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Petitioner: COMMISSIONER OF INCOME-TAX, WEST BENGAL II VS Respondent: UKHARA ESTATE JUDGMENT
Court Name: Calcutta High Court Judge(s): T. K. Basu, P. B. Mukharji Title:COMMISSIONER OF INCOME-TAX, WEST BENGAL II vs UKHARA ESTATE
JUDGMENT
Reported As: 1976 PTD 299 Result: question in the negative Judgment JUDGMENT ' P. B. MUKHARJI, C. J.-This is an income-tax reference under section 66(1) of the Indian Income-tax Act, 1922. The question on which the answer of the Court is sought is as follows: "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in excluding the sums of Rs, 22,197, Rs, 1,88,417 and Rs, 73,327 from the total income of the assessee for the years 1953-54, 1954-55 and 1955-56?" ' The facts giving rise to this question may now be briefly stated. The assessee-company was incorporated on July 3, 1920. The company took over the zamindary properties pertaining to the Ukhara 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, etc., decrees, 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 reserved 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 99 years. ' The memorandum of association of the assessee-company, inter alia, provided as follows:
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"3. The objects for which the company is established are: (a) to take on lease or otherwise acquire, take over or undertake the zarnindaries putnees taiooks lands and properties belonging to Rai Pulin Behari Lal Singha Bahadur and the late Gosta Behari Lal Singha, otherwise known as Ukhara estates for such salami price or consideration and upon rents, terms and conditions as are set forth in the draft agreement referred to in clause 3 of the annexed articles of association; (b) to purchase, take on lease or otherwise acquire and to traffic in land house and other property of any tenure and any interest therein including zamindaries, tenures, forests and plantations and fisheries and the rights of ferry and generally to deal in or traffic by way of sub-lease, exchange or otherwise with land and house property and forest and agricultural produce, timber, boats, rolling stock, machinery, cattle, fish and any other property, whether immovable, or movable, and to encourage trade and traffic therein. (c) . . (d) to take licences or leases to prospect, search for, win, get and quarry any ore, metal or mineral substance of all kinds in any part of India. (e) to carry on the trade or business of colliery proprietors, coal dealers, coke manufacturers, mica dealers, miners, smelters, engineers, lime burners and cement manufacturers in all their respective branches. (f) to carry on all or any of the business usually carried on by companies owning or holding land in all their several branches and in particular to lay out and improve, alter and develop by draining, cleaning, road making or otherwise, any property of the company and thereon to erect and construct or assist in the erection and construction of any buildings or works whatsoever and to pull down, alter and rebuild any existing erection or buildings required by the company. (i) to develop and turn to account any land acquired by the company or in which the company is interested and to carry on the business of zamindaries and land owners. (k) to purchase, take lease or in exchange, hire or other wise acquire movable and immovable property and any rights or privileges which the company may think necessary or convenient, for the purpose of its business, and in particular any lands, buildings, works, ponds, tanks, wells, reservoirs, minerals easements, machinery plant, stock-in-trade, rolling stock, etc." ' There are many other objects declared in clause 3 of the memorandum. Clause 5 of the memoraudum 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 subleases 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., 1360 B. S. And 1361 B. S. ' During the three accounting years under reference the assessee-company granted several sub- leases for which it received salami and premia and there were also acquisitions of portions of the estate by the Land Acquisition Collector for which the assessee-company received compensation. The total amounts received by the assessee-company under three heads, (a) salami, (b) premia,
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and (c) compensation, in these three accounting years were respectively, Rs, 22,197, Rs, 1,88.417 and Rs, 73,327. ' The Income-tax Officer rejected the contention of the assessee that the receipts were of a capital nature. He came to the conclusion that these were trading receipts arising out of the assessee's business in the leasehold rights. He, therefore, made the order including these three amounts in the total income of the assessee-company as its business income. The assessee appealed to the Appellate Assistant Commissioner who reversed the findings of the Income-tax Officer. The Appellate Assistant Commissioner in revesing the Income tax Officer's order then followed the decision of the Tribunal in the appeals filed by the Income-tax Officer against the assessee for the assessm ent years 1946-47, 1947-48 and 1948-49 being Income-tax Appeals Nos. 1720, 1721 and 1722 of 1959-60, respectively. The order of the