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TMI Blog1961 (8) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... . Appeal dismissed. - - - - - Dated:- 31-8-1961 - Judge(s) : P. B. GAJENDRAGADKAR., K. SUBBA RAO., M. HIDAYATULLAH JUDGMENT 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 assessee 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 section 66A(2) of the Income-tax Act and presumably also read with section 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 grant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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... . (52) To sell, improve, manage, develop, exchange, lease, mortgage, dispose of, turn to account, or otherwise deal with all or any part of the property and rights of the company. On May 30, 1921, Messrs. Bird and Co. assigned their 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 sub-leased 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 sub-leasing 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-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at was a realisation of its capital within the ruling of the Privy Council in Kamakshya Narain Singh v. Commissioner of Income-tax. In transferring this general right, it was contended, the position of the assessee-company was indistinguishable from that of 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 section 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 diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... culated under section 10 of the Act. Under that section, tax is payable 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 section 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were property and when he 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, the profit so gained may legitimately be 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. Commissioners of Inland Revenue. 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 wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue v. Korean Syndicate Ltd. : " If you once get the individual and the company spending exactly on the same basis, 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 concessions 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sk here : " Is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit-making ? " 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 articles. The next case is British South Africa Co. v. Commissioner of Income-tax. 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 share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roperty 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 had 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. 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 Salvesen 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, 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 coal-bearing 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 Coalfield Ltd. (shortly T.C.) and sub-let 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 a like period to the Raja of Talchar. The contention of the syndic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 section 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 section 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 Estates Ltd. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness, 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 " (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 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 illustrates vividly dealings with mineral rights and concessions by a company as part of the objects of its business, or, in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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