Karanpura Development Co., Ltd. Vs.
The Commissioner of Income-Tax, West Bengal [1961] INSC 261 (31 August 1961)
31/08/1961 HIDAYATULLAH, M.
HIDAYATULLAH, M.
GAJENDRAGADKAR, P.B.
SUBBARAO, K.
CITATION: 1962 AIR 429 1962 SCR Supl. (3) 368
CITATOR INFO :
MV 1966 SC 843 (16) R 1966 SC1256 (9) R 1972
SC 732 (12) R 1980 SC 340 (3,6,8)
ACT:
Income Tax--Appreciation of Capital or
profits of business-Company formed for acquiring and working coal mining
leases---Company developing coal fields and sub-leasing them--Income realised
by way of increased salami--If amounts to profits of business--Liability to
tax--Indian Income-tax Act, 1922 (11 of 1922) ss. 2(4). 10.
HEADNOTE:
The assessee company was incorporated in 1920
with the objects, inter alia, of acquiring underground coal-mining and relative
rights and to do business of coal raising etc.
Power was given under the memorandum of
association to case, develop or otherwise deal with the property and rights of
the company. The asscssee acquired from time to time diverse coal-mining leases
and after developing the coalfields by providing means of communication etc.,
sub-leased them to collieries and other companies. As a condition of the
acquisition of the head leases the assessee had paid salam at the rate of Rs.
40/per standard bigha and had agreed to pay royalty at certain rate-, while
from the subleases it charged salami at the rate of Rs. 400/and royalties at
higher rates. For the assessment years 1949-50 and 1950-51 the assessee
admitted the liability to tax in respect of the income arising from the
enhanced royalties, but claimed that the excess amount realised by way of
increased salami was an appreciation of capital and could not be taxed on the
grounds that apart from obtaining head leases, developing the coal fields and
sub-leasing its rights, the assessee did not do any business' either by working
the coal-fields with a view to raising coal or by acquiring or selling coal
raised by the sublessees.
Held, that the assessee company in acquiring the
head leases and in granting the sub-leases was carrying on a business within
its memorandum of association and that the increased salami received from the
sub-lessees represented profits of that business, liable to be included in the
assessable income for purposes income-tax and business profits tax.
Kamakshya Narain Singh v. Commissioner of
Income-tax (1943) L.R. 70 I.A. 180, distinguished.
Californian Copper Syndicate (limited and
Reduced) Harris, (1904) 5 T.C. 159, relied on.
Case-law discussed 369
CIVIL APPELLATE JURISDICTION: Civil Appeal
Nos. 376 to 379 of 1960.
Appeal from the judgment and order dated
September 18, 1958, of the Calcutta High Court in Income-tax Reference No. 101
of 1954.
S. Mitra, S. N. Mukherjee and B. N. Ghosh,
for the appellants.
M. C. Setalvad, Attorney-General of India, R.
Ganapathy Iyer and P. D. Menon for the respondents.
1961. August 31. The Judgment of the Court
was delivered by HIDAYATULLAH, J. -These are four appeals filed by the assessee
Company (Karanpura Development Co., Ltd.) in respect of two assessment years,
1949-50 and 1950-51 and two chargeable accounting periods under the Business
Profits Tax Act, January 1, 1948, to December 31, 1949. By these appeals, the
assessee Company impugns the judgment of the High Court of Calcutta dated
September 18, 1958, answering a common question "'whether on the facts and
in the circumstances of the case, the sums received as salami by the asseseee
for granting sub-leases were trading receipts in its hands and the amount of
profit therein is assessable under the Indian Income-tax Act" in the
affirmative and against the assessee Company. The case was certified to this
Court by the High Court under s. 66A (2) of the Incometax Act presumably also
read with s. 19 of the Business Profits Tax Act.
The facts of the case are as follows in 1915,
the Court of Wards representing the proprietor of the Ramgarh Estate granted a
prospecting licence to Messrs. Bird & "Co., of an area of coal-bearing
lands described as the Karanpura Coal Fields. The, licence was for 12 years but
was renewable for .another term of 12 years. The licence reserved to the
licensee the right to take coal mining leases of .the Karanpura Coal Fields or
any part thereof. The 370 licence was transferable. The assessee Company was
incorporated in 1920. The objects for which the assessee Company was formed,
inter alia, were :
"(1) to purchase and acquire from the
owners or proprietors thereof or other persons interested therein underground
coal mining, relative rights of and in the Karanpura Coal Fields in the
Province of Bihar and Orissa at such price or prices for such period or periods
and generally upon such terms and conditions as the Directors may determine and
for that purpose to adopt, enter into and carry into effect all contracts,
agreements and other documents, and in particular to enter into and carry into
effect, with or without modifications, either before or after the, execution
thereof, the agreement referred to in Article 3 of the Company's Articles of
Association.
