done so, but
they did not do so in fact." Fazl Ali J.,(as he then was in Commissioner
of Income tax, Bihar & Orissa v. Viswesh- war. Singh(2) referred to the
distinction between a single payment made at the time of the settlement of the
demised property and recurring payments made during the period of its enjoyment
by the lessee-. This distinction, according to the learned Judge, is clearly
recognised in s. 105 of the Transfer of Property Act which defines-both premium
and rent. This is what was observed at page 545 "It is obvious that if the
premium represents the whole or part of the price of the land it cannot be
income. As pointed out by Sir George Lowndes in the Commissioner of Income tax,
Bengal v. Messrs. Shaw Wallace & Company,: income in the Indian Income-tax
Act 'connotes a periodical monetary return, coming in 'with some sort of
regularity or expected regularity from definite sources. The premium of salami
which is paid once for. all 'and is not recurring payment, hardly satisfies
this test. 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.......
(1) 24 T. 453.
(2)  7 I.T.R. 536.
467 It has not beep even remotely suggested
in the present case that the rent of Rs. 2100 per month was ridiculously low as
compared with the, amount of Rs. 55,200 paid in lump sum.
It is true that the question whether premium
is a capital, or a revenue receipt cannot be decided as a pure question of law.
Its decision necessarily depends upon the facts and circumstances of each case.
It would not, however, be wrong to say that prima facie premium or salami is
not income and it would be for the income tax authorities to show that facts
exist which would make it a revenue receipt. There is another factor which is
of substantial importance in the present case. According to the terms of the
lease the payment of rent was to commence not from the date of the lease which
was February 23, 1946, but with effect from June 1, 1946. It is also not
disputed that the lessees entered into possession after the cinema house had
been completed which was subsequent to the date of the lease. these facts
coupled with the payment of a lump sum which was of a non- recurring nature
showed that the amount in question had all the characteristics of a capital
payment and was not revenue. This would be. in accord with the principles laid
down by this Court in Member for the Board of Agricultural Income tax v.
Sindhurani Chaudhu. rani & Others(1) which was a case of settlement of
agricultural land but in which the principles governing the payment of premium
or salami have been fully discussed.
For the reasons given above we hold that the
question which was referred to the High Court ought to have been answered in
the negative and in favour of the assessee. The appeal is accordingly allowed.
with costs in this Court and the High Court and the answer returned by the High
Court is hereby discharged.
G.C. Appeal allowed.