V.A. Desai, J.
1. The question which arises for consideration in the present reference is 'whether on the facts of the case the salami receipts or any portion thereof are business income chargeable under the provisions of the Indian Income-tax Act, 1922.' The assessee-company was incorporated in 1870. In its memorandum and articles of association the objects of the company, amongst other things, included equation of houses, lands, forests, farms, etc., to cultivate our to give and take on lease land for cultivation or otherwise and to accept payment of rent in cash or in produce and to make advances to cultivators in cash or in produce and to make advances to cultivators in cash or produce or cattle, to let on hire all or any of the property of the company whether immovable or movable including all and every description of apparatus or alliances, etc., and to sell, exchange and in any other manner deal with or dispose of the undertaking of the company or any part thereof. After its formation the company in the course of its activities obtained from the Government of West Bengal settlements of virgin lands. Some of these lands were agricultural and some were non-agricultural and were comprised in what were known as Meena Khan and Canning Divisions respectively. The lands acquired by the company were leased out to various tenants receiving a salami or premium at the time of settlement or resettlement in addition to the annual lease rent. On payment of the full salami money, the possession of the land was given over to the tenant and a pattah or kabulayat giving mokarari mirashi rights in the land was thereafter, at the convenience of the tenants, prepared, signed and registered. When the tenants, to whom the lands were given in settlement, defaulted in the payment of rent, suits were filed against them for the recovery of the defaulted rent and in execution of the decree so obtained their mokarari mirashi rights in the lands were auctioned. The company bid at the said auctioned and being the highest bidder at some of these auctions obtained the said mokarari mirashi rights. Thereafter, the company settled the lands to fresh tenants receiving salami or premium at the time of such settlement. The salami amounts which the company thus obtained fell into three categories : (1) Salami in respect of non-agricultural lands - Canning Division; (2) Salami released on cash basis from settlement of virgin lands for the first time - Meena Khan Division; and (3) Salami realised on cash basis by settlement of lands taken over from the defaulting tenants during the accounting period of earlier years - Meena Khan Division and Canning Division. In the assessment of the assessee for the assessment years 1952-53 to 1956-57, the assessee claimed exemption in rest of these salami receipts on the ground that they were not receipts on the ground that they were not receipts of income from business, but were of a capital nature.
2. This claim of the assessee was negatived by the Income-tax Officer, who held that the amounts of salami were charged by the assessee-company in the course of its business as a dealer in tenancy rights and not as a dealer in land itself and, consequently, they constituted its income from business chargeable as such under the provisions of the Indian Income-tax Act. In the appeals which the assessee took to the Appellate Assistant Commissioner against the orders of the Income-tax Officer, the view taken by him was confirmed by the Appellate Assistant Commissioner and the appeals were dismissed. The assessee, however, succeeded before the Income-tax Appellate Tribunal, which held that the assessee was not trading in tenancy rights and the salami receipts which it had obtained were not its income from business. In the view of the Income-tax Appellate Tribunal, the case of the assessee was completely covered by the decision of the Supreme Court in Member for the Board of Agricultural Income-tax v. Sindhurani Chaudhurani. The department moved the Income-tax Tribunal for a reference to the High court under section 66(1) of the Income-tax Act. It rejected the said application. Thereafter, on an application to this court under section 66(2) of the Act, this court directed the Tribunal to draw up a statement of the case and refer to this court the question of law arising out of its order, which we have stated above. The Tribunal, accordingly, has submitted the statement of the case referring the said question to us.
3. Now, in Sindhurani's case, on which the Tribunal relied, the Supreme Court had to consider the question whether the salami receipts received by the zamindars for the settlement of agricultural land at the time of granting the lease could be regarded as agricultural income within the meaning of the Assam Agricultural Income-tax Act. Salami in that case was charged and taken from the tenant before making a settlement of the holding and it was also charged whenever a fresh settlement was made, whether it was a piece of virgin land or of an auction-purchase holding. 'Agricultural income' as defined in the Agricultural Income-tax Act was any rent or revenue derived from land, which was used for agricultural purposes. The question before their Lordships was whether the salami receipts were rent or revenue derived from agricultural land so as to constitute agricultural income within the meaning of the Act. It was held in that case that where salami is in the form of a lump sum non-recurring payment made by a prospective tenant to the landlord as a consideration for the settlement of agricultural land and parting with certain rights of the landlord in the land in favour of the prospective tenant and is paid anterior to the constitution of relationship of landlord and tenant, it is not rent within the meaning of the word used in the definition of 'agricultural income' in section 2(1) (a) of the Assam Agricultural Income-tax Act, 1939. It had all the characteristics of a capital payment and it was not revenue. Consequently, it was not agricultural income within the meaning of the Act. Now, according to the Tribunal, the nature and character of the salami receipts received by the assessee in the present case was the same as that of the receipts in the case before the Supreme Court. The salami charged by the assessee was a lump sum non-recurring payment made by the prospective tenant to the assessee as a consideration for the settlement of the agricultural land and parting with certain rights of the assessee in the land in favour of the prospective tenant and was paid anterior to the constitution of relationship of landlord and tenant. In view of the Supreme Court decision, therefore, it had all the characteristics of a capital payment and was not a revenue receipt. In the opinion of the Tribunal, the activities of the assessee, in the course of which it received the said payments, were the same as the activities of the zamindar and the assessee was not a dealer in tenancy rights. In the view of the Tribunal, therefore, the salami payments received by the assessee did not constitute its income from business.