(2)To sell, dispose of and otherwise deal in
all such underground coal mining and relative rights upon such terms and
conditions as may appear for the benefit of the company.
(3)To carry on the trades or businesses of
colliery proprietors, coal merchants, miners, smelters, engineers, limeburners
and manufacturers of brick, tile, cement, lime, coke and other bye-products of
coal in all their respective branches.
x x x (6)To prospect for, crush, win, get
quarry, smelt, calcine,, refine, dress, amalgamate, manipulate and prepare for
market coal, ore metal, and mineral substances of all kinds, and to carry on
any other prospecting, mining or metallurgical operations, which may seem
conducive to any of the company's objects and to buy, sell, manufacture, and
deal in minerals, plants, machinery implements, conveniences, provisions, and
things capable of being used in connection with prospecting, 371 mining or
metallurgical operations or required by workmen or others employed by the
company.
x x x (34) To acquire by purchase, lease,
exchange, or otherwise, lands, buildings, and heraditaments of any tenure or
description and any estate or interest therein, and any rights over or interest
therein, and any rights over or connected with land, and either to retain the
same for the purpose of the company's business or to turn the same to account
as may seem expedient.
x x x (52)To sell, improve, manage develop,
exchange lease, mortgage, dispose of, turn to account, or otherwise deal with
all or any part of th e property and rights of the company." On May 30,
1921, Messrs. Bird and CO., assigned rights under the prospecting licence to
the assessee Company. The assessee Company then acquired from time to time
diverse coal mining leases over areas aggregating 20,000 standard bighas. The
assessee Company 'developed these coal fields by providing means of
communication, etc., and then subleased them to collieries and other companies.
In the head leases which the assessee Company had obtained, the term was 999
years. In the sub-leases the term was the balance of the period minus 2 days.
Apart from obtaining head leases, developing the coal fields and subleasing its
rights, the assessee Company admittedly did not do any business. It never
worked the coal fields with a view to raising coal; nor did it acquire or sell
coal raised by the sub-lessees. As a condition of the acquisition of the head
leases, the assessee Company had paid salami at the rate of Rs. 40 per standard
bigha, and had agreed to pay, royalty at certain rates. From the sub-lessees,
the assessee Company charged salami at the rate of Rs. 400 per 372 standard
bigha and royalties at higher rates. For the assessment year, 1949-50, the
assessee Company realised Rs.
19,14,035 as salami for the mining subleases
granted in the relevant account year, and in the assessment year, 1950-5 1, it
realised Rs. 3,96,000 on the same account. We are not concerned with the income
of assessee Company arising from the enhanced royalties, because the assessee
Company admitted that that income would be taxable. The assessee Company's
contention that the excess amount realised by way of increased salami was on
capital account and could neither be included in the assessable income for
purposes of incometax nor in the profits for purposes of business profits tax
",as rejected. Two orders in the income-tax cases and two in the business
profits tax cases were passed on January 30, 1952. The assessee Company filed
four appeals before the Appellate Assistant Commissioner, who dismissed them on
March 31, 1953. Four appeals were then filed before the Income-tax Appellate
'Tribunal, Calcutta Bench, but were dismissed by a common order dated December
31, 1953. The Appellate Tribunal was then moved for a reference in all the four
appeals, and the common question to which we have referred, was raised and
referred by the Tribunal with the result already indicated.
The Tribunal as well as the High Court held
that in acquiring the head leases and in granting the sub-leases, the assessee Company
was carrying on a business within its Memorandum of Association and the
increased salami received from the sublessees represented profits of that
business liable to be included in the assessable income for incometax purposes
and in the profits, for purposes of the business profits tax. The case of the
assessee Company was that it was holding its capital asset namely, the mining
leases through its sub-lessees during the relevant accounting years, and its
activities were the management of the leasehold right, selection of
sub-lessees, collection of rents or royalties 373 which did not amount to the
carrying on of a business. In return for the charge of salami the assessee
Company transferred only the general right to the benefits under the leases, and
that was a realisation of its capital within the ruling of the Privy Council in
Kamakshya Narain Singh v. commissioner of Income-tax (1) In transferring this
general right, it was contended, the position of the assessee Company was
indistinguishable from of that a land owner, who collected rents. All these
arguments were advanced before the Tribunal as well as before the High Court
but were not accepted. In these appeals, we are required to consider whether
the conclusions reached by the High Court and the Tribunal are right.
