Maharaja Chintamani Saran Nath Sah Deo
Vs. The Commissioner of Income-Tax, Bihar & Orissa  INSC 249 (30
CITATION: 1961 AIR 732 1961 SCR (2) 790
CITATOR INFO :
R 1965 SC1871 (3)
Income Tax--Capital or Revenue
receipt--Prospecting licence for bauxite--Licensee's right to appropriate
samples in --reasonable quantities--Grant of right to a Portion of
capital--Payments to licensor--Liability to tax.
In 1945 the appellant who was a Zamindar
granted licences to different parties to prospect bauxite. Under the licence
the licensee had the right to enter upon the land to prospect, dig and prove
all bauxite lying in or within the land and to take away and appropriate
samples of bauxite in reasonable quantities not exceeding 100 tons in the
aggregate. In consideration of the premium paid, the licensees could, at their
option, after giving necessary notice and on payment of a further sum, get a
mining lease for a term of thirty years. The income-tax authorities were of the
view that the licensees were not granted any interest in land and that the
amounts received by the appellant from the licensees were revenue receipts and,
therefore, assess- able to income-tax.
Held, that on its true construction the
transaction of 1945 did not amount merely to a grant of the use of the capital
of the licensor but was really a grant of a right to a portion of the capital.
Accordingly, the amounts received by the appellant were capital receipts and,
therefore, not liable to income-tax.
Raja Bahadur Kamakshya Narain Singh of
Ramgarh v. Com- missioner of Income-tax, Bihar and Orissa, (1943) L.R. 70 I.A.
180,The Member for the Board of Agricultural Income- tax, Assam v. Smt.
Sindurani Chaudhurani,  S C.R. 1019 and Commissioner of Income-tax, Bihar
and Orissa v. Raja Bahadur Kamakshya Narain Singh,  14 I.T.R. 738,
CIVIL APPELLATE JURISDICTION: Civil Appeal
No.424 of 1957.
Appeal by special leave from the judgment and
order dated January 25, 1955, of the Patna High Court in Misc. Judicial Case
No. 621 of 1953.
N. C. Chatterjee and R. C. Prasad, for the
K. N. Rajagopal Sastri and D. Gupta, for the
791 1960. November 30. The Judgment of the
Court was delivered by KAPUR, J.-This is an appeal by special leave' against
the judgment and order of the High Court at Patna answering the question
referred to it by the Income-tax Appellate Tribunal against the assessee who is
the appellant before us. The appeal relates to three assessments made on the
appellant for the respective assessment years 1945-46, 1946-47 and 1947-48.
The appellant is a Zamindar and owns
considerable properties. In the accounting years he granted licences to
different parties to prospect for Bauxite. The particulars of the licences are:
Received from Date of the Period of Assess-
Amount Licence Licence ment year Received.
1.Aluminium Corporation ofIndia Ltd.
20-1-1945 6 months 1945/46 15,290/-.
2.Indian Aluminium Co.Ltd. 26-5-945 1 year
3.Dayanand Modi. 7-5-1945 6 months 1947/48
4.Indian Aluminium Co.Ltd. 14-8-1945 1 year
The Income-tax Officer held that these
amounts were received as revenue payments and were therefore taxable. On appeal
to the Appellate Assistant Commissioner the amounts were -held to be capital
receipts but this order was set aside by the Income-tax Appellate Tribunal
which held the amounts to be revenue receipts and taxable as such. At the
instance of the appellant the case was referred to the High Court under s.
66(1) of the Income-tax Act and the following question was stated for the
opinion of the Court:- "Whether in the facts and circumstances of these
cases the sums of Rs. 15,209, Rs. 1,24,789, Rs. 1,500 and Rs. 70,146 received
by the assessee are income assessable to tax under the Indian Income-tax
Act?" 792 The question was answered in the affirmative and the High Court
held that there was material to support the finding of the Tribunal, and it was
a finding of fact; that the amounts received by the appellant were revenue
receipts and not capital receipts. Against this judgment the appellant has come
in appeal to this court by special leave.
The question that falls for decision is
whether the amounts received by the assessee are capital or revenue receipts
and for that purpose it is necessary to investigate the nature of the grants
made by the appellant. Under the licence the licensee was granted the sole and
exclusive right and liberty to (a) to enter into and upon, to prospect, search
for, mine quarry, bore, dig and prove all Bauxite lying and being in, under or
within the said lands.
(b) For the purposes aforesaid and all other
purposes incidental thereto dig, drive, make and maintain such pits, shafts,
borings, inclines, admits levels, drifts, air courses drains, water courses,
roads and ways and to set up, erect and construct such temporary engines,
machinery sheds and things as may be reasonably necessary for effectually
carrying on the prospecting operations hereby licenced.