4. Mr. Joshi, the learned counsel for the revenue, has argued that the view taken by the Tribunal is erroneous. According to him the case before the Supreme Court was a case of individual land-owners dealing in land and the receipts which the land-owners had received were in the course of their dealing with the land. The assessee in the present case, says the learned counsel, was not a dealer in land, but was an incorporated company formed with the object of carrying on business. The nature and character of the salami receipts in the hands of an individual land-owner dealing in land may have the nature and character of a capital receipt as held by the Supreme Court in Sindhurani's case. The same cannot be said of the salami receipts in the hands of the assessee, who has received them in the course of its business. This important distinction has not been borne in mind by the Appellate Tribunal when it held that the case was covered by the decision of the Supreme Court in Sindhurani's case. The learned counsel points out that the case of an incorporated company receiving salami receipts, in circumstances which are more or less similar to the present case, has been considered by the Supreme Court in Karanpura Development Co. v. Commissioner of Income-tax. According to the learned course, the case of the present assessee is governed by the said decision of the Supreme Court and not by its earlier decision in Sindhurani's case as held by the Appellate Tribunal. He has argued that, in view of the Supreme Court decision in Karanpura Development Co.'s case, the salami receipts received by the assessee in the present case in respect of all the three classed is its income from business and not a capital receipt. At any rate, says the learned course, so far as the third class of the said receipts is concerned, viz., the salami realised on cash basis by settlement of land taken over from the defaulting tenants, there is no distinction whatsoever in the present case and the case decided by the Supreme Court in Karanpura Development Co.'s case, and there can be no doubt whatsoever that the said part of the receipts at any rate must be regarded as income from business of the assessee-company.
5. Now the facts of the case in Karanpura Development Co. v. Commissioner of Income-tax, on which Mr. Joshi has relied, were as follows : In 1915 a company by the name of Messrs. Bird & Co. obtained a prospecting licence of an area of coal bearing lands from the court of wards representing the proprietor of the Ramgarh Estate. This licence had a duration of twelve years and was renewable for another term of twelve years and reserved to the licensee the right to take coal mining leases of the Karanpura Coal Fields or any part thereof. The licence was also transferable. In 1920 the assessee-company, which was the Karanpura Development Co. Ltd., was incorporated with the objects, inter alia, to purchase and acquire from the owners or proprietors thereof or other persons interested therein underground coal mining and relative rights of and in the Karanpura Coal Fields, and to sell and dispose of or otherwise deal with all such under-ground coal mining and relative rights upon such terms as may be prescribed, and to sell, improve, manage, develop, exchange, lease, mortgage, dispose of, turn to account and otherwise deal with all or any part of the property and rights of the company. After the incorporation of the company, on 30th May, 1921, Messrs. Bird and Co. assigned their rights under the prospecting licence to the assessee-company. The assessee-company then acquired from time to time diverse coal mining leases over areas aggregating 20,000 standard bighas. It developed the coal fields and then sub-leased them to collieries and other companies. The said leases, which the company obtained, were for term of 999 years. The sub-leases which it granted after development were for the balance of the period minus two days. The entire activities of the assessee-company consisted of the acquisition of the mining leases and subsequent sub-leasing of its rights after developing the coal fields and it did no other business. It never worked the coal fields with a view to raising coal, nor did it acquire or sell coal raised by the sub-leases. At the time of the acquisition of the head leases, the assessee-company charged salami at the rate of Rs. 40 per standard bigha and also agreed to pay royalty at certain rates. From the sub-lessees the assessee-company charged salami at the rate of Rs. 400 per standard bigha and also royalties at higher rates. It was in the course of these activities that the assessee-company realised an amount of Rs. 19 lakhs and odd as salami in the first account year and Rs. 3,96,000 in the second account year. The assessee's contention before the income-tax authorities was that the excess amount received by way of increased salami was a capital amount and could neither be included in the assessable income for the purposes of income-tax nor in the profits for purposes of business profits tax. The income-tax authorities as well as the Appellate Tribunal and the High Court had negatived the said claim of the assessee, holding that in acquiring the head leases and in granting the sub-leases, the assessee-company was carrying on business within the memorandum of association and the increased salami received from the sub-lessees represented profits of that business liable to be included in the assessable income for income-tax purposes and in the profits for purposes of business profits tax. Before the Supreme Court the