The Income-tax Act puts the tax on income
profits and gains irrespective of the source from which they are derived.
Section 3 of the Act provides, inter alia,
that income-tax shall be charged on the, total income of every company.
Under s.4(1), total income includes all
income, profits or gains from whatever source derived, subject to certain
conditions about residence, etc., with which we are not concerned. Section 6
then enumerates six heads of income chargeable to income-tax. Two of these
heads are (a) income from property and (b) profits and gains of business, etc.
The several heads into which income is
divided under the Income-tax Act do not make different kinds of taxes. The tax
is always one; but it may arise from different sources to which the different
rules of computation have to be, applied. The manner of this' computation is
indicated in the sections that follow. Before income profits or gains can be
brought to computation they have to be assigned to one or more heads. These
heads are in a sense exclusive of one another and income which falls within one
head cannot be assigned to, or taxed under another head.
(1) (1943) L.R. 70 I.A. 180.
374 The words "income" has not been
defined in the Income-tax Act. In the definition which is enacted certain
receipts are said to be included in the concept of income; but it does not say
that "income" itself means. Certain working definitions have been
given by Courts, chief among which is by the Judicial Committee in Commissioner
of Income-tax v.
Shaw Wallace & Co. (1) where it was held
that by income, is meant a periodical. monetary receipt, not in the nature of a
windfall but coming in with some sort of regularity or expected regularity. In
business, it was also pointed out, income was 'the produce of something
"loosely spoken of as capital". This income in business is profit
when is earned by a process of production, or, in other words, by the
continuous exercise of an activity. These observations of the Privy Council were
quoted with approval by this Court in many cases and recently in Senairam
Doongarmall v. Commissioner of IncometaX (2). In the last case, it was also
pointed out that the addition of the words "profits and gains" in the
phrase "income, profits and gains" used in the Income-tax Act does
not restrict the meaning of the word "income" by implication, and
that the whole expression is "income" writ large.
But whatever "income" may include
or mean it is However, clear that it does not include fixed capital or the
realising of fixed Capital by turning it into some other form of capital or
money. Fixed capital is something which the owner keeps in his possession but
turns to profit;
circulating capital However, is turned over
in the process of profit making. It may. sometimes happen that in the process
of production, fixed capital may be consumed or wasted, but that is a reduction
of capital. and not an expenditure in the business claimable as an allowance in
the reduction of assessable income in the shape of profits of the business..
The profit-, of a business are calculated
under s.10 of the Act. Under that section, tax is payable (1) [1932] L.R. 59
I.A. 206.
(2) [1962] 1 S.C.R. 257.
375 by a company under the head ,,profits and
gains of business... " in respect of the profits or gains of any business
carried on by the company. In s. 2 (4) of the Indian Income-tax Act,
"business" has been defined to include any trade, commerce or any
manufacture or any adventure or concern in the nature of trade., commerce.or
manufacture. In all cases where an assessee questions the finding that
assessable profits or gains have been made in a business it is customary to
find the assessee questioning that a business has at all been carried on, and
further that the return is on the capital account and not revenue. This
well-trodden path was also followed in this case, and the assessee Company has
raised three contentions. It contends that the return to it as salami
represented merely a capital return because in acquiring the mining lease the
assessee Company acquired two distinct rights (a) the general right to the
benefits under the leases for which consideration was the salami, and (b) the
right to carry on business in coal.
According to the assessee Company, it never
exercised the second right and when it parted with the first right, it only
realised its capital. This is the first contention.
The assessee Company next contends that there
is no difference between an individual owning properties and selling them, on
the one hand, and a company owning mining leases and issuing sub-leases, on the
other, because in either case, there are no profits or gains of business, if no
business is done. Lastly, it contends that even if the assessee Company was
carrying on business, it was not carrying on a trading activity but its
activities consisted in merely collecting rents or royalties which taken with
the performance of other necessary and allied activities could not amount to
the carrying on of a business resulting in increased salami as profits of the
business.