(c) To remove, take away and appropriate
samples and specimens of Bauxite of every quality, kind and description and in
reasonable quantities not exceeding one hundred tons in all during the terms of
(d) For the purposes aforesaid to clear
undergrowth brushwood and to make use of any drains or water courses on the
lands or for clearing sites of working from any water which may flow or
accumulate thereon or therein.
The periods of the licences were comparatively
short 6 months in two cases and a year each in the other two. Under the
covenants the licensees were to cause as little damage as possible to the
surface of the land. They were to give full information regarding the progress
of the operations and true copies of all borings to the licensor. The licensees
were also 793 required to plug all holes made by them. The licensor convenanted
to give a reasonable right of passage through and over the adjoining lands and
properties and in consideration of the premium paid, the licensees could, at
their option, after giving necessary notice and on payment of a further sum,
get a mining The lease for a term of thirty years on the terms and conditions
set out in the indenture attached as schedule 2 to the licence. The Income-tax
Appellate Tribunal found that the licensees were not granted any interest in
land and the amounts received were revenue receipts and therefore, assessable
to income- tax A reference to some of the cases would assist in determining the
nature of the transaction which was evidenced by the documents placed on the
record. In Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Commissioner of
Income-tax, Bihar & Orissa (1) the payments by way of premium were held to
be capital receipts. In that case large payments by way of royalty for granting
various mining leases were received by the assessee. The leases were for a
period of 999 years for mining coal with liberty to search for, work, make
merchantable and carry away the coal there found and with power to dig and sink
pits. In consideration of these rights the lessees paid a sum by way of salami
(premium) and an annual sum as royalty on the amount of coal raised subject to
minimum annual royalty. The lessor had the right to reenter in case of failure
to pay the royalty. It was contended by the assessee there that the sums
received as salami and royalty were capital receipts representing the price of
the minerals removed. It was held that salami was a single payment paid for the
acquisition of the right to enjoy the benefits granted by the lease and was a
capital asset and that the two other forms of royalty-both minimum and per
ton-flowing from the covenants in the lease were not on capital account and
fell within the meaning of other income under s.12 of the Act. Lord Wright said
at p. 190:- "The salami, has been, rightly in their Lordships' opinion,
treated as a capital receipt. It is a single (1) (1943), L.R. 70 I.A. 186.
794 payment made for the acquisition of the
right of the lessees 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." This case was sought to be
distinguished by counsel for the respondent on the ground that the lease was
for a long period of 999 years but the observations above quoted were not based
on this consideration but on the nature of the right which was conveyed. In
Commissioner of Income-tax, Bihar & Orissa v. Raja Bahadur Kamakshya Narain
Singh (1) a coal company had been given by the Court of Wards a prospecting
licence in respect of certain coal bearing lands with the option of renewal and
also to take a mining lease on certain terms and conditions. The prospecting
licence was subsequently extended on four occasions. When the assessee attained
majority he claimed that the giving of the licence was ultra vires the Court of
Wards but there was a settlement between the licencee and the assessee by which
the latter agreed to accept the various prospecting licences, their extensions
and leases in consideration of which he received by way of salami Rs. 5,25,000
and capital lump sum of Rs. 40,000 and some other payments in lieu of cesses.
The question arose whether the amounts were capital or revenue and it was held
that the amount of Rs. 5,25,000 received as salami and the amounts received as
cesses were capital receipts and therefore not taxable. Manohar Lal, A. C. J.,
held that the amount was received by way of settlement and not by way of salami
but S. K. Das, J. (as he then was) held that salami was a lump sum payment for
rights which were being given to the licensee, namely, the right to prospect
for a certain number of years and also the right to get mining leases and
therefore salami in question was undoubtedly a capital receipt.
In The Province of Bihar v. Maharaja Pratap
Udai Nath Sahi Deo of Ratugarh (2) it was contended that payments in the nature
of premium or salami were (1) [1946) 14 I.T.R. 738.
(2)  9 I.T.R. 313.
795 not part of the income of the assessee
and were therefore not taxable and it was held that salami may, in certain
cases, be regarded as a payment of rent in advance and it would in those cases
be regarded as income but where it could not be so regarded it would not be
income and therefore not taxable. It was also held that prima facie salami is
In The Member for the Board of Agricultural
Income Tax, Assam v. Smt. Sindurani Chaudhurani (1) this Court defined as
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
Thus if it is a consideration paid by the
tenant or the licensee for being let into possession with the object of
obtaining a tenancy or as in this case with the object of obtaining a right to
remove minerals, it cannot be termed rent or revenue but is a capital receipt.
