9911796707
TMI Blog1970 (8) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... e lessors' family and the arrears of rents and cesses, debts, decrees, etc. 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 reseived 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 999 years. The memorandum of association of the assessee-company, inter alia, provided as follows: " 3. The objects for which the company is established are: (a) to take on lease or otherwise acquire, take over or undertake the zamindaries putnees talooks 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 ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sub-leases 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 compensatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it 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 a 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded 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 a side 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. 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 interests in the profit. No dividend shall be payable except out of the profits and no larger ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived 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 facts show 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 facts 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 sub-leases 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 counsel for the assessee, constitute a Mitakshara 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 memorandum 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 born 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 fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1956, and the same expression "carrying on business" with less than 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 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, religiorn, charity or any other useful object and which intends to apply its profits, if any, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lock and also vacant sites and houses. The company sold some of these properties and the question arose regarding taxation of the sale-proceeds. It was found as a fact in that case that the company sold the outlying properties owing to communist disturbances and difficulty in managing them and that was a fact which was not controverted by the revenue. It was also found as a fact in that case that what was sold was the uneconomic plots. The membership of this company was restricted by the articles of association to the members of the P.K.N. family. The Madras High Court came to the conclusion that the company was formed for the purpose of conserving the family assets and was employed in the business of planters from which it derived a very large, income but there was no material to hold that the company carried on the business of dealing in properties. The Madras High Court also was of the view that the mere circumstance that the memorandum gave power to the company to deal in properties was not decisive of the question and was of the view that the mere fact that a person owns a large estate and chooses to sell portions of it year after year cannot lead to the conclusion that he was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee in the present reference before us. What the Supreme Court says in that decision is that one particular or single factor like the memorandum or the listing of many objects in the memorandum or a single transaction or profit motive individually by itself may not be decisive of the question whether the company is a trading company or a family concern. But the Supreme Court does not say in their decision that cumulatively if all the facts are taken together such a concern could not be a trading concern. We have set out the special facts and circumstances in the present reference before us, particularly the payment of dividend and the creation of the reserve fund. it is, in our view, a wrong use of this Supreme Court authority to say that because the court held that certain factors individually were not decisive, these factors were not relevant or cogent for purposes of consideration and ultimate decision on this point. We need only to quote the observations of Finlay J. in St. Aubyn Estates Ltd. v. Strick ,saying: "When one looks at the memorandum and articles, when one looks at the inception of the company, when one looks at what the company in fact did, it did in fact purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the exercise of rights of ownership of the property and carrying on a business in respect of that property was made clear by the following observations appearing at page 377 : "Ownership of property and leasing it out may be done as a part of business, or it may be done as landowner. Whether it is the one or the other must necessarily depend upon the object with which the act is done. It is not that no company can own property and enjoy it as property, whether by itself or by giving the use of its to another on rent. Where this happens, the appropriate head to apply is income from property, (section 9), even though the company may be doing extensive business otherwise. But a company formed with the specific object of acquiring properties not with the view to leasing them as property but to selling them or turning them to account even by way of leasing them out as an integral part of its business, cannot be said to treat them as landowner but as trader. The cases which have been cited in this case both for and against the assessee-company must be applied with this distinction properly borne in mind. In deciding whether a company dealt with its properties as owner, one must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. In his hands, the lands or the rights in respect of them were property, but that character did not necessarily continue in the hands of his lessees. If the lessees treated these lands, so to speak, as the stock-in-trade of their business and