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1943 Supreme(SC) 23
PRIVY COUNCIL [ON APPEAL FROM THEEAST INDIES]
LORD RUSSELL OF KILLOWEN, LORD WRIGHT, LORD PORTER, SIR GEORGE RANKIN AND SIR MADHAVAN NAIR.
RAJA BAHADUR KAMAKSHYA NARAIN SINGH, OF RAMGARH - Appellant
Versus
COMMISSIONER OF INCOME-TAX, BIHAR AND ORISSA - Respondents
On appeal from the High Court at Patna.
Decided On : May. 13. 1943.
Solicitors for appellant:Douglas Grant & Dold. Solicitor for respondent: Solicitor, India Office.
Mining royalties, including those from wasting assets, are taxable as income because they are periodical payments for the enjoyment of leasehold benefits and the right of occupation, rather than merely the purchase price of the minerals extracted.
Headnote:(A) Indian Income-tax Act, 1922 - Sections 4, 6 and 12 - Transfer of Property Act, 1882 - Sections 105 to 108 - Mining royalties - Nature of receipts - Whether royalties received under mining leases constitute "income" or are capital receipts - Salami or premium treated as capital receipt as it is a single payment for the acquisition of the right to enjoy benefits granted by the lease - Minimum royalty held to be income as it is a species of annual guarantee not corresponding to actual extraction - Royalties per ton of minerals raised and dispatched constitute income as they are periodical payments for the continuous enjoyment of various benefits under the lease, including liberties to search, dig, and erect machinery - The fact that the source is a wasting asset being gradually exhausted does not convert income into capital receipts - Income connotes a periodical monetary return coming in with some sort of regularity from definite sources.
(B) Interpretation of "Income" - The term is of the broadest connotation and is not limited to the analogy of fruit, increase, or periodical harvests - Periodical payments for the enjoyment of benefits under a contract are taxable as income regardless of whether the underlying asset is terminable or wasting.
Facts of the case:
The assessee, proprietor of an estate, entered into mining leases for coal. The leases provided for a premium (salami), a minimum annual royalty, and royalties based on the tonnage of coal extracted and dispatched. The assessee contended that the royalties were capital receipts, representing the purchase price of the coal from a wasting asset, and thus not assessable as income under the Act.
Findings of Court:
The premium is a capital receipt. However, both the minimum royalty and the tonnage-based royalties are "income" under the Act. The tonnage royalty is not merely the price of coal but compensation for the occupation and the various liberties granted under the lease, such as the right to sink pits and erect machinery.
Issues: Whether royalties received from mining leases, specifically tonnage-based royalties from a wasting asset, constitute "income, profits or gains" under the Indian Income-tax Act, 1922, or are capital receipts.
Ratio Decidendi: Royalties are periodical payments for the continuous enjoyment of benefits under a lease. The "wasting" nature of the mineral asset is irrelevant to the characterization of the receipt as income. Income is a periodical monetary return from a definite source; the exhaustion of the source simply means the tax ceases when the income ceases. There is no provision in the Act for allowance for amortization in respect of minerals being exhausted.
Result: Appeal dismissed.
Legal Category Hierarchy
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taxation
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income tax
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taxable income
- mining royalties
- capital receipts
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taxable income
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income tax
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property law
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leases
- mineral leases
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leases
JUDGEMENT
Appeal (No. 21 of 1942) from a judgment of the High Court (September 6, 1940) on a reference under s. 66 of the Indian Income-tax Act (XL of 1922) (as amended by Acts
XXI. and XXII. of 1930 and Act XVIII. of 1933), by which the High Court answered in the negative a question of law, submitted by the Commissioner of Income-tax of Bihar and Orissa in respect of an assessment to income-tax of the appellant assessee for the year 1937- 1938. The following facts are taken from the judgment of the Judicial Committee The two questions submitted to the Commissioner by the assessee to be referred to the High Court were " (1.) Whether "royalty on mines being capital revenue should not have been "excluded in computing the total income determined for "income-tax? (2.) What should be the principle on which "cost of management in collection of royalties is to be deter-" mined when there is a combined management covering both "the Zamindari collection of agricultural income and royalties "of mines?” The Commissioner of Income-tax was of the opinion that the second question raised no question of law and should not be answered by the High Court. In fact, no argument was addressed by the assessee to the High Court thereon, and the High Court concurred in the opinion of the Commissioner of Income-tax. No further reference to that question need therefore be made.
The assessee, Kumar Kamakshya Narain Singh Bahadur, was at all material times the proprietor of a revenue paying estate known as the Ramgarh Raj, bearing Tauzi No. 28, in the Collectorate of Hazaribagh, being impartible and governed by the rule of primogeniture. At the time of the assessment which was the subject-matter of this appeal, the estate was under the management of the Court of Wards, the assessee being a minor. On August 10, 1937, the assessee attained his majority and the estate was released from the management of the Court of Wards.
For the income-tax year 1937- 1938 the manager of the estate, on behalf of the assessee, made a return of the income of the assessee to the Income-tax Officer, District Hazaribagh, including a sum of Rs.5,32,368-2-10 being royalties realized from lessees of coal mines under seven leases, each of them for a term of nine hundred and ninety-nine years, in the form of and on similar conditions and covenants as those contained in three leases, that was to say (1.) A lease dated April 5, 1919, between Alexander McNeil Walter, the manager of the Ramgarh Estate under the Court of Wards Act (Act IX. Bengal Code 1879) of the one part and Bokaro and Ramgurh, Ld., of the other part; (2.) a lease dated March 25, 1925, between the said Alexander McNeil Walter and Bokaro and
Ramgurh Ld., of the other part; (3.) a lease dated April 12, 1927, between the said Alexander McNeil Walter of the one part and the Karanpura Development Co., Ld., of the other part. Under the terms of the leases the lessees covenanted to pay to the lessor royalties on all steam coal, rubble
Law. Rep. 70 Ind. App. 180 ( 1942- 1943) Raja Bahadur Kamakshya v. C ommissioner of Income-Tax 85
coal, dust, hard and soft coke gotten manufactured and dispatched, the lessees also covenanting that after certain dates, as provided by the said leases, minimum royalty should be paid on the terms and at the rates provided therein, in the event of the royalties reserved and payable under the said leases not amounting to the figure of the minimum royalty.
It was here only necessary to refer in detail to the material terms and covenants of one of the leases, namely, that dated April 3, 1919. The most material clause was as follows " This "indenture witnesseth that in pursuance of the said agreement "and in consideration of the salami or premium rupees thirty-" seven thousand and forty (being at the rate of rupees forty "per standard bighas on nine hundred and twenty-six bighas) "in respect of the premises at or before the execution of these "presents by the lessees paid to the lessor (the receipt wher
