TMI Blog1970 (4) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... rs are mentioned at paragraph 13 of the statement of the case and it is convenient to mention them after relating some of the relevant facts. The facts appear in the agreed statement of the case. The facts which must be stated as introductory facts are as follows : The assessee is a public limited company, limited by shares. It derives income from several sources including certain business operations. These operations are carried out in India and abroad and used to be carried out, inter alia, at Burma and Siam. The assessee-company carried on business in Burma from 1862 onwards. In connection with its business of selling timber, the assessee-company had to make contracts which are mentioned in the above orders of the Appellate Tribunal as " forest leases " with the Government of Burma. In the year of account ending on May 31, 1950, the assessee-company was the owner of about 15 forest leases. A copy of the forest lease dated October 28, 1925, is annexure " A " to the statement of the case. The agreed position between the parties is that all the other forest leases contained provisions and clauses exactly similar to the above specimen copy dated October 28, 1925. In connection w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing over of the forest exploitation by the Government of Burma. Reference has been made to that correspondence in the arguments advanced in this reference and it will be convenient to refer to the relevant correspondence whilst dealing with such arguments. On June 1, 1948, a third of the total teak area mentioned in the 15 forest leases of the ownership of the assessee-company was taken over by the Government of Burma. Forest exploitation in respect of the rest of the 2/3rds area was also taken over by the Government on or about June 10, 1949. In that connection, certain correspondence had been addressed by the assessee-company to the Government. The Union of Burma on the one hand and the assessee-company and Steel Brothers Company Ltd. on the other executed on agreement dated June 10, 1949, on the footing that the forest leases had been already terminated. A copy of this agreement forms part of annexure " H " to the statement of the case. This agreement provides for making over by the assessee-company to the the President of the Government of Burma of the assessee-company's " residuary rights " under the forest leases together with the non-duty paid logs wherever found and also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finding was that in the year ending May 31, 1950, the assessee had received 18,676 tons of logs. The sale proceeds of Rs. 65,52,153 were received in respect of non-duty paid logs delivered to the assessee-company. The sale proceeds of Rs. 31,980 were received in respect of logs received against depreciable assets, stores and livestock. For the accounting year ending May 31, 1951, he held that the assessee had received in all 16,299 tons of logs. The sale proceeds of these logs were allocated as follows : " Rs. 5,78,896 in respect of non-duty paid logs handed over by the assessee-company to the Government. Rs. 2,69,975 in respect of the logs delivered against handing over of depreciable assets, stores and livestock. " The question that arose upon allocations having been made in the above manner was as to whether the receipt of Rs. 65,52,153 in the accounting year ending May 31, 1950, and Rs, 5,78,896 in the accounting year ending May 31, 1951, was exempt from tax as being a receipt of capital nature as contended by the assessee-company. Similarly, the further question which arose was as to whether the sale proceeds amounting to Rs. 31,980 in the accounting year ending May 31, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Whether, on the facts and in the circumstances of the case, the amount of Rs. 65,52,153 or any part thereof was exempt from tax as being a receipt of a capital nature ? 3. 'Whether, on the facts and in the circumstances of the case, the amount of Rs. 1,41,156 was liable to tax under the second proviso to section 10(2)(vii) of the Income-tax Act, and whether there was any evidence that the conditions of the application of that proviso were all satisfied ? 4. Whether, on the facts and in the circumstances of the case, the amounts of Rs. 5,250, Rs. 1,025 and Rs 25,705, being the excess realisations over Rs. 225 per ton for logs received in respect of depreciable assets, stores and livestock, respectively, were liable to tax under the Act ? " II. Assessment year 1951-52 : 1. ...... 2. Whether, on the facts and in the circumstances of the case, the amount of Rs. 5,18,896 or any part thereof was exempt from tax as being a receipt of a capital nature ? 3. Whether, on the facts and in the circumstances of the case, the amounts of Rs. 44,407, Rs. 8,639 and Rs. 2,16,929, being the excess realisations over Rs. 225 per ton for logs received in respect of depreciable assets, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding over of the residuary rights under clause 27 and the assets was accordingly in respect of capital assets and accordingly on capital account. His second submission was that delivery of the 43,860 tons of logs was an entire single consideration in respect of all the rights that the assessee-company had under the forest at the date of the agreement dated June 10, 1949. The provision in clause 10 of the agreement that a certain quantity of logs was being delivered by the Government in respect of the residuary rights and a certain quantity was being delivered in respect of the other assets was for determination of the manner of handing over of the logs by the Government and for determining the time when the same was to be done. This provision in clause 10 could not justify splitting up of the compensation agreed to be paid by delivery of the 43,860 tons. His submission was