No doubt, in Kamakshya Narain Singh v.
Commissioner of Income-tax (1) the Privy Council (1) (1943) L.R. 70 I.A. 180.
376 made a distinction between sums received
as royal. ties and Salami by the proprietor of the Ramgarh, Estate holding the
former to be income from other sources within s. 12 of the Act, and the latter
as a payment on capital account; but the, facts were different. Since the case
is relied upon by the assessee Company, it is necessary to consider it in some
detail. The Court of Wards acting on behalf of the proprietor of Ramgarh
Estate, granted leases for 999 years to certain companies including the
assessee Company. Under the terms of the leases the lessees agreed to pay to
the lessors royalties at certain rates per ton of different kinds,of coal
raised and a fixed salami or premium,, the royalty being subject always to a
minim annual sum. It was contended on behalf of the proprietor that none of
the, sums was taxable as income. The contention of the proprietor with regard to
the royalty per ton and the minimum royalty was not accepted but with regard to
the salami it was The Judicial Committee observed :
"The salami has been, rightly in their
Lordships' opinion, treated as a capital It is a single 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." In that case, the general right was, in effect sold by
the proprietor of the Estate. In his bands as a landowner, the coal bearing
lands were property and when lie sold the right to the lessees to enjoy the
benefits, he sold his property but he was not doing business. The proprietor
parted with the, general right, but in his bands it was not the stocking-trade
of any business. In his hands the lands or the rights in. respect of them were.
property, but that character did not necessarily continue in the 377 hands of
his lessees. If the lessees treated these lands, so to speak, as the
stock-in-trade of their business and turned them to account at a profit, the
profit so gained may legitimately be a considered as the profit of business. It
is contended that there is no difference between a landowner and a company
which owns land or leases in land, and reliance is placed upon the case of
Balgownie Land Trust Ltd. v. Commissioner of Inland Revenue (1). In that case,
the owner.'of an estate left his landed estate to the trustees " with a
direction to realise". The trustees were unable to dispose of the land on
the market and formed a company to deal in real property to which the estate
was transferred in exchange of shares allotted to the beneficiaries. The
company then acquired other properties as well, and received rents which were
paid as dividends and then sold the newly purchased property and parts of the
estate making a profit. It was held that the profits from the sales were
profits of a trade or business.
The actual decision is against the assessee
Company, but what is relied upon is a passage in the judgment of the Lord
President (Clyde) in the Court of Session (Scotland) at p.
692, where it is observed:
"One is not, however, entitled to infer
from the circumstances that a company is professedly formed with trading
purposes in view and for trading objects that the transactions in which it
engages necessarily constitute a trade or business ; because it does not follow
from the fact that it has objects and powers such as 1 have indicated that it
actually uses them for the purpose of conducting the usual business of a
company trading in real estate." (1) (1929) 14 T. C. 684.
378 If the assessee Company was not doing
business but was merely realising the property which it had acquired, this
passage might have been of some use ; but, as will be shown later, there was
more than mere realising of its property in the present case, and the further
observations of the Lord President apply, which run :
"But the professed objects of a company
are not for that reason, to be left out of account ; on the contrary, they must
be kept in view when considering the transactions in which the company is
proved to have been engaged." Reliance is also placed upon certain
observations of Lord Warrington of Clyffe in Fry v. Salisbury House Estates,
Ltd. (1), where it was said :
"Assuming the memorandum of association
allows it, and in this case it unquestionably does, a company is just as
capable as an individual of being a landowner and as such deriving rents and
profits from its land, without thereby becoming a trader, and in my opinion it
is the nature of its operations, and not its own capacity, which must determine
whether it is carrying on a trade or not." We need not pause to consider
the, facts in that case, because we shall deal with it in detail presently ;
but it is clear even from this passage that the deciding factor is not
ownership of land or leases but the nature of the activity of the assessee and
the nature of the operations in relation to them. The objects of the company
must also be kept in view to interpret the activity. As was observed by Lord
Sterndale, M. R. in The Commissioners of Inland Revenue v. The Korean Syndicate
Ltd.
"If you once get the individual and the
company spending exactly on the same basis, (1) [1930] A. C. 432.
(2) (1921) 12 T. C. 18 1.