contentions raised on behalf of the assessee were that the return to it as salami represented merely a capital return, because in acquiring the mining leases the assessee-company acquired two distinct rights : (a) a general right to the benefits under the lease for which consideration was a salami, and (b) the right to carry on business in coal. According to the assessee-company, it never exercised the second right and when it parted with the first right it only realised its capital. It was also contended that there was no difference between an individual owning properties and selling them on the one hand and a company owning mining leases and issuing sub-leases on the other, because in either case there were no profits or gains of business if no business was run. Lastly, it was also contended that although the activity of the assessee-company may be regarded as a business activity, in a sense it was not of the nature of carrying on a trading activity but consisted in merely collecting rents or royalties which taken with the performance of other necessary and allied activities could not amount to carrying on of business resulting in increased salami as profits of the business. In dealing with the said contentions the Supreme Court pointed out that a salami payment was no doubt a single payment made for the acquisition of the right of the lessees to enjoy benefits granted to them by the lease. In the case of a landed proprietor this general right could be regarded as a capital asset and the money received by him for granting it to the lessee could be held to be a payment of a capital nature. In the hands of the land-owner the land were property and when he sold the general right to the lessee to enjoy the benefits, he sold his property, but he was not doing business. Although the proprietor parted with the general right, it was not the stock-in-trade of any business that he was parting with. That, however, may not necessarily be the position so far as the lessee from the proprietor is concerned. If the lessees treated these lands, so to speak, as stock-in-trade of their business and turned them to account at a profit, the profit so gained may legitimately be considered as the profits of business. In the case before their Lordships the assessee-company had obtained leased from the proprietors of the land at a certain premium and had subsequently disposed of the said leased by sub-leasing them for the whole of the period by charging a higher rate of salami. Their Lordships, therefore, pointed out that in order to ascertain the nature and character of the payment in the hands of the assessee, what had to be found out was whether the assessee-company was merely realising the property which it had acquired or was doing business in the nature of trading operations. With regard to the second contention raised on behalf of the assessee that there was no distinction between an individual owning properties and selling them on the one hand and a company owning mining leases and issuing sub-leases on the other, their Lordships pointed out that it would depend upon the objects with which the company was formed and whether the object of the company was to develop the area and grant sub-leases with an eye to making profit and what its activity was in relation to its object. If the activities of the company consist of letting out premises and collection of rents, the receipts may not amount to income from business, as in the case of an individual proprietor indulging in the same activities. But where the letting and sub-letting is part of a trading operation, the position will be different and the income could properly be regarded as income from business. Whether the activities of the company was of the one nature or the other may have to be determined from its proposed objects and the manner of its activities and the nature of its dealing with the property. The Supreme Court observed :
'Ownership of property and leasing it out may be done as a part of business, or it may be done as land-owner. 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 it 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 land-owner but as trader.. . In deciding whether a company dealt with its properties as owner, one must see not to the form which it gave to the transaction but to the substance of the matter ..... Where a company acquires properties which it sells or leases out with a view to acquiring other properties to be dealt with in the same manner, the company is not treating them as properties to be enjoyed in the shape of rents which they yield but as a kind of circulating capital leading to profits of business, which profits may be either enjoyed or put back into the business to acquire more properties for further profitable exploitation.'
6. After having considered the facts of the case before them, their Lordships found that the assessee-company had done extensive business under clauses 1 and 52 of its objects of formation which related to the acquisition of mining leases and selling them off. This was done by the assessee-company as a matter of business by turning its rights to account. The activities of the company in development of the areas and granting sub-leases was with an eye to profit and the company was treating the leases acquired by them as stock-in-trade to be profitably dealt with. In these circumstances their Lordships held that the excess of the amount realised by the assessee by way of increased salami was its income from business and chargeable as such under the provisions of the Indian Income-tax Act.
