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TMI Blog1986 (7) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... looms large in these appeals arising out of the assessment to income-tax for the assessment years 1950-51, 1951-52 and 1953-54, the accounting years, respectively, ending on May 31, 1950, May 31, 1951, and May 31, 1953. The assessee is a public limited company limited by shares. It derived income from several sources including certain business operations. These operations were carried out in India and abroad and used to be carried out, inter alia, in Burma and Siam. The assessee-company carried on business in Burma from 1862 onwards. In connection with its business of selling timber, the assessee-company had to enter into contracts which are mentioned as " forest leases " with the Government of Burma. In the year of account ending on May 31, 1950, the assessee-company was the owner of about 15 forest leases. The agreed position between the parties was that all the forest leases contained provisions and clauses exactly similar to the specimen copy dated October 28, 1925, which was taken into consideration by the High Court. It may be mentioned, however, that the forest leases were for a duration of 15 years and in respect of large areas. Under these leases, the assessee-company w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernment on or about June, 10, 1949. In that connection, certain correspondence had been addressed by the assessee-company to the Government. The Union of Burma on the one hand and the assessee-company and Steel Brothers Company Ltd., on the other executed an agreement dated June 10, 1949, on the footing that the forest leases had already been terminated. The agreement provided for making over by the assessee-company to the President of the Government of Burma of the assessee-company's "residuary rights" under the forest leases together with the non-duty paid logs wherever found and also for making over of all the assets pertaining to the forest leases, viz., headquarters, elephants, cattle, stores, buildings, dwelling houses, motor transport, tractors, launches, etc., and for certain other incidental matters. The agreement provided for handing over by the President of the Government of Burma to the assessee-company of 50,000 tons of teak logs of specified qualities mentioned in clause 7 of the said agreement. There was no dispute between the parties that in pursuance of the agreement, the assessee-company had made over to the Government of Burma the assets mentioned in clause I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... logs handed over by the assessee-company to the Government, Rs. 2,69,975 in respect of the logs delivered against handing over of depreciable assets, stores and livestock." ([1971] 81 ITR 777 at p. 785). The question that arose upon such allocations having been made in the manner indicated was as to whether the receipt of Rs. 65,52,153 in the accounting year ending May 31, 1950, and Rs. 5,78,896 in the accounting year ending May 31, 1951, was exempt from tax as being receipts of capital nature as contended by the assessee-company. Similarly, the further question which arose was as to whether the sale proceeds amounting to Rs. 31,980 in the accounting year ending May 31, 1950, and Rs. 2,69,975 in the accounting year ending May 31, 1951, in respect of depreciable assets were liable to tax under the Act or were altogether free from such liability. The Income-tax Officer as well as the Appellate Assistant Commissioner made findings against the assessee-company in connection with these amounts. On behalf of the assessee-company, it was urged before the Appellate Tribunal that the entire receipt and delivery of the 43,860 tons of logs were on capital account. The submission was that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plication of that proviso were all satisfied ? 4. Whether, on the facts and in the circumstances of the case, the amounts of Rs. 5,250, Rs. 1,025 and Rs. 25,705, being the excess realisations over Rs. 225 per ton for logs received in respect of depreciable assets, stores and livestock, respectively, were liable to tax under the Act ? " " II. Assessment year 1951-52 1. ......... 2. Whether, on the facts and in the circumstances of the case, the amount of Rs. 5,18,896 or any part thereof was exempt from tax as being a receipt of a capital nature ? 3. Whether, on the facts and in the circumstances of the case, the amounts of Rs. 44,407, Rs. 8,639 and Rs. 2,16,929, being the excess realisations over Rs. 225 per ton for logs received in respect of depreciable assets, stores and livestock, respectively, were liable to tax under the Act ? " Similarly for the assessment year 1953-54, the questions referred by the Tribunal to the High Court were as follows ([1971] 81 ITR 777, 805): " 1. Whether, on the facts and in the circumstances of the case, the amount of Rs. 5,58,188 or any part thereof was exempt from tax as being a receipt of a capital nature ? 2. Whether, on the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rant of other rights in concession Area.-The Government acting on behalf of the Secretary of State reserves to itself the right to enter into agreements with other parties for the extraction of timber other than that which the Contractor is entitled to extract under this Agreement from the whole or from any part of the Concession Area." The proviso to that clause need not be set out. Clause 4(1) was as follows: "4. Period during which agreement is in force.