Puttaswamy, J.
1. In this reference made under section 256(1) of the Income-tax Act, 1961 (Central Act NO. XLIII of 1961) ('the Act'), the Income-tax Appellate Tribunal, Bangalore Bench, Bangalore ('the Tribunal'), at the instance of the Revenue has referred the following two questions of law for the opinion of this court :
'(1) Whether, on the facts and in the circumstance of the case, the Appellate Tribunal was right in law in holding that the sum of Rs. 9 lakhs was a capital receipt and not a revenue receipt
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that no direction could be given to bring to tax the capital gains in these proceeding
2. In order to appreciate the questions referred to us, it is necessary in the first instance to notice the facts that are not in dispute and found by the Tribunal.
3. Prior to June 20, 1968, the assessee, a partnership firm of partners engaged in the business of mining, held six mining leases issued by the Government of Karnataka under the Mines and Minerals (Regulation and Development) Act, 1957 (Central Act 57 of 1957) ('the Mines Act') for extracting and selling manganese ore and iron ore in the District of Bellary as detailed hereunder :
Details of leases held by the assesseeSL. Lease Total area of Year of issue ofNo. No. the land lease1 ML 301 100 acres 1956-572 ML 428 34 acres 19583 ML 456 48 acres 19594 ML 372 640 acres 19575 ML 123 434 acres 19636 ML 130 1136 acres 1963
(Sl. Nos. 1 to 3 were manganese are leases and Sl. Nos. 4 to 6 were iron ore leases)
4. We are concerned with the receipt of a sum of Rs. 9,00,000 by the assessee on the transfer of item No. 6 in June 1968.
5. On June 20, 1968, the assessee with prior approval of the Government transferred the leasehold rights of ML 130 to M/s Chougule and Company (P) Limited ('Chougule'), a reputed mining contractor of Goa, who indisputably paid a sum of Rs. 9,00,000 to the assessee on such transfer.
6. In its letter dated July 14, 1969, accompanying its return for the assessment year 1969-70 relevant to the accounting period from April 1, 1968, to February 20, 1969, file before the Income-tax Officer, Assessment - I, Circle-II Bangalore, the assessee disclosed the receipt of the said sum of Rs. 9,00,000 from Chougule, however claiming that the same was a 'casual receipt' and was no chargeable to tax under the Act. In its further reply furnished on February 20, 1970, to a query made by the Income-tax Officer, the assessee was content in merely asserting that the said receipt was a 'capital receipt' and was not chargeable to capital gains tax or tax under the Act. On a fairly detailed examination of the pleas urged by the assessee and the evidence placed before him, the Income-tax Officer on March 16, 1970 (annexure-A), completed the assessment, in which he held that the lease was a 'stock-in-trade', and the said receipt was a business income chargeable to tax under the Act, with which the Appellate Assistant Commissioner of Income-tax, Bangalore Range-II, Bangalore, on March 20, 1972, concurred in a first appeal filed by the assessee under the Act.
7. But in a second appeal filed by the assessee against the said orders of the Appellate Assistant Commissioner and the Income-tax Officer, the Tribunal on September 29, 1973, set aside the order of the Appellate Assistant Commissioner and remitted the appeal to him for fresh disposal. In Compliance with the said order of the Tribunal, the Appellate Assistant Commissioner restored the appeal filed by the assessee to its original file, considered the same afresh and by his order made on September 13, 1976 (annexure-B), again dismissed the same.
8. Aggrieved by the said orders of the Appellate Assistant Commissioner and the Income-tax Officer, the assessee again filed a second appeal before the Tribunal which by its order made on August 10, 1977 (annexure-E) allowed the same and deleted the assessment of Rs. 9,00,000 as a revenue receipt. Hence this reference :
9. Sri K Srinivasan, learned senior standing counsel for the Income-tax Department, was assisted by Sri H Raghavendra Rao, for the Revenue. Sri G Sarangan, learned advocate assisted by Sri J N S Prasad appeared for the assessee. Both sides in their forceful, thorough and painstaking arguments spread over four days have taken us through every important ruling of the Supreme Court, two rulings of the High Court of Patna, several passages in the treatise 'Kanga and Palkival's the law and Practice if Income-tax', 7th edition, bearing on question No. 1 particular which is crucial to both sides. We express our indebtedness to both the learned counsels for their thorough, neat and painstaking arguments addressed before us.