that since the entire consideration was for all these surviving rights of the assessee-company, the delivery of the logs by the Government would be on capital account. The delivery of the 43,860 tons of logs had the nature of slump price for transfer of the entire business of the assessee-company to the Governm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner of Income-tax v. Rai Bahadur Jairam Valji. His further submission was that even if the forest leases like the specimen lease dated October 28, 1925, are held to be capital assets, the delivery of the 43,860 tons of logs cannot be held as capital receipt. The submission was that the periods mentioned in the leases of the ownership of the assessee-company had all expired. The result was that the profit-making apparatus that was obtained under the forest leases by the assessee-company had come to an end when the agreement dated June 10, 1949, was made. The residuary rights under clause 27 of the forest leases were towards enabling the assessee-company to take away non-duty paid 2,02,000 tons of logs upon payment of duty from the forest areas. These logs were stock-in-trade for the timber business of the assessee-company. He emphasised that all the 2,02,000 tons of logs had been completely extracted and had only remained to be removed by the assessee-company from these areas upon payment of royalty. The extraction having been completed, this quantity of 2,02,000 tons of logs would be stock-in-trade for the timber business of the assessee-company. Towards adjustment of the right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or profit to the assessee. Clauses 9, 10 and 11 relate to rules for felling, logging and removal. Sub-clause (d) of clause 11 provides : " All logs shall as soon after extraction as is practicable be removed to a measuring station ; and no log brought to a measuring station shall be removed therefrom until it has been measured for royalty..... " Clause 20 provides for payment of royalty to the Government at the rates specified in Schedule IV. In case of disputes about a quantity of timber being 'refuse', the scheme in the clause provides for sale of such timber and division of the sale proceeds in the proportions mentioned in the clause. Clause 21 provides : " The contractor shall be entitlted to have the timber which has been measured for royalty marked at the time of measurement with a Government hammer-mark denoting that the timber has been so measured and after payment of such royalty the timber thus marked shall become the property of the contractor. " Clause 23 provides : " Until teak timber has been marked and royalties have been paid thereon......it shall be deemed to be the property of the Government and the contractor shall have no right to sell, mortgage or hy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above nature are ordinary trading agreements made by the assessee-company in the ordinary course of business and whether these agreements are of the nature of the agreement mentioned in the cast of Mohanlal Hargovind v. Commissioner of Income-tax, for removal of stock-in-trade and/or forest produce and accordingly for purchase and/or procuration of stock-in-trade in the ordinary course and accordingly not capital asset. In this connection, the followirg principles require to be borne in mind : As held in the case of John Smith Son v. Moore, " fixed capital is what the owner turns to profit by keeping it in his own possession ; circulating capital is what he makes profit of by parting with it and letting it change masters ". Accordingly, " circulating capital is capital which is turned over, and in the process of being turned over yields profit or loss. Circulating capital is, accordingly, the same as stock-in-trade or trading asset. Now, it is true that what is capital asset in the hands of one person may be a trading asset in the hands of another. Accordingly, as was observed by Romer L.J., in Golden Horse Shoe (New) Ltd. v. Thurgood, " the determining factor must be the natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articular case. The question is a question of fact and must be decided by ascertaining the true nature and object of the transaction made between the parties. The true nature and the object and the main features of the forest leases including the specimen forest lease dated October 28, 1925, made by the assessee-company with the Government of Burma will be evident from the following discussion : " The Government of Burma was always the grantor. Apparently this was so because the forests were always of the ownership of the Government. The Government was the single owner of all the forests. There forests were never intended to be transferred to any grantee at any time. The forest leases were always of duration of 15 years or more. They always related to extremely large areas which were sub-divided into large coupes. These coupes were also not to be worked at the same time, but according to schedule fixed in respect thereof. Each specified group of coupes was to be worked within three years. The extraction of the trees was to be completed within the fixed period of three years. The schedule fixed was compulsorily to be adhered to. The work of extraction was to be done in accordanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the timber produce of the forest areas of these leases for ultimate sale in its ordinary business the assessee-company had the necessity of obtaining these forest leases. These leases by themselves did not give any produce of timber to the assessee-company. As already stated, all and singular, all the operations for extraction of timber from the forest areas of these leases had to be done by the assessee-company alone. The Government had no concern with any operations at all. Under the above circumstances, the true nature of the contracts and transactions at the date of their making