1949 (4) TMI 18 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessee was carrying on a "business" within the meaning of Section 2(5) of the Excess Profits Tax Act, 1940.
2. Whether the income from rent and royalties received by the syndicate could be taxed under the Excess Profits Tax Act, 1940.
3. Application of sub-rule (4) of Rule 4 of Schedule I of the Excess Profits Tax Act, 1940.
4. Relevance and applicability of various case laws cited, including English and Indian precedents.

Issue-Wise Detailed Analysis:

1. Whether the assessee was carrying on a "business" within the meaning of Section 2(5) of the Excess Profits Tax Act, 1940:
The syndicate argued that it was not liable to pay excess profits tax because it was not carrying on a business within the meaning of Section 2(5) of the Excess Profits Tax Act, 1940. The Tribunal found that it was carrying on a business, leading to the question: "Whether in the facts and circumstances of the case, the assessee can be said to be carrying on a 'business' within the meaning of Section 2(5) of the Excess Profits Tax Act, so as to bring the income in question within the charge to excess profits tax?"

The syndicate was formed to acquire coal prospecting rights and to promote a company for acquiring these rights at a profit. It acquired a prospecting license and a mining lease, which it sublet to Talchar Coalfield Limited. The syndicate's income from this sub-lease was treated by the Excess Profits Tax Officer as profits of a business, leading to an assessment of excess profits tax.

2. Whether the income from rent and royalties received by the syndicate could be taxed under the Excess Profits Tax Act, 1940:
The syndicate contended that its income was merely income from property, not from a business. The charging section of the Excess Profits Tax Act, 1940 (Section 4), specifies that tax can only be levied on profits of any business to which the Act applies. The term "business" is defined in Section 2(5) of the Act, which includes trade, commerce, or any adventure in the nature of trade, commerce, or manufacture, but does not include a profession carried on by individuals in partnership if the profits depend mainly on personal qualifications.

The proviso to Section 2(5) states that the holding of investments or property by a company or incorporated society shall be deemed to be a business. However, the syndicate, being a partnership and not a company or incorporated society, was argued not to fall under this proviso. The court found that the syndicate's functions consisted wholly in the holding of property and receiving rents and royalties, which did not amount to carrying on a business.

3. Application of sub-rule (4) of Rule 4 of Schedule I of the Excess Profits Tax Act, 1940:
The department argued that the profits of the syndicate were rightly assessed to excess profits tax by reason of sub-rule (4) of Rule 4 of Schedule I, which states that in the case of a business consisting wholly or partly in the letting out of property, the income from the property shall be included in the profits of the business. However, the court held that this rule only applies where the letting out of property amounts to a business, which was not the case for the syndicate. The syndicate's activities did not constitute a business, and thus the sub-rule could not apply.

4. Relevance and applicability of various case laws cited, including English and Indian precedents:
The Tribunal relied on several English cases, such as Inland Revenue Commissioners v. Korean Syndicate Ltd., which held that a company turning concessions into account was carrying on a business. However, the court distinguished these cases, noting that the definition of "business" in the English Acts was much broader than in the Indian Act. The court also considered Indian cases, such as Commissioner of Income-tax v. Gin and Rice Factory, Guntur, and Commissioner of Income-tax v. Bosotto Brothers Limited, but found them not binding and not applicable to the present case.

The court referred to the Calcutta case of In re Commercial Properties Ltd., which held that a company owning house property and letting it out was not carrying on a business, and the Privy Council case of Raja Bahadur Kamakshya Narain Singh of Ramgarh v. Income-tax Commissioner, Bihar and Orissa, which held that royalties were income from other sources, not from business.

Conclusion:
The court concluded that the syndicate's activities did not amount to carrying on a business within the meaning of Section 2(5) of the Excess Profits Tax Act, 1940. Therefore, the income from rent and royalties could not be taxed under the Excess Profits Tax Act. The answer to the question was in the negative, and the assessees were entitled to costs and a refund of the deposit.