10. We now proceed to examine the questions referred to us in their order.
11. Sri Shrinivasan has urged that the finding of the Tribunal that the receipt was premium and was a capital receipt was contrary to the pleas, the evidence placed by the assessee, the binding legal principles for their determination and that the receipt was a revenue receipt and not a capital receipt.
12. Sri Sarangan has urged that the principles enunciated by the Supreme Court to decide whether a receipt was a capital or revenue receipt in cases of termination of multi trading agencies, were inapplicable to cases of termination of mining leases wherein the receipt was nothing but a 'premium' and a capital receipt as rightly found by the Tribunal and that finding and other findings of fact in the absence of a question referred to us on the same cannot be disturbed by this court in exercise of its advisory jurisdiction under section 256 of the Act.
13. The terms 'capital receipt' and 'revenue receipt' have not been defined in the Act or in the earlier Income-tax Act of 1922 and those terms as pointed out by the Supreme court in more than one case are not capable of a precise definition also. Professor Fisher of Yale University in his treatise ' The Nature of Capital and Income', very neatly and tersely defines the said terms thus :
'(1) Capital is a fund. (2) Income is a flow. A fund of property existing at an instant of time is called capital. A flow of service rendered by that capital, for instance by the payment of money from it, or any other benefit rendered by a fund of capital in relation to such fund through a period of time, is called income.'
(Extracted by W. Strachan in his articles on 'Economic and Legal Differentiation of Capital and Income-vide 26 Law Quarterly Review, page 40 and 29 Law Quarterly Review, page 169).
14. In Kettlewell Bullen and Co. Ltd v. CIT : [1964]53ITR261(SC) Shah J.(as his Lordship then was), speaking for the Bench, referring with approval to the dicta of Venkatarama Aiyar J in CIT v. Rai Bahadur Jairam Valji : [1959]35ITR148(SC) , reviewed all the leading English and Indian cases rendered till then, explained the distinction and difference between a capital and a revenue receipt and the tests to be applied for determining either of them in these words [1964] 53 ITR 266 :
'This case raises once again the question whether compensation received by an agent for premature determination of the contract of agency is a capital or a revenue receipt. The question is not capable of solution by the application of any single test : its solution must depend on a correct appraisal in their true perspective of all the relevant facts. As observed in Commissioner of Income-tax v. Rai Bahadur Jairam Valji : [1959]35ITR148(SC) by Venkatarama Aiyar J. (at page 152) :
'The question whether a receipt is capital or income has frequently come up for determination before the courts. Various rules have been enunciated as furnishing a key to the solution of the question, but as often observed by the highest authorities, it is not possible to lay down any single test as infallible or any single criterion as decisive in the determination of the question, which must ultimately depend on the facts of the particular case, and the authorities bearing on the question are valuable only as indicating the matters that have to be taken into account on reaching a decision : vide Van den Berghs Ltd v. Clark [1935] 3 ITR 17. That, however, is not to say that the question is one of fact, for, as observed in Davies v. Shell Company of china Limited [1952] 22 ITR (Suppl) 1, 'these questions between capital and income, trading profit or no trading profit, are questions which, though they may depend no doubt to a very great extent on the particular facts of each case, do involve a conclusion of law be drawn from those facts.'
15. The inter-relation of the facts which have a bearing on the question propounded must, therefore, first be determined....
16. Whether a particular receipt is capital or income from business, has frequently engaged the attention of the courts. It may be broadly stated that what is received for loss of capital is a capital receipt : What is received as profit in trading transaction is taxable income. But the difficulty arise in ascertaining whether what is received in a given case is compensation for loss of a source of income, or profit in a trading transaction. Cases on the borderline give rise to vexing problems. The Act contains no real definition of income; indeed it is a term not capable of a definition in terms of a general formula (at page 270)....
