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TMI Blog1970 (8) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... estate which belonged to Rai Pulin Behari Lal Singha Bahadur and the late Gosta Behari Lal Singha. The company took lease of the extensive zamindary pertaining to the Ukhara estate and it also took assignment of the movables, including G. P. notes and jewellery belonging to the members of the lessors' family and the arrears of rents and cesses, debts, decrees, etc. due by the tenants of the said estate. The said lease and assignments were taken by the company by the indenture dated July 5, 1920. The properties passing to the company were fully specified in the schedules appended to the said indenture. The consideration of the lease and assignment was fixed at Rs. 4,08,000 which was paid and satisfied by the company by allotment and issue of 4,080 fully paid up shares of the company to the lessors. The quit rent reseived by the lessors for the lease was Rs. 100 per annum. The company undertook to pay the land revenue and cesses payable to the superior landlords in respect of the zamindary. The lease was granted for a term of 999 years. The memorandum of association of the assessee-company, inter alia, provided as follows: " 3. The objects for which the company is established are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in clause 3 of the memorandum. Clause 5 of the memorandum provides that the capital of the company is Rs. 4,50,000 divided into 4,500 shares of Rs. 100 each and upon any increase in capital the company is to be at liberty to issue any new shares in priority to other shares, present and future with any preferential, deferred, qualified or special rights, privileges or conditions as to dividends, votes or otherwise attached thereto." The draft agreement mentioned in clause 3(a) of the memorandum of association of the assessee-company, clause 3 of the articles of association of the company and the statement of the Tribunal mentions that the company was formed for the purpose of conserving the family assets and explain the origin and formation of the company up to a point. The other relevant facts in the statement of the case can now be stated. The assessee-company after having acquired the lease of the estate which included substantial coal bearing lands and mines, started giving sub-leases of lands in different parcels for various terms. The assessment years in this case are 1953-54, 1954-55 and 1955-56, corresponding to the previous years on the Bengali calendar 1359 B. S., 136 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s paid by the assessee-company by allotment and issue of shares to the coparceners of the family. The company agreed to pay a quit rent of Rs. 100 only to the family (besides the rent payable for the estate to the superior landlords) and therefore by granting the lease to the company the family made a profit of Rs. 100 only per year. This fact alone is sufficient to support the contention of the assessee that it took lease of the estates only for the better management thereof and the fact that the company also took assignment of the Government securities and even jewellery belonging to the family lends further support to that contention." This is the first reason which the Tribunal has put forward and which we can describe as the reason for holding that, although this assessee is a company, it was a family company and the business of the company was really not the business of an ordinary company but of the original promoters, the zamindars, as owners of land making use of their own property no longer individually or as members of a coparcenary but as shareholders of the company and so incorporated. The second reason that the Tribunal puts forward is that the assessee-company di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any authority where the impact of this question of dividend on the point has been considered. The next significant feature and fact of this reference is that there is a reserve fund proved by its balance-sheet and profit and loss account. Creation of a reserve fund for this assessee-company is specially provided for in article 124 of the articles of association of this assessee-company. Article 124 reads as follows: The directors may before recommending any dividend set a side out of the profits of the company such sum as they think proper for reserve fund to meet depreciation, contingencies or for repayment of debentures or for equalising dividends or for repairing or maintaining any property for the company or for any other purposes of the company and the same may be applied accordingly from time to time in such manner as the directors shall determine. The directors may invest the sum so set aside as reserve fund upon such securities as the company in general meeting may direct other than the shares of the company or may employ the same in the business of the company without being bound to keep the same from other assets. This article is followed by articles 125, 126 and 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e origin, growth and development of the company are stamped with the only object and purpose of "taking over, the assets of the family for the good management of the family estate." Having regard to the statement of the case that during the accounting years the assessee-company granted several sub-leases for which it received salami and premia, it can be said that the assessee carries on the business of granting sub-leases and making profits out of these transactions. Again, although it is a fact that the assessee-company itself has not run any business in colliery the facts show that these sub-leases were granted to colliery companies who worked the colliery or undertook to work the coal mines. The order of the Tribunal records the facts that such well known colliery companies as the Barakar Coal Co. Ltd., the East Barakar Coal Co. Ltd. and Kajora Coal Mines Ltd. were and are the sub-lessees under the sub-leases