Maharaja Chintamani Saran Nath Sah Deo v. CIT (1971) 2 SCC 521 GROVER, J.
- This is
an appeal from a judgment of the Patna High Court in a reference made to it under Section
66(1) of the Income Tax Act, 1922, by the Appellate Tribunal by which the following
question of law was referred for determination by the High Court: ―Whether on the facts
and circumstances of this case, the Tribunal was right in holding that the sum of Rs 2,20,000
was the income of the assessee assessable to tax under the provisions of the Income Tax Act?
‖ 2. The original assessee was Maharaja Pratap Udainath Sah Deo, the holder of an impartible
estate. On January 22, 1944 the assessee granted a lease of certain mining rights to
Aluminium Production Company Ltd. in respect of 171.03 acres of land for a period of 30
years. The main terms were as follows: (i) Salami (inclusive of Moharkari and Dewani Negi
amounting to Rs. 5000) Rs 2,25,000 (ii) Rent 8 per acre (iii) Royalty 6 per ton (iv) Minimum
royalty Rs 22 per acre. Previously, the assessee had granted a prospecting lease of 311 acres
of land to the same Company on March 20, 1941 for a period of one year. The area covered
by that lease though larger included substantially the area leased out subsequently. The terms
of the 1941 lease were that salami was payable at the rate of Rs 100 per acre and royalty at
the rate of 8 annas per ton.
3. While making the assessment for the year 1944-45 the Income Tax Officer took the view
that the assessee had chosen to take a large sum by way of salami while granting the lease in
the year 1944 and had accepted lesser rate of royalty, the salami represented an advance
payment of royalty. He treated Rs. 5000 out of the sum of Rs. 2,25,000 as Dewani Negi and
Moharkari and the balance of Rs. 2,20,000 was treated by him as income of the assessee, and
the assessment was made accordingly. On appeal the Appellate Assistant Commissioner held
that the amount of Rs. 2,20,000 was paid by the Company to the assessee as salami and as
such it was a capital receipt and not taxable. On appeal by the revenue the Appellate Tribunal
by an order, dated August 7, 1952, remanded the case to the Appellate Assistant
Commissioner for finding whether there were circumstances to indicate that the salami was
really receipt of income. The Appellate Assistant Commissioner made a report, dated April
12, 1956. He gave a finding that the assessee had intentionally accepted lower royalty and
taken higher Salami and therefore the major portion of the sum of Rs. 2,20,000 had been
taken in exchange of royalty that would have accrued during the period of lease. The Tribunal
by an order, dated July 26, 1956 allowed the appeal of the Revenue and restored the order of
the Income Tax Officer. The High Court held that out of the sum of Rs. 2,20,000 the amount
which could be regarded to be salami and treated as a capital receipt could reasonably be
estimated at a sum of Rs. 20,000 which was assessable to tax but the remaining amount of
Vodafone International Holdings B.V. v. Union of India (UOI) and Anr
Rs. 2,00,000 was revenue receipt and was taxable as such. The question referred was
reframed as follows: ―Whether on the facts and the circumstances of this case, the Tribunal
was right in holding that the sum of Rs. 2,20,000 or any portion thereof was the income of the
assessee assessable to tax under the provisions of the Income Tax Act?‖ It was answered
partly in favour of the assessee but substantially in favour of the Revenue. 4. The principles
on which the courts have acted whenever a question has arisen whether a payment described
as a salami is capital or revenue receipt are well settled. Salami is a single payment made for
the acquisition of the right of the lessor by the lessee to enjoy the benefits granted to him 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 merely because a
certain amount paid to the lessor is termed as Salami, it does not follow that no inquiry can be
made to determine whether it has or has not an element of revenue receipt in the shape of
advance payment of royalty or rent. The onus, however, is upon the Income Tax authorities to
show that there exist facts and circumstances which would make payment of what has been
called salami income. The position may be summed up in this way. 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 receipt and the latter a revenue receipt. Parties may camouflage the real
nature of the transaction by using clever phraseology and, therefore, it is not the form but the
circumstances of the transaction that matter. The nomenclature used may not be decisive or
conclusive but it helps the courts, having regard to the other circumstances to ascertain the
intention of the parties. [See CIT, Assam, etc. v. Panbari Tea Co. Ltd., AIR 1965 SC 1871].
5. Now the Appellate Tribunal appears to have based its decision only on the difference
between the amount of salami and the rate of royalty between the prospecting lease which
was granted in 1941 and the subsequent lease of 1944. This is what the Tribunal stated in
Para 7 of its order: ―In 1941, the assessee had granted a prospecting lease in favour of the
very lessee taking a much smaller premium fixing the royalty at 8 per ton. He has not shown
any justifiable reason for fixing up a lower amount of 6 per ton by way of royalty in the later
lease. We found that out of the area of 171 acres that was covered by the later lease a
substantial portion of it about 140 acres were comprised in the area leased out by the earlier
deed of 1941. A week argument was attempted by the assessee‘s representative the older
lease was only for Bauxite whereas the later lease was for Laterite also. In view of the fact
that major portion of the area that is covered in the new lease was in the older lease and as in
the course of the producing Bauxite, Laterite also becomes available, we do not see any
justification for the assessee agreeing to take a lesser amount by way of royalty.‖
