TMI Blog1949 (4) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Act, so as to bring the income in question within the charge to excess profits tax? The facts of the case giving rise to this dispute can be shortly stated as follows:- Sometime in the year 1919 the Villiers Colliery Company Limited obtained a prospecting licence from the Raja of Talchar in respect of about 8 sq. miles (less 1000 bighas) of land under which there were seams of coal. On 5th August, 1920, a partnership was formed which was named the East India Prospecting Syndicate, Calcutta, and this partnership originally consisted of two limited companies and three individuals as partners. Subsequently, one of the individuals died and the partners of the syndicate at all material times consisted of these two limited companies and two individuals. The objects for which this partnership was created are set out in the Instrument of Partnership. The partnership was formed:- (1) to purchase from the Villiers Colliery Company Limited their coal prospecting rights held under that company's prospecting licence with regard to the area in question; (2) to take all necessary steps to give effect to the several terms and conditions contained in such licence; and (3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in favour of the syndicate. However, the Talchar Coalfield Limited were bound to pay not only the half-yearly dead rent but had to pay during the subsistence of this lease a certain amount based on the output of steam coal, rubble and dust coal. The amount so payable periodically was considerably in excess of the amount payable by the syndicate to the Raja. The sub-lease was therefore a profitable undertaking, because the syndicate received from the sub-lessees, the Talchar Coalfield Limited, a half-yearly sum which was considerably in excess of the half-yearly sum payable by the syndicate to the lessor, the Raja of Talchar. For the financial year ending 31st March, 1942, the syndicate's net income on account of rent and royalty under this sub-lease was computed at ₹ 1,20,877. The standard profit after necessary adjustments for the purposes of ascertaining the excess profits was taken to be ₹ 1,04,856. The excess profits were therefore ₹ 16,021 from which sum was deducted a sum of ₹ 5,152 representing the deficiency which had been brought forward. In the result the applicant was assessed to excess profits tax on the sum of ₹ 10,869 for the per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of other persons or the giving to other persons of advice of a commercial nature in connection with the making of contracts: 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 this definition to be a business carried on by such company or society . Mr. Atul Gupta's argument was that the assessee syndicate were not carrying on any business to which the Act applied and therefore they were not subject to excess profits tax. Mr. Gupta relied upon the proviso to Section 2(5) of the Act. He has contended, and I think rightly, that the proviso makes it clear that the functions of any body which consist wholly or mainly in the holding of investments or other property cannot amount to a business, because it is said in the proviso that in certain cases the holding of investments or property shall be deemed for the purpose of this definition to be a business. Where an Act states that certain activities are deemed to amount to a business it is clear that such activities would not nor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts made to the Raja of Talchar under their lease. Dr. Gupta who has appeared on behalf of the department has had to concede that in the years 1941, 1942 and 1943 the syndicate did not carry on any mining operations and that all they were entitled to at that time was to receive the rents and royalties under the sub-lease. It seems to me clear therefore that the functions of this partnership consisted wholly in the holding of property and they had no other functions whatsoever. If this sub-lease had been granted by a limited company or by an incorporated society the net profit could be regarded as profits for the purposes of Excess Profits Tax Act by reason of the proviso to Section 2(5) of the Act. But being neither a company nor an incorporated society, the net profit cannot be regarded as the profits of business and therefore they cannot be taxed under Section 4 of the Act. It appears to me that the terms of Section 2(5) make it clear that the profits of this syndicate cannot be regarded as profits of the business so as to make them taxable under the Excess Profits Tax Act. Dr. Gupta on behalf of the department further argued that the profits of this syndicate were rightl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me that the definition contained in that sub-section and proviso makes it clear that any partnership which merely derives its income from some property by way of rent, royalty or such like cannot be said to carry on business for the purposes of the Indian Excess Profits Tax Act. The Tribunal however, as I have said, considered a large number of cases, particularly English cases and on a consideration of these authorities it came to the conclusion that the syndicate was in fact carrying on business and therefore was liable to pay the tax under Section 4 of the Act. The Tribunal considered the purpose for which this syndicate came into existence. It points out that it came into existence for the purposes of acquiring and exploiting certain mineral rights and making a profit therefrom. It is true that the syndicate did not proceed to carry on the business of coal-making, but they effected their purpose of making a profit by granting this sub-lease on most advantageous terms. The Tribunal thought that the granting of this sub-lease was merely carrying out one of the purposes for which the syndicate was formed and therefore a part of the exploitation of these mineral rights. The Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is required, or only capital expenditure of a comparatively small amount, but including the business of any person taking commissions in respect of any transactions or services rendered, and of any agent of any description, not being a commercial traveller, or an agent whose remuneration consists wholly of a fixed and definite sum not depending on the amount of business done or any other contingency. It will be seen therefore that practically all activities connected with any trade or business could be regarded as trades or businesses within that Act with very few exceptions. The definition is in the very widest terms and is very different from the definition in the Indian Excess Profits Tax Act, 1940. Further Lord Sterndale, M.R., and Younger, L.J., were clearly of opinion that the so called lease by the Korean Syndicate Ltd. to the partnership in Korea was not in the true sense a mining lease at all. At page 271 Lord Sterndale, M.R., observed:- That is the agreement which the Commissioners call a lease. I do not think they meant in any way to beg any question by calling it so; they thought it was a convenient term by which to describe it. As I have said, in my opinio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portion of the profits earned. That being so, the Court of Appeal was of opinion that the receipt of payments