1967-VIL-195-MAD-DT

Equivalent Citation: [1968] 68 ITR 856

MADRAS HIGH COURT

Date: 24.01.1967

PLM FIRM

Vs

COMMISSIONER OF INCOME-TAX, MADRAS.

BENCH

Judge(s)  : RAMAPRASADA RAO., VEERASWAMI.

JUDGMENT

The judgment of the court was delivered by

VEERASWAMI J.- The main question we are called upon to decide on this reference under section 66(1) of the Income-tax Act, 1922, turns on the character of the receipt of dollar 8,540 as damages during the assessment year 1960-61 for breach of a mining contract. Actually there are two questions under reference to this court :

"(1) Whether, on the facts and in the circumstances of the case, the assessment of the sum of dollar 8,540 representing damages received by the assessee in the year of account as income chargeable to tax is valid ?

(2) If the answer to the first question is in the affirmative, whether the said sum of dollar 8,540 is assessable in the assessment of the assessee-firm for the assessment year, 1960-61 or the assessment year 1958-59 ?"

It is common ground before us that the second question should be answered against the assessee in view of Commissioner of income-tax v. A. Gajapathy Naidu and it is accordingly answered.

On the first question, the revenue as well as the Tribunal considered the receipt to be of a revenue nature. The assessee was a registered firm deriving income through money-lending, house property and garden, etc., in Malaya. For the assessment year 1960-61, the firm returned an income of dollar 43,829. But its total income was determined at Pudukkottai by the Income-tax Officer at dollar 65,883. This included an addition made by the officer of dollar 8,540 received by the assessee from one Cheena Pang Yong (Foong Seong of Ipoh). The assessee owned a rubber estate in Malaya in respect of which it entered into an agreement with Foong Seong on December 30, 1954, to lease out a total extent of 39 acres for a period of 10 years for mining purposes. This was followed by a lease deed executed by the assessee on December 18, 1955. 23 acres out of a total extent covered by the lease were intended for mining for minerals in the manner and under the conditions mentioned in the lease deed. During the first year, the lessee was under an obligation to mine an area of not less than 7 acres, and for each subsequent year a similar extent until the whole area was exhausted. On the entire extent of 39 acres, there were rubber trees which the lessee could remove, but on payment of dollar 250 for each acre of rubber trees removed as compensation. The contract of lease provided for payment of tribute in regard to the mining operations upon the gross proceeds of sale of concentrate or other minerals removed from the land, after deducting any royalty or duty or similar charge levied by the Johore Government at the rate of 17% of such gross proceeds. Liberty was provided for termination of mining operations, but only if both parties were agreed that no longer could those operations be carried out profitably. During the lease period the lessee was entitled to occupy and use the remaining extent of 16 acres for the purpose of tailings and as dumping ground on payment of dollar 250 per acre so used. The contract of lease declared that the rights and obligations of the lessor under a certain proprietary mining licence issued in favour of the lessor on September 24, 1955, in respect of the estate passed under its terms to the lessee. Provision was made for automatic termination of the lease on the licence not being extended by the administration beyond the period for which it was originally issued. On June 11, 1957, the lessee notified the assessee as to the impossibility of working the mine profitably and of his desire to terminate the lease. The assessee not being agreeable, on account of the unilateral decision of the lessee, it treated him as in breach of contract. The dispute was eventually referred to arbitration and by an award dated December 19, 1958, the assessee was entitled to recover dollar 8,540 from the lessee as damages. The award is an elaborate document which found that the lessee failed to comply with clause 1(b) of the lease deed in that he made no proper attempt to mine the land held under the lease, regardless of his undertaking to mine 7 acres in the first year of the lease and that, therefore, there was a breach of contract committed by the lessee. There was a further finding in the award that the assessee had sustained damages through failure to work the mines in accordance with the terms of the lease. The amount awarded as damages was computed on the basis of the tribute which the assessee would have got had the mine been worked in accordance with the terms of the lease deed. This was in fact an estimate made on the basis of results arrived at in a neighbouring proprietary mine for tin as in the instant case.

We may mention in passing that the assessee had been in receipt of dollar 13,129.97 by way of tribute from the lessee of which dollar 4,030.49 was received in the assessment year 1958-59 and a sum of dollar 558.53 was received in the assessment year 1960-61. The assessee itself treated these sums as revenue receipt. The revenue partly relied on this in coming to the conclusion that the balance of dollar 8,540.95 was of the same character. The Tribunal, in accepting that view of the revenue, observed that the receipt was not on account of sterilization of the source of income of the assessee, that the assessee had entered into a lease in the ordinary course of business and that it did not therefore consider that the contract was in the nature of a capital asset. In its opinion, the mere cancellation or termination of the lease would not convert the receipt into a capital receipt.