turned them to account at a profit, theprofit so gained may legitimately be considered as the profit of business." This is the crucial point and the dividing line. On the facts of the present reference before us, the creation of sub-leases and the use of such interests in land make it clear that the assessee was using them as its stock-in-trade. So far as this assessee-company is concerned, these lease hold interests are the circulating capital or the stock-in-trade. There is no other circulating capital or stock-in-trade. There cannot ordinarily be a company without any circulating capital or stock-in-trade. On this point also, another observation of the Supreme Court in Karanpura Development Co. v. Commissioner of Income-tax is relevant, which is in the following terms, at page 368: "But whatever 'income' may include or mean, it is, however, clear that it does not include fixed capital or the realising of fixed capital by turning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urani Chaudhurani, the Supreme Court had to consider a point under the Assam Agricultural Income-tax Act. Kapur J., in delivering the judgment of the Supreme Court in that case, observed at page 179 : "Salami is thus not rent and both parties have proceeded on that basis and it could not be called revenue within the meaning of the word used in the definition of agricultural income under section 2(1)(a) of the Act because it was a payment to the landlord by the tenant as a consideration for the transfer of a right in zamindari lands owned by the landlord. It has, therefore, all the characteristics of a capital payment and is not revenue." The Supreme Court noticed the Privy Council decision in Kamakskya Narain Singh v. Commissioner of Income-tax, and the observations of Lord Wright therein to the effect that salami is rightly treated as a capital receipt. The Supreme Court in the Karanpura decisions also noticed that observation and which we have already cited. In Sindhurani's case the Supreme Court also noticed the decision of Harries C.J. in Province of Bihar v. Pratap Udai Nath Sahi Deo. There, Harries C.J. observes in the report of the case at page 326 as follows: "Salami may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shafts, borings and to remove, take away and appropriate samples and specimens of bauxite in reasonable quantities not exceeding 100 tons in the aggregate. The Supreme Court came to the conclusion on those facts that the licence was not merely a grant of the use of the capital of the assessee but it was really a giant of a right to a portion of the capital in the shape of a general right to the capital asset. Therefore, the Supreme Court came to the conclusion that the amounts received by the assessee were capital receipts and were not assessable to income-tax. There also the Supreme Court emphasised the principle at page 512: "The question which has to be decided is what was the nature of the transaction." It will not be inappropriate in this connection to refer to some statutes. Section 105 of the Transfer of Property Act, which does not apply to this case, in defining a lease, says, inter alia : "The transferor is called the lessor, the transferee is called the lessee, the price is called the premium and the money, share, service or other thing to be so rendered is called the rent." The definition of a lease in section 105 is that: "A lease of immovable property is a transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Acquisition Act. Mr. Burman batted on a very strong wicket on this branch of the argument that compensation of this nature from compulsory land acquisition is always regarded as capital on the authority of four decisions which we shall briefly notice now. They come from different High Courts of Calcutta, Madras, Assam and Nagpur. The Calcutta High Court in Calcutta Electric Supply Corporation v. Commissioner of Income-tax held that where an assessee received a price or a compensation for a plant compulsorily acquired by the Government it was a capital receipt and not taxable as an income on the ground that this was not really a voluntary sale as between a buyer and a seller. In that case what had happened was that the Government during the war requisitioned an electricity generating plant of the assessee under the Defence of India Rules which the assessees were not willing to sell but was forced to do so. The compensation that the Government paid to the assessee was in such circumstances held not to be revenue. The next case on which Mr. Burman for the assessee relied was a decision of the Madras High Court in Shanmuga Rajeswara Sethupathi v. Income-tax Officer, Karaikudi. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t at all but a trading asset. This disposes of the cases on which Mr. Burman for the assessee relied. We shall, however, notice one authority of the Punjab High Court on which Mr. Pal for the revenue relied on this point. That is the decision in Raj Kishen Prem Chandra Jain v. Commissioner of Income-tax. There the Punjab High Court holds that the excess of compensation paid to a person who carries on a real estate business in respect of land compulsorily acquired by the Government under the Land Acquisition Act, 1894, over the cost to him of the land is income in his hands and assessable to income-tax. The importance of this decision for the purpose of the present reference lies in this fact only that here the court was dealing with the case of a real estate business in respect of land. In the present reference we have also come to the conclusion that the assessee is a trading company dealing with trading assets. The problem in the present reference before us is more akin to the principle laid down in the House of Lords decision in Commissioners of Inland Revenue v. New Castle Breweries Ltd. In that case, rum was acquired by the Admiralty under a compulsory acquisition and there w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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