379 then there would be no difference between
them at all. But the fact that the limited company comes into existence in a
different way is a matter to be considered. An individual comes into existence
for many purposes, or perhaps sometimes for none, whereas a limited company
comes into existence for some particular purpose, and if it comes into
existence for the particular purpose of carrying out a transaction by getting possession
of concession and turning them to account, then that is a matter to be
considered when you come to decide whether doing that is carrying on a business
or not." The decision in this case must, therefore, turn upon the objects
for which the Company was formed, and whether one of the objects of the Company
was to develop and sell leases and leaseholds with an eye to making profit and
what its activity was, in relation to its objects. Before, however, we analyse
the objects for which the assessee Company was formed and scan its activities,
it is instructive to refer to two cases to which the learned Attorney-General
for the Department called our attention and which have also formed the basis of
the decision of the High Court and the Tribunal.
The first is the well-known case of
Californian Copper Syndicate (Limited and Reduced) v. Harris (1). There, the
assessee company was formed, inter alia, with the following objects :
" (1) To acquire copper and other mines,
mining rights, metalliferous and auriferous land, in California or elsewhere in
the United States of America, and any interest therein, and in particular to
acquire the mines known 'as (here follow some names) situate in the county of
...........
(1) (1904) 5 T. C. 159.
380 (17)To sell, lease, charter or otherwise
dispose of absolutely or conditionally, or for any limited interest, the whole
or any part of the undertaking, property, rights, concessions or privileges of
the Company for such consideration in cash, shares or otherwise as the Company
may think fit..........................." The Company acquired 480 acres
of copper-bearing land for E.
24,000 and spent money on development. Later,
80 acres of this land Were sold to Fresno, Copper Company, Ltd., for ;E.
105,000 payable wholly in fully paid shares
of the Fresno Copper Company. the Company sold the remaining 400 acres for E.
195,000 payable wholly in fully paid shares of Fresno Copper Company. The
Fresno Company had 400,000 shares of E.
I each, and of these, 300,000 were allotted to
the Company.
The Company made no profits assessable to
income tax, and the question was whether the net gain derived from the sale of
the property could be deemed to be profit. The Company contended that this was
only a conversion of one kind of capital into one of another kind. In the Court
of Exchequer (Scotland) Lord Justice Clerk distinguished between two kinds of
cases-(a) where the owner of an ordinary investment chooses to realise it, and
obtains a greater price for it than he originally acquired it at ; and (b)
where the act is done not merely as a realisation but in what is truly the
carrying on or carrying out, of a business. He, observed "There are many
companies which in their very inception are formed for such a purpose, and in
these cases, it is not doubtful that, when they make a gain by a realisation,
the gain they make is liable to be assessed for Income Tax." The learned
Lord Justice observed that the line might be difficult to draw and each case
must be 381 decided on its own facts and posed, the question, which is the
question to ask here :
"Is the sum of gain that has been made a
mere enhancement of value by realising a security, or it is a gain made in an
operation of business in carrying out a scheme for profitmaking ?" The
facts in the case were held to indicate a highly speculative business, and it
was said that the mode of the actual procedure employed also indicated a
trading venture.
Lord Trayner also agreed, observing that it
was "'a proper trading transaction" and one which was not only within
the power of the company but also authorised by the Article.
The next case is British South Africa Co. v.
Commissioner of Income-tax (1). In that case, the assessee was the British
South Africa Co., which was incorporated, inter alia, for carrying into effect
concessions and agreements which had been made by certain chiefs of South
Africa and such other concessions which the Company might acquire. After
acquiring such concessions and mining rights, the Company gave special grants
to other companies in return for fully paid shares and annual payments over a
fixed number of years. The Income-tax authorities in Rhodesia treated these
sums as profits, and assessed to income-tax the full par value of the shares.
It was held that the sums were not capital receipts but income from business.
The High Court of Rhodesia and the Rhodesian Court of Appeal affirmed the view
of the Income-tax authorities. On appeal, the Privy Council did not endorse the
view of the Rhodesian Courts on certain aspects of the case, with which we are
not here concerned, but went on to enquire into the nature of the receipts in
question. Their Lordships in this connection endorsed the view of Hudson, P.
that the payments were income derived from the business of turning to account
(1) [1946] 4 I. T. R. Supp. 17.
382 the Company's rights under the
concessions of winning and disposing of minerals by participating in the
proceeds of the exploitation of such rights by its licensees and the income
was, therefore' taxable as being the profits or gains of a trade or business.
