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Petitioner: KARANPURA DEVELOPMENT Co., LTD. VS Respondent: COMMISSONER OF INCOME-TAX, WEST BENGALHonorable Justice HIDAYATULLAHS. Mitra,M. C. Setalvad
1963 P T D 155
1963 P T D 155
[Supreme Court India]
Present : P. B. Gajendragadkar, K. Subba Rao and M. Hidayatullah, JJ
KARANPURA DEVELOPMENT Co., LTD.
versus
COMMISSONER OF INCOME‑TAX, WEST BENGAL
Civil Appeals Nos. 376 to 379 of 1960, decided on 31st August 1961.
Income‑tax Act (XI of 1922)------
-------- Ss. 4, 6‑Income or capital -Company formed with the object of prospecting and acquiring and disposing of mining rights‑"Salami" received from sub‑lessees- Whether income‑Heads of income.
The assessee was a company formed with the objects, inter alia, of acquiring and disposing of underground coal mining rights in certain coal field. The memorandum of association of the company enumerated other objects, such as coal raising, but the assessee restricted its activities to acquiring coal mining leases over large areas, developing them as coal‑fields and then sub‑leasing them to collieries and other companies. The leases were acquired for a term of 999 years and were sub‑let for the balance of the term of the respective leases minus two days. The company never worked the coal‑fields with a view to raising coal, nor did it acquire or sell coal raised by the sub-lessees. As against a salami of Rs. 40 per bigha which the assessee had paid, it realised from the sub‑lessees Rs. 400 per bigha as salami. In addition, the assessee charged certain royalties at rates higher than those it had agreed to pay under the head leases. It admitted that the income from the royalties was taxable. The question was whether the amounts received by the assessee as salami for granting the sub‑leases constituted trading receipt in its hands and the profit therefrom was assessable to tax under the Income‑tax Act, 1922 :
Held, that the transactions of acquiring leases and granting sub‑leases were in the nature of trading within the objects of the company and not enjoyment of property as land‑owner. There was no sale of its fixed capital at a profit. In acquiring the head leases and granting the sub‑leases the assessee company carried on business and the amounts received by way of salami were trading receipts and the profits therefrom were liable to income‑tax.
The several heads into which income is divided under section 6 of the Income‑tax Act, 1922, do not make different kinds of taxes. The tax is always one ; but it mad arise from different sources to which the different rules of computation have to be applied. The manner of this computa tion is indicated in the sections that follow. Before income, profits or gains can be brought to computation, they have to be assigned to one or more 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.
" Income " does not include fixed capital or the realising of fixed capital by turning it‑ into some other form of capital or money. Fixed capital is what the owner keeps in his possession but turns to profit ; circulating capital, however, is turned over in the process of profit‑making. It may sometimes happen that in the process of production, fixed capital may be consumed or wasted, but that is a reduction of capital and not an expenditure in the business claimable as an 'allowance in the reduction of assessable income in the shape of profits of the business.
Ownership of property and leasing it out may be done as a part of business, or it may be done as land‑owner. Whether it is the .one or the outer 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 land‑owner but as trader. 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.
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 pro perties 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.
Commissioners of Inland Revenue v. Korean Syndicate Ltd. (1921) 12 T C 181 (C A); British South Africa Co. v. Commis sioner of Income‑tax (1 946) 14 I T R (Suppl.) 17 (P C) and Californian Copper Syndicate v. Harris (1904) 5 T C 159 applied.
Kamakshya Narain Singh v. Commissioner of Income‑tax (1943) 11 I T R 513 (P C) ; East Indian Prospecting Syndicate v: Commissioner of Excess Profits Tax (1951) 19 I T R 571 (Cal.) ; In re Commercial Properties Ltd. 1928 I L R 55 Cal. 1057 and Fry .v. Salisbury House Estates Ltd (1930) A C 432 (H L) distinguished.
Karanpura Development Co., Ltd. v. Commissioner of Income-tax (1960) 38 I T R 484 affirmed.