granted by the assessee. Although, therefore, the assessee-company was not itself running a colliery business, yet there can be a business of working the mines through the agency of the sub-leases granted to the colliery companies. It may not therefore appear that becaus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the beginning of this judgment leave little room for doubt that it is a trading company. Secondly, if this company was intended only for preservation or the maintenance of the family and the preservation of the family assets, then the question arises whether actually and in fact, this is what the company does. We find it difficult to hold that this is what the company does because: (a) a joint family, specially such as the Ukhara zamindars, who, we are told by the learned counsel for the assessee, constitute a Mitakshara joint family, is not a static concept and every birth or addition in the family creates a right in the Mitakshara coparceners under the Hindu law. There is no recognition either in the memorandum or in the articles, which we have scanned very carefully, to suggest that any right or share is given to such new advents to the family. The incorporation of this company only gives those persons who are shareholders the right to manage the company and there is no provision that other members of the family who would be born or coming thereafter would be in any way a shareholder or entitled to any sub-division of the shares and if that were so, then the share register ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arily and fundamentally for carrying on trade, business or commerce and for earning profit. Apart from this basic concept of a company for the purpose of trading, certain sections of the Companies Act, 1956, are also illustrative of this idea. For instance, the expression "carrying on business" in section 11 of the Companies Act, 1956, and the same expression "carrying on business" with less than minimum members in section 45 of the Companies Act, 1956, section 149 putting restrictions on "commencement of business", section 433(e) of the Companies Act penalizing failure to "commence business" within a year as a ground for winding up and section 542 of the Companies Act imposing liability for fraudulent conduct of "business". Diverse sections of the Companies Act, 1956, are stamped with the concept of "carrying on business." Ordinarily, therefore, one would not think of an incorporated company under the Companies Act, 1956, to be an institution for the maintenance of the family or preservation of the family assets. We are not unmindful of section 25 of the Companies Act, 1956, but this section is also primarily against treating companies as families. This section deals with the powe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court and affirmed by the Supreme Court in Commissioner of Income-tax v. P. K. N. Company Ltd. The partners, of a firm called P.K.N. formed a private company and transferred to that company their properties situated in Malaya which properties consisted of several acres of rubber and cocoanut plantations which did not form a compact block and also vacant sites and houses. The company sold some of these properties and the question arose regarding taxation of the sale-proceeds. It was found as a fact in that case that the company sold the outlying properties owing to communist disturbances and difficulty in managing them and that was a fact which was not controverted by the revenue. It was also found as a fact in that case that what was sold was the uneconomic plots. The membership of this company was restricted by the articles of association to the members of the P.K.N. family. The Madras High Court came to the conclusion that the company was formed for the purpose of conserving the family assets and was employed in the business of planters from which it derived a very large, income but there was no material to hold that the company carried on the business of dealing in properties. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany might have some bearing but was not decisive, nor was the circumstance that a single plot of land was acquired and thereafter sold is decisive. In fact, the Supreme Court said that even profit motive in entering into a transaction is also not a decisive factor. Mr. Burman has used this authority to support his arguments for the assessee in the present reference before us. What the Supreme Court says in that decision is that one particular or single factor like the memorandum or the listing of many objects in the memorandum or a single transaction or profit motive individually by itself may not be decisive of the question whether the company is a trading company or a family concern. But the Supreme Court does not say in their decision that cumulatively if all the facts are taken together such a concern could not be a trading concern. We have set out the special facts and circumstances in the present reference before us, particularly the payment of dividend and the creation of the reserve fund. it is, in our view, a wrong use of this Supreme Court authority to say that because the court held that certain factors individually were not decisive, these factors were not relevant or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f its fixed capital at a profit. In acquiring the head leases and granting the sub-leases, the assessee-company carried on a business and the amounts received by way of salami were trading receipts and the profits therefrom were liable to income-tax. The essential principle and ratio of that decision on this particular point of distinction between the exercise of rights of ownership of the property and carrying on a business in respect of that property was made clear by the following observations appearing at page 377 : "Ownership of property and leasing it out may be done as a part of business, or it may be done as landowner. 