due under this lease was profit of a business and therefore liable to excess profits tax. This Korean case is only an authority for the meaning of the term business in the English Act and it seems to me that the Tribunal in this case has overlooked the words of Sir George Lowndes in the case of Commissioner of Income-tax v. Shaw, Wallace and Company [1932] 59 I.A. 206 at p. 212. Sir George Lowndes in delivering the judgment of the Board observed; Again their Lordships would discard altogether the case law which has been so painfully evolved in the construction of the English Income Tax Statutes--both the cases upon which the High Court relied and the flood of other decisions which has been let loose in this Board. The Indian Act is not in pari materia; it is less elaborate in many ways, subject to fewer refinements, and in arrangement and language it differs greatly from the provisions with which the Courts in this country have had to deal. Under such conditions their Lordships think that little can be gained by attempting to reason from one to the other, at all ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty cannot amount to a business and that must be so by reason of Section 6 of the Income-tax Act. Section 2(5) of the Excess Profits Tax Act makes the holding of securities or of property business merely for the purposes of the Act in the case of companies or incorporated societies. The mere holding of property or securities cannot in my view however amount to a business within the meaning of that term as used in the Income-tax Act and can only amount to a business as the term is used in the Excess Profits Tax Act by reason of the proviso to Section 2(5) of that Act. It appears to me that the Korean Syndicate case is clearly distinguishable from the present case and in no way compels us to hold that the assessee in this case was carrying on a business. The Tribunal also relied upon the English cases of Commissioners of Inland Revenue v. South Bihar Railway Co. Ltd.(1) and Commissioners of Inland Revenue v. Budderpore Oil Co. Ltd. [1921] 12 Tax Cas. 467 Again these are cases on the English Acts and it appears to me that Commissioners of Inland Revenue v. South Bihar Railway Co., Ltd. [1925] 12 Tax Cas. 657 would have to be differently decided in this country but for the proviso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rice mills and as such was entitled to a deduction for depreciation in the lettable value of its property by reason of wear and tear of the machinery which the company had to bear under the lease. In the latter case a company which carried on a hotel business at Madras and Ootacamund and was empowered under its articles of association to lease its premises, leased a hotel situated in Ootacamund along with furniture and fittings to a firm which carried on the business of hotel there. The company claimed depreciation of the building and furniture leased to the firm. It was held that the letting of the premises was part of the business of the company and so it was entitled to an allowance for depreciation. In both these cases the Madras High Court had held that leasing or letting of the property was within the memorandum and articles of association and therefore within the objects for which the companies were formed. The leasing formed the business of the company and therefore the rent which they received could be regarded as the profits of the business and therefore allowances could be made for depreciation. These cases are not binding on this Court and with very great respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from time to time, to see to the payment of rents and (doubtless) the doing of repairs. If that is carrying on a business, then this company carried on a business in the sense in which every landlord or owner of this type of property must necessarily carry on business. We know from Section 9 itself that it is applicable to property which is let out to tenants and it has been argued before us that when one looks at the case law one finds that, at all events where the owner is a company and the objects of the company include the object of owning and managing house property, then the income that is derived from the tenants is an income that is derived from business. It is in that way that it is contended that these assessees should be charged under Section 10. It is said that if the question were to arise under Section 10 these assessees would not be liable to pay income-tax at all so that no income-tax would be recovered in respect of any of these estates, the reason being that, in point of fact, they have traded so unsuccessfully during the year in question that they have actually made a loss....... It is obvious too, that if we were to depart in such a case as this from the careful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 6] are regarded as excluding royalties from being held to come under that head. Royalties cannot be regarded as 'profits or gains' of a business. The sources of the royalties may properly be deemed to be the lessees' covenants to pay them, and hence royalties fall under 'other sources'. It is quite clear from this observation that royalties receivable by a landlord cannot be regarded as profits or gains of a business. But it is contended by Dr. Gupta on behalf of the Commissioner of Income- tax that it can be so regarded in circumstances such as existed in the Korean case and such as are said to exist in the present case. It appears to me however that the assessees in the present case after they had sub-leased the minerals to the Talchar Coalfield Company Ltd. were merely the owners of a leasehold interest in property and the rent and royalties payable to them must be regarded as income from other sources under Section 6(v) of the Indian Income- tax Act. I cannot see that it would make any difference in India for income-tax purposes, even if the lessors of the sub-lease were a company. In any event the assessees are not a company but are a partnershi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a business because he was an owner of royalties and therefore the income from the royalties was not income from business which should make it assessable to excess profits duty. In India this income from royalties would also in my view be regarded as not income from business, but rather income from other sources and therefore it would not be liable to assessment to excess profits tax. In my judgment no assistance can be obtained from the English cases and it is clear that the view of this Court is that merely holding property and deriving income therefrom by letting it cannot amount to a business. That being so, even apart from the proviso to Section 2(5) of the Excess Profits Tax Act, 1940, we would be bound to hold that the activities of the syndicate do not amount to a business and that their receipts cannot be regarded as the profits of business. That being so, the dead rents and royalties could not be assessed under the Excess Profits Tax Act. That being so, the answer to the question which I have already set out must be in the negative. The assessees will have their costs of this reference--the hearing-fee being assessed at five gold mohurs. The assessees will be ent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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