In Sindurani's case (1) salami was a lump sum payment as consideration for what
the landlord was transferring to the tenant, i.e., parting with his right,
under the lease, of a holding. In the instant case the terms of the covenant
quoted above show that the payment has a close analogy to the payment in
Sindhurani's case(1). That case was sought to be distinguished by the
respondent on the ground that there was a transfer of a tenancy which was
capable of ripening into an occupancy holding but that was not the ground on
which this court decided the case of salami. The definition of salami was
agener alone, in that it was a consideration paid by a tenant for being let into
possession for the purpose of creating a new tenancy. In Raja Bahadur Kamakshya
Narain Singh's case (2) also the Privy Council laid the definition of salami in
general terms and described the characteristics of a payment by way of salami
without any reference to the nature of the lease.
In reply to the argument of counsel for the
appellant, Mr. Rajagopal Sastri for the respondent argued (1)  S.C.R.
(2) (1943) L.R. 70 I.A. 180.
796 that the question was whether the
licensor had allowed the licensee to take his capital or he had allowed him to
use the capital. If it was the former, the receipts were in the nature of
capital receipts and if latter they were in the nature of revenue. His
contention was that it wag really the latter because all that the licensee was
allowed to do was to enter on the lands and make use of the assets belonging to
the appellant. This, in our opinion, is not a correct approach to the question.
What the licence gave to the licensee was the right to enter upon the land to
pros- pect, search and mine quarry, bore, dig and prove all Bauxite lying in or
within the land and for that purpose the licensee had the right to dig pits,
shafts, borings and to remove, take away and appropriate samples and specimens
of Bauxite in reasonable quantities not exceeding 100 tons in the aggregate. It
cannot be said that this amounts merely to a grant of the use of the capital of
the licensor but it was really a grant of a right to a portion of the capital
in the shape of a general right to the capital asset.
In support of this distinction between the
use of capital and the taking away of capital, counsel relied upon the
following observation of Lawrence, J., in Greyhound's case(3):
"The question as to what receipts are
revenue and what are capital has given rise to much difference of opinion; but
it is clear, in my opinion, that, if the sum in question is received for what
is in truth the user of capital assets and not for their realisation, it is a
revenue receipt, not capital." That may be so but the question has to be
decided on the nature of the grant. The terms of the covenant in the present
case which have been quoted above show that the transaction was not one merely
of the user of capital assets but of their realisation, By this test therefore
the receipts were on capital account and not revenue. Counsel then referred to
a judgment of the Patna High Court in R. B. H. P. Bannerji v. Commissioner of
Income-tax, Bihar & Orissa (2) where it was held that compensation received
by the assessee (1) (1936) 20 T.C 373.
(2)  19 I.T.R. 596.
797 for use by the military of his lands for
a short period was a revenue receipt. In that case the assessee purchased 13
bighas of land for purposes of setting up a market. That plot was requisitioned
by the military A authorities under the Defence of India Rules and the assessee
received compensation for the use of the The land. It was held to be a revenue
receipt because it was really profit derived from the land for the use of a
Another case upon which counsel for the
respondent placed reliance is Smethurst v. Davy (1). That was a case which was
decided on the wording of s. 31(1)(d) of the Finance Act of 1948, and therefore
is not of much assistance.
Reference was also made to Stow Bardolph
Gravel Co., Ltd. v. Poole (2). There the assessee company, which carried on
business in sand and gravel, purchased two un worked deposits. The company
contended that the payments made to acquire the deposits were deductible being
expenditure which was incurred in the acquisition of trading stock or otherwise
of revenue character. It was held that the company had acquired a capital asset
and not stock-in-trade.
The case turned upon a finding by the Special
Commissioners and is not helpful. Reliance was also placed on Rajah Nanyam
Meenakshamma v. Commissioner of Income-tax, Hyderabad (3). In that case certain
fixed sums of money were paid as royalty for the whole period of the lease
which were held to be revenue receipts as consolidated advance payments of the
amount which would otherwise have been payable periodically.
None of these cases is of any assistance to
the respondent's case. The question which has to be decided is what was the
nature of the transaction. The covenants in the licence show that the licensee
had a right to enter upon the land and take away and appropriate samples of all
Bauxite of every kind up to 100 tons and therefore there was a transfer of the
right the consideration for which would be a capital payment.
(1)  37 T.C. 593. (2) (1954) 35 T.C.
(3)  30 I.T.R. 286.
101 798 In our opinion the High Court was in
error and the question referred should have been decided in favour of the
appellant. We therefore allow the appeal, set aside the judgment and order of the
High Court and answer the question in favour of the appellant who will have his
costs in this Court and the High Court.