17. On an analysis of these cases which fall on two sides of the dividing line, a satisfactory measure of consistency in principle is disclosed. Where on a consideration of the circumstances, payment is made to compensate a person for cancellation of a contract which does not affect the trading structure of the business, nor deprive him of what in substance is his source of income, termination of the contract being a normal incident of the business, and such cancellation leaves him free to carry on his trade (freed from the contract terminated) the receipt is revenue : Where by the cancellation of an agency the trading structure of the assessee is impaired or such cancellation results in loss of what may be regarded as the source of the assessee's income, the payment made to compensate for cancellation of the agency agreement normally a capital receipt (at p. 282).'
18. In Gillanders Arbuthnot and Company Limited v. CIT : [1964]53ITR283(SC) , the same learned Judge, speaking for the very Bench that decided Kettlewell Bullen and Company's case : [1964]53ITR261(SC) , enunciated one more principle that has relevance to the question before us in these words [1964] 53 ITR 291.
'There is, in our judgment, no immutable principle that compensation received on cancellation of an agency must always be regarded as capital. In each case, the question has to be determined in the light of the attendant circumstances. In the judgment in Kettlewell Bullen and company's case : [1964]53ITR261(SC) , we have explained that the judgment of the Judicial Committee in Commissioner of Income-tax v. Shaw Wallace and Company [1932] LR 59 IA 206; 2 Comp Cas 276, was not intended to, and did not, lay down that in every case cancellation of an agency resulted in loss of a source of revenue or that amounts paid to compensate for loss of agency must be regarded as capital loss.'
18. In all the later cases and notably in CIT v. Chari and Chari Limited : [1965]57ITR400(SC) , CIT v. Best & Co. (P) Ltd. : [1966]60ITR11(SC) and Karam Chand Thapur and Bros. P Ltd. v. CIT : [1971]80ITR167(SC) ,the Supreme Court, referring to the principles stated in these cases or else where, had only reiterated them. The principles enunciated by the Supreme Court in the earlier leading cases like Karanpura Development Co. Ltd v. CIT : [1962]44ITR362(SC) are also to the same effect. In CIT v. S. K. Sahana and Sons Limited : [1976]102ITR437(Patna) and Nauranglal Chiranjilal v. CIT : [1985]154ITR851(Patna) relied on by Sri Sarangan, the High Court of Patna has not enunciated any new principle.
19. The ratio decidendi in each of the cases, many of them no doubt dealing with case of multi-trading agencies, is of general application. The circumstance that they were not enunciated with reference to termination of leases does not detract from the weight of authority of the enunciation at all. We are of the view that the principles enunciated by the Supreme Court are general legal principles laying down general tests relevant for determining whether a receipt is a capital or a revenue receipt. The ruling of the Supreme Court in Ukhara Estate Zamindaries P. Limited v. CIT : [1979]120ITR549(SC) , strongly relied on by Sri Sarangan, which is essentially a decision on the facts of that case, does not lay down any new principle and does not support the broad proposition urged by him. In no case brought to out notice, the board proposition urged by Sri Sarangan has found favour either with the Supreme Court or any other High Court in the country. The distinction made by Sri Sarangan is without a difference and is devoid of merit. We have no hesitation in rejecting the same.
20. We may with advantage deal with the other contentions of Sri Sarangan to the effect that the findings of the Tribunal on facts are binding on us for which purpose he strongly relied on the rulings of the Supreme Court in Sree Meenakshi Mills Limited v. CIT : [1957]31ITR28(SC) ; Karnani Properties Limited v. CIT : [1971]82ITR547(SC) and Rameshwar Prasad Babla v. CIT : [1973]87ITR421(SC) .
21. We are of the view that to satisfactorily furnish our opinion,the very question referred enables us to examine the correctness of the finding of the Tribunal on facts also and a separate and independent question to assail the same was not necessary. Apart from this, the correctness of the finding of the Tribunal based on the construction of documents produced by the assessee unsupported by oral evidence on its bald and vague please is a question of law and requires to be examined by us at the very threshold and a conclusion reached by us one way or the other. Even if we sustain the objection of Sri Sarangan, the conclusion of the Tribunal that the receipt is a capital receipt as found by it and the same was a revenue receipt as urged for the Revenue, which is the precise question of law to be answered by us, really falls within the realm of a mixed question of law and fact elaborately discussed and settled by the Supreme Court in Sree Meenakshi Mills' case : [1957]31ITR28(SC) . We propose to examine the correctness of the conclusion or the finding of the Tribunal from all these standpoints.