-(1)This Agreement shall come into force on the 1st day of January, 1926, and shall unless previously terminated under clause 26 or clause 29 terminate after the expiry of a period of fifteen years, viz., on the 31st day of December, 1940: Provided that in respect of the rights conferred by clause 27 or by sub-clause (2) of this clause and in respect of every liability incurred under this Agreement, it shall continue in force for such further period as is necessary for the enjoyment of such rights and the enforcement of such liabilities. " Clause 15 of the agreement authorises the assessee-company to cut canals, make water courses, build bridges and other railway works, etc., on certain conditions. Clause 16 dealt w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctor or with other party subsequent to this agreement or in the event of no new agreement being entered into at the rates of royalty set out in clause 20 of this agreement; (b) the contractor shall be given such reasonable time as in the opinion of the Government may be necessary to allow him to dispose of such of his buildings, mills, railways or other structures erected for the purposes of his business under this agreement as are standing on land at the disposal of the Government. " Under clause 29, the Contractor was given the right to terminate the agreement at any time by giving two years' notice in writing. On January 1, 1926, there was commencement of the agreement. December 31, 1940, was the due date of expiry of the agreement. On April 7, 1942, there was extension by the Government of Burma of the long term agreement till such time as it became possible to resume forest operations and for such further period as might be required for settlement of new agreements. On January 24, 1948, there was a letter by the Government of Burma to the assessee and others in connection with ending of joint working arrangements between consortium of five contractors on the one hand and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ases were always of duration of 15 years or more. They always related to extremely large areas which were sub-divided into large coupes. These coupes were also not to be worked at the same time, but according to schedule fixed in respect thereof. Each specified group of coupes was to be worked within three years. The extraction of the trees was to be completed within the fixed period of the three years. The schedule fixed was compulsorily to be adhered to. The work of extraction was to be done in accordance with the rules prescribed for felling, logging and removal. The Government was accordingly not a seller of any stock-in-trade and the assessee was not a purchaser of any stock-in-trade. The assessee undertook the obligations of various kinds so as to complete the work of extraction as indicated in the contract. The assessee had to maintain extremely large establishments and headquarters at various places and had in that connection put up various premises including dwelling houses and buildings. It had to maintain diverse sorts of mechanical appliances and had, inter alia, owned motor transport, tractors, launches, elephants, cattle and diverse assets for the purposes of working ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,847 logs received by the assessee under the agreement dated June 10, 1949, were in substitution of the logs that it had already cut and had not been able to remove from the forests. It was urged, it was merely recompense for its rights in the stock-in-trade. It has to be borne in mind that though the assessee had several sources of income including income from business operations, the assessee-company's main income was from felling the trees and it carried on the said business on an extensive scale. On behalf of the assessee, it was submitted that forest leases constituted the income-producing assets of the company. Mr. Kaka submitted that these involved the setting up of the entire business and investment of large funds in building dams, canals, roads, railways, buildings, etc. He drew our attention to clause 15 of the lease agreement which has been set out at page 40 of the paper book in the statement of the case. Mr. Kaka further reiterated that the leases were for a long duration with a first right of refusal to any subsequent leases. Reference was made in this connection to clause 4(2) of the lease agreement appearing at page 30 of paper book. The forest leases, it was u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t at page 82. The splitting up of the consideration, according to him, in clause 10 was merely for the implementation of the agreement as per the Schedule provided in the manner of handing over the logs to the assessee in exchange of certain assets. If the residuary rights and assets had not been acquired by the Government, the assessee would have carried on its business for another three years and logged and removed the felled trees. The assessee was prevented from carrying on this business upon the nationalisation of the forest resources and the consequential acquisition of the residuary rights and assets pertaining to the forest leases belonging to the assessee. Mr. Kaka urged that compensation therefore, paid for acquisition of the residuary rights and assets was for the sterilisation of the company's business