TMI Blog1979 (9) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... or receipts of a capital nature. The facts giving rise to the question may briefly be stated : The assessee was incorporated on July 3, 1920, for the purpose of taking over the zamindari properties pertaining to the Ukhara Estate which belonged to Rai Pullin Behari Singha Bahadur and the late Gosta Behari Lal Singha. Therefore, on incorporation, by an indenture dated July 5, 1920, the assessee took a lease of the extensive zamindari pertaining to the said estate for a term of 999 years, and also took an assignment of movables, including Government promissory notes and jewellery belonging to the members of the lessor's family and the arrears of rents and cesses, debts, decrees, etc., due by the tenants of the said estate, the properties passing to the assessee being specified in the schedule appended thereto. The consideration for the said lease and assignment was fixed at Rs. 4,08,000 which was paid and satisfied by the assessee by allotting and issuing its 4,080 fully paid-up shares to the lessors. The quit rent receivable by the lessors for the lease was Rs. 100 per annum and the assessee also undertook to pay the revenue and cesses payable to the superior landlords in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les of association and the terms and conditions set forth in the draft agreement (in accordance with which the indenture dated July 5, 1920, was executed) which showed that the assessee had been primarily incorporated for the purpose of the conservation and management of the family estate of the lessors, that, in fact, the assessee was not carrying on the business of taking leases and granting sub-leases inasmuch as it had not taken on lease any other property from any one else since 1920 up to date and that the transactions of granting sub-leases of long duration to various colliery companies were by way of management of real property by the assessee as owner of leasehold interest and as such the receipts on account of salami, premia and compensation were of a capital nature. The Tribunal relied upon and applied the ratio of the decision of the Madras High Court in P. K. N. Co. Ltd. v. CIT [1963] 47 ITR 195, which has since been confirmed by this court in CIT v. P.K.N. Co. Ltd [1966] 60 ITR 65. At the instance of the revenue, the Tribunal referred to the High Court for its opinion the following question : " Whether, on the facts and in the circumstances of the case, the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to that conclusion the High Court had wrongly allowed itself to be considerably influenced by the three factors : (a) existence of several objects set out in cl. 3 of its memorandum of association, (b) declaration of dividend by it, and (c) creation of reserve fund by it, as according to him none of these factors would show that the assessee had actually dealt with its leasehold interest in the zamindari property as a trader. Secondly, he contended that the real question was whether after incorporation and after acquiring the lease of the zamindari estate, which included substantial coal-bearing lands and mines, the assessee had dealt with its leasehold interest as a land-owner or not and he urged that the manner in which the assessee granted sub-leases of the lands in different parcels to various well-known colliery companies for various terms of long duration extending over 900 years clearly showed that such transactions of granting sub-leases were transactions in the nature of management of the estate as owner of the land and, therefore, the receipts by way of salami, premia and compensation will have to be regarded as receipts of a capital nature and in that behalf he placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merated 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 sublet 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. The company 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 receipts in its hands and the profit therefrom was assessable to tax under the Indian I.T. Act, 1922. Having regard to the objects for which the company was formed as well as the nature of the operations which the company indulged in, this court held that the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e balance remaining outstanding as a debt due to the firm. Limitations on the admission of the members to the company and other attendant features indicated an intention of conserving the properties of the members of the firm. The memorandum of association of the company specified, inter alia, the following objects : (i) to purchase or acquire and to sell, turn to account, dispose of and deal with property and rights of any kind, and (ii) to sell, manage, develop or dispose of or otherwise deal with any part of the properties, rights and privileges of the company. Large amounts of money were spent on cultivation and development of rubber and coconut plantations and substantial income was derived therefrom but certain uneconomical and inconvenient plots were sold by the company in 1940 and 1941. Between the years 1942 and 1945, when Malaya was under Japanese occupation, some further plots of land were sold. Thereafter, in 1948, 1949 and 1950, lands were sold from time to time at profit. As a result of these disposals, the total holding of the company was reduced to about 2,000 acres of rubber estates, some houses and the Lee estate. The question was whether the profits realised by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad to the real nature and object or purpose of the transactions entered into by the assessee over the years. Before we proceed to examine the nature and object or purpose of the transactions we would like to point out how and where the High Court has gone wrong in answering the issue against the assessee. In the first place, the High Court has erroneously treated the assessee as a trading concern qua its leasehold interest in the zamindari estate without actually examining the real nature and object of the transactions of sub-leases entered into by the assessee with several colliery companies. Secondly, in arriving at that conclusion, the High Court has been greatly influenced by three factors, (a) existence of the power in its memorandum of association enabling the assessee to indulge in trafficking in land by way of sub-leases of the land, (b) declaration of dividend at a high rate of 25% by the assessee for the relevant years, and (c) creation of reserve fund by the assessee pursuant to certain articles of association and the High Court has given such undue weight to these factors that it almost regarded them as decisive factors. P. K. N. Co.'s case [1966] 60 ITR 65 (SC) has cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntenance of the lessors' family was that no provision has been made in its memorandum of association and articles of association conferring any right or share on new members that may be born in the Mitakshara joint family of the lessors but it is difficult to appreciate this view. On the other hand, allotment of shares of the assessee to a few members of the lessors' family and the absence of a provision conferring any right or interest in the shares on the new arrivals in the family would be more conducive to preservation and proper management of the family assets. Secondly, admittedly since 1920 up to date the assessee had not taken lease of any other property from any one else except the lease of the zamindari estate under the indenture dated July 5, 1920, a pointer to the fact that the assessee did not indulge in any business of acquiring other lands. Thirdly--and this is vital--the manner in which the assessee dealt with the leasehold interest in zamindari estate obtained under the indenture dated July 5, 1920, over the years clearly shows that the transactions of granting sub-leases of coal-bearing lands and mines were by way of management of the estate as landowner. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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