22. What is a pure question of fact or of law or of a mixed question of law and fact and how the court should approach and decide them have been set at rest by the Supreme Court in Sree Meenakshi Mills' case : [1957]31ITR28(SC) . On all these aspects, Venkatarama Ayyar J., speaking for the court, has expressed thus (at p. 39) :
'Considering the question on principle, when there is a question of fact to be determined, it would usually be necessary first to decide disputed facts of a subsidiary or evidentiary character, and the ultimate conclusion will depend on an appreciation of these facts. Can it be said that a conclusion of fact, pure and simple, ceases to be that when it is in turn a deduction from other facts What can be the principle on which a question of fact becomes transformed into a question of law when it involves an inference from basic facts To take an illustration, let us suppose that in a suit on a promissory note, the defence taken is one of denial of execution. The court finds that the disputed signature is unlike the admitted signatures of the defendant. It also finds that the attesting witnesses who speak to execution were not, in fact, present at the time of the alleged execution. On a consideration of these facts, the court comes to the conclusion that the promissory note is not genuine. Here, there are certain facts which are ascertain, and on these facts, a certain conclusion is reached, which is also one of fact. Can it be contended that the finding that the promissory note is not genuine is one of law, as it is an inference from the primary facts found Clearly not. But it is argued against this conclusion that it conflicts with the view expressed in several English decisions, some of them of the highest authority, that it is a question of law that inference is to be drawn from facts. The fallacy underlying this contention is that it fails to take into account the distinction which exists between a pure question of fact and a mixed question of law and fact, and that the observations relied on have reference to the latter and not to the former, which is what we are concerned with in this case.
23. In between the domains occupied respectively by question of fact and of law, there is a large area in which both these question run into each other, forming so to say, enclaves within each other. The questions that arise for determination in that area are known as mixed question of law and fact. These question involve first the ascertainment of facts on the evidence adduced and then a determination of the rights of the parties on an application of the appropriate principles of law to the facts ascertained. To take an example, the question is whether the defendant has acquired title to the suit property by adverse possession. It is found on the facts that the land is a vacant site, that the defendant is the owner of the adjacent residential house and that he has been drying grains and cloth and throwing rubbish on the plot. The further question that has to be determined is whether the above facts are sufficient to constitute adverse possession in law. Is the user continuous or fugitive Is it as of right or permissive in character Thus, for deciding whether the defendant has acquired title by adverse possession, the court has firstly to find on an appreciation of the evidence what the facts are. So far, it is a question of fact. It has then to apply the principles of law regarding acquisition of title by adverse possession, and decide whether on the facts established by the evidence, the requirements of law are satisfied. That is a question of law. The ultimate finding on the issue must, therefore, be an inference to be drawn from the facts found, on the application of the proper principles of law, and it will be correct to say in such cases that an inference from facts is a question of law. In this respect, mixed questions of law and fact differ from pure questions of fact in which the final determination equally with the finding or ascertainment of basic facts does not involve the application of any principle of law. The proposition that an inference from facts is one of law will be correct in its application to mixed questions of law and fact but not to pure questions of fact. The following observations of Lord Atkinson in Herbert v. Samuel Fox & Co. Limited [1916] 1 AC 405, clearly bring out the principle above stated :
'...... Your Lordships were pressed with the usual argument, that as the County Court judge, though a judge of law and fact, is the sole judge of fact, his findings cannot be disturbed if there be any evidence before him upon which he, as a reasonable man, could find as he has found. That argument is quite a sound if it be applied to pure findings of fact. It is utterly unsound if it be applied either to findings on pure questions of law or on mixed questions of law and fact...... It is wholly illegitimate, in my view, in cases such as the present, by finding in the words of the statute to endeavour to secure for a finding on a pure question of law, or on a mixed question of law and fact, that unassailability which properly belongs only to a finding on a question of pure fact.'
24. These observations were made in a case under the Workmen's Compensation Act, 1904. But the same principles have been applied to revenue cases, and it has consistently been held that inferences from facts may themselves be inferences of fact and not of law, and that such inferences are not open to review by the court.