Their lordships also held that it was not material "that in dealing with
its mineral rights the Company has retained an interest either by way of a
possible reverser of the property or by a shareholding in a company to which it
made a special grant." The case, of course, is one to which the warning
often given that it is not desirable to rely upon decisions under different
taxing statutes would seem applicable ; but in the judgment of the Privy.
Council, it is made clear that the Rhodesian Act was not different from the
British law. The decision also rests, not upon the provisions of any special
enactment but upon the more general consideration whether such receipts can be
considered in a business sense as belonging to capital account or revenue and
in what circumstances.
These two cases and particularly the
Californian Copper Syndicate case (1) cited by the learned Attorney-General do
establish that if a company sold its assets as a part of its business with the objects
for which the company was formed, the excess receipts over the expenses of
acquisition can be regarded as profits or gains of the business.
The case of the Californian Copper Syndicate
Ltd. (1) is so similar in facts as to be almost decisive; but the assessee
Company relies upon Tebrau (Johore) Rubber Syndicate Ltd. v.
Farmer (2) as laying down the principle which
should govern this case. In that case, a company was formed with the object of
acquiring estates in the Malay Peninsula and developing them by planting and
cultivating rubber trees.
The Memorandum of (1) (1904) 5 T.C. 159. (2)
(1910) 3 T.C. 658.
383 Association contained a power to sell the
property in the following terms:
(12)"To sell, or otherwise dispose of,
as a going concern or otherwise, the whole or any part of the business
undertaking and property of the Company for such consideration as the Company
shall think fit." Two estates were purchased, but for want of adequate
capital were sold to another company for consideration in the shape mainly of
shares in the second company. The return thus exceeded the amount of capital
expended in making the acquisitions. Before the sale, however, a considerable
part of the estates had been planted with rubber trees but no rubber had been
produced and the first company bad not reached the production stage. The
Company had thus not earned any income except what it got by the sale. This was
claimed to be an increase of capital. The Surveyor of Taxes relied, inter alia,
upon the Californian Copper Syndicate case (1).
It was held by the Court of Exchequer
(Scotland) that the profit on sale was merely an appreciation of capital and
not profit assessable to income-tax. Lord Salvesan observed that he was unable
to distinguish the position of the company from that of a person who acquired
property by way of investment and who realised it afterwards at a profit.
He, however, observed:
"No doubt if it is a part of his
business to deal in land or investments, any profits which in the course of
that business he realises form part of his income; but the mere fact that a
person or company has invested funds in the purchase of an estate which has
subsequently appreciated And so has realised a profit on his purchase does not
make that ,Profit liable to assessment." The Californian Copper Syndicate
case(1) was (1) (1904) 5 T.C. 159.
384 distinguished, because in that case, Lord
Trayner bad found that business was being done, and the following observation,
from Lord Trayner's Judgment were emphasized:
"I am satisfied that the Appellant
company was formed in order to acquire certain mineral fields or workings-not
to work the same themselves, for the benefit of the Company, but solely with
the view and purpose of reselling the same at a profit." Lord Salvesen pointed
out that such an inference could not be drawn about the case before him.
These two sets of cases illustrate forcefully
the changing circumstances in which an excess return may be treated as an
appreciation of capital or as profit. If the sale is after a company is wound
up and business has stopped, it may (subject to special statutory provisions)
be said that any excess amount received over and above the capital of the
company is merely an appreciation of capital; but the same cannot be said if
business is being done in lands, mineral concessions, mining rights with a view
to making profits.
In the latter case, a sale at an enhanced
price is not appreciation of capital but profit in the way of business, and the
sale is so to speak, of stock-in-trade.
Mr. Mitra relies upon three cases to
establish that no business at all was being done. He contends that the assessee
Company was merely granting sub-leases of property of which they had the
reverter and all that the assessee Company did was to collect rent and
royalties. Before dealing with the cases, it is necessary to point out that the
ultimate reverter has no significance. The term is 999 years less a few days.
Even if it was shorter a possible reverter is not material. The observations of
the Judicial Committee in the case from Rhodesia quoted earlier have our
assent.
385 The first case relied upon is East India
Prospecting Syndicate v. Commissioner of Excess Profit .Tax(1). In that case,
the facts were very different. In 1919, V.C., a limited Company, obtained a
prospecting licence from the Raja of Talchar in respect of some 8 sq. miles of
coalbearing lands. On August 5, 1920 a partnership was formed which was named
the East India Prospecting Syndicate. The objects of the partnership were:
(1)to purchase from the Company their rights
under the prospecting licence;
(2)to give effect to the conditions of the
said licence ; and (3)to promote a company or companies with limited liability
for the purpose of acquiring at a profit to the Syndicate all or any of the
properties including the benefit of the prospecting licence.