and, therefore, a capital receipt. He relied on the observations of Lord Buckmaster at page 463 and Lord Wrenbury at page 465 in Glenboig Union Fireclay Co. Ltd. v. IRC [1922] 12 TC 427 (HL). It was further urged that once it was held that the forest leases constituted the capital assets of the assessee, compensation paid for the sterilisation of even a part of a capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, sterilisation, destruction or loss, total or partial, of a capital asset would be capital receipt. If a sum represented profit in a new form, then that was income but where the agreement related to the structure of the assessee's Profit-making apparatus and affected the conduct of the business, the sums received for cancellation or variation of such agreement would be capital receipt. In Senairam Doongarmall v. CIT [1961] 42 ITR 392, 406, this Court observed as follows after discussing several authorities : " All these cases were decided again on their special facts. Though they involved examination of other decisions in search for the true principles, it cannot be said that they resulted in the discovery of any principle of universal application. To summarise them., South India Pictures' case [1956] 29 ITR 910 was so decided because the money received was held to be in lieu of commission which would have been earned by the business which was still going, and the receipt was treated as the fruit of the business. The same reason was given in Jairam Valji's case (1959] 35 ITR 148 and the Shamsher Printing Press' case [1960] 39 ITR 90. In Vazir Sultan's case [1959] 36 ITR 175, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in CIT v. Manna Ramji and Co. [1972] 86 ITR 29 (SC). The court reiterated the same principle. We have referred to the discussion which took place with the Government of Burma on October 28, 1925. Having regard to all these, the forest leases, in our opinion, affected the very structure of the operation of the assessee. In this connection, we may remind ourselves of the decision of the House of Lords in Van den Berghs Ltd. v. Clark (H.M. Inspector of Taxes) [1935] 3 ITR (Eng Cas) 17. In that case, a Dutch company and the assessee, who were competitors in the manufacture and dealing in margarine, in order to end the competition, entered into an agreement in 1908, by which they bound themselves to work in friendly alliance and to share their profits and losses in accordance with an elaborate scheme therein specified; further, it was stated that they would promote the commercial, pecuniary, buying and selling and other interests of the two companies. In 1913, another agreement was entered into modifying the original basis of ascertaining and sharing profits, and, subject thereto, continued in force the provisions of the agreement of 1908 until December, 1940. During the war, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her employees necessary for the conduct of their business. These regulated the appellants' activities, defined what the appellants might and what they might not do, and affected the whole conduct of the appellants' business. Accordingly, Lord Macmillan found it, in that case, difficult in seeing how money laid out to secure, or money received for the cancellation of, so fundamental an organisation of a trader's activities could be regarded as an income disbursement or an income receipt. Lord Macmillan noted that the legal character of the payment should not be misjudged by the magnitude of payment for " magnitude " is a relative term. But the magnitude of transaction is not an entirely irrelevant consideration. With respect, we accept this approach of Lord Macmillan to the facts of the present case before us, which appears to be basically similar. The forest leases, therefore, constituted in our opinion, capital assets of the assessee. The same conclusion is fortified by the observations of the House of Lords in the case of Hood Barrs v. IRC (No. 2) [1957] 37 TC 188 . In CIT v. Vazir Sultan Sons [1959] 36 ITR 175, this court held that in considering whether compensation paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operations and the agreement does not involve any transaction of sale between the assessee and the Union of Burma. The assessee-company never paid any money by way of a price in respect of assets delivered to it by the Government and, therefore, this amount of Rs. 1,41,156 could not be brought to tax against the assessee company under the second proviso to section 10(2)(vii) of the Indian Income-tax Act, 1922. The question accordingly was rightly decided in favour of the assessee. Regarding question No. 4 in the assessment year 1950-51 and question No. 3 in the assessment year 1951-52, these related to the delivery of 2,946 and 12,067 tons of logs to the assessee-company in respect of the depreciable assets, stores and livestock mentioned in sub-clause (b) of clause I of the agreement dated June 10, 1949. The High Court was right in holding that the logs came into the possession of the assessee-company in consequence of the agreement made on June 10, 1949, against the delivery of all outstanding or residuary rights of the assets to the Government. The arrangement was in consequence of nationalisation of forest operations in Burma. The whole of the quantity of 43,860 tons of logs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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