Balgownie Land Trust Ltd. v. Commissioners of Inland Revenue (1929) 14 T C 684 ; British South Africa Co. v. 'Commis sioner of Income‑tax (1946) 14 I T R (Suppl.) 17 ; Californian Copper Syndicate v. Harris (1904) 5 T C 159 ; Commercial Pro perties Ltd., In re 1928 I L .R 55 Cal. 1057 ; Commissioner of Income‑tax v. Shaw Wallace & Co. (1932) I L R 59 Cal. 1343 ; Commissioners of Inland Revenue v. Korean Syndicate Ltd., (1921) 12 T C 181 (C A) ; East India Prospecting Syndicate v. Commis sioner of Excess Profits Tax (1951) 19 I T R 571 (Cal.) ; Fry v. Salisbury House Estates Ltd. 1930 A C 432 ; Kamakshya Narain Singh v. Commissioner of Income‑tax (1943) 11 I T R 513 ; Senairam Doongarmall v. Commissioner of Income-tax (1961) 42 I T R 392 (S C) and Tebrau (Johore) Rubber Syndicate Ltd. v. Farmer (1910) 5 T C 658 ref.
S. Mitra.(S. N. Mukherjee and B. N. Ghosh with him) for Appellant.
M. C. Setalvad Attorney‑General for India (P. Ganapathy Iyer and P. D. Menon with him) for Respondent.
JUDGMENT
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 charge able 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 66‑A (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 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 :
" (1) to purchase and acquire from the owners or pro prietors thereof or other persons interested therein under ground 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, either before or after the execution thereof, the agreement referred to in article 3 of the company's articles of association.
(2) To sell, dispose of and otherwise deal in all such under ground coal mining and relative rights upon such terms and conditions as may appear for the benefit of the company.
(3) To carry on the trades or businesses of colliery proprietors, coal. merchants, miners, smelters, engineers, limebur ners and manufacturers of brick, tile, cement. time, coke and other bye‑products of coal in all their respective branches . . . .
(6) To prospect for, crush, win, get, quarry; smelt, calcine, refine, dress, amalgamate, manipulate and prepare for market coal, ore, metal, and mineral substances of all kinds, and to carry on any other prospecting, mining or metallurgical opera tions, which may seem conducive to any of the company's objects and to buy, sell, manufacture, and deal in. minerals, plants, machinery implements, conveniences, provisions, and things capable of being used in connection with prospecting, mining or metallurgical operations or required by workmen or others employed by the company . . . .
(34) To acquire by purchase, lease, exchange, or otherwise, lands, buildings, and hereditaments of any tenure or descrip tion and any estate or interest therein, and any rights over or interest therein, and any rights over or connected with land, 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 company had paid solami 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 on January 30, 1952. The assessee company filed four appeals before the Appellate Assistant Commissioner, who dismissed them on March 31, 1953. Four appeals were then filed before the Income‑tax Appellate Tribunal, Calcutta Bench, but were dismissed by a common order dated December 31, 1953. The Appellate Tribunal was then moved for a reference in all the four appeals, and the common question to which we have referred was raised and referred by the Tribunal with the result already indicated.
The Tribunal as well as the High Court held that in acquir ing the head leases and in granting the sub‑leases, the assessee company was carrying on a business within its memorandum of association and the increased salami received from the sub‑lessees represented profits of that business liable to be included in the assessable income for income‑tax purposes and in the profits, for purposes of the business profits tax. The case of the assessee company was that it was holding its capital asset, namely, the mining leases through its sub‑lessees during the relevant accounting years, and its activities were the management of the lease‑hold right, selection of sub‑lessees, collection of rents or royalties which did not amount to the carry ing on of a business. In return for the charge of salami the assessee company transferred only the general right to the benefits under the leases, and that was a realisation of its capital within the ruling of the Privy. Council in Kamakshya Narain Singh v. Commissioner of Income‑tax ((1943) 11 I T R 513 (P C)). In transferring this general right, it was contended, the position of the assessee company was indis tinguishable 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 busi ness, 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 or more 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 lit Commissioner of Income‑tax v. Shaw Wallace & Co. ((1932) 2 Comp. Cas. 276 (P C))' 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 was also pointed out, income was the produce of something "loosely spoken of as capital". This income in business is profit which is earned by a process of production, or, in other words, by the continuous exercise of an activity: These obser vations of the Privy Council were, quoted with approval by this Court in many cases and recently in Senairam Doongarmall v. Commissioner of Income‑tax ((1961) 42 I T R 392, 407 (S C)). In the last case, it was also pointed out that the addition of the words " profits and gains " in the phrase " income, profits and gains " used in the Income-tax Act does not restrict the meaning of the word " income " by implication, and that the whole expression is " income"' writ large.