7. Now, the question before us is whether the case of the assessee is governed by this decision of the Supreme Court. In the present case the Tribunal has found that the assessee is not a dealer in tenancy rights, nor its activity is in the nature of trading in tenancy rights. Mr. Kolah, the learned counsel for the assessee, has contended that on this finding of the Tribunal the decision in Karanpura Development Co.'s case can have no application to the present case and the salami receipts received by the assessee must be taken to be payments received by it in the course of dealing with the land itself. Consequently, he has argued there is no distinction between this case and the case in Sindhurani Chaudhurani v. Board of Agricultural Income-tax, as held by the Tribunal. Mr. Kolah's argument is that the finding of the Tribunal that the assessee is not dealing in tenancy rights and its activities are not of a trading nature is not challenged by the department by a question being asked in that connection and since on that conclusion the case would be completely governed by Sindhurani's case, we must answer the question referred to us in favour of the assessee. We are not inclined to take the finding of the Tribunal that the assessee is not a dealer in tenancy rights as a binding finding of fact. In our opinion, it is not, as a matter of fact, a finding of fact, but a conclusion of the Tribunal with regard to the correct nature in law of the activities of the assessee. Its conclusion that the salami receipts are not income from business is a consequence of its conclusion on the legal nature of the activities of the assessee-company. The question as it is framed is whether the salami receipts are business income or not, and it calls for a consideration of the question as to whether the activities from which the income arises is in the nature of a business activity. In our opinion, therefore, the question whether the assessee was a dealer in tenancy rights and its activities in the course of which salami was charged by it were activities in the nature of business is open to be canvassed in the present reference. In view of the Supreme Court decision in Karanpura Development Co. v. Commissioner of Income-tax, the answer to the question will have to depend upon whether the assessee-company's activities, in the course of which it has received the salami receipts, were in the nature of dealing in land, in the manner of a land-owner letting out land and collecting rent or whether these activities constituted activities in the nature of trade. The question will have to be determined with reference to the facts and circumstance of the case including the objects of formation of the company and its activities in relation to the said objects.
8. Now, the objects of formation contained in the memorandum of association, which are relevant for these purposes, are contained in clauses (i), (j), (k) and (l) of the memorandum of association. Clause (i) relates to acquisition by concession, grant, purchase, lease, licence, etc., any houses, lands, forests, farms, quarries, water rights, etc. Clause (j) refers to cultivation and giving and taking of lease of lands for cultivation or otherwise. Clause (k) permits the letting out on hire all or any of the property of the company whether movable or immovable, and clause (l) allows the sale, exchange and dealing or disposing of the undertaking of the company or any part thereof. The activities of the company relating to these objects as found by the income-tax authorities are that the company obtained from the Government of West Bengal settlement of virgin lands. After acquiring these lands the assessee settled them on tenants by inviting tenders or by putting up the lands to auction amongst bidders, and settling the land upon the bidder who agreed to pay the highest salami which was a single non-recurring payment made at the time of the settlement. On acceptance of the highest bid the settlement was signed by the party with whom the settlement was agreed to be made and after he had paid the whole amount of the salami, possession of the land was given to him and a patta or kabulayat giving mokrari mirashi rights was thereafter prepared, signed and registered. In the case of these lands so settled, the assessee-company went on collecting the annual rents. In case there were defaults in the payment of rent by the settled tenants, suits were filed against them for the arrears of rent and in the execution of the said decrees their tenancy rights were brought for sale. At these auctions, which were court auctions, the assessee-company took part in the bidding and when it was the highest bidder it became the purchaser of the said tenancy rights. It may, however, be pointed out that the company only bid at the auction held in the execution of its own decrees and never purchased the outstanding tenancy rights in respect of lands of which it was not the proprietor. On the auction purchase of the tenancy rights of the defaulting tenant, the company became the full owner of the lands again and it resettled them on fresh tenants following the same procedure as at the time of the original settlement.
