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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 ..... 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 granted a prospecting licence to Messrs. Bird & Co., of an area of coal-bearing lands described as the Karanpura Coal Fields. The licence was for 12 years but was renewable for another term of 12 years. The licence reserved to the licensee the right to take coal mining leases of the Karanpura Coal Fields or any part thereof. The licence was transferable. The assessee-company was incorporated in 1920. The objects for which the assessee-company was formed, inter alia, were : " (i) to purchase and acquire from the owners or proprietors thereof or other persons interested therein underground coal mining, relative rights of and in the Karanpura Coal Fields in the Province of Bihar and Orissa at such price or prices for such period or periods and generally upon such terms and conditions as the directors may determine and for that purpose to adopt, enter into and carry into effect all contracts, agreements and other documents, and in particular to enter into and carry into effect, with or without modifications, eithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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-company had paid salami at the rate of Rs. 40 per standard bigha, and had agreed to pay royalty at certain rates. From the sub-lessees, the assessee-company charged salami at the rate of Rs. 400 per standard bigha and royalties at higher rates. For the assessment year 1949-50, the assessee-company realised Rs. 19, 14,035 as salami for the mining sub-leases granted in the relevant account year, and in the assessment year 1950-51, it realised Rs. 3,96,000 on the same account. We are not concerned with the income of the assessee-company arising from the enhanced royalties, because the assessee-company admitted that that income would be taxable. The assessee-company's contention that the excess amount realised by way of increased salami was on capital account and could neither be included in the assessable income for purposes of income-tax nor in the profits for purposes of business profits tax was rejected. Two orders in the income-tax cases and two in the business profits tax cases were passed in January 30, 1952. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 different kinds of taxes. The tax is always one ; but it may arise from different sources to which the different rules of computation have to be applied. The manner of this computation is indicated in the sections that follow. Before income, profits or gains can be brought to computation, they have to be assigned to one heads. These heads are in a sense exclusive of one another, and income which falls within one head cannot be assigned to, or taxed under, another head. The word " income " has not been defined in the Income-tax Act. In the definition which is enacted, certain receipts are said to be included in the concept of income ; but it does not say what " income " itself means. Certain working definitions have been given by courts, chief among which is by the Judicial Committee in Commissioner of Income-tax v. Shaw Wallace & Co. where it was held that by income is meant a periodical monetary receipt, not in the nature of a windfall but coming in with some sort of regularity or expected regularity. In business, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 when it parted with the first right, it only realised its capital. This is the first contention. The assessee-company next contends that there is no difference between an individual owning properties and selling them on the one hand, and a company owning mining leases and issuing sub-leases, on the other, because in either case, there are no profits or gains of business, if no business is done. Lastly, it contends that even if the assessee-company was carrying on business, it was not carrying on a trading activity but its activities consisted in merely collecting rents or royalties which taken with the performance of other necessary and allied activities could not amount to the carrying on of a business resulting in increased salami as profits of the business. No doubt, in Kamakshya Narain Singh v. Commissioner of Income-tax, the Privy Council made a distinction between sums received as royalties and salami by the proprietor of the Ramgarh Estate holding the former to be income from other sources within section 12 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the estate was transferred in exchange of shares allotted to the beneficiaries. The company then acquired other properties as well, and received rents which were paid as dividends and then sold the newly purchased property and parts of the estate making a profit. It was held that the profits from the sale were profits of a trade or business. The actual decision is against the assessee-company, but what is relied upon is a passage in the judgment of the Lord President (Clyde) in the Court of Session (Scotland) at page 692, where it is observed : " One is not, however, entitled to infer from the circumstance that a company is professedly formed with trading purposes in view and for trading objects that the transactions in which it engages necessarily constitute a trade or business ; because it does not follow from the fact that it has objects and powers such as I have indicated that it actually uses them for the purpose of conducting the usual business of a company trading in real estate. " If the assessee-company was not doing business but was merely realising the property which it had acquired, this passage might have been of some use ; but, as will be shown later, there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 called our attention and which have also formed the basis of the decision of the High Court and before the Tribunal. The first is the well-known case of Californian Copper Syndicate v. Harris. There, the assessee-company was formed, inter alia, with the following objects : " (1) To acquire copper and other mines, mining rights, metalliferous and auriferous land, in California or elsewhere in the United States of America, and any interest therein, and in particular to acquire the mines known as (here follow some names) situate in the county of... (17) To sell, lease, charter or otherwise dispose of absolutely or conditionally, or for any limited interest, the whole or any part of the undertaking, property, rights, concessions, or privileges of the company for such consideration in cash, shares or otherwise as the company may think fit ........ The company acquired 480 acres of copper-bearing land for pound 24,000 and spent money on development. Later, 80 acres of this land were sold to Fresno Copper Co. Ltd. for pound 105,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 shares. It was held that the sums were not capital receipts but income from business. The High Court of Rhodesia and the Rhodesian Court of Appeal affirmed the view of the income-tax authorities. On appeal, the Privy Council did not endorse the view of the Rhodesian courts on certain aspects of the case, with which we are not here concerned, but went on to enquire into the nature of the receipts in question. Their Lordships in this connection endorsed the view of Hudson P. that the payments were income derived from the business of turning to account the company's rights under the concessions of winning and disposing of minerals by participating in the proceeds of the exploitation of such rights by its licensees and the income was, therefore, taxable as being the profits or gains of a trade or business. Their Lordships also held that it was not material " that in dealing with its mineral rights the company has retained an interest either by way of a possible reverter of the property or by a shareholding in a company to which it made a special ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 who realised it afterwards at a profit. He, however, observed : " No doubt if it is part of his business to deal in land or investments, any profits which in the course of that business he realises from part of his income ; but the mere fact that a person or company has invested funds in the purchase of an estate which has subsequently appreciated and so has realised a profit on his purchase does not make that profit liable to assessment. " The Californian Copper Syndicate case was distinguished, because in that case, Lord Trayner had found that business was being done, and the following observations from Lord Trayner's judgment were emphasised : " I am satisfied that the appellant company was formed in order to acquire certain mineral fields or workings---not to work the same themselves for the benefit of the company, but solely with the view and purpose of reselling the same at a profit. " Lord Salvesen pointed out that such an inference could not be drawn about the case before him. These two sets of cases illustrate forcefully the ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounts periodically which were in excess of the amounts payable for a like period to the Raja of Talchar. The contention of the syndicate was that they were not carrying on any business. It was held that the activities of the syndicate did not amount to a business and their receipts could not be regarded as profits of business and were not chargeable to excess profits tax. It was conceded by the department in that case that the functions of the syndicate, which was a partnership, and neither a limited company nor an incorporated society, consisted wholly in the holding of property, and that they had no other functions whatsoever. It was, therefore, held that the proviso to section 2(5) of the Excess Profits Tax Act, which defined business in certain circumstances, was not applicable. That proviso read : " Provided that where the functions of a company or of a society incorporated by or under any enactment consist wholly or mainly in the holding of investments or other property, the holding of the investments or property shall be deemed for the purpose of the definition to be a business carried on by such company or society." Harries C. J. and Chatterjee J. held that, on the prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpress purpose of acquiring it and utilising it. The rooms were let unfurnished to tenants, but there was some slight service in the shape of heating and cleaning. The company also retained some rooms as its offices. The company was first assessed under rule 8(c)(i) of Schedule A. VII of the English Income-tax Act of 1918, which provided for assessment of landlords instead of tenants in the case of any house or building let in apartments or tenements. The company paid the tax assessed on it. Then a notice was sent under Schedule D. The company admitted that it had to pay tax under Schedule D on profit it might have made from the services it rendered, but contended that income which had been taxed under Schedule A could not be taxed under Schedule D. The company demanded a case. Rowlatt J. held against the company, but his decision was reversed by the Court of Appeal. On further appeal to the House of Lords, it was held that the rents were profits from ownership of land and assessment under Schedule A was the proper mode and they could not be treated as trade receipts of the company for purposes of Schedule D. The assessee-company has relied upon certain passages in the speeches of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llustrates vividly dealings with mineral rights and concessions by a company as part of the objects of its business, or, in other words, in the holding of the business. The Calcutta cases and the case of Fry v. Salisbury House Estates Ltd. illustrate the contrary proposition. There, the property, though dealt with by a company intending to do business, was dealt with as landowner. The intention in those cases was not to derive profit by business done with those properties but to derive income by renting them out. Where a company acquires properties which it sells or leases out with a view to acquiring other properties to be dealt with in the same manner, the company is not treating them as properties to be enjoyed in the shape of rents which they yield but as a kind of circulating capital leading to profits of business, which profits may be either enjoyed or put back into the business to acquire more properties for further profitable exploitation. We shall now turn to the present case, because it remains to consider what the assessee-company was doing with the head leases. The relevant clauses of the memorandum of association of the assessee-company have already been quoted. They ..... X X X X Extracts X X X X X X X X Extracts X X X X
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