But whatever " income " may include or, mean, it is however, clear that it does not include fixed capital or the realising of fixed capital by turning it into some other form of capital or money. Fixed capital is something which the owner keeps in his posses sion but turns to profit ; circulating capital, however, is turned over in the process of profit‑making. It may sometimes happen that in the process of production, fixed capital may be consumed or wasted, but that is a reduction of capital and not an expendi ture in the business claimable as an allowance in the reduction of assessable income in the shape of profits of the business.
The profits of a business are calculated 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 ques tioning that a business has at all been carried on, and fur ther 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 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 busi ness 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 neces sary 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 ((1943) 11 I T R 513 (P C)), 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 the Act, and ‑the latter as a payment on capital account; but the facts were different. Since the case is relied upon by the assessee company, it is necessary to consider it in some detail. The Court of Wards, acting on behalf of the proprietor of Ramgarh Estate, granted leases for 999 years to certain companies including the assessee company. Under the terms of the leases, the lessees agreed to pay to the lessors royal ties at certain rates per ton of different kinds of coal raised and a fixed salami or premium, the royalty being subject always to a minimum annual sum. It was contended on behalf of the pro prietor that none of the sums was taxable as income. The con tention of the proprietor with regard to the royalty per ton and the minimum royalty was not accepted but with regard to the salami, it .was. The Judicial Committee observed :
"The salami has been, rightly in Their Lordships' opinion, treated as a capital receipt. It is a single payment made for the acquisition of the right of the lessees to enjoy the benefits granted to them by the lease. That general right may properly be regarded as a .capital asset, and the money paid to purchase it may properly be held to be a payment on capital account."
In that case, the general right was, in effect, sold by the pro prietor of the estate. In his hands as a landowner, the coal bear ing lands were property and when he sold the right to the lessees to enjoy the benefits, he sold his property but he was not doing his 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, tire profit so gained may legitimately be considered as the profit of business. It is contended that there. is no difference between a landowner anal. '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 ((1929) 14 T C 684). 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 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 pur pose 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 was more than mere realising of its property in the present case, and the further observations of the Lord President apply, which run
"But the professed objects of a company are not, for that reason, to be left out of account; on the contrary, they must be kept in view when considering the transactions in which the company is proved to have been engaged."
Reliance is also placed upon certain observations of Lord Warrington of Clyffe in Fry v. Salisbury House Estates Ltd. ((1939) 15 T C 266, 316(H L)) where it was said :
"Assuming the memorandum of association allows it, and in this case it unquestionably does, a company is just as capable as an individual of being a landowner, and as such deriving rents and profits from its land, without thereby becoming a trader, and in my opinion it is the nature of its operations, and not its own capacity, which must determine whether it is carry ing on a trade or not."
We need not pause to consider the facts in that case, because we shall deal with it in detail presently ; but it is clear even from this passage that the deciding factor is not ownership of land or leases .but the nature of the activity of the assessee and the nature of the operations in. relation to them. The objects of the company must also be kept in view to interpret the activity. As was observed by Lord Sterndale M. R. in Commissioners of Inland Revenue v. Korean Syndicate Ltd. ((1921) 12 T C 181, 202(C A))
"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, where as 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…
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