1970 (8) TMI 23 - HC - Income Tax

Assessee (private company) took lease of the extensive zamindary and it also took assignment of all its estate - lands and collieries were sub-leased - held that, since the land acquired in land acquisition proceedings were stock-in-trade, the compensation received by the assessee for acquisition was not a capital asset but was a trading receipt

Summary

Issues Involved:
1. Whether the sums of Rs. 22,197, Rs. 1,88,417, and Rs. 73,327 received by the assessee for the years 1953-54, 1954-55, and 1955-56 should be excluded from the total income of the assessee.

Detailed Analysis:

Issue 1: Nature of Receipts (Capital vs. Revenue)
Facts and Background:
- The assessee-company was incorporated in 1920 and took over zamindary properties from a family estate.
- The company received salami, premia, and compensation during the relevant assessment years.
- The Income-tax Officer included these amounts as business income, which was reversed by the Appellate Assistant Commissioner and upheld by the Tribunal.

Tribunal's Reasoning:
1. Family Company Argument:
- The company was primarily incorporated for managing family assets.
- Shareholders were family members, and the lease consideration was paid by allotment of shares.
- The quit rent was only Rs. 100 per annum, indicating the lease was for better management rather than profit.

2. No Further Leases:
- The company did not acquire any other leases since its incorporation, suggesting it was not in the business of taking leases.

3. Royalties Assessed Under Section 12:
- Royalties paid by sub-lessees were assessed under Section 12 of the Income-tax Act, 1922, indicating they were not business profits.

Court's Analysis:
- The company declared dividends at a high rate of 25%, indicating it was a trading company.
- The creation of a reserve fund as per Article 124 of the company's articles of association further supports this.

Legal Precedents:
1. P. K. N. Co. Ltd. v. Commissioner of Income-tax:
- The Supreme Court emphasized that the nature of the transaction must be determined by considering all circumstances.
- The case involved a company formed for conserving family assets, and the incidental sale of uneconomical plots did not convert it into a business transaction.

2. Karanpura Development Co. Ltd. v. Commissioner of Income-tax:
- The Supreme Court held that transactions of acquiring leases and granting sub-leases were trading activities.
- The distinction between ownership of property and business activity was emphasized.

Court's Conclusion:
- The objects of the company, as stated in the memorandum, were commercial and trading in nature.
- The company's activities, including declaring dividends and creating a reserve fund, indicate it was engaged in trading.
- The receipts from salami, premia, and compensation were trading receipts and not capital receipts.

Compensation as Capital Receipt:
- The court examined various cases where compensation for compulsory acquisition was treated as capital.
- However, in this case, the compensation received was for trading assets, making it a revenue receipt.

Final Judgment:
- The sums received by the assessee were trading receipts and should be included in the total income.
- The Tribunal was not justified in excluding these amounts from the total income of the assessee for the relevant years.

Answer to the Question:
- The court answered the question in the negative, in favor of the revenue, holding that the amounts should be included in the total income of the assessee.

No Order as to Costs:
- The court did not pass any order regarding the costs.