Whether a receipt is of a capital or revenue nature often presents difficulties. Largely, the decision should depend on particular facts. But the question is a mixed question of law and facts. In a broad sense, income is identified by its recurrent periodical receipt. But a lump sum receipt may in certain circumstances be regarded as income. Income may flow from capital or accrue from other sources in the form of service or transaction and a dozen other means. Though courts have attempted to say what income is, we think we would be justified in stating that no exhaustive or infallible test capable of universal application has yet been formulated or suggested. That is not surprising because in the very nature of things, the concept of income being so broad and flexible, it defies a precise definition. That is how a problem of this kind presents scope for endless pursuit of subtle distinctions and shades of opinions influenced or coloured by the peculiar facts that demand an answer. It seems to us, therefore, that except to bear in mind the broad features of income, it may not be of much assistance to refer to authority in the context of particular facts to see what income signifies or means. Where the question is as to whether a receipt is of a revenue or capital character, a test has, however, been suggested as to whether the receipt is as to price for use of or for the right or capital asset itself. For instance, the Supreme Court in Maharaja Chintamani Saran Nath Sah Deo v. Commissioner of Income-tax, quoted the following observation of Lawrence J. in Greyhound's case :

"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."

This perhaps gives a convenient working test. But its application to the facts in each case is not as easy as it may appear on the surface. In certain circumstances, the test may be satisfactory and lead to a correct result. But in certain other circumstances, the test may not apply and some other principle will necessarily have to be invoked to distinguish the character of a receipt. There may be cases where in the process of user what is used, which is undoubtedly a capital asset, may get gradually wasted and in the end disappear. Raja Bahadur Kamakshya Narain Singh v. Commissioner of Income-tax was in a sense such a case. There was a mining lease there in respect of which the assessee was in receipt of salami and minimum royalty apart from royalty based on actual tonnage of coal mined. Receipt of salami was considered to be of a capital character but the receipt of minimum royalty viewed as a species of annual guarantee was held to be income flowing from the covenants in the lease and not in any sense a payment on capital account. Dealing with that question, Lord Wright, on behalf of the Judicial Committee, observed :

"But, in their Lordships' judgment, the royalties here are clearly income and not capital. They are periodical payments for the continuous enjoyment of the various benefits under the leases. The actual acquisition of the property in a particular ton of coal at the moment when the lessees have cut and taken away the coal is only the final stage."

This approach was made by the Board on the principle embedded in the following further observations :

"The authorities already cited and many others to the same effect show that the fact that the mines, which form an element in the consideration for the royalties, are wasting assets is irrelevant. The English cases are sufficiently collected and explained by the Court of Appeal in Alianza Co. Ltd. v. Bell affirmed in the House of Lords in Alianza Co. Ltd. v. Bell. That case states principles which are generally applicable in India as well as in England. If the receipts are income, it is not material for tax purposes that that for which they are paid comes from a wasting property. If the payment ceases because the source ceases, so does the tax. Once it is established that the royalties are income within the meaning of the Act, it is not material that the mines are in course of being exhausted unless there is provided in the Act that there should be a deduction from the income on that particular ground. But there is under the Indian Act no provision for allowance for amortisation in respect of the minerals being exhausted."

No doubt the Privy Council held the minimum royalty receipt to be of a revenue nature on another ground as well. But it is clear from this decision that in a mining lease---that was a case of coal mining lease---merely because in the process of working out such a lease, minerals in the land are exhausted and from that point of view the consideration is partly for the right to the minerals under the terms of the lease, receipt of royalty cannot for that reason be regarded as of a capital character, because in the very nature of things the working of the lease necessarily involves wasting of the mines. The revenue may well invoke this principle and contend, perhaps attractively, that merely because the tribute payable under the terms of the lease is measured in relation to and paid out of the sale proceeds of tin mined, it does not follow it is of a capital character. That principle will, however, be applicable only if the lease is for use of the land and the asset, which is the subject-matter of the lease, is of a wasting character in the process of user under the lease. If the transaction involves a consideration not merely for user but as a price for the asset itself, different considerations may apply.