25. In The Queen v. Special Commissioners of Income Tax [1984] 3 Tax Cas 289, Esher M. R. observed :
'......... It seems to me that there is a question of fact. It is a question of the true inference which they (Commissioners) had to draw as a matter of evidence upon the facts which they had in evidence before them. But to draw an inference of fact from evidence before you is not a question of law at all. The inference is a question of fact just as much as the direct evidence of fact, and it would be an appeal against facts, which we are not entitled to entertain and consequently there can be no mandamus.'
26. A clearer and more emphatic refutation of the appellant's contention cannot be found. The law is thus summed up in Simon's Income Tax, 1952 edition, volume I, page 281 :
27. 'There can be no doubt that it is for the Commissioners, and for the Commissioners alone, to discover and state the basic or 'primary' facts of the case...... From the primary facts the Commissioners will almost always need to draw some inference or inferences by the exercise of reasoning, and it is this process of inference which may, according to its nature, be a finding of law or of fact, or a mixed finding of law and fact.'
28. The result of the authorities then is that inference from facts would be a question of fact or of law according as the point for determination is one of pure fact or a mixed question of law and fact.'
29. At page [1957] 31 ITR 50, the learned judge summed up the position in these words :
'We have discussed the authorities at great length, as some of the observations contained therein appear, at first sight, to render plausible the contention of the appellant, and it seems desirable that the true meaning of those observations should be clarified, lest error and misconception should embarrass and fog the administration of law. The position that emerges on the authorities may thus be summed up :
(1) When the point for determination is a pure question of law such as construction of a statute or document of title, the decision of the Tribunal is open to reference to the court under section 66(1).
(2) When the point for determination is a mixed question of law and fact, while the finding of the Tribunal on the facts found is final, its decision as to the legal effect of those findings is a question of law which can be reviewed by the court.
(3) A finding on a question of fact is open to attack under section 66(1) as erroneous in law when there is no evidence to support it or if it is perverse.
(4) When the finding is one of fact, the fact that it is itself an inference from other basic facts will not alter its character as one of fact.'
30. In the other two cases on which strong reliance was placed by Sri Sarangan, the Supreme Court was dealing with the conclusion reached by the Tribunal on pure question of fact and not on mixed questions of law and fact. In cases of capital and revenue receipts, law and facts are so closely intertwined that it is almost impossible to separate one from the other. We are clearly of the view that to accept that all the findings of a Tribunal in such cases as final would be to abdicate our functions and duties and would really result in granting a free licence to the Tribunal to say whatever it pleases as if we are there only to gulp whatever it pleases to say.
31. We have earlier noticed as to what was urged by the assessee before the Income-tax Officer and how he dealt with the same. On appeal, the Appellate Assistant Commissioner in his later order, which is material, independently examined the contention of the assessee, all the evidence placed before him including the additional evidence and found that the'receipt' was not 'premium' but was in consideration of (a) the expenses incurred on upliftment and improvement of the mining area, and (b) the scope for further exploitation of these mines. Proceeding further, the Appellate Assistant Commissioner held that the loss of ML 130 did not result in impairing its trading structure. On these findings,, the Appellate Assistant Commissioner concurred with the Income-tax Officer and dismissed the appeal. On appeal, the Tribunal disagreed with all these findings of the Appellate Assistant Commissioner and held (i) that the assessee was not dealing in acquisition, purchase and sale of mines or mining leases; (ii) that the documents filed by the assessee and in particular the affidavits filed before the mining authorities were make-believe, false or sham documents; and (iii) that the receipt was 'premium' for the transfer of ML 130 and was, therefore, a capital receipt. Ultimately, in paras 23 and 24 of its order, the Tribunal dealt with the alternative case urged for the Revenue and held that the capital receipt was chargeable to capital gains tax, but declined to give any direction and subject the same to such tax, which aspect is covered by question NO. 2. With this analysis of the orders, we now proceed to examine the fact-situations first.