9. It will be seen from the activities of the assessee-company that they were no different from the activities of a landed proprietor dealing in land and collecting rents and profits. The assessee in the present case was not a dealer in tenancies as in the case before the Supreme Court in Karanpura Development Co. v. Commissioner of Income-tax. There the specific objects of formation of the company were to purchase and sell leases of mining rights. The activities of the assessee in that case were wholly concerned with the dealing in tenancy rights treating the tenancy rights as its stock-in-trade. It acquired leases, did some development on the coal fields comprised in the leases, and disposed them of at a profit. Its activity in acquiring the leases and so disposing of was with a view to profit and in the nature of a business activity. In the case before us the objects of the company permitted it to acquire lands, to cultivate the acquired lands or to give or take on lease lands for cultivation and collect rents and profits. It also permitted the company to lease out the acquired land. There was no clause in these objects clauses which permitted the company to dispose of the lands acquired by sale treating them as stock-in-trade. The power to sell given under clause (1) was in respect of the undertaking of the company or any part thereof. These clauses (i), (j), (k) and (l) do not indicate that the company was formed with the object of dealing in tenancy rights treating it as stock-in-trade. Moreover, it may be pointed out that even if the objects clauses of the memorandum of association permitted business transactions or dealings in tenancy rights and such transactions if undertaken by the company would, therefore, have been within its competence, that would not necessarily mean that the transactions actually entered into by the company are therefore of a business nature. As has been observed by the Supreme Court in Kishan Prasad & Co. Ltd. v. Commissioner of Income-tax, the circumstance whether a transaction is or is not within the competence of the company's power has no bearing on the nature of the transaction or on the question whether the profits arising therefrom are capital accretion or revenue income. The consideration of the objects of formation of the company would no doubt be relevant for the purpose of understanding the real nature of certain given activities of the company. But they are not conclusive of the same. What must, therefore, be found is whether on the activities actually indulged in by the assessee-company and the manner in which they have been carried on, they are activities of a business or trading nature, and the amounts received by it are in the course of and arising out of the said business activities. We have set out the activities of the assessee relating to the acquired lands and we find no distinction whatsoever between these activities of the assessee and the activities of a land-owner dealing in the land itself and collecting rents and profits. In the case of the first two classes, i.e., in the case of the non-agricultural land or in the case of the virgin land first settled on the tenants on acceptance of salami, the ownership of the land has not been parted by the company at all. These settlements of the company are in no way distinguishable from the settlements of the zamindars in Sindhurani's case. The only activity of the company in respect of these settled lands was to collect the annual rents from the tenants on whom the lands were settled. Mr. Joshi, the learned counsel for the revenue, has argued that it may be that in the case of these two classes perhaps the activities of the company may not be distinguishable from the activities of a landed proprietor. He has, however, argued that in the third class, from which the largest amount of salami has been received by the assessee, there is an element of trading in tenancy rights and, consequently, the amount of salami received from that class must be considered as income from business. What the learned counsel argues is that this amount of salami is received for settlement of the tenancy rights, which the assessee itself has purchased at a court auction. In other words, the activity of the assessee-company in this connection is to buy off tenancy rights at court auctions and thereafter dispose of the same tenancy rights in favour of tenants by charging salami to them. This course of transaction, the learned counsel argues, is trading in tenancy rights and is of the same nature as the activity of the assessee in Karanpura Development Co.'s case. In our opinion, even in this class there is no trading activity or a dealing in tenancy rights as stock-in-trade by the assessee-company. It must be remembered that the tenancy rights which are purchased by the assessee at the court auction are tenancy rights are purchased by the assessee at the court auction are tenancy rights in respect of its own lands. These tenancy rights are a part and parcel of the total ownership rights of the property of the assessee itself and by purchasing these tenancy rights the assessee is merely extinguishing the tenancy rights by merging them with the property in respect of which these rights were created by the earlier settlement. It is, therefore, that the property of the assessee is again dealt with by it by letting it out on lease by fresh settlement. If the assessee, instead of bidding only at the auction of the tenancy rights in respect of its own property, had entered into the market as a purchaser of tenancy rights which were put up for sale and had thereafter disposed of these tenancy rights, Mr. Joshi might have been right in saying at the auction sale is only with a view to obtain possession of its own property back which it had parted under the earlier settlement, so as to be able to grant a fresh lease thereof to a new tenant. This activity, in our opinion, again is not different from the activity that would be followed by an individual landed proprietor similarly placed. In our opinion, therefore, on the facts and circumstances of the case, the Tribunal was right in its conclusion that the assessee was not a dealer in tenancy rights, holding the tenancy rights as its stock-in-trade, and the salami receipts received by it in respect of all the three classes is not its income from business chargeable as such under the Indian Income-tax Act.
10. In the result, therefore, we answer the question referred to us in the negative. The Commissioner will pay the costs of the assessee.
11. Question answered in the negative.