9911796707
TMI Blog1970 (4) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... rives 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 with the arguments advanced in this reference, several of the provisions and the clauses in the forest leases will have to be noticed in detail. At this stage, it is sufficient to state that the forest leases were for the duration of 15 years and in respect of extremely large areas. Under these leases, the assessee-company was authoris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 for making over of all the assets pertaining to the forest leases, viz., headquarters, elephants, cattle, stores, buildings, dwelling houses, motor transport, tractors, launches, etc., and for certain other incidental matters. The agreement provides for handing over by the President of the Government of Burma to the assessee-company o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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, 1950, and Rs. 2,69,975 in the accounting year ending May 31, 1951, in respect of depreciable assets were liable to tax under the Act or were altogether free from such liability. The Income-tax Officer as well as the Appellate Assistant Commissioner made findings against the assessee-company in connection with these amounts. On behalf of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, stores and livestock, respectively, were liable to tax under the Act ? " In connection with these questions, Mr. Kaka for the assessee-company has made the following contentions : " Under the terms and conditions of the forest leases, the assessee-company had no right, title or interest in the completely extracted logs until they were measured and roy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 Government as a going concern. On these facts, the question of income and profits from the transaction mentioned above did not arise. He relied upon the decision in the case of Commissioner of Income-tax v. Mugneeram Bangur & Co., in support of his contention that when slump price is paid for transfer of an entire business the price paid must be held to be capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any 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 rights of the assessee-company of removal of these logs, after payment of royalty, the assessee-company had received delivery of a part of the above 43,860 tons of logs. The agreement dated June 10, 1949, accordingly was not for termination of any source of income or profit-making apparatus obtained by the assessee-company. He, therefore, submitted that the logs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 hypothecate it or create any charge or lieu thereon. " Under clause 25, the assessee is prevented from assigning the benefit of the contract without the previous sanction in writing of the Government. Under clause 26, the Government reserved to itself liberty to terminate the lease by giving summary notice in writing in certain events. Under sub-clause, (b) of this clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 nature of the trade in which the asset is employed. Again, compensation received for immobilisation, sterilization, destruction or loss, total or partial, of a capital asset would be capital receipt. Where compensation is recovered for an injury inflicted on a man's trading, so to speak, a hole in his profits, the compensation would go to fill that hole and would be a trading receip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 accordance with the rules prescribed for felling, logging and removal. The Government was accordingly not a seller of any stock-in-trade and the assessee was not a purchaser of any stock-in-trade. The assessee undertook the obligations of various kinds so as to complete the work of extraction as indicated in the contract. The assessee had to maintain extremely large establishments and headqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 interest in land, was almost of the same nature. Now, it is true that in the case of Mohanlal Hargovind v. Commissioner of Income-tax, in respect of a contract authorising the assessee to carry away from the lands of the grantor tendu leaves for his bidi business, the Privy Council came to the conclusion that this contract was not a capital asset and the expenditure incurred by the assessee- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 agency rights granted to the assessee-company by Philips Electrical Company. At page 231, the principles on which compensation paid on termination of agency may be held to be capital receipt or revenue receipt ire discussed. Mr. Kaka particularly relied upon the fact that the agreement in that case was liable to be determined by either part by giving three months' notice. Even so Rs. 40,000 pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 connection with this question, Mr. Joshi emphatically submitted that at the date of the delivery of these logs, the periods mentioned in the forest leases had already expired. Even the extended period had already expired. The profit-making apparatus obtained by the assessee in the shape of forest leases had thus come to an end. What had remained was merely residuary rights mentioned in clause 27 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 areas as a going concern on June 1 and to work the concessions by a State organisation on a commercial basis in much the same way as the industrialists have worked them in the past. Government will, therefore, require the services of all indigenous officers and subordinates hitherto employed by the companies in the areas concerned ; it will also require to employ elephant contractors with their elepha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement:...... " 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 : 20 tons for each male elephant 18 years and over and under 55 years of age. 12 tons for each female elephant 18 years and over and under 55 years of age. 12 1/2 tons for each trained male calf under 18 years of age. 8 tons for each trained female calf under 18 years of age. 3 1/3 tons for each untrained calf. 3 1/3 tons for each tusker 55 years of age an over. 1 ton for every Rs. 225 worth of assessed value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 words of clause 1 of the agreement dated June 10, 1949 : " The lessees hereby agree to make over forthwith to the President their residuary rights in the said forest areas, together with all non-duty paid logs..... " In so far as the assessee-company is a party to the agreement, it looks as if the agreement was the result of negotiations and consent given by the assessee-company. Even so, one cannot forget that in fact the bac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 tons of logs which were delivered by the Government to the assessee-company were towards completely taking over all the residuary rights of the assessee under the forest leases and the assets also belonging to the assessee-company as mentioned in sub-clause (b) of the clause. These residuary rights formed an inseparable part of the asset of forest leases acquired by the assessee-company. As the 28,847 tons of logs were delivered m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 holding that the agreement dated June 10, 1949, was a transfer for consideration. Mr. Kaka has rightly with some emphasis submitted that there is no evidence in the agreement dated June 10, 1949, about any price agreed between the parties and, accordingly, about any sale of the assets mentioned in clause (b) by the assessee-company to the Government. There is no dispute that for levying balancing charge under section 10(2)(vii) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se (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 excess over Rs. 225 will be taxable on the principles of the decision of the Supreme Court in Commissioner of Income-tax v. Bai Shirinbai K. Kooka. Now, Mr. Kaka has contended that the Appellate Tribunal was wrong in applying to the facts of the present case the observations of the Supreme Court in the above case. His submission was that these logs were received by the assessee-company over a period of four years ending May 31, 1952. An ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessment year are that nothing was paid by the Government to the assessee-company in connection with the 1/3rd of the forest areas which the Government had taken over from the assesee-company on June 1, 1948. The assessee-company filed a suit against the Government in connection with the timber logs and stores taken over by the Government on June 1, 1948. The facts in connection with the delivery of these goods appear in the letter of the Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