32. ML 130 was issued in 1963 to exploit iron ore over an area of 1136 acres for a period of 20 years renewable for a further period of 20 years. As on the date of transfer, a negligible small area of 25 acres had been exploited by the assessee. In their application for transfer of this lease to Chougule before the Government, the assessee in unmistakable terms stated that no premium had passed from Chougule. In the deed of assignment of transfer annexed to the said application (annexure-C), the assessee and Chougule stated that for the assignment of lease only a sum of Rs. 1,000 had passed to the former from the latter and that no premium had passed between them. In support of the application for transfer, the assessee and Chougule also filed affidavits reiterating the same. One D. N. Gopalakrishna, one of the partners of the assessee, in his affidavit (annexure-D), stated thus :
'2. That the deponent's company has agreed to transfer the Mining Lease No. 130, situate in Sandur Taluka of Bellary District, Mysore, acquired by it under Mining Lease No. 130 dated 28th September, 1963, from the Government of Mysore, in favour of Messrs. Chougule and Company Private Limited, Mormugao Harbour, Goa, India, by an agreement in accordance with the Mineral Concession Rules, 1960.
3. That in this transfer of lease no premium is involved excepting the investments already made by the deponent's company and the liabilities incurred by the deponent's company ever since the taking up of the said mineral concession.'
4. What emerges from this is that before the mining authorities the assessee maintained that no premium had passed from Chougule for the transfer of the lease held by it. Before the Income-tax Authorities, it was undoubtedly open to the assessee to resile from what had been pleaded before the mining authorities and even contend to the contrary. Whether it did so is the next question that must be carefully examined.
5. In its letter annexed to the return filed before the Income-tax Officer, except disclosing the receipt in a veiled manner and contending that the same was a 'casual receipt' and was not a taxable receipt, the assessee did not plead that the same was premium and was a capital receipt though it so asserted in its further reply but without details. Before the Appellate Assistant Commissioner, the assessee sought to improve its case. But, there also the assessee did not go the whole hog in contending that what had been stated by it before the mining authorities was 'false', 'incorrect' or 'untrue' and cannot be acted upon which was also the position before the Tribunal. In these circumstances, we cannot but hold that it was somewhat surprising for the Tribunal to have held otherwise and taken exception to the findings of the Appellate Assistant Commissioner at all. We are even constrained to say that the findings of the Tribunal are based on surmises and conjectures and is contrary to the pleadings and the rules of evidence, and, therefore, justify our rejection. From this, it also follows that the Tribunal could not have held that the receipt by the assessee was premium.
6. On the above conclusion, we proceed to examine the nature of the receipt with due regard to the principles enunciated by the Supreme Court in particular in Kettlewell Bullen & Co.'s case : [1964]53ITR261(SC) and Best & Co.'s case : [1966]60ITR11(SC) .
7. As noticed earlier, the assessee held six mining leases out of which it transferred one to Chougule from whom it received a sum of Rs. 9,00,000. The extent of the area transferred to Chougule was 1, 136 acres out of which a very negligible extent had been exploited by the assessee before transfer. Even after the transfer of ML 130, the assessee had been working the other five mining leases which necessarily means that it had not impaired its mining business at all. On a careful and critical examination of these and all other relevant aspects, we are clearly of the view that the receipt of Rs. 9,00,000 by the assessee from Chougule was not premium and was not a capital receipt but was a business receipt.
8. On the foregoing discussion, we hold that our answer to question No. 1 must be in the negative.
9. We now pass on to examine question No. 2.
10. On the view we have expressed on question No. 1, question No. 2 flowing as it does from the former, does not survive for consideration. We must accordingly decline to answer the same as having because unnecessary. But, we will assume that question No. 2 survives and examine the same on that basis also.
11. While holding that the receipt was a capital receipt, the Tribunal declined to subject the same to capital gains tax on the view it held that such a course was not permissible in an appeal filed by the assessee. We are of the view that this question is concluded against the Revenue by a Division Bench ruling of this court in CIT v. Maryam Mirza (I.T.R.C. No. 143 of 1978 dated on 21-9-1983) : [1987]165ITR339(KAR) . For the very reasons stated in Maryam Mirza's case, we must necessarily answer question No. 2 against the Revenue even if it survives.
12. In the light of our above discussion, we furnish our answers to the questions referred to us as hereunder :
Questions Answers
Question No. 1 : In the negative, in favour of the
Revenue and against the assessee.
Question No. 2 : Does not survive. But, if it survives, then
Our answer is in the affirmative, against the
Revenue and in favour of assessee.
In view of the divided success and failure of the parties, we consider it proper to direct them to bear their own costs. We, therefore, direct the parties to bear their own costs.