The Syndicate acquired the prospecting
licence from the Company, V.C. In 1921, the Syndicate obtained a mining lease
from the Raja of Talchar over about 500 acres for 30 years with option to
renew. The Syndicate then promoted a Company called the Talchar Caulfield
'Ltd., (shortly T.C .) and sublet the mining property to it. They received
payment in cash, in the shape of shares in T.C. and certain amounts
periodically which were in excess of the amounts payable for alike period to
the' Raja of Talchar. The contention of the Syndicate was that they were not
carrying on any business.
It was held that the activities of the
Syndicate did not amount to a business and their receipts could not be regarded
as, profits of business and were not chargeable to excess profits tax. It was
conceded by the Department in that case that the functions of the Syndicate,
which was a partnership, and neither a limited Company nor an incorporated
society, consisted (1) [1951]19 I.T.R. 571.
386 wholly in the holding of property, and
that they had no other functions whatsoever. It was, therefore, held that the
proviso to s. 2(5) of the Excess Profits Tax Act, which defined business in
certain circumstances, was not applicable, that proviso read:
"Provided that where the functions of a
company or of a society incorporated by or under any enactment consist wholly
or mainly in the holding of investments or other property, the holding of the
investments or property shall be deemed for the purpose of this definition to
be a business carried on by such company or society." Harries, C.J., and
Chatterjee, J., held that, on the principle expressio unius exclusio alterius,
the fiction in the proviso was not applicable to individuals and other bodies.
It was, however, pointed out that:
"If this sub-lease had been granted by a
limited company or by an incorporated society the net profit could be regarded
as profits for the purposes of Excess Profits Tax Act by reason of the proviso
to Section 2(5) of the Act." The case was thus decided on the words of s.
2(5). of the Excess Profits Tax Act and the fact that the Syndicate was a
partnership. The High Court then went on to consider the nature of rents and
royalties received by the Syndicate, and held on the authority of In re
Commercial Properties Ltd.
(1) that for income-tax purposes the income
would fall to be considered under s. 9 and not s. 10.
It will be noticed that there was but one
property which the Syndicate held and the whole of that property was sub-let to
T. C. Before it was, so sub-let, it was not being used for any business and all
that the Syndicate did with it was to lease (1) (1928) I.L.R. 55 Cal. 1057.
387 it out. It was, in these Circumstances,
that it was held to yield income from property and not profits or gains from
business. The case is analogous to In re Commercial Properties Ltd. (1), which
is also cited by the assessee Company. There, the object of the registered
company was to acquire land, build houses and let premises 'to tenants in
Calcutta and elsewhere. The sole assets were three properties which were let
out and all that the registered company did was the management and collection
of rents.
Rankin, C. J., held that the receipts were
income from property within s. 9 of the Income-Tax Act, that letting out such
property and collecting rents was not doing business, and that profits, and
gains from business were very different from income from property. These two
cases were decided on their very special facts. The first was a case of excess
profits tax, and the fiction created by s. 2(5) of the Excess Profits Tax Act
not being applicable, the nature of the business, if any, was examined, and it
was held that there was no more than collection of rents from property.
The second case was also one of rents from
property and not of profits from business.
The last case relied upon is Fry v. Salisbury
House Estate Ltd. (2) already mentioned. in this Judgment. Salisbury House was
a building with 800 rooms. A company was formed for the express purpose of
acquiring it and utilising it.
The rooms were let unfurnished to tenants,
but there was some slight service in the shape of heating and cleaning.
The company also retained some rooms as its
offices. The company was first assessed under r.8(c)(i) of Sch.A VII of the
English Incometax Act of 1918., which provided for assessment of landlords
instead of tenants in the case of any house or building let in apartments or
tenements. The company paid the tax assessed on it. Then a notice was sent
under Sch. D. The company admitted (1) (1928) I.L.R. 55 Cal. 1057.