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 its to another on rent. Where this happens, the appropriate head to apply is income from property, (section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneral right was, in effect, sold by the proprietor of the estate. In his hands 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 hands it was not the stock-in-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 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, theprofit so gained may legitimately be considered as the profit of business." This is the crucial point and the dividing line. On the facts of the present reference before us, the creation of sub-leases and the use of such interests in land make it clear that the assessee was using them as its stock-in-trade. So far as this assessee-company is concerned, these lease hold interests are the circulating capital or the stock-in-trade. There is no other circulating capital or stock-in-trade. There cannot ordinarily be a company without any circulating capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pensation have lost much of its importance. But even then it will be necessary to discuss the law and the authorities on this point. On behalf of the assessee, Mr. Burman has relied on certain decisions to support his argument that salami is always a capital receipt. It is not like rent or royalty. In Board of Agricultural Income-tax, Assam v. Smt. Sindhurani Chaudhurani, the Supreme Court had to consider a point under the Assam Agricultural Income-tax Act. Kapur J., in delivering the judgment of the Supreme Court in that case, observed at page 179 : "Salami is thus not rent and both parties have proceeded on that basis and it could not be called revenue within the meaning of the word used in the definition of agricultural income under section 2(1)(a) of the Act because it was a payment to the landlord by the tenant as a consideration for the transfer of a right in zamindari lands owned by the landlord. It has, therefore, all the characteristics of a capital payment and is not revenue." The Supreme Court noticed the Privy Council decision in Kamakskya Narain Singh v. Commissioner of Income-tax, and the observations of Lord Wright therein to the effect that salami is rightly t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rties to prospect for bauxite and the periods of the licences were six months in two cases and one year in the other two. Under those licences the licensees were granted the right to enter upon the land to prospect, search and mine, quarry, bore, dig and prove all bauxite lying in or within the land and for that purpose the licensee had the right to dig pits, shafts, borings and to remove, take away and appropriate samples and specimens of bauxite in reasonable quantities not exceeding 100 tons in the aggregate. The Supreme Court came to the conclusion on those facts that the licence was not merely a grant of the use of the capital of the assessee but it was really a giant of a right to a portion of the capital in the shape of a general right to the capital asset. Therefore, the Supreme Court came to the conclusion that the amounts received by the assessee were capital receipts and were not assessable to income-tax. There also the Supreme Court emphasised the principle at page 512: "The question which has to be decided is what was the nature of the transaction." It will not be inappropriate in this connection to refer to some statutes. Section 105 of the Transfer of Property Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that the assessee's rights in land in this case are such a stock-in-trade or a circulating capital for this assessee-company. The only other concept that remains to be discussed is the concept of compensation. As already indicated here a certain amount of money in this case was compensation received by the assessee-company by reason of the acquisition under the Land Acquisition Act. Mr. Burman batted on a very strong wicket on this branch of the argument that compensation of this nature from compulsory land acquisition is always regarded as capital on the authority of four decisions which we shall briefly notice now. They come from different High Courts of Calcutta, Madras, Assam and Nagpur. The Calcutta High Court in Calcutta Electric Supply Corporation v. Commissioner of Income-tax held that where an assessee received a price or a compensation for a plant compulsorily acquired by the Government it was a capital receipt and not taxable as an income on the ground that this was not really a voluntary sale as between a buyer and a seller. In that case what had happened was that the Government during the war requisitioned an electricity generating plant of the assessee under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd not income and, therefore, not liable to tax. As will be seen from the observations at page 226 of the report, there the Nagpur High Court came to the conclusion that it was a capital asset and therefore the conclusion was inevitable that the compensation was capital and not revenue receipt. Here, however, on the facts, we have found that this is not a capital asset at all but a trading asset. This disposes of the cases on which Mr. Burman for the assessee relied. We shall, however, notice one authority of the Punjab High Court on which Mr. Pal for the revenue relied on this point. That is the decision in Raj Kishen Prem Chandra Jain v. Commissioner of Income-tax. There the Punjab High Court holds that the excess of compensation paid to a person who carries on a real estate business in respect of land compulsorily acquired by the Government under the Land Acquisition Act, 1894, over the cost to him of the land is income in his hands and assessable to income-tax. The importance of this decision for the purpose of the present reference lies in this fact only that here the court was dealing with the case of a real estate business in respect of land. In the present reference we have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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