We have, therefore, to examine the contract of lease in this case and see the nature of the grant thereunder. There are three kinds of payments contemplated under the document. One is compensation for rubber trees cut, to be paid at the rate fixed at so much per acre. The other is again payment at a fixed rate for use of the land for the purpose of tailing and dumping. The third is as tribute at 17% of tin mined and produced. If and when tin is produced, it has to be sold within a specified time and the assessee would be entitled to 17% of the sale proceeds. If there is delay in sale by the lessee, liberty is reserved for the assessee to sell the available tin on its own initiative and appropriate 17% of the sale proceeds as tribute payable to itself. The terms of the lease clearly show that only if tin is produced by mining that any liability to pay tribute at the stipulated rate would arise. No amount of damage to the land by excavation or other reasons in the process of mining without production of tin will attract any liability to pay tribute. Having regard to these terms, it seems that, although in character the transaction is a mining lease, on account of the specific terms we mentioned in respect of payment of tribute, this is a case of payment of tribute as price for the quantity of tin produced by mining. On that view the facts here are more akin to Maharaja Chintamani Saran Nath Sah Deo v. Commissioner of Income-tax and Seth Madan Gopal Bagla v. Commissioner of Income-tax. The first of these cases related to short term licences for prospecting for bauxite and the question for consideration was whether licence fee received under the licence was income or capital receipt. On the terms of the licence, the Supreme Court was of the view that it was not merely a grant of use of the capital of the assessee, 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 and that, on that view, the fees received were capital receipts not chargeable to tax. In coming to the decision, the Supreme Court observed that the question had to be decided on the nature of the grant and that if the grant consisted of merely a licence to use the capital asset, the fee receipt would be in the nature of income ; but if the licence, in addition to that, involved a grant of the right to the mineral, the fee paid therefor would partake the character of capital receipt. Seth Madan Gopal Bagla v. Commissioner of Income-tax was a case of lease of land for five years for manufacture of bricks for a lump sum payment. The question was whether the lump sum received was income. For the purpose of manufacture of bricks, setting up of kiln and using the earth for moulding bricks were contemplated under the contract. A lump sum of Rs. 6,000 for lease of the land was received by the assessee there. The Allahabad High Court expressed the view that the lump sum payment was a capital receipt. In our opinion, the principle of these cases will apply and the character of the tribute under the lease is not income but capital in the hands of the assessee. The fact that in the earlier year and partly in the year in question the assessee treated the tribute as of a revenue character is not conclusive on the question and we do not see any bar to the assessee contending before us that that view was not the correct one.

Learned counsel for the revenue however contends that even assuming that the tribute under the lease is not income, that does not affect the receipt under consideration. He says that what was received by way of damages was not in the nature of or a substitute for the tribute, but it flowed from the contract itself, though as a result of its breach. We do not think that the revenue is right. As a result of the breach of contract, the entire transaction of lease terminated or came to an end. The consequence was the very source of income, namely, the transaction of lease, ceased to exist. That being the case, the payment of damages under the award can hardly be related to the tribute paid or payable under the contract if it was worked. As we mentioned, it is only when actually tin was produced that any liability to pay tribute would be attracted.

In Helen Rubber Industries Ltd. v. Commissioner of Income-tax the Kerala High Court had to consider the nature of a receipt by way of damages. One of the clauses of the contract provided that if the lessee discontinued the lease before the termination of the period fixed therein, he should pay the lessor a stated sum by way of liquidated damages for the discontinuance. Dealing with the question, the learned judges referred to Hari Kailash & Company v. Commissioner of Income-tax and stated :

"Thus, damages paid under contracts are divided by the learned Chief Justice into two classes, one received for the non-performance of a contract entered into in the course of business for the purpose of making trading profits, and the other, damages paid for the discontinuance of the business itself. . . . As the damages provided for in clause 16 is in respect of the discontinuance of the business from which the company was deriving its income till the termination of the lease, the amount credited thereunder, namely, Rs. 8,050-1-6, has to be held to be a capital receipt and not revenue receipt."

In the present case the damages awarded by the arbitrator were in respect of the discontinuance of the lease from which the assessee was to derive tribute. With due respect, we accept the principle of Helen Rubber Industries Ltd. v. Commissioner of Income-tax and hold that the sum of dollar 8,540 received as damages under the award is not income but of a capital character not chargeable to tax.

We answer the first question in favour of the assessee with costs. Counsel's fee Rs. 250.

Questions answered accordingly.

 

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