(2) [1930] A.C. 432, 388 that it had to pay
tax under Sch. D on profit it might have made from the services it rendered,
but contended that income which had. been taxed under Sch. A could not be taxed
under Sch. D. The company demanded a case. Rowlatt, J., held against the
company but his decision was reversed by the Court of appeal On further appeal
to the House of Lords, it was held that the rents were profits from ownership
of land and assessment under Sch, A was the proper mode and they could not be
treated as trade receipts of the company for purposes of Sch. D. The assessee
Company has relied upon certain passages in the speeches of the learned and
noble Law Lords, one of which from speech of Lord Warrington of Clyffe has
already been quoted. It is not necessary to quote the other passages except one
from the speech of Lord Tomlin because the purport is the same.
Says Lord Tomlin :
"Further in my view the perception of
rents as landowner is not an operation of trade within the meaning of the Act.
If this be so, I am unable to appreciate how the existence o f ancillary
activities which produce profits taxable under Schedule D can affect the nature
of the operation or how the legal significance of the perception is 'altered
for the purpose of income-tax if the recipient is a limited company rather than
an individual." As has been already pointed out in connection With the
other two cases where there is a letting out of premises and collection of
rents the assessment on property basis may be correct but not so, where the
letting or sub letting is part of a trading operation The dividing line is
difficult to, find but in the case of a company with its professed objects and
the manner of its activities and the nature of its dealings I with, its
property, it: is possible to say on which side the operations fall, and to what
head the income is to be assigned.
389 Ownership of property and leasing it out
may be done as a part of business, or it may be done as land owner. Whether it
is the one or the other must necessarily depend upon the object with which the
Act is done. It is not that no company can own property and enjoy it as
property, whether by itself or by giving the use of it to another on rent.
Where this happens, the Appropriate head to
apply is "income from property" (s. 9), even though the company may
be doing extensive business otherwise. But a company formed with the specific
object of acquiring properties not with the view to leasing them as property
but to selling them or turning them to account even by way of leasing them out
as an integral part of its business cannot be said to treat them as landowner
but as trader The cases which have been cited in this case both for and against
the assessee Company must be applied with this distinction properly borne in
mind. In deciding whether a company dealt with its properties as owner,, one
must see not to the form which it gave to the transaction but to the substance
of the matter. The Californian Copper Syndicate case (1) illustrates vividly
dealings with mineral rights and concessions by a company as part of the
objects of its business, or, in other words, in the doing of the business. The
Calcutta cases and the case of Fry v. Salisbury House Estate Ltd.(,) illustrate
the contrary Proposition. There, the property, though dealt with by a company
intending to do business, was dealt with as landowner. The intention in those
cases was not to derive profit by business done with those properties but to
derive .income by renting them out Where a Company acquires properties which it
sells or leases out with a view to acquiring other properties to be dealt with
in the same manner, the company is not treating them as properties to be
enjoyed in the shape of rents which they yield but as a kind of circulating
capital leading to profits of business, which profits (1) (1904) 5 T. C. 159.
(2) [1930] A. C. 432.
390 may be either enjoyedor put back into the
business to acquire more properties for further profitable exploitation.
We shall now turn to the present case,
because it remains to consider what the assessee Company was doing with the
head leases. 'The relevant clauses of the Memorandum of Association of the
assessee Company have already been quoted. They show the various objects for
which the assessee Company was incorporated. Though power was taken under ClS.
(2), (3), (6) and (34) to do business of coalraising, etc.., the assessee
Company did not do the sort of business authorised there. It restricted its
business to ClS. (1) and (52). Under el. (1), power was taken to purchase and
acquire underground coal-mining and relative rights. Under el. (52), power was
taken to sell, improve, manage, develop, exchange, lease, mortgage, disposeof,
turn to account or otherwise deal with all or any part of the property and
rights of the Company. Business was done extensively within these two clauses.
Annexure F shows the areas which were sub-leased. A glance, ,at the chart shows
the large number of sub-leases and the different companies to which the
subleases were granted. These sub-leases were granted, because the assessee
Company wanted,, was a matter of business, to turn its rights to account. The
assessee Company opened out, and developed the areas, and then granted these
sub leases with an eye to profit. It is clear from these operations that the
assessee Company having secured a large tract of' coal-bearing land parcelled
and developed it into kind of stock-in-trade to be profitably dealt with. The
assessee Company extended its business along these lines acquiring fresh
fields. In the circumstances, the nature of the business was trading within the
objects of the Company and not enjoyment of property as land owner. There was
also no sale of its fixed, capital at a profit. In our opinion, 391 the High
Court rightly answered the question against the assessee Company.
In the result, the appeals fail, and are
dismissed With costs.
Appeals dismissed.
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