Appellate Assistant Commissioner therefore was to exclude the amounts-(a) Rs, 22,197, (b) 1,88,417 and (c) Rs, 73,327, from the total income of the assessee for the relevant years. The revenue therefore appealed to the Tribunal. The Tribunal dismissed the departmental appeals and upheld the order of the Appellate Assistant Commissioner excluding these amounts from the income of the assessee. In coming to that conclusion the Tribunal was moved by the following reasons and considerations. Repelling the revenue's contention that the assessee was carrying on the business of taking leases and granting subleases for profits and, therefore, the amounts of salami, premia and compensation should be assessed as the business profits of the assesseecompany, the Tribunal says: "That the assessee-company was primarily incorporated for the purpose of taking over the assets of the family for the good management of the family estate. The shareholders of the company were all members of the family and the consideration for the lease amounting to Rs, 4,08,000 was 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 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 did not have any further lease from any other party since 1920 up to date so that it could not be said that it was doing any business of taking any lease. Therefore, the Tribunal came to the conclusion, "these facts are by themselves sufficient, in our opinion, to suggest that the company was not carrying on any business by acquiring the leases and granting sub-leases." ' The third reason which the Tribunal put forward is that the royalties paid to the assessee- company by its sub-lessees were assessed by the revenue under section 12 of the Income-tax Act, 1922, and the fact that such royalties were not assessed as business profits under section 10 of that Act itself goes to suggest that the revenue authorities were of two minds on the point. The Tribunal on this point applied the authority in P. K. N. Co. Ltd. v. Commissioner of Income-tax (1) of the Madras High Court, which has since been affirmed by the Supreme Court as Commissioner of Income-tax v. P. K. N. Co. Ltd. (2). We shall presently discuss these authorities.
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' Although the question appears to be innocent enough, yet it has many complicated and troublesome aspects. It is noteworthy that, although this company was incorporated in 1920, yet practically for 25 years, from 1920 to 1946, the revenue authorities never thought of taxing the sums realised as-.(a) salami, (b) premium, and (c) land acquisition. The trouble started from 1946-47 when the revenue wanted to tax these amounts. ' The special features and facts of the present reference must, at the outset, be emphasised. The profit and loss account for the year ending 1953-54, to which reference has been made by the Income-tax Officer as having been filed by the assessee before him, shows that the total profit of this assessee-company was Rs, 1,03,036-5-9. What is significant is that a large dividend amounting to Rs, 1,02,000 for each of these three accounting years was declared by the assessee-company whose rate, learned counsel for the assessee and the revenue assured us by reference to the profit and loss account and the balance-sheet to be at the high rate of 25%. It is a significant point for consideration in this reference how far this feature of declaration and payment of dividend make this company a trading company and its leasehold interest on lands its trading assets. No case or authority has been cited to us from the Bar nor have we been able to find 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 aside 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." (1) (1963) 47 I T R 195 (Mad.) (2) (1966) 60 1 T R 65 (SC) ' This article is followed by articles 125, 126 and 127 relating to dividends. They are respectively as hereunder: "125. The directors may with the sanction of the company in annual general meeting declare a dividend to be paid to the members according to their rights and interets in the profit. No dividend shall be payable except out of the profits and no larger dividend shall be declared than is recommended by the directors. 126. When in the opinion of the directors the position of the company permits, interim dividends may be paid to the members on account of the dividends for the then current year. 127. The dircetors may deduct from the dividends payable to any member all such sums of money as may be due from him to the company on account of calls, debts, liabilities or otherwise." ' From these articles and from the fact of dividend having been declared and paid, it is clear that the assessee-company makes profits and declares dividends, a feature which distinguishes this reference from all the authorities cited from the Bar. ' Having set out the special facts and features of the present reference, we shall now proceed to discuss the basic argument in this case, viz., is it a family of co-owners or coparceners as landlord, or land owners using their rights as owners of land in the garb of a company or is it a business Company with objects of trading. Upon this crucial question will depend the ultimate answers to the question asked in this reference.