by the assessee-company appears to us to be contracts and transactions for acquisition of a source of income. These forest leases must accordingly be held to be capital assets. We accordingly accept Mr. Kaka's submission that these forest leases were of the nature of the transactions mentioned in the case of Hood Barrs v. Commissioners of Inland Revenue (No. 2). These leases were transactions which obtained to the assessee-company a profit-making apparatus for its ordinary business in timber. The interest which the assessee-company obtained in the growing forest trees and uncut timber, if not interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zir Sultan's case, the compensation was held to replace loss of capital, and in Godrej's case, the compensation was said not to have any relation to the likely income or profits but to loss of capital. Each case was thus decided on its facts. We have so far shown the true ratio of each case cited before us, and have tried to demonstrate that these cases do no more than stimulate the mind, but none can serve as a precedent, without advertence to its facts. The nature of the business, or the nature of the outlay or the nature of the receipt in each case was the decisive factor, or there was a combination of these factors. Each is thus an authority in the setting of its own facts. " Having regard to these observations, it is quite clear that much useful purpose cannot be seived by our discussing in this judgment the authorities cited at and relied upon at the Bar. Mr. Kaka had relied upon the decision in the case of Commissioner of Income-tax v. Vazir Sultan Sons, the ratio whereof is already mentioned in the judgment of Hidayatullah J. referred to above. Mr. Kaka also relied upon the case of P. H. Divecha v. Commissioner of Income-tax, which also related to termination of agen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,847 tons of logs were delivered to the assessee-company in lieu of its rights under clause 27 is correct ? " In this connection, the finding of the Appellate Tribunal was that at the date of the agreement dated June 10, 1949, the assesseee-company had completed extraction of 2,02,000 tons of logs. It had the right under the forest leases to remove these logs to the measuring station and then upon payment of royalty to acquire complete ownership of these logs and remove them from the forest areas to desired destinations for trade purposes. The Tribunal accordingly held that the delivery of 28,847 tons of logs was merely made at Rangoon free of any costs of royalty and transport in lieu of the existing stock-in-trade of 2,02,000 tons of logs. As the delivery was made in exchange for stock-in-trade, the goods delivered had not any element of capital. The transaction involved only delivery of stock-in-trade. Before discussing this question, it requires to be stated that the sum of Rs. 65,52, 153 mentioned in question No. 2 for the first assessment year and the sum of Rs. 5,18,896 mentioned in question No. 2 in the second assessment year relate to the above 28,847 tons of logs. In conn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... residuary rights under the expiring agreements and advise Government in that connection. The committee would also provide the Government with a list of the assets of all kinds to be acquired and that in the matter of valuation the committee was enjoined to arrive at equitable assessments, so as to enable departmental extraction to continue. At paragraph 7 of the letter, the assessee was informed that as soon as the Government was in possession of materials sufficient to assess the financial implications of residuary rights and to provide a reasonable approximation of the value of the assets, the Government would be in a position to proceed with a comprehensive agreement about the sums to be paid and the time and the form of payments. He relied upon the fact that the ultimate agreement of June 10, 1949, was the result of the above correspondence exchanged between the assessee-company and the Government. In connection with this question, it is relevant to refer to the Government's press communiqué dated March 7, 1948, which is annexure " G " to the statement of the case. This communiqué, inter alia, stated : " It is the aim of the Government to take over extraction in these are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yalty, rehabilitation contributed and any other form of tax on timber............to permit the lessees to mill and market the teak logs handed over in the manner specified in clause 10 hereof.........and to permit the lessees to retain, in the country or countries where earned, the proceeds from the sale of timber from the said logs.......... " It is further agreed by both parties in order to implement this agreement:...... " 10. That the said 50,000 tons of teak logs shall be regarded as being divided in the following manner : (a) 34,000 tons as against the logs to be made over to the President under clause 1(a) ; (b) 16,000 tons as against all assets other than logs which are to be handed over by the lesees to the President under clause 1(b). This tonnage is to be handed over by the President pro rata as the assets concerned change hands in accordance with the Schedule B hereto attached........ " The Schedule B runs as follows : " Schedule 'B' [Clause 1(b) of the Agreement] Subject to the limit of 16,000 tons logs when available in Rangoon will be handed over to the lessees in exchange for the following assets as they are transferred to the President at a rate of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he parties. The trees and/or timber on which much labour would be expended and large expenses would be incurred during the last period of three years would fetch no benefit of any kind to the assessee-company without reservation to it of the lights and liberties as provided by clause 27. This right was ordinarily not a transferable and assignable right. This is so, notwithstanding the provision in clause 25 of the forest leases, because after the period of the forest leases expired, the Government would never permit the assessee-company to assign rights and liberties reserved to it under clause 27. Now, the important fact to be remembered is that under section 44(2) of the Constitution of the Union of Burma, the Government had decided to take over the exploitation of forests. In fact, 1/3rd of the forest area given to the assessee-company was taken on June 1, 1948, and the remaining was taken over if not earlier in any event as of June 10, 1949. The result of this policy of the Government was that the rights and liberties reserved to the assessee-company under clause 27 were altogether ended as from June 29. It is this policy of the Government which is reflected in the following wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to them on June 10, 1949, the assessee-company (and Steel Brothers) should be handed over 50,000 tons of teak logs as mentioned in clause 7. That these 50,000 tons of teak logs represented compensation agreed to by any negotiations or by any Tribunal has not been proved. The entire quantity of 50,000 tons of teak logs was accepted by the assessee-company (and Steel Brothers) in lieu of the assets mentioned in clause 1(a) and (b) of the agreement dated June 10, 1949. The provision in clause 1(a) and (b) relates to handing over by the assessee-company (and Steel Brothers) of all residuary rights and other assets to the Government, so that the Government could carry on its operations in forest areas in the same manner as the assessee-company (and Steel Brothers) were doing. The handing over was towards completing the policy of taking over of the forest operations as a going concern. We find it difficult under the circumstances to accept Mr. Joshi's submission that the 28,847 tons of logs were handed over as true compensation for 2,02,000 tons of logs whereof extraction was completed. In our view, the 50,000 tons of teak logs mentioned in clause 7 and the total quantity of 43,860 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to one ton of teak logs. The figure of Rs. 225 per ton represented the market value of the logs as at the time of the agreement. He then observed : " This monetary value arrived at by converting the logs received against the various items at the rate of Rs. 225 per ton gives the sales proceeds arising to the assessee on the date of the agreement in respect of various items and profit under section 10(2)(vii) and capital profit in excess of cost is determined in respect of the various assets on the basis of this sale value realised. " Proceeding in the above manner, he brought to tax a sum of Rs. 1,41,156 describing it as profit under section 10(2)(vii) in respect of assets (assumed as) sold to the Burma Government. In connection with that finding, on behalf of the assessee, the submission made to the Appellate Tribunal was that the assessee-company never sold any assets to the Government. The assets were taken over on nationalisation. Same argument was advanced before us and reliance was placed in that connection on the correspondence which we have referred to above and the provision in the agreement dated June 10, 1949. The Appellate Tribunal rejected the contention made by h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 10(2)(vii). There is no evidence on the basis whereof the provisions could be applied to this amount of Rs 1,41,156. The above question No. 3 will be answered accordingly. The question No. 4 in the assessment year 1950-51 and the question No. 3 in the assessment year 1951-52 relate to the delivery of 2,946 and 12,067 tons of logs to the assessee-company in respect of the depreciable assets, stores and livestock, mentioned in sub-clause (b) of clause 1 of the agreement dated June 10, 1949. The Income-tax Officer held that the above two quantities were received by the assessee-company when the market value thereof was Rs. 225 per ton. These logs having been received in respect of the depreciable assets, stores and livestock, were received by the assessee-company on revenue account. These logs were timber and stock-in-trade in the hands of the assessee-company. To the extent that upon resale thereof the assessee-company received profits at a rate higher than the rate of Rs. 225 per ton the assessee-company was bound to pay tax as on revenue receipts. This finding is discussed by the Appellate Tribunal in paragraph 18 of its judgment. The Tribunal held that in these cases " the exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany did not mix up these logs with any of the stock-in-trade held by it in its ordinary course of business as timber dealer. These logs were received by the assessee-company in the course of about four years and held by it in the account which is described as " Burma forests assets realisation reserve account ". Under these circumstances, the sale proceeds of these logs could not be held to have been received by the assessee-company on revenue account. The contrary finding of the Appellate Tribunal was accordingly wrong. In the result, the answer to the question No. 4 in the first year and the question No. 3 in the second year will be against the revenue and in the negative. In respect of the assessment year 1953-54, the questions referred are as follows : " 1. Whether, on the facts and in the circumstances of the case, the amount of Rs. 5,58,188 or any part thereof was exempt from tax as being a receipt of a capital nature ? 2. Whether, on the facts and in the circumstances of the case, the amount of Rs. 9,493, being the amount of compensation received for stores acquired by the Burmese Government, was liable to tax under the Act ? " The facts relating to this assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