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' The assessee contends that this is a family of land owners exercising original right of ownership by making use of the land and earning an income although it works and functions in the garb of an incorporated company. Incidentally, it is an assessee which is a private limited company. The second contention of the assessee-company is that it has no business of taking leases because it has not taken any lease except the present one in the circumstances already mentioned. Thirdly, the assessee contends that as a Company it is not its business to run collieries and has not, in fact, run any colliery on its own. Fourthly, the assessee contends that this receipt from what it has done is not a business profit at all The assessee's argument is that as owner of the property it has only let out to lessees and sub-lessees and has earned rent, salami and premium, and have received compensation for the land acquired. Lastly, it is the assessee's contention that the 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 fact shows 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 fact 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 subleases 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 because the company was not running a colliery business or because the assessee-company was only granting numerous sub-leases to colliery companies, that it could not be said to be carrying on a trade or a business. ' But the fundamental argument on behalf of the assessee-Company is that this letting or granting of sub-leases was not done as a trade or as a business but as owners of property and for the maintenance and preservation of the family and coparceners who constituted this assessee- Company. It will therefore be necessary to examine this basic contention of the assessee whether the object was of family maintenance or of trading. Before we proceed to a detailed examination of this point it will be appropriate to say that trading and family maintenance can equally co-exist and it may not be possible to separate the one from the other, i,e,, family maintenance from the trade in such a manner as to separate the sheep from the goat. This is an aspect of some importance, for, in India, joint family business have turned into limited companies and landlords into industrialists. In this era of transition in India it may well be said that this branch is crossing through the twilight frontier between feudalism and industrialisation. This interpenetration between the landlord's rights over the land as owner and his rights as the member or shareholder of a company in the use of such land creates many factual and legal complications which will be seen from the decided cases which we shall presently analyse. ' The considerations which militate against treating this private limited company as a purely family affair for the maintenance of the family and the preservation of the family assets in order to exclude it from being a trading concern should now be examined. First, the objects of the company appearing in the memorandum of the assessee are clearly commercial and trading in their character and import. They expressly say that the object is to "traffic" in land and to "traffic" by way of sub-leases and to encourage "trade and traffic therein". See these expressions in clause 3(b) of the objects clause of the memorandum. It is also an expressly declared object of the assessee to carry on the trade or business of colliery proprietors, coal dealers [see clause 3(e) of the objects clause of the memorandum of the assessee]. The other clauses which have already been cited at
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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 counsle for the assessee, constitute a Mittakshara 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 memo randum 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 horn 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 will have to be changed or altered by these births and additions and filed with the Registrar of Joint Stock Companies under the Company law showing the new shareholders and the amount of their shares. That will make the management of the company impossible and its constitution odd. Therefore, this company cannot, prima facie, be said to be for the preservation of the family assets or the maintenance of the family. We are leaving aside the other consideration of Hindu Law in this connection such as right of residence and right of Hindu widows in the joint family which will create more complication in the company concept and for which there is also no provision made in the memorandum or in the articles; (b) the declaration of dividends and the creation of profits and the payment of dividends out of such profits: A family or an individual of land or a group of such owners do not declare dividends. Declaration of dividends out of profits would therefore indicate that this is a trading concern and not a mere family concern exercising right of members of family over their own lands as owners by granting sub-leases to colliery companies; (c) the terms and conditions of the creation of the reserve fund under the specific articles which we have already quoted would also indicate that this is a trading company trading and trafficking in granting sub-leases and making an income therefore by rents, royalties, salamis and premia. Normally the very notion of a reserve fund under the company management of this nature is for expansion and development and reading article 124 of the articles of this assessee such a conclusion is justified that it is so in this case; (d) ordinarily the formation of a company is intended for trade and commerce and for earning profits and income. The twenty first edition of Palmer's Company Law, at page 3, Chapter I, puts forward this concept by saying: "The company limited by shares is undoubtedly the most important legal from of business organisation; in its various forms it is adopted by all kind of business, large and small." and again at page 20 "The Companies Acts place a very great variety of forms of companies at the disposal of businessm en." ' Ordinarily, a company including a private limited company under the Companies Act is not a family institution or organisation to exercise rights of ownership but primarily and fundamentally for carrying on trade, business or commerce and for earning profits, 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 then 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
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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 power to dispense with the word "limited" in the name of charitable or other company. The concept of charitable or other company is made clear in section 25(1)(a) and (b) indicating a limited Company for promoting commerce arts, science, religion, charity or any other useful object and which intends to apply its profits, if any, or other income in promoting its objects and to prohibit the payment of dividends to its members. Obviously, the present assessee-Company cannot claim that it is a company for the promotion of religion or charity or art or science and, in any event, far from prohibiting payment of dividends to its members, it allows payment of dividends by its articles and has in fact done so. ' Section 25(6) of the Companies Act provides that it shall not be necessary for such a company under section 25 to use the word "limited" or the word "private limited" as any part of its name unless its articles otherwise provide. This assessee-Company, however, does not come within this concept because it is a private limited company and is designated and registered as such under the Companies Act, 1956. Because it is a private limited company, naturally transfer of shares is restricted under the usual law on that point. ' On these considerations we are…
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